Earnings Call Transcript - MTX Q3 2024

Operator, Operator

Good day, everyone, and welcome to the Third Quarter 2024 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.

Lydia Kopylova, Head of Investor Relations

Thank you, Sheley. Good morning, everyone, and welcome to our third quarter 2024 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 an appendix of this presentation, which are posted on our website. Now, I'll turn it over to Doug.

Doug Dietrich, Chairman and CEO

Thanks, Lydia. Good morning, everyone, and thanks for joining today. Let's go over a quick outline for today's call. First, I'll provide a quick review of our performance highlights for the quarter, and then I want to spend a few minutes reviewing the progress we've made with a variety of key initiatives and business development activities, as well as run through some highlights and key takeaways from our Investor Innovation Day that we held in September. Erik will then take you through the detailed financials for the quarter. We'll try to keep our prepared remarks short today so we have more time for your questions. Let's start with our Q3 highlights. This is a record third quarter for us and we're on track for another record year. We did experience a general slowdown across our industrial markets this quarter, primarily in the Engineered Solutions segment. But this softness was offset by growth in our consumer-based businesses. This is the balanced structure of our portfolio that I often refer to, and it continues to prove that it can deliver solid results through a range of market conditions. Despite the softer conditions in our industrial markets, operating income was a record for the third quarter, and both gross and operating margins remained strong, reflecting the increased profitability we are driving across the company. Price improvements, higher sales of our newest products, input cost savings, and productivity improvements all contributed to this performance. Operating cash flow increased over last year and our balance sheet is in great shape. We have broad opportunities to invest capital in ourselves, both to support our organic growth and to capture manufacturing cost improvements in our facilities. With debt leverage at our target levels and with our free cash flow generation of around 7% of revenue, we have sufficient financial flexibility. We continue to follow our balanced approach to capital allocation, which is to return 50% of our free cash flow back to shareholders while retaining the other 50% on the balance sheet for inorganic growth opportunities. We completed our previous $75 million share repurchase program last week, and last week announced a new $200 million share repurchase initiative. We increased the dividend by 10% at the same time, demonstrating the confidence we have in our ongoing financial strength and long-term growth prospects. Overall, I'm proud of our team's performance this quarter and pleased with how well MTI is positioned to continue our strong performance track. We made significant progress over the past several quarters with our growth strategies in both segments, and I'd like to highlight a few initiatives and accomplishments that will have a meaningful impact on expanding our leadership in key markets and positioning the company for the future. In household and personal care, we recently launched a new global B2B brand called SIVO. Over the past few years, we've built a leading cat litter business, emerging as the leading partner for both private-label and well-known brands. The SIVO identity was established to unify and embody the strength of this global business and its focus on solutions that improve the lives of pet owners and their cats. No other cat litter manufacturer can offer the level of expertise and service that we can through our global mining, processing, packaging, innovation, and logistics. The SIVO business is positioned to offer our customers the very best assortment of products in every region, which we see as an extremely strong base for long-term growth. Within the specialty additives product line, we expanded our offering of products targeting sustainable solutions. We've grown our position in paper and packaging markets this year through the deployment of our new yield recycling technology, and we recently launched a new specialty additive technology for the bioplastic market called EMforce Bio. This additive helps maintain the plastic's physical properties and functionality and in certain applications, enables it to be fully compostable. In the Engineering Solutions segment, we continue to deploy our MINSCAN LSC automation technology for refractories with two additional installations expected in Q4. And we continue to increase the penetration of our foundry blends into the China and India markets with the conversion of several new customers to our blended solution. We've made significant progress with the validation and deployment of FLUORO-SORB, our PFAS remediation solution. As you know, we're collaborating closely with the EPA to further demonstrate the effectiveness of FLUORO-SORB in drinking water treatment and have been included in pilots at eight water utilities. The results so far are very promising and we anticipate that this will accelerate the adoption of FLUORO-SORB across the U.S. We have other examples of growth initiatives that we've pursued this year, but these are a few that demonstrate how we are aligning the company with secular growth trends, developing new sources of revenue, and positioning the company for future growth. One last comment before I move on. We tend to focus our comments regarding innovation on new product development, but we've also made several innovative advancements within our operations and back-office processes. At MTI, we constantly look for ways to remove inefficiencies, improve safety, and increase our process capability. Over the past few years, we've deployed several AI-based tools in our operations to aid areas like predictive maintenance and process optimization. We've also deployed intelligent tools to supplement our shared service business processes and our R&D capabilities. We're beginning to see the benefits from these initiatives, which give us greater insight into lowering manufacturing costs, aiding our R&D activities, and becoming even more efficient in both manufacturing and business processes. One significant recent example is the partnership we just announced with a technology company to deploy autonomous mining capabilities. We've been working together to refine this technology for the past two years. We see where this can help us to increase employee safety, improve productivity, and drive higher utilization of our mining equipment. I mentioned all of this to highlight that innovation at MTI is deeper than just new product development. It's one of the core tenets of our operational excellence culture and is driving improvements in efficiencies across the company. Speaking of innovation, on September 24th, we hosted investors at our Innovation Day event at our Hoffman Estates R&D Center, and for those of you who attended, thank you for taking the time to join the event. The day focused on three of our four core technologies, primarily around how we apply them in our bentonite-based businesses. We showcased how we apply these technologies in the development of some of our latest products in environmental water remediation, health and beauty, high-temperature foundry systems, and pet care. But the day was not intended to just demonstrate our products; it was to highlight the depth of our technological capabilities, their versatility, and how they can be applied to create solutions for a wide variety of problems. An additional point we were trying to convey during the day was to show that these technological capabilities, important as they are, are only one piece of what makes MTI unique. We demonstrated four key characteristics of MTI, describing our world-class mineral reserves, these core technologies, our deep applications expertise, and our intimate knowledge of our customers' products and processes. The combination of these four and how they are supported by the MTI business system and our culture of operational excellence is what truly differentiates MTI. It's this architecture that supports our leadership in the marketplace and positions us to be able to develop, manufacture, and deliver valuable products and solutions over the long term. If you weren't able to attend this event, I would encourage you to access the presentation materials on our website, and we look forward to showcasing our other technologies and minerals at another Innovation Day in the future. Now, I'll hand it over to Erik, who will walk us through the financial details, segment highlights, and our outlook for Q4.

