Minerals Technologies Inc
NYSE:MTX
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Minerals Technologies Inc
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[00:00:03] Good day, everyone, and welcome to the third quarter Twenty twenty Minerals Technologies earnings call, today's call is being recorded. And at this time, I'd like to turn the call over to Eric Aleg, head of Investor Relations of Minerals Technologies. Please go ahead, Mr. Erik Aldag.
[00:00:21] Thanks, Deborah. Good morning, everyone, and welcome to our third quarter Twenty twenty earnings conference call. Today's call will be led by Chief Executive Officer Doug Dietrich and Chief Financial Officer Matt Garth.
[00:00:34] Following our prepared remarks, we will open it up to questions.
[00:00:38] I'd like to remind you that beginning on page 14 of our 19 10k, we list the various risk factors and conditions that may affect our future results. And they also point out the safe harbor disclaimer on this slide. Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and condition.
[00:00:59] I'll now turn the call over to Doug Doug.
[00:01:04] Thanks for the introduction, Eric, and good morning, everyone. And we appreciate you taking the time to join today's call, and I hope you are all staying safe and healthy. Let me outline a brief agenda for the call. I'll begin by taking you through our third quarter highlights, including improving trends in our sales results, our strengthened operational and financial profile and progress made on the business development front. I'll then turn it over to Matt to provide a more detailed look at our third quarter performance by Business segment. I'll conclude our prepared remarks by discussing trends in our end markets and highlighting new business that will contribute to our volume growth next year. First, I want to comment on the 8-K we filed this week related to a ransomware attack we recently experienced. Which impacted access to some of our companies, IT systems. We have procedures and protocols in place for situations like this, and immediately after detecting the incident, we implemented our comprehensive cybersecurity response plan, including taking steps to isolate and carefully restore our network to resume normal operations as quickly as possible. We've notified law enforcement and have been working with industry leading cybersecurity experts to conduct a thorough investigation. Throughout this situation, we operated our facilities safely and met our customer commitments. Before going through the third quarter review, I'd like to note that I'm very pleased with how our global team and businesses have performed and what continues to be a complex and challenging environment. We remain focused on managing our company with an unwavering commitment to keeping our employees safe, operating our plants efficiently and serving our customers with value added products.
[00:02:57] Dedication, engagement and resilience of our employees has been nothing short of exemplary during these times, and I want to thank them for their perseverance they've shown over the past several months. Let me take you through how our third quarter unfolded. As we previewed in July, we anticipated the demand conditions and our end markets would improve with the second quarter having the most acute impacts from covid-19. And that's largely how the quarter played out as we were prepared to respond to the volume recovery, which led to sequential sales growth in nearly all of our product lines. Overall, we had a solid quarter from an operational and commercial standpoint. These results reflect our team's disciplined execution related to cost control, pricing and productivity, which resulted in higher sequential and year over year operating margins. They also demonstrate our strong product portfolio and end market mix has enabled us to capture opportunities with existing and new customers. From a financial perspective, total sales in the quarter were three hundred and eighty eight million dollars, an increase of about nine percent sequentially, but still at lower levels compared to last year. As we indicated on our last call, our July sales were trending upwards and demand conditions in several markets continued to strengthen throughout the rest of the quarter. We generated 52 million dollars of operating income and earnings per share, where 92 cents. In addition, we delivered 54 million dollars in cash from operations, continuing our solid cash generation profile. After experiencing volatile conditions and our businesses that serve industrial related and markets through the second quarter, we saw considerable demand improvements in the third quarter, along with continued strength in our consumer oriented product lines.
[00:04:53] Let me touch on some of the highlights. Narrowcasting business continued to rebound as our foundry customers in North America ramped up production to meet the demand increase in the automotive sector. By the end of the third quarter, our metal casting facilities were operating at about 95 percent of last year's levels, noticeable improvement from the reduced levels seen earlier. In addition, penetration of our pre blended products remains on a strong growth trajectory in China as sales increased 20 percent over last year, and this momentum should continue moving forward. Bells in our portfolio of consumer products, which includes pet care, personal care and edible oil purification, remained resilient, led by an 11 percent year over year growth in pet care. Continue to strengthen our robust private label Petcare portfolio in North America and Europe and have expanded our presence through partnerships with several new customers. Another area to highlight is our global peak business, which benefited from satellite restarts in India and North America, combined with an improved demand environment from the low levels in the second quarter. As we indicated on our last call, Jilli volumes were trending approximately 15 percent higher compared to June and these dynamics continued through the third quarter. Of note, paper sales in China continue to deliver a solid performance with 18 percent growth over last year. In addition, specialty PCC sales increased sequentially as automotive and construction demand strengthened through the quarter and food and pharmaceutical applications remained at strong levels. Other pockets of strength came in our talk and business as demand improved for our products used in residential and commercial construction, as well as automotive applications, and in our refractory business, where steel utilization rates increased in the US from a low of 50 percent in the second quarter to 65 percent at the end of September.
