Good day everyone, and welcome to the First Quarter 2022 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Erik Aldag, Head of Investor Relations for Minerals Technologies. Please go ahead, Mr. Aldag.

Thanks, Jennifer. Good morning, everyone. And welcome to our first quarter 2022 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'll open it up to questions. I'd like to remind you that beginning on page 15 of our 2021 10-K, we list the various risk factors and conditions that may affect our future results. And 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, Erik. Good morning, everyone. Welcome to today's call. I'll start by walking you through our results for the first quarter and provide an overview of market dynamics, as well as some strategic highlights. I'll also provide some context to put our first quarter results into perspective and explain what's driving our strong performance. Matt will then review our financial results in more detail, and we'll also share our second-quarter outlook. First quarter was a record financial performance for MTI. And these results reflect the team's successful execution on a number of fronts. Sales of $519 million were up 15% versus the prior year, and up 19% on a constant currency basis. From a market perspective, demand remains robust across our segments. Our consumer-oriented products, which make up approximately 30% of our sales, continue to benefit from favorable secular market trends. We've seen steady growth across pet care, personal care, edible oil purification, food and pharma applications. We also continue to see strong demand from our industrial product lines with robust sales to the foundry, steel, and construction customers. Our results this quarter are also a function of our strategic growth initiatives, driven by multi-year advancements in new product development and geographic penetration, as well as additional growth from acquisitions. I'll take you through this in more detail in a few moments. Operating income of $68 million was 15% higher than last year, and a record for a first quarter, and earnings per share of $1.36 was a record for any quarter. Performance is also driven by the agility of our team delivering solid execution across operations, pricing actions, and cost control. The historic pace of inflationary cost increases continued in the first quarter, including significant spikes in the energy cost across the world, and in Europe in particular. Despite the continued rapid inflation, our pricing actions more than offset the higher costs on a dollar basis in the first quarter. We are the price leader in most of our end markets, and our ability to pass through pricing is based on the significant value our products provide our customers every day. In addition, the supply chain team has been incredibly proactive in managing and mitigating our cost increases through this inflationary period. We expect margins to expand further over the coming quarters as additional pricing actions, as well as contractual pricing mechanisms, take effect in the second and third quarters. As always, we remain disciplined around cost control and operational efficiency. Our operational excellence culture drives countless incremental improvements every day from employee suggestions and structured problem-solving events. These improvements increase our productivity, reduce our operational costs, and remove wasteful activities in general, at a time when these efficiencies are critical to meet these levels of demand. All in all, it was a very strong quarter, and this performance is a result of the actions we've taken to position the company for this type of profitable growth. Our strategy is to grow the company through new product development, growing in under-penetrated regions, and also through acquisitions of mineral-based companies with technological differentiation. These three elements of our strategy have been aimed at repositioning our portfolio of businesses to generate higher and more sustainable growth rates. Specifically, this repositioning has involved the expansion of our consumer-oriented businesses to create more balance with the industrial side of the company. Our household and personal care product line, which includes many of these consumer-oriented businesses, grew 30% in the first quarter versus the prior year. And over the last five years, this product line has grown at a 14% compound annual growth rate. This has been driven by both organic and inorganic investments, including the acquisitions of Sivomatic in 2018 and Normerica in 2021, and sustained market-driven growth across these product lines. This consumer-oriented set of businesses has structurally higher and more stable growth fundamentals, and combined with our leading industrial positions, creates a more stable topline growth profile for the company. New product development is truly accelerating across the portfolio and it's becoming a much more significant lever of growth. Let me give you some examples of how innovation is driving new product sales and also enabling expansion into new and growing markets. For the past five years we've commercialized new products twice as fast as we used to. In the first quarter alone, sales from new products increased 25% on an annualized basis over last year. Many of these new products are advancing sustainability initiatives in partnership with our customers. In pet care, we're advancing eco-friendly packaging and increased recyclability. We've commercialized multiple online-only products to support our e-commerce growth strategy, and are also developing new product offerings in Asia where pet care sales grew 36% in the first quarter versus last year. Sales of our bleaching earth products are up 32% in the first quarter. These products enable customers to achieve higher purity edible oils. We're expanding our reach by demonstrating the significant advantage our product has in the high-growth biodiesel filtration applications. Sales of our personal care products grew 15% over last year, as our Health and Beauty Solutions business has expanded capability in the manufacturing of retinal delivery technologies and the private-label packaging of skincare formulations. We also continue to see high growth rates and new opportunities for our clay-based rheology modifiers for cosmetic applications. We're seeing increased interest in our fluoro-sorb solutions for PFAS remediation, including the use of fluoro-sorb as the highly effective media in the treatment of industrial and drinking water. We're developing and expanding this product line with the introduction of our patented fluoro-sorb flex, which targets short-chain PFAS compounds in a unique and innovative way. Our product development efforts are also contributing to growth in our industrial product lines. Let me give you some examples. Our latest specialty drilling products are performing well in various horizontal directional drilling applications for the installation of underground utility and broadband fiber optic cables. Our new geothermal growth products are well positioned to take advantage of the trend towards net zero emission buildings. The use of geothermal heating systems is a growing area as building designers look to partially or fully replace fossil fuel heating systems. In this application, our product not only assists in the drilling process but also enables more efficient heat conduction from the earth to the recirculating fluid in the heat loop. In building materials, our new Wintegra product is a dual-purpose waterproofing and vapor barrier offering. This product offers our customers a one-step, dual-purpose, cost-effective application in the below-grade waterproofing market. Our growth is also supported by the expansion of our core product lines in growing under-penetrated regions. Global greensand bond sales have grown at a 5% compound annual growth rate over the past five years. Our high-performance pre-blended formulations and technical service capabilities help foundry customers improve their efficiency while reducing defects, costs, and emissions. For years we've worked collaboratively with our customers to bring them innovative formulations to improve their foundry systems. This collaboration is also supporting the penetration of our engineered solutions in the Asia foundry market where sales have been growing at a 10% annual rate for the last five years. Our PCC business has been growing in the under-penetrated Asia region for the last several years. We secured three new satellites there in the last year, including our first deployment of GCC technology for use in coated whiteboard packaging. Lastly, our refractory segment is realizing strong growth driven by our complementary portfolio of innovative products, unparalleled steel mill services, and high-tech laser measurement equipment. It's this combination that's enabled us to grow with our customers in the newest steel installations in the U.S. Our growth has also been supported through acquisitions. Today, I'd like to announce that we closed on another acquisition for the small bolt-on pet care company called Concept Pet. This acquisition comes with a complementary operational footprint to support the expansion of our European pet care business, as well as additional mineral reserves. The bolt-on of this company will add approximately $20 million in incremental sales on an annualized basis, through their customer positions in Western and Central Europe. We welcome our newest employees from Concept Pet to MTI, and we look forward to working with them to grow our European pet care business. M&A is an important part of our strategy, and we've completed four acquisitions over the past four years totaling nearly $300 million in sales, all while prudently maintaining a strong balance sheet and solid liquidity position. Let me summarize my comments for today. We're executing on all facets of our strategy to build a higher growth, higher profit, higher return company. MTI has a winning combination of unique mineral reserves, world-class operating capabilities, leading technology platforms, and applications expertise, all of which results in leading positions across our end markets. Supported by our team of 4,000 dedicated and engaged employees around the world, we see a strong future for the company. What it all means for us in 2022 is that we're on track to deliver another record year. With that, I'll hand it over to Matt to discuss the financial results and our outlook for the second quarter. Matt?

