Minerals Technologies Inc Q3 FY2025 Earnings Call

Good morning, and welcome to the Minerals Technologies Third Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Lydia Kopylova, Head of Investor Relations. Please go ahead.

Thank you, Gary. Good morning, everyone, and welcome to our third quarter 2025 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 to 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 slide. 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 and in an appendix of this presentation, which are posted on our website. Now I'll turn it over to Doug.

Thanks, Lydia. Good morning, everyone, and thanks for joining today. I'll start today's call with a review of our third quarter, followed by an update on what we're seeing across our key end markets. I figure it would be helpful to provide some perspective on how our markets have changed over the past year and how they continue to move within the global economic context. I then want to highlight some of the recent investments we've made to support the long-term growth we are seeing across several of our product lines. Erik will then take you through the detailed financials and share our outlook for the fourth quarter, and then we'll open it up to questions. Let me start with our Q3 numbers. We had strong execution across our business, delivering solid financial results despite facing mixed market conditions, which I'll get into a bit later. Our sales increased 1%, both sequentially and over last year to $532 million. Operating income came in at $78 million and earnings per share were $1.55, a company record for the third quarter. Cash flow was strong and was up 24% year-over-year. We continue to strengthen our balance sheet, providing us with a financial foundation from which we can evaluate different investments and opportunities to drive growth. We also returned $20 million to our shareholders in the quarter and last week announced a 9% increase to our regular quarterly dividend, making this the third consecutive year that MTI has had a dividend increase. We recognize our sales growth has been sluggish this year due largely to the softer market conditions we've been experiencing in residential and commercial construction, heavy truck and agricultural equipment markets and in Europe in general. These softer market conditions have largely offset the growth we are seeing in many of our other product lines where we are executing on opportunities in markets that are structurally expanding and where we have built a distinct competitive advantage. I'll highlight some of these specific investments and opportunities in a moment and outline how they will set us up for meaningful expansion across several product lines, both in the near and long term. But first, let me provide an update on our current market conditions. As a general overview, after the first quarter, most of our end markets have been and remain relatively stable. A few continue to be weaker than last year, and we expect them to remain so through the fourth quarter. Let's start with our Household & Personal Care product line. Pet litter market conditions in North America and Europe have remained stable and at similar levels compared to last year. We continue to see discounting activities from branded producers in North America, and in response, we've worked with our customers to make promotional adjustments to the products we supply them. These activities have had a positive impact on our sales volumes and profits. The pet litter market in Asia, and more specifically, China, continued to show strong growth. Our volumes are growing there, and we are making investments to support this long-term growth. In our other consumer markets, demand for our natural oil purification and animal health products has been strong, with our sales this year up 18% and 12%, respectively, and we see this trend continuing. In Specialty Additives, we're facing mixed market conditions in paper and packaging. Asia continues to be a market with good opportunities for us to expand our base business and introduce new technologies. However, this year, North America demand has been weaker. Elsewhere in this product line, demand in the residential construction market has been relatively flat all year. We did see some signs of further softening late in the third quarter, which may make it a slower end of the year. For our high-temperature technologies product line, conditions have remained relatively stable for steel production in the U.S. with utilization rates remaining in the mid to upper 70% range. It is not the highest level we've seen over the past 2 years, but healthy enough for stable volumes. Europe continues to be more of a challenge with steel utilization rates dropping below 60% this year. The U.S. foundry market has also remained relatively steady for most of the year, buoyed by stable auto production. Two areas that have been soft for this business all year are the agricultural equipment market and heavy truck markets. When these markets begin to rebound, they will provide good opportunities for foundry demand. The China foundry market has remained relatively strong this year despite the impact of tariffs and ongoing trade disputes. In fact, we've seen strong volume across our metalcasting business there with year-to-date volumes up over 10% from last year. In environmental and infrastructure, commercial construction remains slow compared to historical levels, and these similar conditions exist for the environmental lining and remediation markets. We expect to see some improvement in project activity as interest rates ease and projects are financed. We are already specified on several large commercial and environmental projects and expect an inflection in this product line sales when these projects commence. Elsewhere, we've seen strong pull for our infrastructure drilling products this year, increased geothermal drilling and fiber optic cable installation have been driving the increased demand. As you can see, we continue to experience mixed conditions across our end