[00:07:00] While many of our businesses return to a positive trajectory, we've had some challenges in our project oriented businesses such as environmental products, building materials and energy services, which are still experiencing volatility and order patterns and timing delays. Energy services was further impacted by several hurricanes that occurred in the Gulf of Mexico during the quarter. Their volumes began to trend upward through the quarter, we were able to leverage these sales into income, resulting in overall operating and EBITDA margin improvement on both a sequential and year over year basis. We've maintained our focus on operational efficiency, including variable cost adjustments and structural overhead savings, as well as on continued pricing increases, capturing favorable raw material costs and increasing sales of higher value products. As markets continue to recover, we are well-positioned to expand margins further on increased volumes. Our focus on strengthening our financial position also remains a priority, with an emphasis on tightly controlling our cash generation cycle and creating more flexibility around our capital structure. Delivered another quarter of strong cash flow generation, the majority of which was used to pay down debt. Well, navigating through the current environment, we've remained focused on advancing our growth initiatives and made further progress this quarter on several fronts when they go through some of these highlights in more detail.
[00:08:33] The commissioning of two new EPS satellites scheduled for the fourth quarter continue to move ahead. Currently ramping up production at our 45000 tonne facility in India, the 150000 tonne satellite in China should be operational by December. It will also be resuming production in November at our previously closed satellite in Wickliffe, Kentucky, to support Phenix papers restart of that mill. During the quarter, we made a small acquisition of a Halling and mining company to further strengthen our vertically integrated position and our bentonite mines in Wyoming. This transaction improves our position and enhances our flexibility with our mining and our transportation in the region. Now, refractory business, we signed two new five year contracts to supply our refractory and metallurgical wire products in the U.S.. These contracts total approximately 50 million dollars, or about 10 million dollars of incremental revenue on an annual basis. A new product development efforts are progressing well as we look to accelerate the pace of commercialization and drive new revenue opportunities. If commercialized, 36 value added products so far in Twenty twenty contributions from each of our businesses, 12 of these products were introduced in the third quarter. It kept at a similar pace to last year while conducting many of these product development activities virtually. All in all, there are a number of positives about our performance in the quarter, especially how we've executed as a company, well, navigating through difficult conditions. There are still some challenges ahead with strong momentum across many of our businesses and with an enhanced cost profile, we expect to continue to deliver improved profitability as volumes recover.
[00:10:23] But that I'll turn over to Matt to discuss our results in more detail now.
[00:10:27] Thanks to our panel review our third quarter results, the performance of our four segments, as well as our cash flow and liquidity positions. Then turn the call back over to Doug for some additional perspective on our current operating environment and the visibility we have going forward. Now, let's get into the review of the third quarter results. Third quarter sales were three hundred and eighty eight point three dollars million, nine percent higher sequentially and 14 percent below the prior year, gross margin, EBITDA margin and operating margin all improved sequentially and versus the prior year, driven by our continued pricing and productivity actions. Asahina expense was flat with the second quarter and also contributed to the margin expansion. Earnings per share, excluding special items, was 92 cents, and we incurred special charges of three point two dollars million after tax in the third quarter for nine cents per share. Our effective tax rate for the quarter was nineteen point eight percent versus nineteen point one percent in the prior year and 16 percent and the prior quarter going forward, we expect our effective tax rate to be approximately 20 percent. Now, let's review the changes in sales and operating income in more detail. On this slide, we were presenting the year over year comparisons of sales and operating income on the left side and the sequential quarter comparisons on the right side. Third quarter sales were 13 percent lower than the prior year on a constant currency basis.
