Earnings Call Transcript - MTX Q4 2025

Lydia Kopylova, Head of Investor Relations

Thank you, Gary. Good morning, everyone, and welcome to our fourth 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 the slides. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from the 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 the appendix of this presentation, which are posted on our website. Now I'll turn it over to Doug.

Douglas Dietrich, Chairman and CEO

Thanks, Lydia. Good morning, everyone, and thank you for being here today. I will begin by providing a brief overview of our performance for 2025, and then Erik will discuss our fourth-quarter and full-year financial summary, along with a preview of the first quarter. Toward the end, I will share insights on how we foresee 2026 developing in terms of our end markets and anticipated sales growth across each product line. After that, we will open the floor for questions. 2025 proved to be a tougher year for us, especially in comparison to the record year we experienced in 2024. Like many companies, we felt the effects of a fluctuating and at times unpredictable operating environment, marked by geopolitical uncertainties, varying tariffs, and reduced market demand. Our team's ability to adapt to these changing conditions while remaining committed to key aspects of our long-term strategy demonstrates their strength. I want to emphasize that in 2025, the employees at MTI achieved world-class safety performance, the best in the company's history. The health and safety of our employees, partners, and communities remain our highest priorities. Although we are still working towards our goal of completely eliminating injuries at MTI, the progress we made this year is a positive step toward that objective. Turning to our financial results, full-year sales totaled $2.1 billion, consistent with the previous year. Our operating income was $287 million, and earnings per share stood at $5.52. Many of our key end markets saw either stagnation or decline over the year. Our teams acted swiftly to adapt to these challenges by controlling costs and managing inventories while navigating changing tariffs and staying focused on quality, customers, and safety. We proactively worked on improving our cost structure, launching a company-wide cost savings program in the first half of the year, which will yield full-year benefits moving forward. Despite the challenges in the market and operations, we made significant progress on the three pillars of our organic growth strategy in both segments. This includes expansion into higher-growth consumer markets, positioning ourselves in faster-growing regions, and introducing innovative, higher-margin products. We shared examples of recent investments aligned with this strategy, such as enhancements to our pet litter facilities across the U.S., Canada, and China, expanding our natural oil purification operations in Turkey, establishing several paper and packaging satellite plants in Asia, and increasing our production of FLUORO-SORB. Each of these initiatives is expected to contribute to significant sales growth in 2026, and I will provide further details later in this presentation. We also experienced a productive year in technology and new product development, with sales from our latest products accounting for 19% of our total sales—the highest percentage we've recorded. This reflects the effectiveness of our innovation efforts and our capacity to deliver new value through our core technologies. Additionally, we managed our capital effectively, returning $73 million to our investors through dividends and share repurchases while maintaining a solid balance sheet that positions us well for both organic and inorganic growth initiatives. Now, I’ll pass it over to Erik to go over our financials in greater detail.