markets. But despite the impact these conditions are having on our top line this year, our team has navigated these conditions to maintain margins, profits and cash flow. At the same time, we've not deviated from our focus on investments in technologies and markets where we see the biggest growth opportunities, which I'll go into more detail on the next slide. We've spoken about our strategy to build positions in higher growth markets. Markets with economic or macro trends where we can deploy new technologies or expand our existing technologies to drive higher levels of growth and balance the more cyclical portions of our company. We've been executing on these opportunities, expanding our pet care business, investing in technology serving a variety of consumer-driven end markets, and deploying new technology in some of our more traditional businesses like refractories and paper and packaging to expand our value proposition globally. As you've likely seen, we announced a few recent investments made in support of these strategies, and I want to highlight a few of them to remind you of the opportunity we continue to see. Let's start with a few opportunities in our Consumer and Specialty segment. In our pet care business, we remain confident in the long-term growth trends of this market and in the private label portion in particular. We expect the North America pet litter market to continue to grow by 3% to 4% and in the Asia market to grow by 6% to 8% per year over the long term. Over the past 5 years, our pet litter business has grown organically at a 9% compound rate, adjusted for the 2 acquisitions we've made over this period. To support this continued growth, we recently made investments at our plants in Dyersburg, Tennessee; Branford, Ontario, and Chaoyang City in China. We've broadened these plant manufacturing capabilities to increase throughput, lower cost and offer greater packaging flexibility to meet customer demand. Dyersburg and Branford are both strategically located and well connected to large portions of the North America market. These recent investments to expand capacity upgrade capability at these sites enabled us to secure some significant contracts beginning in 2026. In China, we've outgrown our existing facility and are bringing online a completely new one to meet the demand that we are seeing from this rapidly growing pet litter market. The upgrades across these 3 plants are expected to be completed by the end of 2025 and will fortify our position as the largest high-quality private label cat litter supplier to customers around the world. In our natural oil purification product line, we announced an investment at our plant in Turkey to support the significant growth we are seeing in this market. Since 2018, our Bleaching Earth business has grown at a compound rate of 20%, and this is our third expansion since we opened the facility to support this level of revenue growth. Our facility in Turkey both mines the raw materials and manufactures absorbents and Bleaching Earth products sold under the brand name Rafinol, which are used for the purification of edible oils and renewable fuels, including biodiesel, renewable diesel, and sustainable aviation fuel. The market opportunity here is significant. The global natural oil purification market size was $1.1 billion in 2024. The renewable fuels portion accounts for over 12% of this market and is the fastest-growing segment. Demand for sustainable aviation fuel, in particular, is growing rapidly and is being bolstered by supportive regulatory changes in the U.S. and Europe. Our Rafinol product line is differentiated in the market with its high-performing absorptive properties that succeed in the most challenging applications like sustainable aviation fuel. Also worth mentioning, we've made other investments to meet the increased demand for our natural animal health products, and also for our higher tech fabric care solutions for dry laundry detergent. In our Paper and Packaging business, we continue to secure new contracts in Asia, and in the next 6 months, we expect to commission 4 new satellites in the region. There continues to be a significant unpenetrated addressable market in Asia for our technologies. We've been driving the deployment of engineered calcium carbonate and the introduction of renewable technologies to the paper and white packaging industry as producers expand and look to upgrade their product quality. Since 2022, our volumes there have grown by 20%, including the doubling of our sales to the white packaging industry. We've always been the leader in the region and are well positioned to continue to grow by delivering the best calcium carbonate solutions including innovative technologies like NewYield. On the Engineered Solutions side, our MINSCAN installations and our Refractories business continue to go strong. We just signed our 18th MINSCAN contract, and we'll be installing 6 new units this coming year. There's a large addressable market with over 130 electric arc furnaces in the U.S. and Europe capable of using MINSCAN, providing us with a significant runway to grow over the next several years. In summary, we expect these investments to generate $100 million in incremental revenue over the next 12 to 18 months as they ramp up. And these are just a few examples of the investments that we've recently made to support the growth opportunities for which we have strategically positioned ourselves. I want to be clear that these are just a subset of the initiatives that we are pursuing. Other areas like PFAS remediation, natural skin care additives, geothermal drilling products and further penetration of our greensand bond technologies into Asia are all progressing nicely as well. Together, they provide several significant pathways for us to drive sales higher going forward. And when our weaker markets begin to rebound, we see that providing additional upside to our top line growth. With that, let's have Erik take you through more detail on our third quarter financials and our fourth quarter outlook.