Thanks, Doug. I'll review our first quarter results, the performance of our segments, as well as our outlook for the second quarter. Following my remarks, I'll turn the call over for questions. Now, let's review first quarter results. First quarter sales were $519 million, reflecting strong sales growth both year-over-year and sequentially. Year-over-year sales bridge on the left of the slide shows that sales grew by 15% compared to the prior year, and by 19% when excluding the impact of foreign exchange. Sales were higher by double-digits across all segments with organic growth contributing 4%, the Normerica acquisition delivering 6%, and selling price actions yielding 9%. Operating income, excluding special items, was $67.8 million in the first quarter, and the year-over-year operating income bridge, on the lower left of the slide, shows that operating income grew by 15% compared to the prior year. As we expected, our selling price actions surpassed the impact from inflation in the first quarter despite increasing energy costs, particularly in Europe. In total, we delivered $41.5 million of selling price increases, compared with $39.1 million of inflationary costs. In addition, continued strength in our refractory segment, further demand recovery in several of our project-oriented businesses, and lower corporate costs helped to offset a slow start to the quarter stemming from COVID and weather impacts in the United States. Operating margin in the first quarter was 13.1% of sales, which is an increase of 10 basis points compared to the prior year despite the dilutive effect related to inflation pass through. Now moving to the right side of the slide. The sequential sales bridge shows that sales increased by 9% compared to the fourth quarter and were 10% higher on a constant currency basis. Sequential operating income bridge shows that inflation continued to accelerate into the first quarter; however, pricing actions delivered nearly $26 million to more than offset inflationary costs. These results include roughly $2 million in additional inflationary costs that will be passed through contractually beginning at the end of the second quarter. Operating margin improved by 160 basis points compared to the fourth quarter, which was driven by actions on selling price to more than offset inflation and continue to expand margins. Finally, we continue to control overhead expenses with SG&A as a percentage of sales at 10.4%, 130 basis points below the prior year. Now let's review the segments in more detail, beginning with Performance Materials. First quarter sales for Performance Materials were $272 million, an 18% increase over the prior year and 6% higher sequentially. Sales in household, personal care, and specialty products were 30% higher than the prior year, and 13% higher sequentially, driven by continued strong demand for consumer-oriented products and the Normerica acquisition. Our global pet care business overcame many of the logistics challenges faced in the fourth quarter to deliver 10% sequential sales growth. Meanwhile, our edible oil purification and personal care businesses continued their robust growth trend. Metal casting sales were 2% lower year-over-year and 5% lower sequentially due to lower China sales related to the Chinese New Year and Winter Olympics and the timing of large shipments in North America. Note that the latest China COVID situation began in earnest in the second quarter, and we are seeing a slow recovery in sales in the region. Environmental Products grew 38% year-over-year, driven by increased project activity, while building material sales were 2% lower versus last year, largely due to wet weather conditions in North America that affected building starts. Operating income for the segment was $34.7 million, and operating margin was 12.8% of sales. Operating margin improved sequentially as additional pricing actions overcame the impact of inflation. Looking ahead to the second quarter, we expect continued strong demand for our consumer-oriented products, and we will be moving into a seasonally higher period for our project-oriented businesses. Metalcasting sales in North America will improve based on strong demand, and China sales will continue to be slow during the current COVID situation. In addition, we expect that the benefit from our selling price actions will continue to more than offset inflation. As a result, we see operating margin improvement and a sequential increase in operating income of approximately 10% to 15%. Now let's move to Specialty Minerals. Specialty Minerals sales were $163 million in the fourth quarter, 10% higher than the prior year and 15% higher sequentially. First quarter global PCC and processed mineral sales grew by 10% and 11% year-over-year, respectively. Operating income for the segment improved sequentially to $18.4 million as we implemented significant pricing adjustments in the first quarter. SMI absorbed $2 million of additional energy costs that will be contractually passed through beginning at the end of the second quarter. As we look ahead to the second quarter, we expect a modest seasonal increase in sales, selling price actions that offset inflation, and an improvement in margins that together will increase operating income by approximately 10% to 15%. Now let's turn to Refractories. First quarter sales for refractories were $84 million and were 14% higher than the prior year, driven by favorable mix from new customer wins and selling price adjustments implemented to cover inflationary cost increases. The refractory segment delivered another strong operating performance as selling price actions and operational efficiencies more than offset inflationary impacts. First quarter operating income for the segment was $16.5 million, an increase of 38% compared to the prior year. Operating margin was 19.7% of sales. As we look to the second quarter, we are seeing some energy and raw material inflation. However, we expect a similar level of operating income sequentially. Now let's turn to our cash flow and liquidity highlights. First quarter cash from operations was significantly lower than the prior year due to an increase in working capital related to inflationary pricing and accounts receivable and a temporary strategic inventory build ahead of the Winter Olympics. Despite the $72 million increase in overall working capital, our efficiency as measured by days working capital improved by three days year-over-year. Note that as the strategic inventory positions release, we expect cash flow to strengthen and another year of strong free cash flow around $150 million. First quarter capital expenditures were $19 million, and we repurchased $16.7 million of shares in the first quarter, bringing the program to-date total to $28.5 million. At the end of the first quarter, total liquidity was approximately $480 million, and our net leverage ratio was 2.2 times EBITDA. We continue to maintain a strong balance sheet, providing ourselves with the flexibility to continue to invest in high-value, high-return growth opportunities, organically and through M&A. Now let me summarize our outlook for the second quarter. Overall, we see continued strong demand across our end markets and another quarter of strong sales growth. We anticipate that the inflationary environment will persist, and our teams are working closely with suppliers and customers on pricing actions to drive margin expansion. In addition, we expect to see productivity improve sequentially as volumes increase, and we will continue to take a disciplined approach to controlling expenses. In summary, the second quarter is typically our strongest quarter of the year, and we expect another record quarterly performance with operating income increasing by 8% to 10% sequentially, which represents around 15% growth versus last year. Second quarter earnings per share are anticipated to be around $1.45. While there are some uncertainties in the macroeconomic environment, our outlook for the remainder of the year reflects generally stable market conditions, sales growth from acquisitions, and further margin expansion that together will generate full-year earnings per share around the range of $5.60 to $5.70. With that, we'll now take your questions.