Erik Aldag, CFO

Thanks, Doug, and good morning, everyone. I'll start by providing a summary of our fourth quarter and full year 2025 results, followed by a review of our segments, and I'll wrap up with our outlook for the first quarter. Following my remarks, I'll turn the call back over to Doug for additional perspective on 2026. Now let's turn to review our results. The fourth quarter played out largely as we expected. Sales, operating income and EPS were all roughly in the middle of the ranges we provided on our third quarter earnings call. Sales were $520 million, up slightly from the prior year as 2% growth in Engineered Solutions offset a 2% decline in Consumer & Specialties. Operating income was $67 million and operating margin was 12.8% of sales. Operating margin for the quarter was impacted by lower residential construction and foundry volumes in the U.S. as well as lower productivity and fixed cost absorption at our plants serving those markets. Turning to the full year. Sales were $2.1 billion and operating income was $287 million. You can see in the sales bridge on the upper right that sales were 2% lower than prior year, driven by $74 million of unfavorable volume and mix impacts, which was partly offset with $21 million of selling price increases and an $8 million benefit from foreign exchange. You can see in the bridge on the bottom right that unfavorable volume and mix impacted operating income by approximately $27 million from the prior year. Our selling price increases completely offset inflationary impacts, including the impact from tariffs. However, we also experienced unfavorable productivity and fixed cost absorption, primarily due to volume challenges in the first and fourth quarters. And as we mentioned, we had some temporarily higher logistics costs associated with our cat litter plant upgrades. Operating margin was 13.9% of sales versus 14.9% in the prior year. Lower volume was the biggest driver of the change and was worth about 80 basis points. We see this margin reverting back towards 15% as volume improves, and we won't have these one-time cost impacts I just mentioned. Earnings per share, excluding special items, was $1.27 in the fourth quarter and $5.52 for the full year. Now let's turn to a review of our segments, beginning with Consumer & Specialties. Fourth quarter sales in the Consumer & Specialties segment were $274 million. Sales in our Household & Personal Care product line increased 2% sequentially to $133 million and were 1% below prior year. Momentum continued to build for our cat litter business with sales up 8% sequentially and up slightly from prior year. We also saw continued growth in edible oil and renewable fuel purification as well as animal feed additives. However, this growth was offset by lower Fabric Care sales as customers reduced their inventories in the fourth quarter. In our Specialty Additives product line, sales of $142 million were 2% below prior year as higher sales to paper and packaging customers were offset by a pronounced slowdown in residential construction, which resulted in several customers taking unusually long downtime in December. These customers resumed ordering in January, but we are not expecting this market to improve significantly from the fourth quarter to the first quarter. Operating income for the quarter was $29 million, $9 million lower than prior year, driven by unfavorable volume and the associated impact on fixed cost absorption at our plants, particularly those serving residential construction. Turning to the full year. Consumer & Specialty sales were $1.1 billion. Household & Personal Care sales of $513 million were down 3% from prior year overall, but improved by 5% in the second half of the year compared with the first half. The improvement in the second half was driven by a positive trend in cat litter sales, which were 7% higher in the second half as we worked with our retail partners to drive higher volumes. We also continue to make solid progress on some of our key growth initiatives, with full year sales into edible oil and renewable fuel purification up 17% and sales of animal feed additives up 12%. Sales in Specialty Additives were $585 million, 4% below prior year. As I mentioned, one of the bigger macro challenges we faced in 2025 was a slowdown in residential construction, which impacted sales for this product line in both the third and fourth quarters. Overall volumes to paper and packaging customers were also lower than the prior year as our new satellites in Asia were offset by declines in North America and Europe, including two paper machine shutdowns that occurred over the past year in the U.S. Despite these market challenges, our sales to paper and packaging customers picked up in the second half of this year, increasing by 3% compared with the first half of the year as some of our newest satellites continue to ramp up and volumes in Europe and Latin America also ticked higher. As I mentioned, overall sales to paper and packaging customers returned to year-over-year growth in the fourth quarter. And with the capacity that has come out of the market in North America, operating rates at our customers are very healthy in the 90% range, which is positive for our volumes. Full year operating income for the segment was $134 million compared to $166 million last year, driven by unfavorable volume and mix and the associated unfavorable cost productivity as well as temporary cost increases related to our facility upgrades. Now let's turn to a review of our Engineered Solutions segment. Fourth quarter sales in the Engineered Solutions segment grew 2% from prior year to $245 million. Sales in High Temperature Technologies of $178 million were up 1% from the prior year as higher sales to steel customers offset lower foundry sales in North America. As we expected, foundry customers in North America took extended seasonal outages toward the end of the fourth quarter. In the Environmental & Infrastructure product line, sales of $67 million were 7% higher than prior year. Sales growth was driven by infrastructure drilling, offshore services and environmental lining systems. This growth was partially offset by lower sales of waterproofing materials for the commercial construction market. Fourth quarter operating income was $40 million, representing another strong performance by the segment despite mixed market conditions. Turning to the full year. Segment sales were $975 million. Sales in High-Temperature Technologies were $705 million, representing a 1% decrease from prior year. We continue to see growth in our Asia foundry business, which helped to offset slower demand from foundries serving the agricultural equipment and heavy truck markets in North America. Sales to steel customers were relatively flat overall as growth in North America was offset by softness in Europe. Full year sales in the Environmental & Infrastructure product line were $270 million, up 2% from prior year, primarily driven by higher demand for infrastructure drilling products, environmental lining systems and offshore water treatment. The segment navigated mixed market conditions and tariff impacts to deliver record operating income of $163 million and record operating margin of 16.7% of sales. Now let me turn to a summary of our balance sheet and cash flow highlights. Fourth quarter cash from operations was $64 million, bringing the full year total to $194 million. We deployed $107 million of capital expenditure, which was a bit higher than the prior year, driven by the higher number of growth investments we've made. Overall free cash flow was $87 million for the year. After a slow start to the year, our free cash flow averaged 7% of sales from Q2 to Q4. And for 2026, we're expecting full year free cash flow in this more typical range of 6% to 7% of sales. We returned a total of $73 million to shareholders last year in keeping with our balanced approach to capital deployment. Our balance sheet remains solid, finishing the year with more than $700 million in liquidity and a net leverage ratio of 1.7x EBITDA. Now I'll summarize our outlook for the first quarter. Overall, we expect first quarter sales and operating income to be similar to the fourth quarter, which would represent approximately 5% growth over the prior year. In the Consumer & Specialties segment, we expect sales to be up mid-single digits versus prior year. In Household & Personal Care, we're building on the momentum we've generated in cat litter and other consumer-oriented products, and we expect this product line to be up mid- to high-single digits year-over-year in the first quarter. We've also seen an uptick in Fabric Care orders after a slow fourth quarter. In Specialty Additives, we're expecting growth in Paper and Packaging to offset continued softness in residential construction. In Engineered Solutions, we're also expecting mid-single-digit growth in the first quarter. In High-Temperature Technologies, we see continued growth in Asia foundry and continued strong sales to steel customers in North America, which we expect to offset the softness we are seeing in North America foundry. Our North America foundry customers continue to be impacted by sluggish agricultural equipment and heavy truck volumes, and a few permanent foundry closures have been announced for the first quarter. We expect most of the volume from these foundries to be absorbed by other foundries in the U.S. However, it will take some time for that volume to transition. In Environmental & Infrastructure, we're expecting continued growth in infrastructure drilling products as well as offshore water treatment. For the total company, we're facing $2 million to $3 million higher energy and mining costs in the first quarter versus the fourth quarter, which will have a temporary impact on our margins. We expect to offset these higher costs through pricing and improved productivity as we move through the quarter, and the margin impact should be limited to the first quarter. We expect overall sales and margins to improve as we move through the year, particularly as some exciting new growth opportunities begin to ramp up in the second quarter. With that, let me turn the call back over to Doug for some additional detail on these opportunities and some perspective on the year ahead.