Erik Aldag, CFO

Thanks, Doug, and good morning, everyone. I'll begin by providing an overview of our third quarter results, followed by some detail on 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. We delivered another strong quarter. Our results represented third quarter records for operating income and EPS, excluding special items. Third quarter sales were $525 million, down 2% from last year on an underlying basis as growth in Consumer and Specialties was offset by lower sales in Engineered Solutions. We experienced a slowing of industrial market activity in the third quarter, and you can see how that impacted our high-temperature technologies and environmental and infrastructure product lines in the sales bridge on this slide. In the operating income bridge, the volume and mix impact reflects this market softness, which you can see we more than offset with continued pricing improvements and cost performance. Selling price increases totaled $3 million versus the prior year, which translated to 40 basis points of margin improvement, and cost improvements contributed $6 million in higher income and 120 basis points of margin improvement over last year. Our teams continue to manage costs well, delivering a strong mining and productivity performance, and we're realizing the benefits from the cost-savings program we implemented last year. Altogether, third quarter operating income rose by 3% versus last year to $79 million, and operating margin increased by 100 basis points to 15.1% of sales. Earnings per share was $1.51, excluding special items, up 1% from the prior year, and finally, our cash flow remains strong with $60 million in cash from operations in the third quarter. Now let's review the segments, beginning with Consumer and Specialties. Third quarter sales in the Consumer and Specialties segment increased 1% on an underlying basis from last year to $280 million. Sales in household care increased 2% year-over-year to $131 million. We continue to realize solid sales growth in several of our high-margin consumer applications such as personal care, which was up 7%, edible oil and renewable fuel purification up 4%, and animal health up 13% over last year. Meanwhile, our fabric care sales were temporarily lower than last year due to the timing of customer orders, and we expect that to reverse in the fourth quarter. Cat litter sales grew 5% sequentially and were up low-single digits versus last year. After a slower-than-usual summer period in the U.S. and Europe, our cat litter sales picked up late in the third quarter and volumes have continued to trend upward in October. We're expecting a stronger fourth quarter for the entire household and personal care product line, and early indications are that next year is also setting up nicely for mid-to-high single-digit growth. In specialty additives, sales were 1% higher on an underlying basis. Volumes in paper and packaging continued to grow, driven by our newest plants in Asia and improved demand across Europe and North America compared to last year. Meanwhile, demand for our specialty additives serving automotive and construction markets has been more tempered. Third quarter operating income for the segment was $42 million, up 9% year-on-year on favorable underlying volume as well as strong cost control. We captured input cost savings and productivity improvements as we continue to drive production efficiencies in our acquired cat litter facilities. Operating margin for the segment improved 170 basis points from the prior year to 14.9% of sales. Turning to our fourth quarter outlook. In household and personal care, our cat litter business is entering its seasonal strong period, and in specialty additives, we expect volume from paper and packaging satellite ramp-ups to help offset the seasonal slowing period for residential construction. Overall, for the segment, we expect operating income to be similar sequentially and up over 10% versus last year. Now let's turn to the Engineered Solutions segment. Third quarter sales in Engineered Solutions were $244 million, 5% lower than last year. This is the segment that is most impacted by industrial market conditions. Sales in high-temperature technologies, our largest product line, were $175 million, 1% off from last year, driven by softer demand from foundries serving the agricultural and heavy equipment market and from some of our customers in the steel industry. Sales in the environmental and infrastructure product line were 12% lower year-over-year on continued softness in commercial construction and environmental lining applications. Segment operating income of $39 million was 4% lower than the prior year, driven by lower volumes. Operating margin remained strong, improving by 10 basis points to 15.9% of sales as our teams remained focused on execution and delivered a solid cost performance. Looking ahead to the fourth quarter, we expect industrial market conditions to remain soft for high-temperature technologies, and we are entering