Good day, everyone, and welcome to the First Quarter 2023 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Lydia Kopylova, Head of Investor Relations for Minerals Technologies. Please go ahead, Ms. Kopylova.

Thank you, Carrie. Good morning, everyone, and welcome to our first quarter 2023 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik's prepared remarks, we'll open it up for questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on this slides. Our SEC filings disclose certain risks and uncertainties which may cause our actual results to differ materially from these forward-looking statements. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release, which is posted on our website. Now I will turn it over to Doug. Doug?

Thanks, Lydia. Good morning, everyone, and thank you for joining. Let me give you a quick outline for today's call. I'll start with first quarter summary. And as you may have noted from the press release, we're reporting this quarter on our two new segments, Consumer and Specialties and Engineered Solutions. There is a big change in how we present the company. So I'm going to give a quick refresher on these two new segments and how we've organized them from a product market and technology standpoint. Erik will then take you through the financial details for the quarter and our outlook for the second. And after that, we'll open it up for questions. Let's go through a quick summary of the first quarter. We delivered what we expected in terms of sales, operating income, and earnings per share. After a challenging end to last year, we remain focused on growth, margin recovery, and improved cash flows, and we delivered on all three. We posted record first quarter sales for MTI with growth across both segments and in all four product lines. Revenues increased 8% sequentially and 8% year-over-year on a constant currency basis, achieved amidst a backdrop of mixed market and economic conditions. Despite these mixed conditions, we continued our growth trajectory, which points to the stability that our portfolio can provide. Sales in household and personal care increased 7%, driven by strong demand in all regions for pet litter, edible oil purification, and animal health products. The specialty additives product line benefited from higher volumes of paper PCC in Asia, our newest satellites, and improved market conditions. This was offset partially by the continued weakness we are seeing in residential construction markets, which has impacted demand for ground calcium carbonate and specialty PCC compared to last year. Demand in the Engineered Solutions segment was driven mainly by the varied economic conditions we're observing across our regions. For high-temperature technologies, market conditions remained relatively strong in North America and sales for foundry and refractory products remained robust. This was offset by continued weak conditions in the European steel and China foundry markets. We expected some modest improvement in the China foundry market as we moved through the quarter, and we did see some improvement in March. However, conditions remained well below the levels we experienced last year. In the environmental infrastructure product line, demand remained relatively stable in all regions for our water remediation technologies and infrastructure drilling products. We benefited from two large sediment capping projects in the United States. Sequential operating income increased 43% to $63 million, and margins expanded 290 basis points. We implemented additional pricing actions, drove productivity gains, and operating conditions improved in the areas that were impacted last quarter. Margin growth is a key focus area this year. We expect margins to continue to expand throughout 2023 as our pricing actions catch up with the cost inflation we experienced in the second half of last year. Cash flow and maintaining a strong balance sheet are always priorities for us. First quarter cash flow returned to historically normal levels, and our balance sheet remains solid from a liquidity and net leverage standpoint. An additional highlight for the quarter is that we completed the resegmentation and reorganization of our businesses. The significant change, and I want to take you through a couple of slides to review the new structure. If you followed us over the past few years, you've seen how we've targeted acquisitions in pet litter, invested in new higher-margin products, and moved into adjacent, faster-growing markets. We've transformed from a company that historically served industrial markets in North America and Europe to one with greater involvement in less cyclical and growing consumer, environmental, and agriculture markets, together with an increased presence in higher growth regions. The word 'technology' has always been part of our company's name. Going forward, you'll hear more about what we call our core technologies and capabilities, the foundational part of what our company does, and a central part of how we have established and how we maintain our leading market positions. Our innovation pipeline draws on these core technologies, and the advancements we've made in new product development over the past few years have been another dramatic transformation at MTI. Today, we're generating almost three times more revenue from new products than we did five years ago, and we have a new product pipeline currently in place to drive this higher. Our company culture is based on continuous improvement, and in keeping with that culture, we saw that moving our organization to one that was structured around our core technologies, similar market types, and customer dynamics was a more powerful