Thanks, Doug, and good morning, everyone. I'll start by providing an overview of our third quarter results followed by a review of the performance of our segments, and I'll wrap up with our outlook for the fourth quarter. Following my remarks, I'll turn the call over for questions. Now let's review our third quarter results. Overall, our team delivered another solid performance while continuing to navigate mixed market conditions. Third quarter sales were $532 million, up 1% sequentially and 1% higher than the prior year. You can see in the sequential sales bridge on the top right that sales increased in 3 of our 4 product lines. In Consumer & Specialties, our Household & Personal Care product line was up 2% sequentially and driven by increases in cat litter and other consumer specialties. In Specialty Additives, sales were 2% lower sequentially as we moved into the seasonally lower period for residential construction applications. In Engineered Solutions, sales in high-temperature technologies increased slightly from the second quarter as higher sales to steel customers were partly offset by lower sales to foundry customers in North America. And we saw a 5% sequential increase in our environmental and infrastructure product line, driven by increased demand for offshore services as well as infrastructure drilling products. To summarize, conditions played out mostly as we anticipated, and I'll take you through more of the details when I cover the segments in a moment. Operating income for the quarter was $78 million, down 1% sequentially and versus the prior year, and operating margin was 14.7% of sales. In the operating income bridge on the bottom right of the slide, you can see that unfavorable volume and mix primarily in the Consumer & Specialty segment impacted income directly by $1 million. And lower volume also contributed to temporarily higher operating costs at a few of our facilities in the quarter. Higher pricing of $1 million offset inflationary input costs, including higher tariff costs in the third quarter. EBITDA was $100 million, up 1% from prior quarter and prior year and EBITDA margin was 18.8%. I'd like to point out that versus the third quarter last year, we've done well to offset $10 million of higher costs, including tariff costs raw material increases, energy and temporary increases like higher logistics costs associated with our U.S. cat litter plant upgrade. We offset these cost increases with a combination of productivity improvements, supply chain actions, price increases and our cost savings program. And I would also highlight as we move through the temporary cost increases, we should see margin improvement from these actions going forward. Earnings per share, excluding special items, was $1.55, the same level as the second quarter and up 3% from last year, representing a record third quarter for the company. We recorded special items of $7.5 million in the quarter related to litigation expenses. Now let's turn to a review of our segments, beginning with Consumer & Specialties. Third quarter sales in the Consumer & Specialty segment were $277 million, flat sequentially and down 1% from last year. In Household & Personal Care, sales improved by 2% from prior quarter to $130 million, driven by improving volumes in our cat litter business and continued progress on growth initiatives in consumer specialty applications. Most notably in edible oil and renewable fuel purification, where sales grew 18% over last year. In Specialty Additives, sales were 148 million, 2% lower sequentially. The Global Paper and Packaging volumes were flat compared with the second quarter as volume increases in Asia offset lower volumes in North America. Meanwhile, demand for residential construction products was incrementally softer in the quarter, which pulled volumes lower for the product line. Despite the volume pressure in Specialty Additives, the segment continued to build on the operating performance gains we saw in the second quarter, delivering a modest improvement to operating margin sequentially. Operating income in the quarter was $37 million, representing a 13.5% of sales. Looking ahead to the fourth quarter, in Household & Personal Care, we expect continued sequential growth in cat litter, edible oil and renewable fuel purification. And in Specialty Additives, we're expecting lower sales sequentially, primarily driven by typical seasonality for residential construction products. We do expect softer-than-normal residential construction volumes in the fourth quarter as some customers are indicating they have efficient inventory levels heading into the winter months and they are planning to adjust production schedules accordingly. Overall, for the segment, we expect sales to be flat or slightly lower sequentially. Now let's turn to the Engineered Solutions segment. Third quarter sales in the Engineered Solutions segment increased by 2% sequentially and grew 4% from prior year to $255 million. In the high-temperature technologies product line, sales of $179 million were similar to prior quarter and up 2% year-over-year. Sales to steel customers in North America continued strong, more than offsetting continued weakness in the Europe and Middle East steel market. Sales to foundry customers were mixed with North America volumes impacted by continued softness in the heavy truck and agricultural equipment markets, in addition to the typical third quarter customer maintenance outages. On the positive side, we saw continued strong demand across a with foundry volumes up 5% sequentially and up 17% versus prior year. In Environmental & Infrastructure, sales led by 5% sequentially and were up 9% from prior year driven by a strong pull for offshore services and strong pull for infrastructure drilling products. The segment did a nice job of mitigating tariff impacts and turned in another strong operating performance. Operating income was $45 million, and operating margin improved by 20 basis points sequentially to 17.6% of sales, a record level for the segment. Looking ahead to the fourth quarter, we expect environmental and infrastructure sales to be 10% to 15% lower sequentially due to typical seasonality for large project activity. And in high-temperature technologies, we expect sales to be slightly lower sequentially as several of our foundry customers in North America have communicated longer than anticipated downtime toward the end of the year. While these plans could change, our current outlook assumes a reduced number of foundry working days in December, along with the temporary margin impact of the associated lower productivity at our plant sites. Overall, we expect segment sales to be lower by around 5% sequentially. Now let me turn to a summary of our balance sheet and cash flow highlights. We delivered another solid cash flow performance in the third quarter with free cash flow of $44 million. Capital expenditures totaled $27 million in the third quarter, and we remain on pace for approximately $100 million of capital investments for the full year. Some of the key investments that Doug outlined earlier will be commissioned during the fourth quarter with revenue ramping up in the beginning of 2026. And we expect that sort of cadence to continue into next year with additional start-ups expected throughout the first half. In total, we returned $20 million to shareholders in the third quarter through share repurchases and dividends in keeping with our stated balanced approach to capital deployment. Our balance sheet remains strong, and our net leverage ratio remains at 1.7x EBITDA, below our target of 2x EBITDA. Now I'll summarize our outlook for the fourth quarter. Overall, we expect fourth quarter sales to be approximately 2% to 4% lower sequentially and primarily driven by seasonal patterns in a few of our end markets. Operating income for the quarter is expected to be between $65 million and $70 million, with earnings per share between $1.20 and $1.30. Our sales range of $510 million to $525 million considers a number of factors. On the positive side, we expect continued traction with our growth initiatives in Household & Personal Care. The cat litter business is gaining sales momentum, and the fourth quarter is typically a strong one for cat litter. In addition, we expect continued growth in edible oil and renewable fuel purification. As I noted earlier, some of our customers serving the residential construction and foundry markets in the U.S. are signaling the potential for slower order patterns and extended outages around the holiday, which would impact volumes of some relatively high incremental margin products in both our Specialty Additives and high-temperature technologies product lines. We are also watching for potential volatility in order patterns due to uncertainty around tariff policy. As we've communicated, we don't have a significant direct exposure to tariffs. However, we're mindful of potential near-term impacts on our customers. Our guidance takes all of these into account, and where we land in the range depends on how they play out. In summary, we have positive momentum across a number of product lines as we head into the fourth quarter, and we are focused on delivering the growth initiatives that will carry this momentum into next year.