[00:11:57] The slowdown in economic activity brought on by the covid-19 pandemic continued to impact our volumes on a year over year basis in the quarter. The operating income bridge on the bottom left shows we were able to significantly offset the impact of lower sales versus the prior year, but favorable pricing and cost performance driven by the actions we have taken over the last year. These actions resulted in higher operating margin versus the prior year, despite the lower volume. On a sequential basis, we saw significant improvement in demand with sales up seven percent, adjusting for currency and up nine percent overall. Conditions improved across most of our end markets, and we maintain pricing levels across the company. On our last call, we told you that sales rates in July were turning approximately five percent higher than June and this trend accelerated through the rest of the third quarter. Daily sales rates in August were six percent higher than July, and September was seven percent higher than August. Operating income increased 18 percent sequentially on a constant currency basis, primarily due to the improvement in our end markets and continued cost control. Operating margin was thirteen point three percent in the quarter versus thirteen point two percent in the prior year. Eleven point eight percent in the second quarter. Now, let's take a closer look at the operating margins and how they have improved on the next slot. On this side, we are showing year over year and sequential operating margin bridges for the third quarter.
[00:13:29] Starting with the prior year comparison, our pricing and cost actions contributed to 190 basis points of improvement, which more than offset the unfavorable volume impact. On a sequential basis, we leveraged additional volume and the 60 basis points of margin improvement in our continued cost control contributed another 70 basis points of favorability. The actions we have taken on pricing, productivity, cost control and new product development have positioned us well to leverage incremental volumes into improved margins going forward. Another margin we like to highlight for the third quarter was that EBITDA margin improved by 70 basis points versus both the prior year and the prior quarter. Now, let's turn to the segment review, starting with performance materials. Performance material sales increased 10 percent sequentially and are eight percent lower than the prior year. Narrowcasting sales grew 26 percent sequentially as foundry production improved in North America and demand remains strong in China. Improvement in North America was primarily driven by the ramp up of automotive production. China metal casting sales grew 11 percent sequentially and 20 percent versus the prior year on continued strong demand for our customers and continued penetration of our specially formulated blended products, household personal care and specialty products. Sales remained resilient, up seven percent sequentially and flat with the prior year on continued strong demand for consumer oriented products. Meanwhile, environmental products and building materials continued to experience covid-19 related project delays and sales remain below prior year levels.
[00:15:14] Operating income for the segment was twenty eight point two dollars million, up 34 percent sequentially and up five percent versus the prior year. Operating margin was fourteen point eight percent of sales, up 270 basis points from the second quarter and up one hundred and basically 180 basis points from the prior year. Continued pricing actions, strong cost control and expense reductions, more than offset the operating income impact of lower sales versus the prior year. The chart on the bottom right shows daily sales rates by month this year compared to the prior year. The segment experienced a clear rebound in demand and sales increased steadily throughout the third quarter. And we would normally expect a seasonal decrease in sales for this segment between the third and fourth quarters driven by our construction and environmental end markets. However, this year, we expect to offset the typical seasonality with continued positive momentum in our other markets. Overall, we expect fourth quarter sales to be similar to the third quarter, despite the typical seasonal effects. I'd also like to note that we experienced higher mining and energy costs while operating in colder months, and this will temporarily impact segment margins in the fourth quarter. Now let's move to specialty minerals. Especially mineral sales were one hundred twenty five point one million dollars in the third quarter of 14 percent sequentially and 13 percent below the prior year. EPS sales increased 14 percent sequentially as paper mill capacity came back online in the U.S.
[00:16:58] and India following temporary covid-19 related shutdowns. Asia-Pac sales in China grew 11 percent sequentially and 18 percent over the prior year on continued penetration and strong customer demand. Especially peak sales increased 16 percent sequentially as automotive and construction demand improved through the quarter and consumer oriented products remain strong. Processed mineral sales increased 13 percent as end markets steadily improve through the quarter. Operating income, excluding special items, was 18 million dollars, up 18 percent sequentially and 17 percent below the prior year and represented fourteen point four percent of sales, which compared to thirteen point nine percent in the second quarter and fifteen point two percent in the prior year. The impact of lower volume versus the prior year was partially offset by continued pricing actions and cost control. Daily sales rates charged for this segment also shows improving conditions through the third quarter, and we expect this trend to continue into the fourth quarter as paper production in the U.S., Europe and India continues to ramp up. In addition, we are bringing on my new capacity in the next several months, and most of this capacity will come online late in the fourth quarter. Sequential improvement in paper PCC will offset the typical seasonality we experience in the residential construction market served by the other participants overall for the segment, we expect fourth quarter sales to be similar to the third quarter. Now let's turn to retractors. Factory segment sales were fifty nine point three dollars million in the third quarter, up six percent sequentially as steel mill utilization rates gradually improved from second quarter levels in both North America and Europe.