Thank you. Our first question today comes from Daniel Moore with CJS Securities.

Thank you. Good morning, Matt. Good morning, Doug. I appreciate you taking the questions. To start, could you discuss Concept Pet's potential? Specifically, where are the reserves? I understand it's small, but what synergies or growth potential do you foresee? Also, are there comparable opportunities of a similar size available?

Sure. Thanks, Dan. Yes, we're really excited about Concept Pet. It's a small addition to continue the growth of our European Pet Care business, the brand being Sivomatic. It complements our presence in Western Europe while also attracting some customers in Central Europe. The reserves are located in Slovakia, where we have operations as well. This strategy gives us a solid logistical and geographical presence throughout Europe. While those reserves will support our business, they can also be utilized for other purposes. There won't be significant cost synergies due to its size; instead, the focus is on enhancing service for our European pet care customers and growing alongside them. We're really enthusiastic about this opportunity and welcome the 50 new employees to MTI.

Got it. Really helpful. Matt, you gave some good detail, particularly within the segments around pricing actions as it relates to this quarter and the guide. When we think about the Q2 guide, how much catch up in terms of pricing do we still have to go that could drive margins further still into Q3 and beyond, or be closer to caught up by the end of Q2? Thanks.

Yes. From my perspective, I view it as a tally starting around June of last year when inflation began to rise. Since that time, we have absorbed approximately $94 million to $95 million in inflationary costs, which you have seen reflected in our reports over the past few quarters. In contrast, we have offset that with around $77 million in pricing. While there's still some ground to cover, the gap is narrowing. However, we are still experiencing inflation, especially in energy, which has been quite volatile in Europe. This quarter, we absorbed about $2 million that will be contractually passed through in late Q2 or early Q3. We expect this situation to continue, but we are confident that we have already recovered about $2 million to $3 million of that inflationary gap, and we plan to provide more details on this in Q2. Looking ahead for the full year, we anticipate further margin improvement as we close this gap and make enhancements in the latter half of the year.

Really helpful. And then, China, you gave a pretty solid outlook for Q2 despite what type of impact do we expect on Metalcasting? Or maybe, I shouldn't say in Metalcasting, overall in China based on where we sit today in Q2?