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

Pet Care. It seems there was an increase in cat litter volumes in Q3. How should we consider the market dynamics you mentioned, and what is the potential for your pet care business to return to a growth rate of mid-single digits or higher over the next 12 to 24 months, not necessarily your 2026 guidance?

I appreciate that. As I mentioned, I'll start and then hand it over to DJ for some details. We've faced a challenging pet care market. However, if you consider the long-term view on the market and our performance, we've seen organic growth. We've built the business through acquisitions, but even accounting for those over the past two years, our business has grown by 9% on a compound basis. This year, growth has leveled off due to some unprecedented market dynamics. We've made necessary adjustments and have collaborated with our customers to implement those changes. As a result, we've seen a recovery in volume, which I believe will carry through the fourth quarter and into next year. Importantly, I think this is a solid business for us; we are vertically integrated and the largest player globally with advanced technology, and we remain confident in our long-term growth rate of 3% to 4% in North America and 6% to 8% in Asia. We are investing to support the anticipated growth for next year. Now I'll let DJ discuss that further.

Yes. Thanks, Dan. We kind of close out some of the market dynamics and then just give you a sense of the return back to that upper single-digit growth rate. On the North American market, what we did see early on, and we had mentioned in previous calls, these battles among the brands and is the only way I would describe the significant discounting that went on the brands, that caused some pretty big market share shifts within the brands, but it also had an effect on private label. Most pronounced at some specialty pet stores and grocery stores. We want to adjust with our private label partners and come up with promotional schemes that still keep their private label relevant. That includes price discounts, changes in packaging, changes on shelf allocation. And so we feel that part of the market has stabilized pretty well. Doug had mentioned some pretty significant investments that reposition us for some future growth and coming pretty quickly. Doug had mentioned some contracts. So what you'll be seeing is some $30 million plus of growth that will be going into next year as those contracts come online, that's towards the end of the first quarter. So we feel really good about that.