the seasonal period when project activity is slower for environmental and infrastructure. Operating income for the segment is expected to be approximately 10% lower sequentially, which is a typical seasonal change. I will note that there's a little more industrial market uncertainty out there for the next few months. However, we expect these more interest-rate sensitive end markets will strengthen with greater visibility around interest-rate reductions. Overall, we feel positive about how the economic backdrop is setting up for both of our segments next year. Now let me turn to a summary of our balance sheet and cash flow highlights. We delivered another strong cash flow performance in the third quarter. Cash from operations was $60 million in the quarter, bringing our year-to-date total to $166 million, a 20% increase over the prior year. Year-to-date free cash flow was $105 million, a 55% increase from the prior year. We continue to expect full-year free cash flow in the $150 million range, which would put our full-year free cash flow conversion at approximately 7% of sales. CapEx totaled $25 million in the third quarter, and we expect our full-year capital spend to be around $90 million. We also deployed $9 million toward debt repayment in the quarter and we completed our previous one-year $75 million share repurchase program this month. As Doug highlighted, our Board of Directors recently approved a 10% increase in our quarterly dividend and a new $200 million share repurchase program, which we expect to execute over the coming years as part of our balanced approach to capital allocation. Our balance sheet remains very strong with over $550 million of liquidity and net leverage at 1.7 times EBITDA. Now I'll summarize our outlook for the fourth quarter. We expect overall sales to be similar sequentially and similar to the prior year. In past years, we would normally expect lower sales in the fourth quarter due to the seasonality of some of our end markets. However, the combination of our growth initiatives and our more balanced portfolio of consumer and industrial products is helping to offset that seasonality. We expect sales growth in Consumer and Specialties with stronger cat litter sales and new paper and packaging satellites helping to offset seasonally lower residential construction activity. In Engineered Solutions, we see lower sales sequentially as industrial end-market conditions are expected to remain soft and will be entering the seasonal low period for environmental and infrastructure project activity. We typically experience higher energy and mining costs in the fourth quarter, and our margin guidance reflects that typical seasonality. We're also expecting overall product mix to be less favorable sequentially given the lower sales in some high-margin product lines within Engineered Solutions. Overall, we expect to deliver another quarter of year-over-year margin improvement with operating income between $70 million and $75 million, and earnings per share between $1.35 and $1.45, and we expect continued strong cash flow generation. For the full year, we are on track for another record performance for operating income and EPS, and we expect our full-year operating margin to be close to 15%, ahead of the 14% target we set for this year. Overall, despite mixed end-market conditions, MTI is well-positioned heading into next year with multiple levers to drive long-term growth and shareholder value. With that, I'll turn the call over for questions.

Operator, Operator

Our first question is from Daniel Moore with CJS Securities.

Daniel Moore, Analyst

Thank you. Good morning, Doug. Good morning, Erik. Thanks for taking the questions.

Doug Dietrich, Chairman and CEO

Hi, Dan.

Erik Aldag, CFO

Hi, Dan.

Daniel Moore, Analyst

I'll start with prepared remarks. If I heard right, I think you said you mentioned your end-markets and new products set you up well for mid-to-high single-digit growth next year across Consumer and Specialties. Did I hear that right? Number one. Number two. Can you break that down a little bit by category and what are the key new products or innovations that give you that confidence?

Erik Aldag, CFO

Yes. So the comment in the remarks was in reference to household and personal care. And the fact that the growth was, I think, low-single digits in the third quarter and October is looking pretty strong for pet care, and we feel good about the fourth quarter and heading into next year. And generally, we've been seeing good growth out of that Consumer and Specialty segment and in particular, the household and personal care product line. It's not just the pet care, but it's the high-margin specialties that we're talking about, the bleaching earth, edible oil purification, renewable fuel purification, personal care, fabric care, animal health. There's a lot of product lines in there that we feel confident about. And so that's what the statement around mid-to-high single-digit growth for next year was about.