way to run our business. This new organization has more clarity of purpose, will promote faster decision-making, improve execution, and drive closer collaboration on innovation and technology, together fueling higher earnings potential. It's also added a spark to the organization and brought new energy to the team. Let's take a quick dive into these two segments and their respective product lines. The first item I'll point out is that these two new segments and four product lines are well balanced. Balanced in terms of size, growth, types of end markets, and long-term growth drivers. First, let me take you through the Consumer and Specialty segment and its two product lines: household and personal care and specialty additives. Products sold in the household and personal care segment are consumer products or components of consumer products that you would find in your home, like cat litter, edible oils, over-the-counter skincare products, and laundry detergent. Products are developed primarily through the application of one of our core technologies called Functional Additives, where we specifically design, classify, or create a particle to perform a specific function, such as absorb odors, remove impurities, or act as a delivery system. The consumer market served in this product line shares similarities, such as common service models, innovation timelines, and macro growth trends. By organizing these products together into one product line, we can better leverage these similarities to drive innovation and growth opportunities. The specialty additives product line contains our mineral-based products that become functional components of items such as paper and packaging, sealants and adhesives, paints and coatings, and food and pharmaceuticals. These products were developed through the application of a core technology called Crystal Engineering, where we design crystal morphologies for specific functions, such as strength, optical brightness, gloss, calcium fortification, and CO2 sequestration. We can also further adapt these crystals to provide enhanced functionality like rheology modification. The market served in this product line shares a common growth strategy of penetrating growing geographies by using our applications expertise to offer customers a higher value solution. For example, we've been driving penetration of PCC into the Asian market for many years by offering customers production cost savings, recycling options for waste streams, and brighter or glossier surfaces. The region has become our largest for volumes of paper PCC, and there's still room for continued growth. This week, we announced three new long-term supply agreements in Asia for our PCC filler technology, one of them for our newest recycling product called NewYield LO. Similarly, our specialty PCC products are growing globally, and we see opportunities to penetrate sealant and adhesive markets outside the United States. Next, let's go through the Engineered Solutions segment, which contains products and solutions designed for our customers' manufacturing processes. In the high-temperature technologies product line, we are leaders in providing consumable materials and process solutions primarily for the foundry and steel-making industries. These products are developed through the application of a core technology called Engineered Blends. We use our deep understanding of our customers' processes to formulate products that deliver benefits such as improved dimensional stability and surface finish, increased production efficiency and safety, and lower emissions. Growth in this product line is driven primarily by the substitution of lower performing products in large and growing markets. For example, we continue to drive penetration of our greensand bond systems in China and India, and deploy our new scantrol measurement and application system in North America and Europe. The fourth product line is environmental and infrastructure, which is home to many of our unique innovative products and solutions for infrastructure, water remediation, and environmental waste containment. Here we apply a core technology called Particle Surface Modification, where we physically alter or adapt the surface of a substrate particle to perform a specific function. These modified particles are used in bulk to create waste barriers, scavenge impurities from water, waterproof large construction projects, and enhance drilling fluids. Our products support important projects in communities around the world like wastewater and drinking water cleanup, sediment capping, industrial landfill containment, and infrastructure projects. Growth in this product line is driven by the increased demand for environmental remediation solutions, commercial construction and infrastructure spending, and the global need for clean water. Lastly, it's important to mention that each of these product lines is supported and supplied by our own world-class mineral reserves. The quality, quantity, and strategic locations of our mineral reserves combined with our leading technologies and applications expertise provide long-term supply stability and tremendous value for our customers. It's the reason we are the leader in many of the markets we serve and what makes MTI truly unique. With that, I hope you have a better understanding of the segments and product lines and can see how they fit together and how they better reflect the MTI of today. I'll certainly take you through more details on these segments and product lines, technologies, and our strategies at our Investor Day in May, and we look forward to doing so. Now I hand it over to Erik to provide more financial details. Over to you, Erik.