Really helpful. And just pulling on that string. With all of those investments you're making, how do we think about just the overall increase in capacity as we exit '25.

There has been an overall increase in capacity, particularly in North America, which is projected to be around 6% to 8%. Starting with China, we've invested in a new facility that can sustain capacity for the next 3 to 4 years. It is large enough to accommodate additional packaging capacity for long-term growth. We are beginning with modular growth to support incremental investments over the next decade. In North America, our investments in Canada and the U.S. were focused on quality and handling upgrades at the two facilities we acquired. These improvements were planned well in advance, and we had to carefully shift production to ensure customer supply during the transition. This is a significant factor behind the cost increases and some margin decline this year, but we have moved past those challenges. And we've made upgrades to material handling, quality packaging, packaging flexibility, throughput, all of which have reduced costs as well and should accrue to profitability going forward. So it's a number of different things, but we've got plenty of capacity in these facilities to grow at those rates for I'd say the next 5 to 10 years. But again, we can also have space in them to add modular packaging capacity if we need to keep up with the market. So I think we're in good position, Dan. These investments, they're not significant huge investments for us, but they did put us in a position to be able to secure higher quality contracts. And as DJ mentioned, we see about $30 million of that coming in starting in the second quarter next year.

Very helpful. Switching gears, there are some strong areas in Environmental and Infrastructure this quarter. I know we’re facing a seasonally slower period ahead, but can you discuss the momentum as we look towards 2026?

We experienced some momentum this quarter, particularly in our offshore water treatment business, which has performed exceptionally well. I’d like to begin by noting that our construction and environmental remediation sectors have remained relatively stable. We have received some new projects, as I previously mentioned, and we anticipated some growth in this area this year, but that has not yet materialized. The commercial construction sector, especially large building projects, has also remained flat. I believe this market is sensitive to interest rates, and I expect that when rates begin to decrease, we will see more activity from shelved projects, which would be beneficial for us. This quarter saw significant contributions from water filtration, driven by our expertise in PFAS remediation and our ability to eliminate complex contaminants from water. We secured several new projects offshore, which made a positive impact this quarter, and we believe this trend will continue through the fourth quarter and into next year.

Very helpful. Just in terms of the Q4 guide, revenue down 3-ish percent sequentially at midpoint, op income down more like low teens. So a little bit of a higher decremental margin. I appreciate the color on boundaries, which is high margin. Are there other corporate incentive comp, any other expenses, which you might call out in Q4 that could pinch margins more than might be typical given the volume decline?

Yes. Thanks, Dan. This is Erik. No, nothing unusual from a corporate expense standpoint in the fourth quarter. The main drivers are really the ones that I called out in the prepared remarks in terms of the mix. I mean, the markets that are down seasonally for us, Q3 to Q4 and then the foundry and some of the residential construction products that we have, those are higher incremental margin products for us. And so we do have a mix impact that goes against us in terms of the decremental margins that we're seeing Q3 to Q4. The only other thing I would highlight is we had some strong margins in the third quarter in the Engineered Solutions segment. That was continued strong performance from the team's offsetting tariffs, continued strong productivity, variable conversion cost control. We did have a couple of the equipment sales in the high-temperature technologies product line that helped margins in the third quarter, and we don't have any of those equipment sales forecasted for the fourth quarter. But as Doug mentioned, we've got about 6 to come next year in terms of those MINSCAN installations.

The next question is from Mike Harrison with Seaport Research Partners.

I would like to discuss the margin performance in Consumer & Specialties. It seems to be somewhat in line with your expectations, yet it's tracking about 150 to 200 basis points lower than last year. Could you help break down the key factors contributing to this weaker margin performance? Specifically, I'd appreciate insights on the discounting or promotional activity in pet care, the product mix, the volume declines in Specialty Additives, and the temporary costs associated with pet care expansions. Furthermore, as we look ahead to next year, could you provide direction on how these factors might influence consumer and specialty margins?