Doug Dietrich, Chairman and CEO

Dan, that said, we'll take it a little further. So the high to mid-single digits is household and personal product line, but I do think that Erik made another comment that sets up the backdrop for next year could be very positive for both. Now interest rates and how they'll trend down, impact, and the delay that it will take to kind of move some of these more industrial markets, especially commercial construction, which we have some projects that we know are on the sidelines that are ready to go, this could provide a very nice backdrop next year for both of the segments in terms of growth. So we're setting up nicely in the Consumer and Specialties business and I think we could be set up nicely next year if some trends take place where we could see that revert to a growth. And for both segments going that direction, that's where we're going to revert back to that mid-to-high single-digits or at least mid-single digits for the company.

Daniel Moore, Analyst

Very helpful. Near term, how much of the slowdown you're seeing across the more cyclical pieces of the business? How much of it, if any relates to customers being cautious and working down their inventories versus actually related to kind of softening end-market demand over the next quarter or so?

Doug Dietrich, Chairman and CEO

Let me start, and then I'll hand it over to Brett, the Group President for Engineered Solutions. I believe we are experiencing a mix of factors. We are still noticing weakness with minimal activity in commercial construction, likely due to economic conditions and interest rates. This also applies to larger environmental projects. However, the situation with foundry and refractories seems to differ. Brett, could you provide some insights on the two product lines and what trends you're observing?

Brett Argirakis, Group President for Engineered Solutions

Sure. From the perspective of metal castings, particularly in North America, demand in the agricultural market has softened significantly. The decline in the third quarter was more pronounced than in the second quarter. A major equipment supplier has withdrawn considerable production from the market, and other agricultural foundries have taken extended breaks. However, our core business remains stable. The ongoing reductions are largely due to high interest rates and elevated inventories of both used and new farming equipment, indicating a general slowdown in the market. For the fourth quarter, we expect conditions to stabilize, with no significant further decline anticipated in the agricultural market, which comprises about 15% of the total metal castings market. The automotive sector in North America appears stable, and we anticipate similar performance moving into the fourth quarter. On the steel side, we are noticing some weakening in the market, with utilization rates in North America around 72%, down from the mid-70s last year. This decline is primarily in flat-rolled steel, as service centers are reducing inventories due to softer demand and pricing adjustments. We expect steel production to remain flat in the fourth quarter and likely through the first quarter as well. Europe remains stable, and we believe that after the elections in the second quarter, with a possible decrease in interest rates, we may witness an upward trajectory. Overall, we are optimistic about the market and our performance in the upcoming quarters.

Daniel Moore, Analyst

That's a great color. Just trying to get a sense for when it turns, whether there might be a little bit of extra boost from inventory replenishment so to speak. I think that really helpful. Last one and I'll jump out. You've been running ahead of your margin targets on a pace of 15% op margin this year. How do we think about the upside to those goals? And if so, when might you think about updating or establishing kind of new longer-term targets? Thanks again for the color and congrats on the execution.

Erik Aldag, CFO

Thank you, Dan. I appreciate that. Regarding margins, we believe there is potential for improvement beyond our 15% target. I think this will come from a few areas next year. It will be driven by volume growth and revenue growth, which, as I mentioned in the two segments, are positioned well for next year. We tend to keep our fixed costs under control, and we have the capacity in our plants to support that revenue growth. Therefore, I anticipate that the contribution margin will positively impact the bottom line. Additionally, we are witnessing an increase in some of our higher-margin products, which has been evident throughout this year. These include new products and some high-temperature technologies that are recovering from a slower second quarter or second half; I believe these will contribute positively to our margins moving forward. Regarding price and costs, we will make pricing adjustments if we encounter cost pressures to maintain our margins. However, I think we are mostly past that. We will be careful with our pricing, but I expect that next year we will see volume growth, revenue growth, and higher-margin products all positively affecting our bottom line. As for where we end up next year, I believe we need a clearer understanding following the election in the fourth quarter and a better outlook on next year’s volume, after which we will provide some targets likely at the end of the year.

Daniel Moore, Analyst

Sounds great. Thank you again. Jump back with any follow-ups.

Operator, Operator

Your next question is coming from the line of Mike Harrison with Seaport Research Partners.

Michael Harrison, Analyst

Hi. Good morning.

Doug Dietrich, Chairman and CEO

Hi, Mike.