[00:18:57] Segment operating income was seven point three dollars million, up 24 percent from the prior quarter and represented twelve point three percent of sales. Again, you can see improvement in the daily sales rates through the third quarter, we expect continued improvement in the fourth quarter as steel utilization rates improve and laser equipment sales pick up. Overall for the segment, expect a modest sequential improvement in sales in the fourth quarter versus the third quarter. Now let's turn to energy services. The energy services segment experienced significant customer project delays in the third quarter. These delays were related to cope with 19 restrictions, as well as several weather related shutdowns on the Gulf of Mexico and what has been a very active storm season. As a result, sales were thirteen point three million in operating income with break even for the third quarter. Now, the daily sales rates chart shows the solid start to the year, followed by sales levels that have remained low relative to the prior year. Continue to see a strong pipeline of activity and we expect sequential improvement for this business in the fourth quarter. Now let's turn to our cash flow and liquidity highlights. As I've noted, third quarter cash from operations totaled 54 million dollars and free cash flow was 40 million dollars.
[00:20:26] We continued our balanced approach and deploying cash flow, paying down 30 million dollars of debt, and we resumed our share repurchases, acquiring three million dollars of shares in the quarter. Continue to repurchase shares in October and completed the expiring program with 50 million dollars of shares under the 75 million dollar authorization. As noted earlier, the board of directors has approved a new one year, 75 million dollar repurchase program. Our net leverage ratio is two point one times EBITDA, and we have 682 million dollars of liquidity, including over 375 million dollars cash on hand. Before I hand it back over to Doug for the market outlook, I'd like to summarize my comments on what we are expecting for the fourth quarter in each of our segments. And our most businesses, we expect continued improvement and many of our markets offset the typical seasonality and we expect sales to be similar to the third quarter. Margins will remain strong on a year over year basis, though sequentially margins will be impacted by seasonally higher mining and energy costs. And our services business, we expect continued gradual improvement in factories as utilization rates improve and we expect sequential improvement in energy services, has delayed projects resume and activity levels pick up. Overall, we expect MTI sales in the fourth quarter to be similar to the third quarter. With that, let me turn it back over to Doug to discuss our current and market conditions and outlook in more detail.
[00:22:06] Thanks, Matt. Before beginning the Q&A portion of the call, I wanted to take some time to provide a little more insight into the conditions across each of our businesses and where we see opportunities to drive incremental growth.
[00:22:22] The improving market trends experienced across most of our businesses will likely extend through the rest of the year while our project oriented businesses may continue to face persistent challenges with uncertain customer order patterns patterns. Ed.. As we build on the momentum from the third quarter, we're also executing on a wide, wide range of attractive growth projects which will accrue to revenue in 2021.
[00:22:47] I mean, I'll take you through what's happening by business segment, starting with performance materials, our largest and most of our second. Our household and personal care product line will continue on its strong sales trajectory as demand for these products stays high and we leverage our expanded channels and presence with new customers. Specifically, we're growing our portfolio of premium pet care products in both North America and Europe with the expansion of new online retail channels with larger customers and the introduction of new products such as our 100 percent carbon neutral eco care product in Europe, example of how we're satisfying customer preferences while also contributing to our sustainability efforts. Ed. Those of our edible oil purification products have more than doubled since last year as we grow this business through an expanded global customer base. There are metal casting business we expect to continue to benefit from the automotive demand rebound in North America. Noted earlier, we expanded our customer base in China through the continued penetration of our higher value blended products, which led to sales growth of 20 percent over the last year, our solid growth trend there will continue for the rest of the year and into 2021. I'll touch on environmental products and building materials together as they're both experiencing similar dynamics. While each maintains a robust and active pipeline and continues to introduce more specialized products, these businesses have been impacted by timing delays around when customers will commence larger remediation and waterproofing projects.