Right now, China was a drag through the first quarter in Metalcasting volumes. We see those rebounding through the second quarter. While it's still moving along sideways and hasn't ramped up yet, our outlook at least through June and into July is much more positive. The demand from both automotive and non-automotive production remains strong. We do have some backlog that we're working to clear through our plants, given the transportation restrictions. Progress is being made, although it has been a bit slow. Overall, our outlook for the region through the second quarter and beyond is quite positive.

Perfect. Thank you. I've got one or two others, but I'll follow up and jump back in queue. Thank you.

I apologize for not addressing your bolt-on question earlier, Dan. If you'd like to ask it now, I can respond to it. In terms of pet care,

Yes, curious about the opportunity set. That would be great.

Sure, sure. There are other opportunities. I would say though in the Pet Care business through Sivomatic, Normerica, and now Concept Pet, we've put together a really nice portfolio of positions, mine resources, manufacturing locations next to population densities to be able to effectively serve those pet litter customers. But right now, our goal is obviously to continue through the integration of Normerica, making sure we finalize that. Now concept that in Europe, and then really utilize this space to grow that business. Further out, I think there are in other geographies some other positions that may make sense, but I think right now we've really built a nice global base of operations and mine assets to really grow this business. So we're excited about it. We've put it together. When we started this business, when we bought Amcol, the business was about $70 million, and now that business is about $385 million in revenue. So that gives you the size, and it's growing at about 8% to 10% per year. That gives you an idea of what we think this is capable of, and bolting on Concept Pet is going to be a real help to continue that growth.

And our next question comes from Mike Harrison with Seaport Research Partners.

Hi, good morning. Congratulations on a nice start to the year.

Thanks, Mike.

I had a couple of questions here on the Refractories business. First of all, you mentioned some additional raw material cost, are you having any problems with cost or availability of magnesium oxide? And can you also comment on whether the Russia-Ukraine war may be leading to some weakness in Russian Steel and creating some opportunities for your Refractories business where you participate outside of Russia?

Yes, let me start with that, and then I'll pass it to Brett Argirakis, who is leading that business. No, we're not seeing any issues around supply and the supply chain. I will say that part of Matt's comments around our strategic inventory build was making sure that we secured and put on docks from parts – part of that was China and getting some reserves in our raw materials out of the country ahead of time. So we utilized some really good opportunities to purchase and some timing to build those inventories, and that's part of that inventory build that will release throughout the year. So no, we really did a good job on the supply chain issues. As far as Russia-Ukraine, this was a business that had some business in Russia and Ukraine, about $5 million. It was negatively impacted actually as we ceased those sales into the region, probably around $1 million in the first quarter. So it was a detractor from the results. But really, I think the results that you're seeing right now are just a solid execution, really smart cost control, a good procurement. We're talking about the delivery of these technologies in a packaged form. These newer formulations, raptor, and laser measurement and application technologies that are leading to positions and just delivering higher value to the customers. So anyway, sorry, Brett, if I took a little away from you, but too exciting to hold back. So why don't you give us more color, particularly in the U.S. around what you're delivering in terms of new sales from this?

Thanks, Doug. Mike, I’d like to add a bit more detail. Regarding Russia, as Doug mentioned, our total sales from Russia and Ukraine are around $5 million, which is a small portion of our business. However, we might see some indirect benefits from Ukrainian steel production relocating to Turkey, where we have a strong presence. This could lead to increased demand for our refractory products. In general, Russian steel production is approximately 75 million tons, while the U.S. produces about 85 million tons. They do have a solid market, but our penetration there is limited, primarily focused on refractory and some laser products. As Doug indicated, we are concentrating on growth and new business initiatives, and our outlook seems quite promising. Our business remains robust, with eight new contracts set to begin in 2022, all related to refractory wire and laser technology or a mix of both. We are very excited about that. The Ferrortron laser operations are performing well now. Our order book is strong, and as COVID restrictions ease, we are able to commission those lasers. The new refractory formulations are showing very positive results and are helping us expand into global markets. Additionally, we've secured around $120 million in new sales over the next five years, positioning us well for continued growth and strong margins. I hope that clarifies things.

Yes, I appreciate all the additional color there. Maybe shifting over to the household Pet Care and Specialty business, the revenue number, I think was a record there in that low $140 million range. I know that there is some seasonality to that business, but with the pricing efforts you have in place with the growth initiatives, and obviously we need to bake in the Concept Pet acquisition as well, is this kind of a good revenue run rate for the rest of the year going forward or should we think that Q1 maybe marked some inventory restocking after you had some of the issues in Q4 with the supply chain?

I don't think there's anything significant in the first quarter. Interestingly, you're correct that the lower seasons for some of our businesses occur in the colder months, while the Pet Care business experiences lower seasons in the warmer months, as cats tend to be more outdoors. However, I don't think that has a material impact. What we expect with the Concept Pet acquisition is a continued run rate of growth. This segment has seen a 14% compound growth rate over the past five years, and we anticipate that will continue. The Pet Care business alone has grown around 8% compound in that segment. I believe this presents a solid run rate for you, Mike. With the introduction of new positions, new products, and the success of our e-commerce strategy, particularly with the growth emerging in Asia, I think we are looking at a sustainable growth rate moving forward.