Michael Harrison, Analyst

I was hoping that we could maybe dig in a little bit on the HPC business. We've had a couple of softer quarters there. I think last quarter, we were talking about some changeovers that impacted the pet care business. This quarter, as you went through the different product lines within that business, it seemed like everything was kind of growing pretty nicely except fabric care. And I'm just kind of curious how we got to a 1% or 2% type of growth number if everything else was growing and it was really just fabric care that was soft. Can you give us some more details on what you were seeing in that business?

Doug Dietrich, Chairman and CEO

Sure. Let me start, Mike, and then I'll hand it over to D.J. for more details. This product line is performing well and continues to grow. We have some of our newest products in this category. There has been a slight dip in the pet care segment over the past couple of months, which is typical for the slow season, but it's picking up again. The fabric care segment experienced a shift in ordering patterns, primarily from our Asian customers, but I don’t see any major issues there. Overall, these businesses have strong potential moving forward. D.J., would you like to provide more insights on the product lines and your observations?

D.J. Monagle, Executive

Yes, gladly. So, Mike, let me address fabric care specifically then we'll talk a little bit more about specialties and then just provide you some color on pet side as well. On the fabric care, yes, a little slow, but if you look at, as Doug said, mostly that was some order pattern issues, primarily with Asia. So that will be coming back to our expected pace in this quarter and next. But long-term, I guess, if you look at that product line in general, the lineup that we've got with some of the macro trends out there on natural solutions and environmentally friendly approaches, all those things that we're doing, we're seeing a substantial customer pull in fabric care, in particular. This trend towards dry detergents is where our expertise lies and we're getting increased requests for higher performing additives that do everything from fragrance control to go into some new products that will be further working through dry products, reducing water consumption and eliminating plastics in that line. But if you look at that broader perspective of that particular product line, bleaching earth, we still continue to get strong pull, especially from renewable fuels, and that is just a nice performing mineral in that space. Animal health, the drivers, again, are improved nutrition for especially these, let's say, the food animals, the protein sources that are out there. And we're lining up with natural solutions that kind of go along with the trend of moving away from the antibiotics and those sorts of things. So we're really comfortable that we're in the right space for all of those items. When you look at pets, a little bit of a slow quarter, caught me a little bit by surprise on the early part of the quarter. We're seeing strong orders right now from them. So we'll see both sequential growth and year-over-year growth as we go into this quarter. Erik already highlighted those items. As we go into next year, we're seeing pretty substantial pull on some new products, new offerings that we have. That's everything from a fragrance to some new packaging, but we're also seeing some upscale private-label strategy expansion where people are going upscale and downscale depending on what their particular strategies are. An upscale move would be something like a hygiene improvement, something with less dust, higher brightness or something specific for these new robot litter boxes that are going out there, and the downscale would just be something that's a more competitive price offering versus an existing private-label. So we're lined up well, Mike.

Doug Dietrich, Chairman and CEO

Yes, Mike, I would like to provide some perspective. We experienced a slightly slower quarter in some of our product lines, but over the long term, about a year and a half ago, we set targets for our pet care business during our Investor Day. At that time, we aimed for a $350 million business. We now expect it to reach around $440 million to $450 million next year, and our goal is to hit $500 million by 2027. We are on track, if not ahead, of that target. While the summer was a bit slower, our initiatives, such as aligning with e-commerce in Asia and the new products showcased in Hoffman Estates, including robotic litter boxes with our new additive, position us very well. I believe we will not only meet but might even exceed our target. This outlook is similar for the other products in that category that D.J. mentioned.

Michael Harrison, Analyst

All right. Thanks very much. That's definitely helpful. And then on environmental and infrastructure, that business continues to be pretty soft, I think even though we're kind of lapping some easier comps there, and you mentioned that the lower interest rates maybe should help. But can you talk a little bit about what you guys are hearing from your key customers, what they're saying about backlog? And I'm just kind of curious, is there some pent-up demand there that could start to materialize in the next year or two, particularly as interest rates are coming lower?

Doug Dietrich, Chairman and CEO

Yes, sure. Brett, do you want to go through some of what we're hearing from our customers?