[00:24:29] Switching to the specialty minerals segment will begin with paper PCC. If paper demand in North America and Europe gradually improving, we expect sequential volume growth in all regions in the fourth quarter. Asia and China, more specifically, will continue its solid growth trajectory. But also benefit from the ramp up of our satellite in India and our new satellite in China should be operational in December. On the horizon, we have two new facilities coming online in the first half of Twenty twenty, one one for a packaging application in Europe and another for a standard facility in India. Overall, we're bringing online two hundred and eighty five thousand tons of new peak capacity over the next three quarters. We also maintain a very active business development pipeline across our broad portfolio of technologies, including high filler packaging and recycling. Each of these opportunities could add to our overall volume total next year. And our specialty PCC Chicontepec businesses sales for our pharmaceutical and consumer products, including food applications, will remain strong. Man, for our high performance ceiling and plastic products that are used for automotive applications should strengthen as build rates continue to improve in North America and Europe. And sales for products used in residential and commercial construction applications should stay steady.
[00:25:59] But the refractory segment, current steel utilization rates in North America and Europe are around 70 percent and 65 percent respectively, and we expect these rates to gradually improve in the upcoming quarters. Ed.. Our order book for laser measurement equipment remains strong in the fourth quarter. As I mentioned earlier, we've recently signed two five year contracts totaling fifty million dollars to supply our broad portfolio of refractory and metallurgical wire products, which will start to accrue to revenue growth in 2021.
[00:26:33] Finishing up the discussion with energy services where we maintain an active pipeline of offshore services, covid-19 and adverse weather conditions have led to some early mobilizations or postponements from our larger offshore projects. Some of these projects have been scheduled to resume in the fourth quarter. In addition, we've recently been awarded new large projects in the Gulf of Mexico, which we expect to commence over the next few quarters.
[00:27:01] We're focused on navigating through a highly dynamic environment, and our culture of continuous improvement can positions us to do so. Over the past six months, we've been successfully implementing virtual tools to help improve productivity, efficiency and connectivity with our employees and customers, and I've been impressed with how quickly we've adapted to the changing environment. These tools have enabled us to run our business smoothly as we connect seamlessly with our operating facilities for meetings and site visits, conduct problem solving cases and events, and collaborate and communicate efficiently with our global customer base. Many of these new ways that we're operating on a daily basis will become permanent and we'll balance them within in-person activities. As we look ahead into Twenty twenty one, I'm confident in the direction we're heading, the solid foundation we have in place to leverage improved market conditions and the growth projects we haven't had or covered, related uncertainties still persist. Our end market conditions continue to show signs of improvement. With the operational actions we've taken, we are well positioned to drive improved profitability. Addition, strength and flexibility of our balance sheet provides solid resources to support both organic and inorganic growth opportunities. For taking your questions, I want to say to our team at MTI how proud I am of the way they've executed and performed in what has been an incredibly complex, dynamic environment and thank them again for their dedication and engagement. With that, let's open the call to questions.
[00:28:42] All right, if you would like to ask a question, you may signal by pressing Star one on your telephone keypad, if you are using a speakerphone, please make sure your mute function is turned off so that your signal can reach our equipment.
[00:28:55] Again, that is star one to ask a question. And we'll pause for just a moment to allow everyone an opportunity. All right, the first question is from Daniel Moore with CJS Securities.
[00:29:14] Doug Mack, good morning, thanks for taking questions and I want to start with EPS. Can you just refresh us? Breakdown the revenue by geography in Q3 where we are today as a baseline, and where do you see that by the end of 2001, given all the new schedule capacity coming online?
[00:29:38] Well, let me start now and give you kind of the bridge to the new capacity and volumes that we see for 2021 and then maybe you can sort of revenue you.
[00:29:50] As I mentioned, we're bringing on about two hundred eighty five thousand tons of capacity, 200 of that will be here in the fourth quarter.
[00:29:57] Ramping up, you know, kind of this quarter and into the first and then another 85000 tons in the first half of next year, and that's to facilitate the packaging and another facility in India.
[00:30:09] This year, we experienced shutdowns. If you remember the last call Verso Paper and Danta million, Ashtown, Arkansas, totaling about 100000 tons of volume, came out this year. So NetNet were up about 185 thousand tons next year. By the by the middle of next year, we'll have installed about one hundred eighty five thousand tons of incremental, given the timing of when they come on and as they ramp up, we see, you know, probably one hundred and twenty five thousand, 150000 tons of new volume in Twenty twenty one.
[00:30:42] Kind of on an annualized basis, so when you get to the second half of next year, you should be on an annualized run rate of about 150000 tons of additional volume.