Thanks, Doug, and good morning, everyone. I'll review our first quarter financial results, and I'll also provide an outlook for the second quarter. Following my remarks, I'll turn the call over to Q&A. Now let's turn to our financial results. I'll start with the sequential quarter bridges on the left side of this slide. Sales increased 8% sequentially to $546 million, driven by higher volumes, incremental pricing adjustments, and favorable foreign exchange. Operating income improved 43% to $63 million, an increase of $19 million from the fourth quarter. The biggest driver of the improvement came from pricing adjustments related to the significant inflationary costs we absorbed late last year. We also experienced some moderation of cost pressures on a sequential basis, primarily driven by lower energy costs and more typical sea freight rates. Moving to the year-over-year bridges on the right side of the slide. Sales increased 5% over the prior year and were 8% higher on a constant currency basis. Our sales growth was primarily driven by higher pricing, which helped offset unfavorable foreign exchange and slightly lower volumes overall compared to the prior year. Demand remains healthy across most of our end markets, with a few exceptions. Residential construction markets are softer than last year in the U.S., and foundry products demand in China started to improve late in the quarter as expected after a slow start to the year. In addition, while the majority of our consumer-oriented end markets remain strong, we have experienced some customer destocking in personal care, primarily associated with our functional skincare products. Operating income was 7% lower than the prior year quarter, primarily driven by the lower volumes. Our pricing actions offset the year-over-year cost increases in the period, and we expect to recover additional margin through the year with continued price increases and as the pace of inflation continues to moderate. First quarter earnings per share, excluding special items, was $1.14. Note that higher interest rates versus last year impacted EPS by $0.11 in the quarter, and our effective tax rate was 22% versus 20% in the prior year quarter. Going forward, we expect our effective tax rate to remain at approximately 22%. Now let's review the segments in more detail, beginning with consumer and specialties. First quarter sales for consumer and specialties were $297 million, 5% above the prior year and 7% higher on a constant currency basis. Sales in household and personal care increased 7%, driven by strong market conditions and higher pricing. For example, global pet litter sales grew 18%, driven by continued strong demand, the acquisition of Concept Pet, and higher selling prices. Our edible oil purification sales grew 16% as we continue to penetrate the market with our highly effective bleaching earth products. Meanwhile, personal care volumes were lower than the prior year due to customer destocking of certain skincare products. Specialty additive sales were 3% higher than last year, primarily driven by higher selling prices. Overall market conditions for this product line were in line with our expectations. Demand for food, pharmaceutical, and automotive applications remained strong throughout the quarter, but we experienced lower demand in U.S. residential construction and from paper mills in the U.S. and Europe. In the paper end market, demand in Europe has remained low, with paper mill operating rates currently in the 70% range. We saw some softness in North America as we moved through the quarter, with operating rates in the low 80% range. We did, however, see higher paper volumes in Asia, driven by our newest satellite operations in China and India. We expect operating rates in the U.S. to improve as we move through the year. First quarter operating income for the segment was $32 million, the same level as last year. Our pricing actions are beginning to catch up with the accumulated inflation we've absorbed over the last several quarters. Going forward, we expect the benefit from price versus cost to expand margins further as additional price increases take effect. Looking to the second quarter, we expect to see improved demand in both the household and personal care and specialty additives product lines. In household and personal care, we expect demands for pet litter to remain strong, and demands for personal care products to improve. Additional selling price increases will take effect across pet litter as we continue to recover the significant inflationary costs we've absorbed in that business. In specialty additives, we expect to see similar demand conditions across the food, pharmaceutical, and automotive end markets. Residential construction activity should improve sequentially based on typical seasonality, but we expect demand to remain below prior year levels. Demand in paper markets will be similar sequentially, apart from typical customer maintenance outages in North America. Finally, we expect to see continued recovery of previously absorbed inflationary costs through our contractual and negotiated selling price increases. Altogether, we see operating income for the segment increasing by 10% sequentially to approximately $35 million. Now let's turn to Engineered Solutions. First quarter sales in the Engineered Solutions segment were 249 million, 6% higher than last year and 9% higher on a constant currency basis. Sales in high-temperature technologies grew 5%, driven by selling price increases and higher volumes in North America. Overall market conditions for this product line were in line with our expectations going into the quarter. Demand in North America for refractory and foundry products remained strong, and demand in China began to recover late in the quarter. Sales in environmental and infrastructure grew 7%, driven by large remediation projects and higher sales of infrastructure drilling products into tunneling and horizontal directional drilling applications. Operating income for the segment was $35 million, 5% lower than the prior year, primarily driven by the slower start to the year in China. We also experienced higher logistics costs in the U.S. due to ongoing rail service issues, which are causing us to use more expensive modes of transportation. Looking ahead to the second quarter, we expect continued strong demand in North America for refractory and foundry products, and we expect continued improvement in China foundry demand. In addition, we have solid order books heading into what should be a stronger period for environmental infrastructure and commercial construction projects. In total, we expect operating income for this segment to increase 10% sequentially to approximately $39 million. Now let's review our balance sheet and cash flow highlights. Total liquidity at the end of the first quarter was $437 million, up slightly from the fourth quarter, and net leverage improved to 2.3 times EBITDA. Cash from operations increased $33 million versus the prior year quarter as the inflationary impact on our working capital has moderated relative to last year. As a reminder, the first quarter is typically our lowest cash flow quarter of the year. We deployed $24 million toward capital expenditures in the first quarter, bringing free cash flow to $9 million, which is $28 million above last year. We expect our free cash flow to continue to improve as we move through the year. Our CapEx in the first quarter included incrementally higher spending on a few discrete projects, including our newest PPC satellites in Asia. For the full year, we continue to expect CapEx in the $80 million to $90 million range, which includes our normal amount of sustaining capital to maintain our operations and selective crude investment in high-return, short payback opportunities. Depending on the timing of the spend on the new satellites we just announced, we could end up at the high end of that range and will continue to update you as we move through the year. At this point, we continue to expect free cash flow of approximately $150 million for the full year. The balance sheet remains in a strong position, and we are maintaining our balanced approach to capital deployment. Our near-term priority is to continue to move toward our target net leverage of around two times EBITDA through debt repayment. Now I'll summarize our outlook for the second quarter. Overall for MTI, we expect another strong quarter ahead. In our consumer and specialty segment, we expect to see continued strong demand for pet litter globally, and we expect sequentially higher volumes in personal care and edible oil purification. Residential construction demand will likely remain below last year, but we should see an increase sequentially as we enter the peak construction season in North America. We expect paper market demand to be similar to the first quarter, with the usual second quarter customer maintenance outages occurring in North America. In Engineered Solutions, we expect continued strength in North American steel and foundry markets, and China foundry volumes should continue to recover on a sequential basis. In addition, the second quarter should be a stronger period for environmental and infrastructure project activity. We expect our margins will expand further from continued pricing adjustments and as the pace of inflation moderates, which will help us catch up on the price versus cost lag we've experienced for the last several quarters. We expect our cash flow to improve as we move through the year. Overall, our outlook for the second quarter assumes that end market conditions remain similar to the first quarter and we will experience typical seasonal improvements as well as continued sequential improvement in China. As of today, we have not heard anything to the contrary from our customers. In total for MTI, we expect operating income to increase 10% sequentially to around $70 million in the second quarter, which equates to earnings per share between $1.25 and $1.30.