Brett Argirakis, Group President for Engineered Solutions

Absolutely, let me outline our main product lines and their current status as well as our future expectations. Our building materials sector is still facing challenges due to ongoing economic issues globally. The market hasn't fully bounced back from the impacts of COVID, supply chain disruptions, increased interest rates, and tighter credit. This has been a source of frustration for us. However, we're beginning to notice more stability worldwide and increased activity, with our products being specified in various projects. The general outlook suggests that once interest rates decrease further and the political landscape stabilizes, we'll see more movement in the market. We're feeling more optimistic about 2024 and 2025 than we have in recent years, especially since our products are integral at the initial stages of construction projects. As construction begins, our products will play a critical role. On the environmental front, particularly regarding municipal waste and coal ash, landfills are continuing to grow, and they remain a significant component of the EPA's waste management plans in the U.S., while Europe is shifting more towards incineration. Our compact clay liners will continue to be utilized, and when additional airspace is required, our geo-synthetic liners are used as well. These products are foundational to our business. The coal ash market, however, is more cyclical and has been slow, which is an essential part of our operations. Progress in this area involves lengthy planning stages, but we foresee increased interest for 2025, indicating improvement. Drilling has actually been a standout aspect of our environmental and infrastructure business this year, contributing solid sales, particularly in sectors unrelated to traditional heavy construction. As that sector reactivates, beyond our existing sales mainly directed at the electrical grid, clean water, broadband internet, and energy projects, we anticipate a generally positive year ahead. We have ongoing wastewater projects related to the industrial discharge into municipal systems, city remediation, and drinking water initiatives. While there's considerable activity, it has been slow to materialize, but we believe we are well-prepared for the forthcoming projects that are on the verge of initiation.

Doug Dietrich, Chairman and CEO

Does that help, Mike?

Michael Harrison, Analyst

All right. Thanks. Super helpful. And maybe just a quick follow-up. I think of that project-based business as having a very high incremental margin, or being a place where more activity can leverage really nicely to the bottom line. Is that still the right way to be thinking about that in both environmental and infrastructure business?

Doug Dietrich, Chairman and CEO

Yes, it is. When you look at the Engineered Solutions segment, it has the highest margins in the company. Referring back to the earlier question on margin improvement, as industrial activity increases in foundry, refractories, and projects with significant contributions, especially in the construction market, we expect to see both growth and those contributions returning. This is where we anticipate margin and profit improvements next year.

Michael Harrison, Analyst

All right. Very helpful. Thanks so much.

Operator, Operator

Our next question is coming from the line of Kyle May with Sidoti.

Steve Ferazani, Analyst

Hi, good morning. This is Steve Ferazani filling in for Kyle. Thank you for the detailed insights this morning, Doug and Erik. I wanted to inquire about the increased share buyback. Is it still intended for a one-year term? Additionally, what factors contributed to this increase? Was it due to better cash conversion, an improved balance sheet, or your assessment of the valuation? I understand there may be considerations regarding potential M&A candidates being priced too high, or perhaps there aren't many available. It's a question of whether you have a positive or negative outlook.

Doug Dietrich, Chairman and CEO

We're certainly optimistic about our position. Thank you for the question, Steve. I’d like to revisit our capital allocation strategy. Typically, when our balance sheet shows leverage around two times or lower—currently, we're at 1.7 times—we prefer to return capital to shareholders. On average, we direct 50% of our free cash flow back to shareholders each year, while retaining the other half for potential M&A opportunities. Over the past year, we generated around $150 million to $160 million in free cash flow, which resulted in a $75 million share repurchase alongside dividends, totaling about $96 million returned to shareholders. Looking ahead, we anticipate growth, improved margins, and enhanced cash flows, which reinforces our capital allocation strategy and allows for additional inorganic opportunities if they present themselves. As part of this approach, we have initiated a $200 million share repurchase program, which is not restricted to a single year; we plan to continue buying back shares over the next two to three years. With increased cash flow and confidence in our future sales projections, we have also raised our dividend by another 10% after doubling it last year. Our financial strength provides us with the flexibility to maintain a healthy balance sheet, increase dividends, repurchase shares, and still leave room for M&A opportunities. We believe we can effectively pursue both strategies simultaneously.

Steve Ferazani, Analyst

Thanks, Doug. Can I ask about the AI applications in the mining processes? If you're making these investments, I understand you emphasized worker safety, but I'm assuming you see some potential for enhancing margins as well. You've mentioned productivity, and I know you're still in the early stages. Is that your long-term goal, and how confident are you that these efforts could lead to margin improvement?

Doug Dietrich, Chairman and CEO

Yes, I believe so. Over the past couple of years, we've been focused on our Innovation Day that showcased products and new concepts, and I want to emphasize that this goes deeper than just that. We are examining different tools, including AI tools, that we utilize daily in our operations. One aspect we found particularly interesting to announce is that while there are direct savings and efficiencies in fuel, this also enables us to use equipment in situations where we normally wouldn't, enhancing safety, especially in challenging conditions for our employees. For instance, during inclement weather at night, it's not safe to operate this equipment, but this technology allows for better asset utilization, leading to long-term cost savings. Although it may not significantly improve margins immediately, our mining team excels at their work, and being able to run this equipment around the clock is a significant advancement.