All right. And then wanted to make sure to hit a couple of questions here on the project-driven businesses. Can you give us a little more color on the strength that you're seeing in Environmental Products and how sustainable that could be into the rest of the year? And then in building materials, you noted some delays related to supply chain issues, and we're hearing this about raw material availability. Have those issues run their course or do you still see that some customers are going to be struggling to get the materials they need as we get into the busier building season?

I don't think we've seen any real supply chain disruptions, so the business has been doing well from the manufacturing, operation side. I want to let in Jon Hastings, why don't you give us a little color on environmental building?

Sure, Mike. Hi, good morning. A couple of things. You keyed into it. Our pipeline has strengthened significantly. As you know, the markets have opened up projects are progressing, through funding. We're seeing this in most of our sectors. We see it in the municipal landfills; coal ash pond projects that are supporting the coal fire power plants. We're seeing waterproofing projects, infrastructure projects all expanding. So the outlook has grown considerably stronger as we moved from '21 into '22. To give you a couple highlights by region: For example, in North America, we did see the demand pick up in Q1 just as we expected, and now we're fully booked through Q2 and beyond. We even saw within building materials, we had a little bit of a blip in the Pacific Northwest with the Teamster strike, that affected some project starts, but our order book has continued to be strong and we're working through that, and that seems to have been resolved. In Europe, our second biggest market, bidding activity continues very strong. In Southern Europe, they're executing awards and construction of large-scale projects at a much higher clip than what they've done in the past two to three years. We suspect that some of this is also some pent-up demand, but it also is just an expansion of both building materials and also Environmental Products. Internally, what we're focused on is strategically introducing our innovative new technologies. We're focused on sales of our high-value, high-margin specialty products. And as you would expect from us, we continue to ensure efficient and cost-effective operations to effectively serve all of our markets. So yes, there are some, there is a little bit of volatility on logistics and raw materials periodically, but we're really well positioned to continue to offset that with pricing and instituting the best practices, the business practice that we put in place. Our order book remains full, and we're executing on all cylinders. So hope that helps, Mike.

Very helpful, thanks. Last question for me is on the guidance. It kind of looks as if you're expecting the second half to be maybe just slightly better than the first half. I think a lot of us have been watching the price-cost dynamics and assuming that, what would be a headwind in the first half should actually turn into some additional margin tailwind in the second half. I guess maybe just help us understand if you're trying to be conservative with that 560 to 570 or if there are some other components of margin headwind that we need to keep in mind?

I think a few things to note, Mike. Recall that's the first time we've given annual guidance in quite a bit of time. As we've given you now second quarter and the full year, you are seeing the benefit of a few things like we detailed. Improvement in our end markets like was just detailed by Jon, and you heard that from Brett, and we've talked about it, demonstrating some of that, being able to price. Doug talked to you about the pricing construct that we have; we've been able to change our contracts. We've been able to work with our customers. We price on the value that we contribute. That speaks to the margin potential that we have in pricing beyond just recovering inflationary factors. Yes, you'll continue to see that as we move through the year. If you remember last quarter, Doug talked about a flight pass in our margin as we move through the year, and that's what we are looking at. And that flight path moves towards that 14% level as you move into the later months of the year. That's coming from continued volume growth based on stable market conditions, expanding those margins, getting pricing in place that values our products, our technologies and our partnership with our customers, pulling that all together to deliver what we think is a strong year. In that 560 to 570 range gives you a sense of some confidence as you look into the second half of the year around those factors, being able to control what we can in the face of some uncertain market conditions that are going to be obviously making some headlines, whether that's an economic factor or specific markets that might provide some level of drag that we need to manage through. But overall, looking at a very good year in total and progression through the year.

All right. Thank you very much.

I would like to add that we still have some progress to make with the integration of our acquisitions. In the latter half of the year, we are continuing with the integration process, particularly with our Normerica acquisition, where there's potential for margin expansion, as well as with Concept Pet. We anticipate that the second half will contribute positively to our revenue from these acquisitions. As Matt mentioned, our confidence in the business and its ability to deliver is reflected in our projections.

Sounds good. Thank you.

And we'll hear next from Silke Kueck with JP Morgan.

Hi, good morning.

Hi, Silke.

In your earnings guidance for the second quarter and the full year, what pricing assumptions are included in that outlook? Your prices were 9% higher in the first quarter; what do you anticipate year-over-year for the second quarter, and what is reflected in your guidance for the full year?

Yes. I think if you remember the way that we detailed our full year outlook last quarter was that we were going to experience about 15% top line growth. That was going to be 5% through organic, 5% through the Normerica acquisition, and 5% through pricing. Again, what you saw this quarter was about 4% organic and that's volume and mix despite what we've alluded to was a challenging January and February. So, a very good organic growth component, that 5% looks good as we move through the year. Normerica contributing about 5% to 6%. Acquisitions, as Doug said, that will trickle through the rest of the year with Concept Pet. Still seeing about that 5% topline growth. Pricing, to your point, came in stronger than what we had anticipated, and there are a few factors surrounding that. One, you're continuing to see inflation, and we are continuing to drive pricing as inflation moves. That speaks to our value proposition with our customers and the partnership we have in being able to recover that pricing. Furthermore, recovering our margin, which was embedded in that 5% as we came into the year. So, as you're looking at it, Silke, you'll continue to see a higher level of pricing as we go through the year, just based on the higher level of inflationary factors that we had. But again, that 15% that we guided to feels good.