Before we go to Q&A, I'd like to remind everyone that MTI will be hosting an Investor Day on the morning of May 24th at the New York Stock Exchange. We hope you'll be able to join us in person, so please reach out to Lydia if you'd like us to save you a seat. More details will be posted on our website. But if you can't make it in person, the events will also be webcast. We're excited to share how MTI's portfolio of businesses and growth opportunities have evolved over the last several years to position the company for meaningfully higher growth and earnings power. We'll be providing a deep dive into our current businesses, their leading market positions, and their sustainable long-term growth drivers. And we'll also be highlighting what makes MTI unique in terms of technologies, capabilities, and our culture of operational excellence. Thanks to our recent reorganization, the elements that make MTI unique and valuable are more evident than ever before, and that's why we believe it's a great time to share our story. So we hope you'll join us next month to hear and see more. And with that, let's turn the call over to questions.

Thank you. Our first question comes from Daniel Moore with CJS Securities. Please go ahead.

Good morning, Doug. Good morning, Erik. Thank you for all the color and taking the questions.

Hi, Dan.

To start with, obviously really good preview of the Investor Day and congrats on the solid progress in the quarter. You saw margin uptick, and obviously you're pointing to additional margin expansion in coming quarters. Just I think there's a kind of a wide range of expectations. So previously you had said 13.5% to 14% margins were kind of a goal by H2. Is that still what you're thinking? And is that on an annualized kind of run rate basis? There's typically some seasonality where Q4 would be lower at least pre-pandemic. We saw that. So just want to think about kind of the cadence for margins and how we should be thinking about that expansion over the next few quarters. Thanks.

Yeah. Thanks, Dan. This is Erik. I can take that one for you. So what I said last quarter was that just based on our price versus cost catch-up alone, we have line of sight to 150 to 200 basis points of margin improvement by the end of the year on a run rate basis. So that's on a full year run rate basis. And like you said, we do have some seasonality in the fourth quarter. But what that means is we're going to we expect to see sequential margin improvement through this year as our pricing continues to catch up with that inflation. I will say what we've experienced so far this year has been in line with our plan, our expectations from an inflation perspective. Energy has been down a little bit, and that helps not quite back to pre-2022 levels, but definitely down from the peaks that we saw last year. As I mentioned, our freight, our sea freight in particular has come back down to more reasonable levels here in the first quarter. So from an inflation side of things, everything has been happening according to plan. And from a pricing perspective, we're also on our plan for pricing adjustments. The majority of those have been put in place already in the first quarter and in April. We will have some continuing contractual pricing adjustments happening later in the second quarter and in the third quarter and some additional pricing adjustments taking effect. But the majority of the pricing has already been put in place. And so we still see that margin improvement happening on a sequential basis through the year. In terms of the year-over-year overall margin improvement, remember, so 2022 we did 12% operating income margins for the full year. That margin improvement on a year-over-year basis is going to be backend weighted this year.

That is very helpful, Erik. I appreciate that. Shifting gears, really good to see the new paper agreements that you signed. Let's talk about New Yield and how that's gaining traction specifically and more generally what the pipeline of additional opportunities looks like?

Yeah. Sure. Let me take that one first. We're really excited about these new satellite opportunities and contracts, Dan. Specifically to New Yield, I'm going to let D.J. talk about it a bit, but this comes directly from what, you know, in my comments that crystal engineering. Our ability to be able to, in this case, repurpose a crystal to reshape it or to modify it to become a functional additive is kind of core to what we do. It's the same as the technology of growing a crystal for filler in paper or to grow a different type of crystal to become gloss on a box or another product. This is our ability to take a waste stream and be able to understand that crystal and reapply it. One of these contracts is for that new product. So D.J., you want to take us through the timing and a little bit more depth there?