Steve Ferazani, Analyst

Excellent. Okay. Thanks for that, Doug. Last one for me on FLUORO-SORB. You talked about some progress on those eight pilot programs. Can you talk about when we can actually, move to an implementation phase? Is that going to be driven more by the success of those programs, or the regulatory requirements timing-wise?

Doug Dietrich, Chairman and CEO

Well, we're already in the implementation stage. I guess it's just a matter of trajectory and timing and adoption from the marketplace. We are in six utilities already by ourselves removing PFAS from water. So we're already implementing that. I think the engagement with the EPA is really we're already validated as a very high-functioning PFAS removal agent. What this is doing is, having the EPA kind of utilize the three technologies, primary technologies that are out there, ours being one of them in eight studies. Now I think that will just add to the confidence level of FLUORO-SORB as a very effective PFAS removal media and will likely accelerate its adoption. It will give utilities the confidence that this is a good solution for PFAS and I think it will accelerate it. Now regulation in the utility is really not going in until 2029. It's not to say that water utilities are waiting. So it will ramp up and it will ramp up as we get closer to that. And we're also working in environmental remediation, groundwater capping systems as well. So it's only one element of PFAS removal is drinking water. We have other environmental water cleanup projects as well. So we're already in the implementation stage, Steve.

Steve Ferazani, Analyst

Excellent. Great. Thanks so much, Doug.

Doug Dietrich, Chairman and CEO

Thanks, Steve. Appreciate it.

Operator, Operator

Our next question is coming from the line of David Silver with C.L. King.

David Silver, Analyst

Yes. Hi. Good morning.

Doug Dietrich, Chairman and CEO

Hi, David.

David Silver, Analyst

Hi, thank you. I would like to discuss the cost performance this quarter. Referring to the bottom right-hand corner of Slide 8, Erik mentioned a $6 million benefit in operating income year-over-year. I noticed there is a slight increase in prices as well. So we have prices rising a bit and costs decreasing, but primarily on the cost side. Would you say that the $6 million benefit is overall reflective of this? Is it due to lower raw material costs, improved mining efficiency, or reduced fixed costs? What factors would you identify as contributing to the cost benefits you saw this year compared to last year?

Erik Aldag, CFO

Yes, thanks, David. This is Erik. It really encompasses everything you mentioned. To break it down, it's about a third raw materials, a third energy, and a third productivity, including fixed-cost savings. From a productivity standpoint, we're performing exceptionally well this year. We typically aim for a 10% improvement in productivity and a 3% reduction in variable conversion costs each year. These are ambitious targets, but this year we are over 5% in productivity savings across the company. A significant portion of that comes from our newly-acquired pet care facilities, where we're still enhancing efficiencies as we continue to automate and align these new plants with our productivity standards and variable conversion costs. There are savings in that area. Additionally, we are maintaining discipline regarding fixed costs. I mentioned that we implemented a savings program last Q3, and we are now seeing the full impact of that. Overall, we are performing well from a cost perspective.

David Silver, Analyst

Thank you for that. I have a question that builds on the earlier PFAS discussion, and I will also include MINSCAN. You mentioned having eight pilot projects in progress, and I believe that between now and around 2026, when water utilities will need to define their approach regarding EPA standards and formulate a remediation plan, there is likely to be a significant increase in pilot projects and beta testing. I am curious if this will have a net economic cost impact on your company. In other words, does the increased testing and rollout of your products to potential customers lead to meaningful upfront costs? I’ll stop there, but how should we consider this? We're always thinking about price and volume, but if you are expanding the rollout of new products more broadly compared to past initiatives that were more targeted, what should we understand about how the upfront expenses or the pilot testing phase will affect your financials?

Doug Dietrich, Chairman and CEO

Thanks, David. Let me provide some perspective before passing it to Brett. We have mentioned eight pilot trials with the EPA and our involvement with six water utilities, but in reality, we are conducting 250 different pilots globally focusing on PFAS. These pilots can start as small tests and transition into larger trials. Our approach is quite extensive as we are testing in various scenarios. Most of these pilots are compensated, so while they may not generate significant revenue individually and do incur manufacturing costs, we are still seeing profit from them. The potential for these 250 projects to scale over the next three to four years is significant, and as they progress through their pilot phases with various technologies, the volume we can achieve will increase. Some may use PFAS while others might focus on different technologies, or we could be utilized alongside other solutions. That is when we expect to see a notable increase in volume and contribution from this product. Brett, would you like to add more detail? I just wanted to set the context before handing it over to you.