[00:30:52] Very helpful, given all the puts and takes we've had over the last couple of quarters and then just trying to get a sense for what the new baseline looks like, as you know, Europe and as far as Asia and China continue to grow India as well, while North Americans have been on a bit of a different trajectory. Any update there?
[00:31:13] Yeah, so I think let me go back and pick the right baseline. So if you look at our 2013 volumes, you know, before going into Twenty twenty with all the puts and takes I just gave you there about two point nine million tons of TCC, you know, we've had so this chart, the big dip in volumes through the second quarter and the gradual improvement through the third.
[00:31:34] And we think into the fourth with this additional volume, we should probably by the end of next year, be back to that level. And then with the additional volume accruing into the next year. So, again, you know, look, there's a lot of demand conditions that have to continue to continue through the fourth quarter and into the first and and seeing where we are with the kind of covid related uncertainties. But but if you take a look at a 19 base with the puts and takes from this year, we should be able to get back to that level run rate basis by the end of next year.
[00:32:07] Ok, I'll do some of the math, I'll fly on geography, but sorry, no, no.
[00:32:12] And then I was going to give you actually that that rough breakdown on a geographic basis. And let's do it on a on a revenue basis, as you asked for it, roughly 40 percent North America region. You're going to have the rest fairly split between Europe and Asia. There's a small bit in there called five percent that exists in Latin America. But that's the way we break it down.
[00:32:37] Perfect. That's helpful. OK.
[00:32:39] I'll add that then that will add to that that, you know, that's what we have in hand. So, you know, things kind of stop today. That's that's how that's going to shake out. There are you know, we always talk about we have a pipeline of opportunities that we continue to work on there in different stages to technologies in terms of our high Siller, our Nield products for recycling. And those many of those are in, you know, advanced stages of discussion, which also should accrue to could could accrue to volume next year as well.
[00:33:12] That was my follow up, was, you know, some of the news that it seems like the dam is breaking a little bit for for new contracts, are you seeing increased momentum there? And sounds like you are at least with some of the new technologies.
[00:33:26] Yeah, let me give you that. You want to give a little color about some of our new technologies and some of the trials are running.
[00:33:33] Yes, sure, glad to. And Dan, just to further the conversation on regional breakdown for the standard Pixie's, I would say that, you know, all of the contracts were chasing on standard PCC and the putting in writing grades. Most of that is India and China and and the rest of Southeast Asia. So that shift will continue to happen. And then we look at the new technologies. It's kind of a balance, the the new technology that we've got where we've run some pretty successful machine trials and we're into the commercial discussions. That's that's a little bit more in Europe and the Americas kind of balance between those two. If I look at the new products in packaging, the most momentum we have right now for the white grades, the white board packaging would be North American packaging. And then we've got a couple of products in and brown grades, that new newer technology, one being new yield, others being a new product design for brown paper. Those would be in the Americas too. So standard PCC ClearPath for growth and and a good pull in Asia. And then the new products seem to be getting more momentum in the Americas and a little bit in Europe.
[00:35:04] Perfect, helpful, a lot of really good work done on the cost side and a lot of discussion in the prepared remarks, but, you know, the opportunity for margins to move higher just remind us either across the businesses or consolidated with incremental margins typically would look like and whether we see upside to those kind of historical typical incremental margins over the next 12 months, given some of those cost reduction initiatives as volumes do recover.
[00:35:38] And what we've typically told you and if you remember in the beginning of the year, as revenues are tracking down, we talked about the decremental margins being in that 30 percent range and that's been proved out as you looked at the second quarter. Let's come back on. The incremental margins has also been in that 30 percent range. Now it's a little bit north of there. And we would expect the cost control that we've been seeing and the effort on our fixed costs expenses that we would be able to move that incremental margin as the volumes are coming back. So I'd use those two numbers around 30 percent, either decremental or incremental, you know, for now. And we'll prove it out as it's expanding over the next coming quarters.
[00:36:19] And then answer your your your initial question, there's absolutely room for margins to move north. You know, if you take a look at the margin chart in terms of the volume impact we've absorbed and offset, you know, that volume at those incremental margins, you know, really accrue to, you know, income, but also those margins as well. You know, we're always looking at opportunities to become more efficient, you know, with our culture in terms of productivities and looking for ways to do things better. We've captured a lot of that over the summer and months. But but that's part of our DNA. We do that constantly. And so we're always looking for ways to continue to hold costs or reduce costs so that those new products, those higher margin products and that volume, as our markets continue to recover, I'll drop right to the bottom line and help those that margin story.