Okay. So, I think pricing should be something more like double digits going forward for the second quarter and full year?

Yes, Silke, we're currently maintaining our guidance of 5% organic volume growth and 5% from acquisitions at least through the fourth quarter. As Normerica annualizes, we will phase out that acquisition figure. Based on our current outlook with inflation, we still have some contractual pricing to implement that will occur in July and August through the third quarter. This mainly affects our Paper PCC contracts and some refractory products. You can expect to see the initial nine in the first quarter, likely another five in the second quarter, and probably another five in the third quarter regarding pricing. The exact outcome will depend on inflation trends. We intend to maintain that margin spread and aim to increase margins, similar to what Matt mentioned, with expected run rates exceeding 14% in the fourth quarter. If inflation continues at its current rate, we will keep progressing in this direction. Eventually, once this phase subsides, pricing might decrease somewhat. But for now, we anticipate maintaining an average 5% increase compared to the previous year at least through the third quarter.

Okay. And in terms of the electricity and your energy costs, like it seems in paper that you have a contractual pass-through. Do you have that? Given like the unusual spikes in Europe, do you have that ability of pass-through in all of your businesses, or you only have that in paper?

In our paper business, our contracts include terms for pass-throughs. We receive utilities from our customers, particularly where our satellite facilities are located next to the paper mills. When there is a price increase for those utilities, we pass it through contractually, though there is a delay involved and other factors to consider. In North America, the timing for these adjustments is generally quick, sometimes even immediate, but in Europe, some legacy contracts can have delays of six to nine months. We've experienced inflationary costs in the past, sometimes amounting to a couple hundred thousand dollars over six months that we later pass through contractually. Recently, as Matt mentioned, we've seen energy cost increases of $2 million in our paper businesses in Europe that we will carry through multiple quarters before passing them on. Our contracts are designed to protect us, but the delays during high inflation periods can be challenging. Importantly, our products are priced based on their value rather than the paper market. We maintain transparent conversations with our customers about these increases, as they are often in similar positions. Although these discussions can be difficult, the value our products deliver is recognized and understood by our customers.

Okay, thank you for that. And if I can ask like one or two more. Regarding the Normerica acquisition, my memory is that it was like a $140 million business when you acquired it, something like $35 million in sales per quarter. Maybe there's like some seasonality, but did the Normerica business in volume terms grow this quarter or it contracted? I thought the acquisition benefit was unusually low.

They're about at that pace. They're at that pace, Silke. They have not contracted. We're running at that rate. I was just looking to Jon. We have some new business opportunities that are taking hold that we're putting in place. What you will see is some growth in revenue in that Normerica business. Again, it's going to be in that Pet Care business. We probably won't call out exactly how much is Normerica or legacy business or Europe. But I think all of that, and the new business, and the acquisitions are going to contribute to that continued kind of 8% to 10% growth rate in that business. For the quarter, I think they were relatively flat with the fourth.

Yes, just to add on, from a transaction perspective, the integration continues on pace. As Doug said, we have some systems integration that are going to take place later in the year. So we'll continue to put effort there. But overall, Normerica remains very much on track.

Okay. And I guess, there's a question I wanted to ask about your exposure to the Asian markets. Some of the COVID related shutdowns in China. Where does that touch you most in which businesses? And what do you expect for the second quarter?

Yes, I think it's most impacting our foundry business, our Metalcasting business. Jon, how about you tell us where we are with customers and our facility there?

Yes, Silke, like Doug said, it mainly affects our Metalcasting business, greensand bonds. What we've seen just in the past couple of weeks and months is that there has been an increase in difficulty in the ability to actually ship out of our plants. However, that's been resolved through a lot of hard work, working with the government, working with trucking, etcetera. We've built up a little bit of the backlog with our customers. We have now been supplying. We've worked off that backlog. Going forward, again, it's volatile. We're going to continue watching this. But so far, there haven't been any real significant disruptions, and we will continue to generate the volumes for our customers that are needed. So again, no real significant impact so far.

Right. In the guidance we gave you, as you go through it, you'll see what we basically said is that that China COVID situation is going to continue. Sales are pretty slow in China Metalcasting, and that looks like it's going to continue into the second quarter predicated on what's going on with the COVID condition there. So guidance has embedded that viewpoint. And so we'll work from there. But as John outlined, very good performance from the team working with customers and moving forward.

I just want to jump in here. We have 500 employees in China. We have two offices, one in Shanghai, one in Beijing. Those teams are at home, and they're continuing to work. They're doing a fantastic job. So a quick call out to them for all their doing in maintaining that business. As Jon said, they're working really closely with customers, and those volumes are getting shipped; we're keeping them running. So anyway, I wanted to put that out there.

That's helpful. And I have a very last question just on cash flows. I was wondering what your CapEx target is for the year? And what's your share repurchase target for the year?