Brett Argirakis, Group President for Engineered Solutions

Yes. Hello, David. Doug is correct. We have over 250 active pilots, and it's important to note that we indicated this at our conference; there’s minimal to no capital required. Our equipment does not need to be capitalized, as the FLUORO-SORB can be utilized with existing municipal equipment. Thus, our cost outlay is very minimal since our product is designed to integrate with current systems. The collaboration we're pursuing with the EPA should help speed things up. However, we likely won't see a significant increase in the next couple of years; it will take some time. As Doug mentioned, we recently brought on eight new pilots and have six full-scale drinking water systems using our FLUORO-SORB, with two additional full-scale projects set to launch in the fourth quarter. We're genuinely excited about this progress. Internationally, we are also observing an increase in active piloting of the FLUORO-SORB in other EU countries for drinking water. Remember, this product can be applied, as we discussed earlier, to drinking water, landfill leachates, wastewater, and remediation efforts. We're enthusiastic about these developments. The timeline for when we'll see results is still somewhat uncertain, but we are committed to our goal of reaching 30 million by 2027 and hope to accelerate that timeline.

David Silver, Analyst

Thank you for explaining that. I have a question related to China, focusing on both metal casting and PCC. It seems that the rebound in China's economy has been slow, and the government has recently implemented measures to stimulate economic growth. Considering your limited involvement in the Chinese economy, have you noticed any significant effects from the government's economic support on your relevant businesses there? Moreover, if there is any improvement, is that taken into account in your projections for 2025?

Doug Dietrich, Chairman and CEO

I think it's a bit early to determine if the stimulus measures implemented in China are having a significant impact. My belief is that it will, but it may be too soon to assess their effect on our business and volumes. However, despite the slower economy in China over the past few years, we have continued to grow in the foundry segment. Our volumes have increased by 8% this year, even in what many would consider a weaker Chinese economy. I mention this to emphasize that we are still building our case for growth in Asia, particularly in China and India. We are able to maintain an 8% to 10% growth rate even in periods of lower demand because market penetration of our solutions is only around 25%. Over the past decade, we've increased this from 5% to 25%, with significant opportunity for further growth. India has even lower penetration, presenting a vast addressable market. Despite the weaker Chinese economy these last few years, we are still managing to increase our penetration and volume growth. On the paper side, the situation is a bit different. Economic stimulus can aid this sector, but dynamics vary. We are seeing consolidation in paper and packaging production with newer machines and technologies emerging, where we are the leading provider. Environmental recycling technologies are gaining traction, and even with flat production in China and India, we continue to penetrate the market with our innovations. This is a key driver of our revenue streams, and if these economies improve in GDP, it will further enhance our growth.

David Silver, Analyst

Okay, very good. I have one last question, and I have to admit that this is probably the first time I've focused on your most recent dividend increase. In my view, the context for this is somewhat different from most other companies I follow. You've been public for over 30 years, and during that time, the number of dividend increases you've announced could likely fit on one hand, maybe with one or two fingers left over. You're in an environment where you doubled the dividend a year ago, and now, one year later, you're announcing a significant but historically more modest dividend increase. When I consider two dividend increases that more than double the previous one from a base that you're now more than doubling, is this part of a long-term strategy for distributing cash to shareholders? Or how should I interpret a relatively rare event becoming somewhat more common?

Doug Dietrich, Chairman and CEO

You are correct. The company has increased the dividend a total of four times in its history. However, I want to highlight that the company is in a different position today than it was five or ten years ago. In the past, we focused more on share repurchases, which allowed us to pursue growth opportunities. I’m not implying that we are a mature company; rather, we have positioned ourselves for more stable revenue, profit, and cash flow growth. You will notice that we are still leaning towards share repurchases, as we believe there are valuable inorganic opportunities. This flexibility allows us to consider acquisitions in addition to share repurchase. The current cash flow profile also supports a dividend increase. While you might view the 10% hike as modest, we will continue to assess cash flow growth in the coming year. It may become a regular occurrence. We have reached a point where we feel confident in supporting a dividend increase, following last year's doubling and another increase this year, along with a share repurchase program and inorganic opportunities. This demonstrates significant financial flexibility and strength for our company. Our business model is robust enough to navigate economic fluctuations while still generating a solid cash flow. Therefore, we can increase the dividend, maintain a share repurchase program, and still have capital available for growth opportunities. I believe this reflects the current state of the company. Does that help?

David Silver, Analyst

Yes. No, I really appreciate the context there. Thank you. That's it from me. I appreciate all the color. Thank you.

Doug Dietrich, Chairman and CEO

Thanks, David.

Operator, Operator

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

Doug Dietrich, Chairman and CEO

Thank you very much for attending this quarter's call. We look forward to chatting with you at year-end and giving you our full-year results in January. Take care.

Operator, Operator

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