Yes, thanks, Mike. This is Erik. I believe you addressed many of the key points. For the third quarter, our margins were in line with our expectations for the segment. A significant factor contributing to this is some temporary cost impacts we are experiencing. We are undergoing a substantial upgrade at one of our U.S. cat litter plants, and this has required us to adjust production across our North American operations, leading to increased logistics costs. This is the main reason for the margin pressure we see from Q2 to Q3. That facility will begin ramping up in the fourth quarter, which means we are moving past these temporary impacts. Regarding discounting, we have not experienced a negative margin effect because we are assisting our retail partners with their discounting efforts. While we have implemented some additional pricing discounts on our products, this has positively affected our volumes. As we generate more volume through these plants, we benefit significantly from fixed cost leverage. Consequently, we haven't seen any margin erosion from the discounting shared with our retail partner. Looking ahead, the segment is positioned well to achieve a 15% operating margin. We came very close to that last year, and we aim to reach it again as we navigate through these temporary challenges. That remains our goal for this segment.

Michael, the only thing I'll add, and I'll put that same as echo what Erik just said. We'll get back to and probably exceed last year's margins in the segment. And that's going to come from a couple of things. A, the ending of the temporary logistics expense, number one, and some of the other ancillary expenses that came across as we made these investments in these facilities. Two, we have seen some lower volumes due to this discounting, which we've adjusted. And as Erik just mentioned, those volumes are coming back. That is helping profitability. And three, the additional volume that we're going to be putting through these plants next year, starting in the second quarter, is going to be very accretive to those margins. And so I think, as Erik said, we're set up to get back to last year's margins next year and probably see them with some of this additional volume.

All right. That's very helpful. And then maybe just on the investments that you're making in Turkey with the Bleaching Earth for renewable fuel. Can you help us understand what the dollar amount of that investment looks like? How much is your capacity expanding? And I guess, should we think about the investments as mostly mine expansion or is there something that you're doing on the, I guess, refining or processing side that's helping to improve your capabilities as well.

I want to be cautious about sharing specific information on the capacity we're adding to the market, so I won't provide too many details. We constructed the facility eight years ago with room for expansion, primarily focused on the edible oil market, which grows at about 3% to 4%. We had a strong product suited for that market. However, since then, we've observed the emergence of the renewable fuels market, and we began supplying that sector around four or five years ago. More recently, the regulatory changes in Europe, and now the U.S., have significantly increased the demand for sustainable aviation fuel. This expansion is expected to cost between $9 million and $10 million, increasing the plant's capacity by about 30% to meet the rising demand. Over the past eight years, we have grown at approximately 20% annually. Initially, our business was entirely focused on edible oil applications, but that has shifted, with around 34% of our business now in sustainable aviation fuel and renewable fuels, which is rapidly increasing. This current expansion will support both markets, but the renewable fuels will likely be utilized quickly. We have ample reserves in the region for decades, and we plan to potentially expand the facility again in the next five to six years, depending on market conditions. This expansion is incremental, but if we continue to grow at this rate, the next expansion may involve a completely new facility.

All right. Very helpful. And then last question I have is just on the cash flow and maybe some of the working capital dynamics. You mentioned the higher logistics costs, but I assume you're carrying some additional inventory in the pet care business as you work through these expansions. And then is there anywhere else that maybe inventory is a little bit elevated right now? I'm thinking, in particular, maybe MGO as you're trying to navigate or mitigate some of the tariff impacts. Just trying to think about how working capital trends in Q4 and how we should think about it as we're starting to look at next year?

Yes. Thanks, Mike. So in terms of working capital, AR, AP, both in good shape. We watch those metrics closely and no major changes there. We are holding on to a little more inventory, and you touched on it a few of the spots there. A little higher inventory in pet care, but some strategic positions, I would say, in the high-temperature business. MGO being one of them, every couple of years, there's a river closure in the middle of the U.S. that we have to work around, and we build up some inventories to manage around those. We're going to be working through a lot of those inventory positions in the fourth quarter. And so we should be ending the year sort of at a more typical level in terms of the inventories. We'll still have some of those strategic positions in place, but more of a typical level from an inventory perspective. From a cash flow standpoint, we're expecting a strong fourth quarter as usual for the company; strong cash from operations, the free cash flow number is going to depend a little bit on the pace of some of these growth capital investments that we've talked about. We've got a number of them ramping up in the fourth quarter. And so the capital number that ends up happening in the fourth quarter could depend a little bit on the timing of how those come through. But overall, expecting a strong cash flow quarter in the fourth.