Douglas Dietrich, Chairman and CEO

Thanks, Erik. Every first quarter, I'd like to give you a general perspective on our end market conditions for the year. And as Erik just mentioned, we're not currently seeing any significant changes in our end markets and expect them to largely remain stable at current levels through the first half. Several factors could change this outlook, such as lower interest rates, increased consumer confidence in home buying and remodeling and improvements in on- and off-highway vehicle builds. These factors could take hold this year, but the timing of the resulting inflections is hard to determine at this point. But independent of exactly how our markets play out, the growth investments we made last year were well-timed, and we have captured significant sales growth for 2026 as a result. Let me take you through each product line and give you some examples. In Household & Personal Care, we're set up for what we expect to be a strong year. The result of the investments we made into the U.S. Our U.S., Canadian and Chinese cat litter facilities is that we've secured significant new business this year with major retailers, which will begin to ramp up at the beginning of the second quarter. We're also completing the expansion of our Bleaching Earth facility in Turkey to support the rapid growth of our edible oil and renewable fuel purification business. Regulatory changes driving increased use of sustainable aviation fuels worldwide are creating significant demand for our best-in-class bleaching earth products. We've also recently qualified our products at a large refinery in Asia, which opens this large market to us. Over the past 5 years, this business has grown at an average of 15% per year. And this year, we expect that growth rate to accelerate further. Lastly, we're expanding capacity for our animal health and fabric care products with new partnerships and products in development, and we expect to share more on these initiatives over the next 2 quarters. In Specialty Additives, we have three new paper and packaging satellite plants coming online this year in Asia, which will drive solid volume growth. We've recently shared details in a press release about our multi-year expansion in the region, which continues to provide a solid pipeline of opportunities for us and that will yield additional contracts and volume growth going forward. The main uncertainty this year in this product line is the residential construction market and the question of when it will begin to strengthen from its current condition. When it does, this will have a positive impact on our GCC and Specialty PCC volumes. Moving to the Engineered Solutions segment. Our High-Temperature Technologies product line is positioned for a solid year. Steel production in the U.S. remains stable, and we've seen some recent improvement in Europe. We're commissioning six additional MINSCAN units this year and continue to see strong pull for our latest high-performance refractory formulations. Foundry output in the U.S., however, remains relatively slow due to flat auto builds and weaker heavy truck and agricultural equipment demand. Asia presents a large addressable market for us, and we continue to see opportunities to expand our business there. The China foundry market proved to be resilient last year, and we expect to see continued strong volume growth there again this year. In the Environmental & Infrastructure product line, our commercial construction and large environmental lighting markets are beginning to trend in a positive direction. FLUORO-SORB continues its qualification track with hundreds of trials taking place at water utilities across the U.S. and in Europe. We have ten new FLUORO-SORB water utility installations scheduled for this year, which will more than double our current footprint. We're also seeing continued strong demand for our infrastructure drilling products and expect this strength to continue throughout the year. In summary, the specific actions we took last year in support of our long-term strategy have put us in a position to deliver a strong 2026. With relatively stable markets, we see growth returning to the mid-single-digit range. Should the U.S. construction and foundry end markets improve this year, 2026 will turn out to be an even stronger year for MTI. Before I wrap up, I also want to let you know that we're planning another investor event this year, where we will highlight many of our newest technologies and update you on our progress against our five-year targets. We also have some exciting new projects in our innovation pipeline that we hope to share with you. These projects are targeted at opportunities created by the regulatory and tariff-related policy changes around the world that are driving the increased importance of and demand for local mineral supply. We feel we are uniquely positioned with some of our technologies to turn these opportunities into significant new revenue streams for MTI. More to come on this, so stay tuned for details. Again, thank you for joining today, and thank you to everyone at MTI for your ongoing focus on safety. With that, let's open the call to questions.