Certainly. So, Dan, let me unpack kind of the state of new business development and the progress you're going to be seeing. We had already announced an expansion into packaging with a GCC satellite. We announced that some time ago, and that'll be coming on towards the second half of this year. That provides gloss and a high-end packaging application. We've also already announced, and this is what Erik was referring to with the new PCC satellites, new opportunities both in China and in India. Those were standard PCC applications in printing and writing grades and are about 70,000 tons a year and they're continuing to ramp up. So they've been completed, started in the second half of last year and the first quarter of this year and they're ramping up. Now with this last announcement that we had, we had three PCC agreements. They total about 180 some thousand tons. One of those is a pretty key investment with a company called Nine Dragons. This particular application is standard PCC and printing and writing grades. But Nine Dragons is a packaging company, so we're going to be able to work with them and expand that crystal product into some packaging grades there. We also announced some 60,000 tons that come online with Zhefeng new materials. This is a specially tailored PCC that will go into specialty grades. Some printing and writing grades, but these specialty grades will include things like food wrap and those applications. The last element that we announced, which you were referring to with NewYield LO, is a new variant on a platform we developed some time ago. That's going to be deployed in India with Andhra Papers, and that's going to be some 40,000 tons in that application. The right way of looking at the immediate trajectory is that the 70,000 tons of PCC was a good part of that growth, and there's still more to come towards the second half of this year. That GCC will come online, and then also that 185,000 tons of PCC will be second half of this year and early into 2024. Now I'll tell you, just going a little further on NewYield LO, and I do want to link it to what Doug was referring to with the crystal engineering. All of these PCCs have been tailored for these unique applications. What we're excited for about NewYield LO is we are repurposing this waste stream from the customer. In this particular application, we're building the satellite around the concept, so that customer would be disposing and landfilling this waste product, and we're able to take a good portion of it now and put it into that paper and provide a high-quality printing and writing grade paper. That is allowing for their high performance, but it's also reducing their cost. In general, we do have some further pull for this. This particular application mostly in these developing regions where their paper machine is designed that has some of that waste; they'll no longer landfill it. We think that this really bolsters our ability to continue to penetrate the market and at the market share that we've enjoyed in the past. I hope that helps.

Absolutely does. And from a revenue perspective, I think it used to be like $100 a ton. There's been a lot of inflation. And I know these are all different, you know, end markets and different applications. But still in that kind of $150 per ton to $200 per ton. Is that the right thought process?

That's the right thought process. I can't give away any of those specifics, but that's a reasonable process. Everything that's been deployed is consistent with our pricing, and I would say consistent with our returns. I would just remind you, though, that GCC opportunity that we had announced earlier and we had said this in some previous discussions, that one's a little bit different. That's going to be some 320,000 tons to 50,000 tons of material. That is a different pricing model. That's a tolling arrangement. But it's reasonable for you to think that the returns that we put on the capital there are consistent with what our business model is. The sort of income that's generated would be the size of say a small satellite.

Make sense. All right. I will jump back in queue. Look forward to hearing more about these and others, obviously, later in May.

Thanks, Dan.

And we'll take our next question from the line of David Silver with C.L. King. Please go ahead.

Okay. Thank you. I'd also second Dan's comments about thanks for doing that walkthrough of the new segment setup. It helps just to hear things maybe more than one time. I wanted to ask you maybe about the remediation opportunities. So it was called out in the press release as a source of incremental growth. But I think it was referenced the water remediation, and I believe to date the commercialization has been on the ground remediation side of things. So maybe just an update on the pace of commercialization or beta testing in your overall remediation portfolio. Thank you.

Sure, David. Let me take you through just quickly what the types of applications that we provide in the remediation space, environmental remediation. A couple of different types. One is water remediation. So these are things like groundwater, drinking water, and these are areas where our FLUORO-SORB product comes in. We're able to take impurities out of water. We also apply this in oil and gas in terms of our offshore deep-water flow backs. We're able to remediate that water right offshore on that platform. This is a technology we have as part of the company where we create these media or even the systems to be able to, in some cases, pump and treat. If you remember last year, we did a project for a U.S. government military base which had some PFAS contamination. That was an area where we actually pumped the water out of the plume underground, treated the water, and then put it back in. That's a pump and treat application. The one I was referring to, another area where we provide remediation services is in sediment capping. This quarter, I mentioned a couple of sediment capping projects, one of which was here in New York City. It was the Gowanus Canal. We've been continuing to cap and work on that project over several years, but that was really moving forward this past quarter and another sediment capping project here in the United States on Lake George. We're able to provide products that can cap in place and contain chemicals or things that sit on riverbeds. The other area I mentioned is drinking water industrial. We also have an industrial wastewater. So we'll go around to industrial sites, providing the media and, in some cases, the system to clean up water on site. I mentioned our drinking water where we have some installations to begin to remove PFAS chemicals from drinking water systems. I know you've probably noted some of the news around that and some of the proposed limitations that the EPA is putting on PFAS in drinking water. We've been working for, as you know, several years with utilities to provide the system and the media. We're finding our product to be extremely effective, to remediate down by itself, to the levels the EPA is dictating. So that's a new area for us, but it all comes from that capability and technology to provide a particle or a substance that can take toxins or impurities out of water. Hopefully that helps.