Thank you, Silke. So cash flow, as I said, free cash flow, we're expecting to generate about $150 million. So another strong year of free cash flow. I think we talked through the dynamic of how working capital is going to release as we move through the year, particularly those strategic inventory positions. CapEx embedded in that assumption is about $80 million to $90 million. If you remember, last year we did about $85 million coming into this year. We said we'd have a similar experience, really good opportunities for investment inside the company. We're going to take care of those and also sustaining CapEx continuing to be in that $40 million range. As you look at our use of cash, yes, you are right, we are currently operating under a $75 million repurchase authorization. We anticipate that we'll complete that by October, so purchases will continue there. The other opportunities for our free cash flow, we've talked to you about our balanced approach using some of that cash. We've just acquired Concept Pet with cash on hand. We will continue to also look at opportunities to pay down debt, and you'll see that as we move through the year with free cash flow as it's generated. So really using that cash flow on all three pegs of the stool, delivering to shareholders, finding opportunities to deploy to growth, and then also maintaining a very strong balance sheet.

Okay. Thanks very much.

Thanks, Silke.

And our next question comes from David Silver with CL King.

Yes, hi, good morning. I think the first question, the first topic, I would like to ask you about is the PCC business. And I'll just apologize if this is going to be one of my famous kitchen sink question styles. But I would like to focus maybe on the sequential growth in that area, both the paper and the specialty side. It was pretty striking compared to a typical 4Q to 1Q. And I'm just wondering if you could maybe break it down that well into double-digits growth that was there sequentially. In particular, were there a few start-ups? I think Baiyun on my list is scheduled for first half of this year. There may have been a restart in the U.S., but what are the elements that led to that very strong sequential performance in your PCC business this quarter and will that carry through to the second quarter? Sometimes I believe there is a seasonal dip there. So, just the trend last quarter, next quarter kind of trend in that business would be helpful. Thank you.

Sure. In general, it was mainly due to some seasonal factors, but also in the fourth quarter, we experienced about a 14% sequential growth rate in that business. We saw stronger performance, moving past a challenging December impacted by COVID logistics. While December was tough, things improved in January, and by March, various factors came into play, including construction and higher automotive builds, as well as paper mills that had previously been down due to COVID returning. The sequential growth reflects this shift from late in the fourth quarter to a much different market scenario in March. If you consider March and look into the second quarter, that's the pace we're maintaining. We saw strong growth due to certain factors in December, but March's performance, combined with construction, automotive, paper, and seasonal activities, indicates we will continue to see growth into the second quarter. DJ, would you like to provide more specifics on what's driving this?

Yes, David. On the specialty side, we're effectively utilizing the expansions we implemented, and there's strong demand from both the automotive and construction industries, with a positive outlook. We've also been successful with pricing in that area, and we expect this trend to continue, which is reflected in Matt's guidance. In the paper segment, North America is performing extremely well in terms of industry run rates, and we see potential growth in China and India as COVID conditions improve. As mentioned by both Matt and Doug earlier, the contractual price increases will take effect in the second half of the year. Additionally, the Baiyun expansion will be operational towards the end of the second quarter, and the India contract with SPB will begin to contribute in late Q3 or early Q4. We expect the other GCC opportunity to materialize in 2023. Overall, the growth trajectory looks favorable based on current developments, and I can say the pipeline is strong as well.

And just to follow up briefly, D.J, but if I just take the simple revenue numbers for the first quarter, $121 million total for your Paper PCC plus the specialty. So you're over $120 million. If I go back in my records, I mean it's been I think 2015, 2016 was the last time we had that kind of revenue rate, and of course, I'm not inflation adjusting there. But maybe, if you just had a moment, I mean just reflect on kind of how you see the business situated now early 2022, with the diversification into packaging grades relative to how the business looked five years ago. I'm thinking there is just a lot more end market diversification and new applications relative to the last time the business was generating this type of revenue. Thank you.

Thank you. So a couple of things. If we concentrate on that paper business, the team is doing a really good job of shifting that portfolio, both to advanced products in the printing and writing grades that allow for more consumption per ton of paper that's made, but also into that packaging. If you look at that pipeline five years ago, maybe I would have had a packaging opportunity in there, probably not. Now, if you look at a dozen active engagements with customers, probably 30% of those are packaging, some of them PCC, some of them like the GCC opportunity that we looked to earlier, and then some of them also non-PCC related technologies. From a PCC standpoint, both portfolios are well positioned for the future.

And David, I appreciate you highlighting the past. The business has changed and is not fully there yet. We have transitioned from being heavily focused on base copy paper to offering a wider range of higher-tech products across our portfolio. These products are situated in markets that are experiencing structural growth, as well as in rapidly expanding geographies. This aligns with our strategy over the past few years to enhance stability and shift towards higher-growth products and regions. In both specialty and Paper PCC, this is evident. As D.J. mentioned, there are secured contracts this year and into the next that have not yet impacted the top line but will, and I believe that trend will continue.

Yes, I know. Thank you for that. I mean I considered the development of that business, just a very good microcosm, Doug, of how you talk about a mineral base, but with a differentiation or a technological edge to it. So that's why, I mean, I kind of brought it up. Okay.

Yes, thanks for doing that.

Doug, I appreciate you mentioning the new product development earlier in your comments. I was wondering if you could provide a quick update on fluoro-sorb in particular. You also mentioned rheology modifiers, which I haven't heard you discuss in a while; I may have missed it. To me, that's a significant area within performance materials. I'm curious, by bringing it up today, has there been any noteworthy movement or development in that area of your business? Thank you.