Operator, Operator

Our first question today is from Mike Harrison with Seaport Research Partners.

Michael Harrison, Analyst

I wanted to start out with the Consumer & Specialties segment. The operating margin performance there was the worst you've had in a few years. I understand there were some fixed cost absorption issues as well as possible inefficiencies related to your pet care work. Was the performance worse than you expected, or was it in line? As we consider what the margin might look like in that segment for 2026, could you provide some guidance on how we should view that margin performance this year?

Erik Aldag, CFO

Yes. Mike, this is Erik. Thanks for the question. Regarding the fourth quarter margins, I would say they aligned with our expectations, except for the softness in residential construction demand we experienced later in the quarter. This had a twofold impact on the margins in that segment. First, the residential construction products we offer have a relatively high contribution margin, so when volume decreases, it creates an unfavorable mix impact. Secondly, as I mentioned, a significant drop in volume affects the absorption of fixed costs at our facilities, making it difficult to adjust those costs during such volume shifts. These were the primary factors affecting the fourth quarter. You also brought up the temporary impacts from the plant upgrades. Most of these occurred in the second and third quarters, though we began ramping up the upgraded facility in the fourth quarter, so we didn’t fully realize the benefits of that upgrade at that time. Moving forward, volume will be the key driver for increasing margins in that segment. I showed you the MTI operating bridge, and both volume and mix were the main factors influencing the change in margin from 2024 to 2025, particularly in the Consumer & Specialties segment. We are confident about the volume growth in Consumer & Specialties, which will contribute significantly to margin improvement, along with avoiding the one-time costs we faced last year.

Michael Harrison, Analyst

All right. Very helpful. And then I wanted to just dig in a little bit on the press release you put out recently talking about your paper PCC business. Some of the new satellites that have come on and are still to come on during 2026. I was hoping you could just give a little more color on how you're seeing the market? Presumably, North America still is maybe a little bit soft, but you would expect to see some growth in Asia. Maybe also talk about the pipeline of opportunities for future satellites as you see it right now.

Douglas Dietrich, Chairman and CEO

Yes, this is Doug. I'll begin and then pass it to DJ for additional details. We find that Asia continues to offer significant growth potential for us due to its large market size and stable paper production. We have previously mentioned our penetration strategy. In the Asian market, we have only penetrated about 50% with PCC as a pigment, whereas in Europe and North America, the penetration rate is nearly 100%. This indicates a substantial opportunity to expand our PCC business in Asia. This expansion will be facilitated by the consolidation of smaller paper mills into larger operations and the introduction of newer machines. This trend has been ongoing for about a decade and we anticipate it will continue. Additionally, it opens up a great pipeline for us in other avenues, such as our new technologies like NewYield, where we are finding ways to repurpose waste streams while also entering the packaging sector, which is rapidly growing in Asia. By adapting our technologies and products from traditional printing and writing paper to packaging and these innovative solutions, we see even greater opportunities ahead. Now, I'll hand it over to DJ to discuss that further before we shift back to North America and its outlook for this year.

D. J. Monagle, Chief Operating Officer

I'm happy to elaborate on what Doug mentioned. We discussed the four announcements coming online in 2025, and Doug highlighted three more that are set for 2026, all focused on growth in Asia. Specifically, one of these involves an expansion, mainly in China and India, and we anticipate that this trend will continue. Shifting to our pipeline, we currently have fewer than two dozen viable opportunities, mostly in Asia, along with a few in more developed regions. NewYield is gaining significant traction and has evolved from being a singular product focused on converting a waste stream to a broader platform. We have numerous applications we can pursue, particularly in recycled packaging in Asia, where we are also providing satellite ground calcium carbonate that has attracted interest from packaging customers. We expect our pipeline to stay strong. If I had to pinpoint the next opportunities beyond what Doug mentioned, they would likely be broader Southeast Asia prospects, which are also continuing to grow. Erik pointed out that operating rates in the base market are solid, with North America operating at a sustainable 90%. Europe is slightly behind that and is facing competition from Asia, but our customers there are well-positioned, being leaders in their region. Overall, we are optimistic about the continued expansion of the paper group, especially with a focus on growth in Asia due to market penetration.

Michael Harrison, Analyst

All right. Last question I had is just kind of on capital deployment going forward. The balance sheet is still very strong. You guys have a good track record of free cash flow generation, and it sounds like maybe some further recovery in free cash flow in '26. Can you just talk about how you're thinking about spending cash during 2026 as you look at your M&A pipeline as well as I forget what you have left on the share repurchase authorization. But what should investors be expecting this year?