Yeah, no, that's very helpful. I had a question maybe about currency and how it might affect your thinking for the balance of the year. But I think we're coming up on a lengthy period where almost every quarter currency effects were a detriment to your reported results. At least if I'm thinking of the dollar-euro and maybe some other relationship currency relationships, it looks like that's something that might flip here going forward. So maybe over a one or two-quarter period, I don't want to ask you to project currency rates too far out. But is that in effect a factor that's likely to kind of flip from being a detriment to kind of a positive element of some magnitude? What are the maybe the one or two key currency relationships that you're looking at, which maybe have been the most volatile and maybe we should keep an eye on in terms of the overall effect of currency on your reported results? Thank you.

Yeah. Thanks, Dave. This is Erik. You saw that there was a bit of a reversal in our first quarter results. So on a year-over-year basis, we're still seeing unfavorable currency impacting our revenues. It was about a 3% impact in the first quarter on a year-over-year basis. That's less than it has been in previous quarters. And if you look at the sequential bridges, it was actually favorable moving from the fourth quarter to the first quarter as the euro strengthened a little bit. So in broad terms, euro USD matters for us. It's euro and euro-linked currencies operating in that region. I’m not going to project much further. But yeah, on a sequential basis, it flipped to being favorable for us in the first quarter.

Yeah, the only thing I'll add there, David, is that we have some it's not just euro dollar. We have some inter-region crosses that are mindful. We have euro lira, which impacts some of that currency, but the translation is mostly euro dollar. So we're not going to predict where currencies are. But you've seen the latest set of Europe, and the economy seems to be maybe stabilizing or improving some. We'll see where the interest rate curves go. But I would think the tendency would be maybe for a weaker dollar going forward, at least from where it is today. Given our mix of revenues more heavily weighted to the U.S., that would be a positive for us. But I'm not going as far to say when that will happen, but probably out later this year into next, I think that could be a positive for us and start to flip the other way.

Okay, great. Last question would be just maybe a general thought about cost inflation here and how it affects your strategies or your plans to fully restore your margins to the desired levels. But in general, I mean a number of my companies are talking about non-raw material elements in the cost picture. So last year, it was all raw materials and logistics. This year it's more like labor, utilities, insurance, and other overall elements in the cost picture that are moving ahead, even if raw materials have kind of stabilized here. I'm just wondering if you're seeing the same thing. And secondly, more importantly, how do you anticipate offsetting that? In other words, the companies I talked to would say that it's just a harder negotiation to get reimbursed for cost increases that are not as visible, let's say, as raw material prices might be. So managing the overall cost elements in a still inflationary environment, maybe where the sources of the inflation are shifting. Thank you.

Yeah, well, I'd say we're seeing the exact same thing we have for some time now, at least the past six quarters. It's across the board. We're seeing raw material cost inflation. We're seeing energy inflation, at least last year. Erik mentioned some of that's moderated. I would say logistics and transportation. We're seeing labor inflation. But I also think there's another area that will continue to impact, and that is in the capital expenditures. So we're seeing CapEx and things that we buy, these satellites we build. Therefore, having to make a return on that capital that will increase potentially, this has the impact of increasing depreciation and being an additional longer-term weight on margins. We're across the board looking at that and how that impacts our cost structure in total, fixed and variable, and working through pricing with our customers to manage that. Again, we always say we have very constructive conversations with our customers. I think some of the examples we gave you today are that we're not just selling a product necessarily. We're selling a solution. We actually work with them to tailor something to their product. In the case of some of our paper and packaging contracts, we tailor something, which ends up being a ten or a 15-year contract, right? With the pricing that's negotiated, which varies through that contract. We're able to find ways to protect ourselves. But we also understand the value we provide to our customers in that solution. Therefore, there is a fair margin that we should be able to make, and I think they recognize that as well. Now, pricing discussions are never easy; they're always challenging. But we're able to have very constructive conversations, and we've protected the company through contractual pricing that will revert to giving those margins back, and then the negotiated pricing. When you're providing a solution in a very valuable solution, that's an easier conversation. If these costs continue to inflate, we're going to continue to drive our price to make sure we get the value we deserve in the products we provide. That's how we manage it. But we are looking at it and we're seeing it in labor, transportation, raw materials, energy, and in our capital expenditures. It's across the board, and companies have had to deal with it. I think we're dealing with it pretty well, although there's some time associated with how we pass that through. But I think as we've shown over the past year or more, we're very able to deliver pricing, and we'll get our margins back to where they should be.

Thanks for all the additional detail. I appreciate it.

Thanks, David.

And we'll take our next question from the line of Steve Ferazani with Sidoti. Please go ahead.

On cash flow, I know you had a targeted range. Obviously much improvement over Q1 of the year ago. There was free cash flow, even with higher CapEx. Just trying to think of what to know your sense on cash conversion trends now that we're five months into the year and whether those sort of targets still hold?