Thanks, David. Let me give you just some, I guess frame-up the innovation kind of pipeline and the company. I mentioned a number of comments and stats. If you looked at the total value of the portfolio, upwards of $800 million worth of ideas through different stages in that portfolio. We have a much bigger funnel of thinking, but that funnel is focused on some very specific areas, right? I'll give you a couple of those threads. One of them is, we've always been in rheology modification. i.e. in just about everything we do in specialty PCC and in some of our clay-based products are rheology modifiers. What is that? It imparts an ability for formulation to flow or a physical property of flow. I'll give you an example in construction automotive sealants being able to have a robot put out a line of sealant and then have it set and not sag. It has to come out really quickly but it can't go anywhere from that nor can it have a tail of a string once the gun is pulled away but what makes it do that is our specialty PCC. Being able to engineer the particle and engineer how it goes into that process helps that flow under pressure; this is what rheology is. But we have that capability across the company and we apply it with our different Minerals. Some of these are in cosmetic applications and we use clay to do the same things. It's been part of the technology of the company for a long time. We're finding opportunities in markets to apply it more broadly. Jon was just mentioning right now, it's in drilling. Our drilling mud is basically a rheology modification; being able to lubricate the drill as it goes through and then set up to hold the hole in place. It's nothing new; it's a base technology we have in the company. We're just being able to apply it with our growth in these other markets, many of them consumer, more broadly. It's really nothing, it's a base technology. But sustainability is another thread in that innovation pipeline. 60% of our products in our innovation pipeline are either something that helps us make a product more sustainable or helps our customers with a sustainability issue they face. That's grown from almost 40% just a year ago, now 60% of the portfolio of $800 million of products is something to do with a sustainability initiative. We're generating about $270 million of revenue from new products on an annualized basis this year over products that we've commercialized in the last five years. That's up from $210 million last year; if you think of a crank, we're turning the crank a lot faster. It's a lot more focused and we have a lot more focused projects in that funnel that are coming out to deliver these types of results, and we think that's going to continue to accelerate. As far as PFAS, Jon, you want to give us an update on?

Sure, sure, glad to. You mentioned fluoro-sorb and PFAS. Again, we've got a lot of attention from potential customers, and strong performance is being witnessed in all of our pilot applications. We've got 90 successful demonstrations. Just to give you a couple of concrete things since last year's Canadian DoD in-situ project. We've got fluoro-sorb that's been impregnated into our reactive mats, and they've been installed at a U.S. DoD site. We've got mobile filtration systems that have been placed at two other sites. We've got one in North American landfill. That's in the in-situ space. In the drinking water space, we're pleased that in the next month or two, in Q2, we're going into two new municipal drinking water systems. Other utilities and regulators are watching that really closely. The performance we see with fluoro-sorb is substantially better than other competitive technologies. We're pretty excited about having those drinking water systems and some commercial installations coming up in the next couple of months. So, looking at the roadmap going forward, as you know, the EPA continues to set the stage, and we're poised to take advantage of the demand once it manifests itself in the marketplace. A lot of excitement, a lot of trials, some commercial applications, and certainly poised to satisfy the demand once it comes from the regulatory environment.

That's great. Thank you very much. I really appreciate all the color.

Thanks, David.

Thank you once again. I have one more quick question. You're experiencing faster growth in revenue and now also in profit margins, with your implied guidance for 2022 being comfortably under 2 times. You're set to generate a significant amount of cash in the latter half of the year. Given that the stock is currently trading in the 10 to 11 times forward EPS range, are there strategies you're considering to highlight the consumer business, which now constitutes a third of your operations and is less cyclical? This could involve re-segmentation, another Analyst Day, or any other options you have in mind. Additionally, could you explain why there's not a more aggressive stock buyback strategy, considering the current leverage and the metrics I mentioned? Thank you for sharing your thoughts.

Certainly, let me address your last question first. I appreciate it. Our cash flow generation and the status of our balance sheet support increased levels of share repurchase. Currently, the $75 million represents 50% of our average free cash flow, and while it could certainly increase, we believe this is a prudent level for cash allocation, allowing us to pursue acquisition opportunities as well. We aim to keep our debt and balance sheet positioned around a 2 times leverage ratio, and there might be some debt repayment this year. We are looking at those acquisition prospects and want to balance our cash usage to ensure we can take advantage of those opportunities. If acquisition opportunities diminish, we could increase our share repurchase, but if they become more imminent, we may reduce the share repurchase to allocate cash for those strategic acquisitions. We are comfortable with this approach and recognize that our balance sheet and cash flow position could allow for a higher repurchase level if needed. On a different note, that's a great question. We dedicate significant time to interacting with investors and discussing our strategy, and I hope that you found our comments today to clarify where we are and our direction. Having an Analyst Day is definitely on our agenda, and we've been discussing the timing. We are considering holding it possibly this fall. We believe this would be highly beneficial for you and other participants on this call, as well as our investors, to illustrate our long-term vision beyond just 2022. So, stay tuned. We think it's a fantastic idea, and we are actively planning it to ensure a comprehensive presentation of our future direction.

Appreciate the thoughts as always. We'll talk soon.

Thank you for the question, Dan.

And there are no further questions at this time. I would like to turn the call back over to Mr. Dietrich for any additional or closing remarks.

Thank you very much, Jennifer. Thanks everyone for joining the call today. I appreciate the questions and we'll talk to you in three more months. Thanks.

This concludes today’s conference. Thank you all for your participation. You may now disconnect.