Douglas Dietrich, Chairman and CEO

Yes, Mike, we continue to implement a balanced approach to capital deployment. With our current debt levels, we aim to allocate 50% of our free cash flow to shareholders while reserving some for future opportunities. We have approximately $140 million remaining in our share repurchase program, which we plan to continue at the same pace this year without a specific timeline. We will seek opportunities to optimize the use of that cash, but we also keep about 50% on the balance sheet for potential acquisitions. We believe there is a solid pipeline of targets that could help accelerate our growth strategy, including smaller acquisitions in different regions and potentially larger opportunities that could enhance our scale. Our balance sheet is in good shape, and we are monitoring the market to ensure we are ready if an opportunity arises. Our team is well-prepared, and we are patiently watching for what may come. While timing such opportunities can be challenging, we remain active in our search, and in the meantime, we will maintain our balanced strategy, including our share repurchase and dividend efforts while adhering to that 50% free cash flow allocation.

Operator, Operator

The next question is from Daniel Moore with CJS Securities.

Dan Moore, Analyst

So just maybe clarification or drill down on a couple of specific products or end markets. Fabric Care, you called out customers managing inventories late in the year, not a shock. But is that largely behind you and talk about your visibility into Q1?

Douglas Dietrich, Chairman and CEO

Yes, we believe so. It's been a somewhat inconsistent year for Fabric Care. Some of our larger customers shifted orders from the first quarter to the second, making it a bit challenging to forecast. This also occurred late in the fourth quarter with some adjustments from that period impacting the first quarter. As Erik mentioned, those orders have increased. We believe the volume is still available, but it does fluctuate from quarter to quarter at times. More importantly, we anticipate good volumes in the future. We've been developing new technologies and products, which we hope to introduce this year that could significantly enhance our Fabric Care business. There isn't anything troubling regarding the current situation, just some rescheduled orders. However, we have projects in our pipeline that we're excited to launch this year that could accelerate growth.

Dan Moore, Analyst

Got it. And then shifting to Pet Care. You gave the outlook. Just maybe take a step back. Obviously, early '25 was challenging in terms of market dynamics of discounting by branded players. How would you describe market conditions, both U.S. and Europe as we enter '26 and kind of underpinning that growth expectation?

Douglas Dietrich, Chairman and CEO

This year was a bit challenging overall for the market. The markets for pet litter were relatively flat, growing only about 1% to 2% in total. We noticed some discounting activity that required us to make adjustments with our customers. We implemented those changes during the second quarter. That's why we emphasized working with them on promotions to highlight the value of private label products compared to the discounted prices of branded products. As a result, we saw volumes return. Our sales in pet litter during the second half were 7% higher than in the first half, indicating that our efforts took effect. While I expect that discounting will continue, we've made necessary adjustments this year, particularly in North America. I believe we will continue to experience base volume growth. Additionally, we have secured significant business. We dedicated time and resources this year to upgrade our facilities, including starting one in China, which are now operating as expected. This will help us increase capacity and improve our plants' capabilities, resulting in better throughput, cost structure enhancements, and the ability to offer a variety of products and packaging options. This has allowed us to secure substantial business, estimated at around $25 million to $30 million, which Erik mentioned in relation to returning to high single-digit growth in that segment. This new business should contribute significantly in the coming year. Overall, we expect a strong performance for pet litter, having made the necessary adjustments last year, with volumes returning and new business driving growth.

Dan Moore, Analyst

Great. Very helpful. One or two more, I'll turn it over. Q1, 5% revenue growth, quite healthy. And I know you called out the higher mining and energy costs. So that's a chunk of it, but just wondering why we wouldn't expect to see maybe a little more operating leverage on that type of top line growth.

Erik Aldag, CFO

Yes, Dan, this is Erik. Regarding the higher energy and mining costs, that's around $2 million to $3 million on a sequential basis. The mix impact I mentioned earlier, particularly the softer residential construction we've observed in the first quarter compared to last year, is affecting our margins. This product typically has a relatively high contribution margin, but right now the market is softer. Historically, Q4 and Q1 are usually slow for this market, but so far this year it's softer than last year. Additionally, lower equipment sales in Q1 are impacting margins. We had some equipment sales in high-temperature technologies in the fourth quarter and the first quarter last year, but none in the first quarter this year, which is also affecting the margin.

Dan Moore, Analyst

That really helps. Last one for me. mid-single-digit growth this year, if I listened appropriately or heard correctly, which is a very healthy outlook. Obviously, 15% operating margin has been a goal for some time. You made great progress toward it. What would it take to get there from here in terms of organic top line growth? Is that achievable in '26? And what type of time frame should we be thinking about, if not? And I appreciate the color.