I'll take that.

Yeah, I can take that, Steve. So, yeah, I mean, as I mentioned, Q1 is typically our lowest cash flow quarter that we have each year. What we saw in the first quarter was back towards more of the normal levels that we expect. It was within our expectations. It doesn't change anything about our outlook for the full year. We're still expecting $150 million of free cash flow. It's going to improve somewhat in the second quarter, but the majority of the cash flow, which is also typical, is going to be in the second half. What is helping our cash flow this year versus last year is that moderation in inflation. Costs don't necessarily have to come down, and they haven't that much. But as the pace of inflation slows, the impact on our working capital moderates, and that cash flow starts to fall through. That's what you're going to see as we move through the year.

So it's still reasonable to think you can get to two times or even under year-end leverage net leverage?

Yeah. Our target is around two times EBITDA. We're going to be using free cash flow to pay down debt. That's going to happen more towards the end of the year. It's reasonable to think that through debt paydown and building up cash from our cash flow and EBITDA, we're going to get much closer to that target.

Yeah, Steve, with $150 million.

So, no change.

Sorry. Go ahead, Steve.

No, no, no, please go ahead, Douglas.

I was going to say with $150 million of free cash flow, two times the leverage would be around $80 million of net. So, with cash build and debt repayment, we see absolutely able to get to two times or below. Some of that cash we will maintain, we generate cash both in the United States and Overseas. We will hold that cash overseas. We use that for capital expenditures. So we don't have to move cash offshore. We'll use it for bolt-on acquisitions or we can make the choice to bring it back home. But there's a trade-off with that, as you know, with taxes, etc. We make those trade-offs all the time, but we've got the cash flow to be able to hit that target within reason, yeah.

How do bolt-on opportunities look now that cash flow could be improving?

I guess I'd say this year we keep our eye on opportunities. They are out there. I'm going to tell you that that's they're hard to time. We have a strong balance sheet to be able to purchase something when it becomes actionable. I am going to say our bias this year is continuing to work on. We've got some real good opportunities and some strong profit growth to generate from the ones we've purchased over the past three years. So continuing to integrate Normerica Concept Pet. We've worked on some of the, I won't say easier things, but there's a lot of capacity there and some fixed cost leverage that we can go after as we continue to grow these product lines. So I think this year really looking at making sure that we're generating the profitability we want off the acquisitions we've made over the past couple of years and paying down debt. But that's our focus. However, if something were to come up small, we've got the cash in the regions and on the balance sheet to be able to execute on it. I think we're in a really good spot with our balance sheet, Steve, but I think the focus is really going to be on ourselves this year and some debt paydown.

Great. Thanks for the color on that. I appreciate it, guys.

And we'll take our next question from the line of Mike Harrison with Seaport Research Partners. Please go ahead.

Hi. Good morning.

Hi, Mike. How are you?

Doing well, thank you. Now that you've completed this reorganization, you've definitely indicated that there's some real streamlining that is associated with this new structure. I was hoping that maybe you could just give a little bit more color on what you're seeing now that these changes have been implemented in terms of how these segments are operating. Is there any way to quantify some of the benefits, either in margin terms or growth terms or dollar terms, I guess?

Mike, you're going to need to attend the Investor Day to get more answers to those questions. Just kidding. We're starting to see some quantifiable results regarding the insights we have on various segments and product lines. I want to emphasize that while the company remains the same as it was last year, our organization around these areas has improved. The technologies, similarities, and growth drivers we are recognizing have allowed us to group consumer on-shelf products together, which facilitates natural conversations that weren't happening before among separate segments during innovation cycles. There are some shared customers in this mix, and being able to unify our discussions lets us present ourselves differently to major global consumer products companies. In terms of high-temperature solutions, we've recently had a few meetings with R&D teams to discuss engineered blends and ongoing developments. There's considerable knowledge sharing taking place, and we're noticing direct sales opportunities in foundries using refractory materials, which presents some minor synergies. I won't overstate this, but we're beginning to have more discussions among sales and R&D groups, looking at the similarities in strategies within the industry globally. This trend is likely to unfold over time, and I believe the strength of these segments will become more apparent as we proceed. I think this will lead to quicker innovation and increased conversations within the company, ultimately driving faster innovation and growth. Additionally, we are seeing synergies related to higher-margin products. Many items we've developed in the last three years are aimed at higher growth and higher margin categories, which are growing rapidly and will contribute to our margin improvement moving forward. It might be surprising why it took this reorganization to ignite these conversations, but once we align things and introduce the right incentives, it creates a new dynamic. We're starting to witness that, and that's what I meant by sparking energy within the organization. We plan to discuss how this will unfold over the next five years at our Investor Day in May. I hope you can join us, or at least catch up afterward if you're unable to attend.