The next question is from Pete Osterland with Truth Securities.

I wanted to follow up on the recent investments in pet care and Bleaching Earth. You mentioned aiming for $50 million in growth investments to support an additional $100 million in revenue. Can you share how much of those targets are already accounted for in your current initiatives? Additionally, are you still planning for more organic growth investments across your portfolio?

So if I understand the question correctly, the $50 million of CapEx and the $100 million of revenue that we've discussed are the investments that Doug highlighted today regarding our growth capital projects. However, it's important to note that these figures represent just a portion of the growth opportunities available to us. A significant part of our opportunity leverages existing capacity, which means it doesn't necessarily require additional growth capital to support it. These investments are simply ones we wanted to emphasize as part of the growth opportunity.

Yes. When I consider the North America pet litter market, the Asia pet litter market, the $1.1 billion bleaching earth market, and the rapidly expanding renewable fuels segment, along with paper, packaging, and our MINSCANs, these investments are expected to generate $100 million within the next 12 to 18 months. This trend is not limited to those markets alone. Each MINSCAN installation can bring us $1 million to $2 million, depending on the vessel size. With 18 installations already completed, we estimate they contribute about $20-plus million in recurring revenue annually, and there are many more opportunities ahead. While we may not capture 100% of the potential $250 million market from this product line, it remains a significant opportunity for us. We're looking at the bleaching earth market alongside renewable fuels, with the goal of expanding this business to $75 million over the next two years. In pet care, currently a $400 million business, we anticipate growth to $500 million, aiming for that target by 2027, and I believe we are on track. While this year may push the timeline another 6 to 9 months, we still project an additional $100 million in growth for this segment, supported by our previous investments. Overall, we see hundreds of millions of dollars in opportunities where we've positioned ourselves. The investments we are making now are just the first steps to tapping into these. Over the past five years, this is our third expansion in bleaching earth, and we have also upgraded our facilities in pet care, focusing on two or three key locations now. These are repeat investments that have proven successful for us, and they are setting the groundwork for sustained growth. You can expect to see this progress. I expanded a bit on your question, but these represent significant opportunities, and we have strategically positioned ourselves to take advantage of them.

No, that's very helpful. And just kind of following up on the pet care investment specifically that you're expecting to finish by the end of '25. I guess what's the time frame to realize that run rate of incremental revenue that you discussed? I mean, is it kind of a gradual ramp throughout the course of '26, so you kind of expect that to continue driving growth into '27? Or how should we think about that?

For pet care, in particular, as DJ mentioned, these investments will set us up for longer-term growth. But in particular, we've secured about $25 million to $30 million of contracts on an annual basis that should start to ramp up through the first, but be full run rate by the second. So I think if you snap the chalk line at the end of March and ran 12 months, we think that's $20 million, $25 million of revenue right there. So next year, probably expecting $20 million, $18 million of that $25 million to hit in pet care alone, and that's going to continue. And we've got further capacity in China for that market that continues to grow. So we think we're getting this thing back on track. These investments will position us with high-quality operations, low-cost operations and strategically located to deliver on the business. And so I think you'll start to see that growth rate revert in the second quarter.

Very helpful. And then just lastly, I wanted to ask for any update on Talc. It looks like litigation expenses have trended higher each quarter during this year. Just was wondering if you have any update to share on the time frame or expected cost to resolve? And would you expect that until it's resolved, with the $7.5 million of litigation expenses you saw in the third quarter, would that be the run rate of what to expect going forward?

This quarter saw increased activity, though our average has typically been between $3 million and $4 million per quarter, and we anticipate returning to that range. We are diligently working on establishing a 524G trust, but there are not many significant updates to share this quarter. We are currently awaiting responses from the Southern District of Texas District Court regarding several motions to determine whether our case will proceed in District Court or revert back to bankruptcy court. We remain committed to establishing the 524 and are eager to finalize the process quickly, though the court's timeline is beyond our control. While progress has been limited, we are dedicated to resolving this matter fairly and swiftly. Regarding costs, we believe the reserve on our balance sheet is adequate for both establishing the trust and the associated costs. Therefore, there are no changes to our perspective on the reserve.

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Dietrich for any closing remarks.

Thanks, everyone, for joining this quarter. We appreciate the questions. We appreciate the attention and interest in Minerals Technologies, and we'll chat with you again at the end of January. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.