Erik Aldag, CFO

Yes. So I think on the growth side, we do feel more confident about the growth this year. We've talked a lot about these growth investments that we've made that support about $100 million of new revenue. Right now, we're estimating about $50 million of that will come through in 2026, that's everything we've mentioned, the cat litter, the new cat litter business, new SKUs on the shelf, new distribution centers that we haven't served before. It's the bleaching earth expansion. It's the new satellites, it's new MINSCANs. That's about $50 million that we think is going to come through this year. And on top of that, we've got $20 million of pricing. So $70 million right there of things that we can tally up, and we feel very confident about. That's before we even start talking about things like the Asia foundry growth that we expect to continue, the refractory business, they've got new products. We expect those to continue to grow. Animal Health, FLUORO-SORB, the whole environmental and infrastructure product line has been on a pretty good trend recently. So look, markets could get weaker from here. But right now, we're not expecting markets to change very significantly. So that's why from where we sit today, we feel confident that we're going to have a strong year. If we get some help from the markets, particularly like construction, ag equipment, heavy truck, that's why we think we could have a really strong year this year.

Douglas Dietrich, Chairman and CEO

Dan, I want to emphasize that the company is fundamentally built around a 15% margin. Erik has mentioned some temporary cost challenges and declines in mix and volume that have affected our margin by about a percentage point. Last year, we were close to that 15% target at around 14.9%. This year, we’ve seen an 80 basis point drop attributed solely to lower volumes. However, I believe that with the anticipated growth, including at least $70 million to $100 million from single digits, we will manage to absorb that volume. Additionally, we are seeing growth in some higher-margin products, which I think will help bring us back to that 15% margin level on a run rate basis this year as revenue and volume increase. Currently, half of the company is operating at 16.7% margins, even reaching record levels, despite the foundry not contributing yet. There is potential for further improvement in that area. With our new higher-margin products gaining traction, including in areas like bleaching, animal health, Fabric Care, and pet litter, I believe margins could revert to around 14% and potentially exceed 15%. While it's uncertain if the market will assist us this year, I am confident that with our current resources and past investments, we will begin to elevate that margin, likely by late this year or early next year, with 15% being a structural target for us.

Dan Moore, Analyst

And certainly progress toward it this year is what I'm hearing.

Operator, Operator

The next question is from Pete Osterland with Truist Securities.

Peter Osterland, Analyst

First, just wanted to ask in Specialty Additives with sales being up year-over-year in the Paper and Packaging business during the fourth quarter. I was just wondering if you could break out that sales growth by region. And I was also wondering, is there a meaningful geographic mix impact on margins for sales into North America and Europe versus sales into Asia in that business?

Erik Aldag, CFO

Yes. Thanks, Pete. So definitely, the growth is coming from Asia, and that's offsetting the softer volumes in North America. We mentioned a couple of shutdowns we have to overcome. But the growth in Asia did start to overcome that in the fourth quarter. And so that's the dynamic that you see. As far as margins go, on an operating income basis, yes. So we're bringing on new capital with these investments in Asia, and they've got a higher depreciation load than the assets in North America and Europe. And so on an operating income basis, there's a lower operating margin in Asia for the new satellites coming on than for some of the volume declines that we've seen in North America. On a cash flow return basis, we look at these investments on an IRR basis. We're getting the same level of returns that we expect around the world in Asia. And so as those assets depreciate, the operating margins will go up, but that's basically how the math works.

Peter Osterland, Analyst

Got it. And then just a clarification, I apologize if I missed it, but you talked about plans to implement pricing and productivity as offsets for some of the margin pressure you're seeing. Just given the breadth of end markets and businesses you have, where within your portfolio do you have relatively strong pricing power to implement increases?

Douglas Dietrich, Chairman and CEO

Yes, I believe we have significant pricing power across our entire portfolio. In softer markets, this can be somewhat challenging, but as demonstrated in the 2023 to 2024 timeframe, the company managed to implement nearly $250 million in price increases overall. We collaborate closely with our customers to ensure we capture the value that our products provide, while also being mindful of the competitive landscape they operate in. This year, we are implementing standard base price increases across the Specialty Additives business. In our high-temperature technologies, we have considerable pricing strength. Last year, we successfully navigated tariff increases, which contributed to our overall pricing capability. The price increases will be broadly distributed throughout our business, not concentrated in any single product line. We are also aware that our pricing must sufficiently cover our input costs to maintain our margins. Therefore, while there is no specific area we are focusing on, we have the ability to adjust prices as required across the board.

Peter Osterland, Analyst

Very helpful. And then lastly, I just wanted to ask, you called out that you're expecting to have at least ten installations of FLUORO-SORB later this year. I was just wondering what's the approximate revenue potential associated with those installations? And how long does that take to ramp?