Perfect. Well, I appreciate the preview at least. Wanted to follow up on the New Yield offering. Is that something that you can retrofit with an existing satellite? It sounded to me, D.J., in your explanation that it's something that's integrated into the construction of the satellite. So do you have to start with a new project, or is that something that can be retrofitted?

So, Mike, I think the best way to think of New Yield is as capability that is very specific to how we apply that crystal engineering to which Doug referred earlier. Specifically, this particular product can be retrofitted to certain applications. We have a couple of advanced trials and negotiations that are contemplating that specifically. So it can be built as a new satellite and it can be retrofitted onto an existing satellite, tailored based on the specific environmental condition in this particular case of each customer. It's not going to apply to everybody, but it does have a good application. I would also tell you that we're starting to get some pull from some packaging manufacturers that are interested in pursuing this technology as well. So it's retrofit, standalone, and able to be a little more broadly applied than this particular application in printing and writing papers.

All right. Great. And then a question on the consumer business and pet care. You guys have worked to expand your position in private label. Curious if you're starting to see consumers starting to trade down because of inflation. I guess just maybe reiterate where private label margins look compared to the products that you're selling into big-name glitter brands.

Over time, private label products have been growing, not just in the pet litter market, but overall. They are expanding more quickly than some branded products. Our pet litter business includes private label offerings, and we are the largest private label packaged litter manufacturer in the United States. In Europe, the market is different as it mainly consists of store-brand products, and we are a premium provider in that space. We are also the leading premium cat litter supplier in Europe. Additionally, we sell to branded manufacturers, providing bulk litter and bentonite for clumping cat litter to various branded customers in the U.S. We're also seeing growth in Asia, particularly in China, where pet ownership has increased by 15% in recent years. We have initiatives in place to grow further in that region. Our products are available through multiple channels; we sell in stores, to brands in bulk, and online, especially in Europe and North America, which is becoming increasingly important in Asia, particularly China. Demand for our pet care and litter products has been strong across all regions, with stable growth averaging between 6% and 8%. This growth rate for the category as a whole is slightly lower, indicating that private label products are experiencing a higher growth trajectory, especially in North America. While I can't comment on margins for branded companies, our margins are good and on the rise, driven not just by pricing but also by fixed cost leverage from our global system of plants and mines. We still have opportunities to further leverage this system. With the consistent growth in pet litter, we have ample capacity, and we believe that this fixed cost leverage will continue to improve margins in our pet care business. There's more work ahead, but the outlook for growth and margin enhancement in this sector is quite promising.

I guess just to clarify my question on margins, is that you guys realize better margins on packaged private label products than you do on bulk bentonite. You're selling to customers that use it in their blends.

I'm not going to answer that, Mike. We ensure that we maintain solid margins on our bulk products. It really varies depending on the market. However, being vertically integrated and having the resources means we operate in all those channels. I would say there's probably a 60% to 65% chance that if you're using clumping cat litter in North America, it's likely that our bentonite is involved in some capacity. This is the advantage of being vertically integrated, and we make sure we derive value from that resource.

Understood. Last question for me is just hoping that maybe we could get a little bit of a comment on the full year outlook. You guys talked about your expectation of driving sequential margin improvement as the year goes on. But, I mean, do you have I guess maybe I'll start here. Do you have confidence that you're going to be able to show year-over-year EPS growth for the full year? Any other detail on guidance there for the full year would be appreciated.

Erik mentioned some guidance on the margin, and I want to emphasize that we expect sequential margin improvement throughout the year. This growth in margin is driven by the pricing strategies we've implemented, along with contractual pricing adjustments that will occur at specific intervals. We are experiencing a slight reduction in inflation, though transportation costs remain high for us. Overall, we anticipate a margin improvement of approximately 150 to 200 basis points on a run rate basis compared to last year. Last year's margins were 12%, and we aim to reach about 13.5% by year-end, possibly even hitting 14%. However, the EPS outlook is a bit more complex. The growth in EBIT will occur, but the EPS is impacted mainly by rising interest rates. About 50% of our debt is at floating rates, which has become more costly compared to previous years. Last year, the below-the-line interest charged us around $0.40 of EPS compared to 2021. While we believe EPS can grow, we anticipate another potential $0.30 impact this year from interest rates and recent global tax changes. Overall, EBIT and EBITDA will improve, but projecting EPS growth this year is challenging due to interest rate fluctuations.

Excellent. Thanks very much.

Thanks, Mike.

At this time, I'd like to turn the call back to Mr. Dietrich for any closing remarks.

Thank you, operator. I appreciate that. I very much appreciate everyone joining today for our first quarter call. I do encourage you to join us virtually or in person for our Investor Day. I'd love to take you deeper into these segments and our growth trajectories, and we hope to see you there. Anyway, thanks for joining today. Take care.

This concludes today's call. Thank you for your participation, and you may now disconnect.