Douglas Dietrich, Chairman and CEO

Yes. Maybe I'll start, and I'll let Brett talk a bit more about FLUORO-SORB, in general. These are probably smaller installations still. These are smaller utilities that are coming in place. They are I guess, we call tank renewals. So we're putting in the media into tank systems that will get renewed maybe a couple of times, three times per year. So those change-outs aren't super high revenue. But as we get them put in place, that kind of feeds more opportunities because they get more use and they get more storytelling around their capabilities. And so it's more of an indication of more of the acceleration of use of FLUORO-SORB. I think the revenue this year will probably grow a couple of million dollars from those installations. But I think more importantly is that the number of installations and trials that's going on right now, we're talking a couple of hundred, I believe, trials across the United States and into Europe. That really bodes well for as this accelerates towards some of the regulation changes. more quickly more installations and take-up of FLUORO-SORB over the coming years. So Brett, do you want to give any more color than that and what's going on specifically in the U.S.?

Brett Argirakis, FLUORO-SORB Project Lead

Thanks, Pete. Yes, the progress with FLUORO-SORB continues to be positive despite the regulatory delays. Last year, we saw sales grow by about 20% year-over-year. Currently, we have eight full-scale drinking water projects in process, and as mentioned, there's a pipeline of ten additional projects where FLUORO-SORB has been chosen as the absorptive media this year. Interest is growing beyond the U.S.; specifically, Germany, Sweden, and the U.K. are actively piloting FLUORO-SORB, and we’re collaborating with the German EPA to secure approval for its use in drinking water applications. Additionally, France has launched a full-scale drinking water pilot in Belgium and Sweden is continuing to test in situ PFAS remediation projects using FLUORO-SORB. We're very confident in our product's performance and expect to keep advancing the commercialization of FLUORO-SORB to eliminate PFAS. We're excited about the prospects and anticipate continued growth in this product line.

Operator, Operator

The next question is from David Silver with Freedom Capital.

David Silver, Analyst

I'm going to follow up on a couple of areas first. I wanted to revisit your comments about pet litter. For 2025 as a whole, revenues were probably up by low single digits, mostly in the latter half of the year, as you mentioned. Within that, there seems to be both a volume component and a price component. Earlier in 2025, you made some adjustments to support pricing for your customers. Could you break down the pet litter growth in terms of the change in volume versus price? Additionally, could you comment on the pricing outlook for 2026? Specifically, is that customer support still in place, or are there opportunities to recover some of those price reductions?

Erik Aldag, CFO

Sure. The impact of pricing was relatively small. In some cases, we did make price concessions, but that was in exchange for increased volumes. From a margin perspective, this can actually benefit us because it allows more volume to flow through our plants. So, I would say there were some targeted pricing adjustments in certain areas, but not universally. The other part of the question was regarding volumes, which are primarily what we are focusing on.

Douglas Dietrich, Chairman and CEO

The revenue challenge this year was primarily related to volume, largely due to competitive factors and the price differences between brands as they offered discounts on private labels. We have made adjustments, including some price changes, but most of the recovery has come from promotions, packaging, and collaborating with our retail customers to enhance the value of their products on the shelf. So, it was mostly volume with a small price impact. Looking ahead, the estimated $25 million to $30 million increase will primarily come from volume, along with average prices from major retailers and various regions. We've also established new distribution centers that we previously didn't have, securing that business. While customers still need to make purchases, we are confident that this volume will come through, which should address some of the absorption and productivity issues and help in utilizing the new plants we've built. We are optimistic about this progress.

David Silver, Analyst

Okay. Great. The second topic is regarding the refractory side. I noticed that you have six new MINSCAN units scheduled for commissioning. Should I assume that these six will be commissioned in 2026? Additionally, I recall that the previous batch of five MINSCAN units generated approximately $100 million in total revenue. Is this new batch of six expected to be similarly sized, or how should we interpret that?

Douglas Dietrich, Chairman and CEO

Let me explain. The $100 million represents the total market opportunity we are targeting, which includes about 130 different electric arc furnaces in North America and Europe. This presents a significant market potential. However, adopting this technology will take time as customers adjust. The technology has primarily been implemented in the United States, mainly due to safety concerns, allowing us to install the device at the plant's furnace while ensuring the safety of personnel nearby. Additionally, it enables efficient scanning, measuring, and deployment of our refractory material. We see a substantial market opportunity here. Each project comes with approximately a five-year contract, and over this period, we estimate securing around $100 million. This means we expect to generate about $17 million to $20 million annually from installations so far. This model offers stable long-term contracts and taps into our higher-performing refractory products. Now, I realize I’ve covered a lot of what Brett could elaborate on, so I’ll hand it over to him.

Brett Argirakis, FLUORO-SORB Project Lead

Thanks, Doug. Looking at Europe and the United States, our two largest markets, we have around 130 targeted projects. Our pipeline is strong and continues to grow. Regarding installation, we will commission six additional units this year, with about half expected in the first quarter or first half, although some may be delayed. Five of these units will be in the U.S. and one in Europe. Our pipeline remains robust, and we are introducing products that complement it. I previously mentioned our banks and bottoms materials that are not gunning products but are placed beneath the molten steel. We launched these last year, and by the second half, our growth trajectory significantly improved. We've doubled our growth in the refractory group, and we anticipate similar results this year due to these new products, which are not only used in furnaces but also in steel ladles transporting molten steel to the continuous caster. We're very enthusiastic about this business, and it's performing well. I hope that answers your question.

David Silver, Analyst

Yes, I appreciate all the information. While I have you, Brett, I wanted to ask a follow-up question on FLUORO-SORB. Earlier in 2025, the EPA extended the timelines for drinking water authorities to select a remediation plan and then an additional two years to implement it. I'm curious about your thoughts on the adoption curve in light of these extended timelines. Should we anticipate that adoption will begin to increase as the deadlines approach, potentially pushing the growth out by a couple of years? Or is it possible that there might be more early adopters since some potential customers have already been trialing it under the assumption of a shorter timeline? In other words, should we extend the growth curve for FLUORO-SORB by two years, or might adoption happen more quickly despite the longer timelines set by the EPA?

Brett Argirakis, FLUORO-SORB Project Lead

Yes, that's a great question, David. The current U.S. EPA drinking water limits are set for 2029, with discussions about possibly extending them to 2031. This timing could be crucial for the growth of this product line. However, I must be honest and say that while many drinking water utilities have delayed major projects, there's been a notable increase in trial activity, opportunities, and inquiries. It seems we're seeing more trial efforts due to the extra time provided, which could benefit us. Although we would prefer to see immediate sales growth, this allows us to effectively demonstrate our product. Therefore, we're observing more and more activity. Additionally, I previously mentioned our efforts in Europe, which are gaining momentum with different regulations. We are collaborating with the German EPA and other countries to advance this product. Regardless of the regulations, we are not slowing down. The trajectory may depend on when the regulations are finalized, but we will continue to push forward and boost sales.

Douglas Dietrich, Chairman and CEO

As Brett mentioned, there could be an additional year delay, but that extra time is being used to solidify FLUORO-SORB in these facilities. This has been beneficial for trial activity, and we believe it will lead to a strong solution in the United States. In the meantime, we are also working in other countries. We think the revenue trajectory and the range of regions we are addressing may align with our expectations from two years ago, even considering the delay.

Operator, Operator

Okay. Great. My last question is about free cash flow. Looking at the fourth quarter results and the full year 2025, it seems that free cash flow was a bit lower than I had expected for early to mid-2025. We don’t have access to your cash flow statement yet, but could you highlight where the free cash flow generation differs from a year ago? Perhaps in terms of working capital or CapEx exceeding earlier projections? Should we expect a minor drag extending into 2026 for this metric, or will things rebound to align more closely with your long-term targets?

Erik Aldag, CFO

Thanks, Dave. The main factor affecting us this year was income. Compared to our earlier expectations, the income came in lower, which impacted our cash flow. At the end of the year, working capital was somewhat elevated, largely due to foreign exchange effects. The weakening of the U.S. dollar had a noticeable impact on our working capital balances, but we expect to benefit from that as we collect cash from receivables and sell inventory that was on our balance sheet at year-end. Looking ahead, as I noted in the presentation, we anticipate free cash flow to be in the range of 6% to 7% of sales for the full year. Additionally, last year started slowly for us. We expect this first quarter to perform better than the same period last year regarding free cash flow. However, Q2, Q3, and Q4 last year all achieved around 7% of sales. Overall, there's been no change in the company's ability to generate free cash flow.

Operator, Operator

The next question is a follow-up from Daniel Moore with CJS Securities.

Dan Moore, Analyst

I appreciate all the information provided and almost didn't ask, but do you have any updates on talc litigation? Do we still believe that the reserves we've set aside are sufficient at this point? Thank you.

Douglas Dietrich, Chairman and CEO

Yes, we still believe the reserves are sufficient. We're making positive progress as we work towards establishing a 524G trust. We're committed to this process and are doing our best to move quickly. However, we want to ensure that the result is fair for everyone involved and provides closure for the company. We'll continue our efforts until we feel we've achieved those goals. As I mentioned, we're dedicated to the process and are working as efficiently as possible, and we are making positive progress. That's the information I can share.

Operator, Operator

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

Douglas Dietrich, Chairman and CEO

I just want to say thank you for everyone joining today. I also want to again reiterate to those at MTI. I really appreciate your work in this past year, more to do, and thank you very much on the safety front. Again, more work to do, but thank you very much for the efforts, and we'll talk to you in another 3 months. Thanks. Bye.

Operator, Operator

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