[00:37:07] So, you know, I think, you know, we always talk about 15 percent. If you take that volume from the first quarter or even just from last year, we'd be north of that right now.
[00:37:17] Perfect for me, and I'll hand it over, you give very good color in Q4 and then some some color on some of the margins for the individual, the individual segments. Overall, if we put all those together margins flat or slightly down from two, three sequentially, based on what we see the world today, is that the right takeaway or is there a better conclusion?
[00:37:47] You know what we told you, we basically laid out the the trajectory for revenues to be essentially the same. Now the mix of revenues is going to change. And the one item we also called out for you, Dan, was the higher mining and energy costs can also be some other incremental cost that will be in there. And those are going to be in that two to three million dollar range. So you are going to see the margin impact taking place just based on sort of those seasonal temporary effects of the mining and energy costs while revenues are staying relatively flat.
[00:38:21] Perfect. Thank you. I'll jump back a little bit.
[00:38:23] Yeah, but but then just to just to be clear, those margins, you know, continue that trend of being above the prior year. So strength in the margin story. But you're going to sequentially because of those seasonal effects will be down.
[00:38:37] Understood. That's really helpful. Thank you.
[00:38:42] All right, once again, if you would like to ask a question, please, press star one, if you like to remove yourself from the queue by pressing star to. Give me the next question is from Soke Cook with JPMorgan.
[00:39:03] Hi, good morning, how are you?
[00:39:05] It's OK, how are you?
[00:39:08] Do you have any view on the audible groans at the fourth quarter, you know, have your customers tickled anything about whether they'll be, you know, shut down in the US in December or, you know, there won't be? And what's it like? The trajectory looks like it looks like these from you know, they're sort of like some covid shutdowns coming in Europe that often there's some seasonal shutdowns that happen in the US in the summer. And the Asian markets are really strong. And so I was wondering, like what you hear from your customers.
[00:39:42] Sure, let me start it off and then, you know, I think we'll talk more about the automotive and the impacts, just to remind everyone Inpex and automotive have primarily in North America and Asia for our metal casting business, we supply more the automotive industry and our minerals businesses in our specialty PCC, a little bit more of North America and Europe focus. So just give you the breakdown of those impacts.
[00:40:07] Jon Hastings, you want to talk a little bit about metal casting and what we're hearing from customers going into the fourth quarter.
[00:40:14] Doug. But let me touch base on North America and talk about China and also Southeast Asia, but what we're seeing in North America is everybody's running pretty well, pretty strong. As you know, auto production went went south in Q2, rebounded in Q3, but the inventories are remaining low and everybody's looking to restock the pipeline. And auto sales remain pretty strong. All of our customers are telling us that they're running fairly strong throughout the remainder of the year. Again, we'll see what happens around the end of your holiday season with shutdowns, but we don't expect any major impact. We see a fairly strong. China, you know, about 40 percent of our business is in auto and heavy truck in China and we've seen a very, very strong year. The build rate the customers are have come back extraordinarily strong in Q3. We expect that to continue into Q4. What we see is not only domestic production and consumption, but then also the exports, exports of parts and also vehicles going into both the U.S. and Europe. Those continue to rebound. And as a result, the demand has been very strong. The last region in the world that's rebounding in Southeast Asia. And what we're seeing is that they're currently running at about our businesses about 18 percent year on year. And that's a relatively small piece of American business worldwide. But we do see that increasing on a sequential basis. And that's because the auto production in Thailand, Korea, Indonesia, you know, they're they're they're on the rebound coming off the covid shutdowns. So that's the last region in overall. You know, we're we continue to look pretty strong going through Q4.
[00:42:14] So that's the only thing I'd add to that is, look, I think, you know, our visibility in the middle of the third quarter was, you know, probably a little bit stronger going into looking into the fourth. Well, you know, dressing, I think, where your question is coming from with the shutdown's recent news in Europe and what we're seeing around the world. Yes, it's a bit of cautious, but right now, what we can see through the fourth quarter is kind of continued demand levels, as John. And that includes, you know, the automotive supply that we have through North America and Europe and our specialty PCC business for now. But we continue to watch it and we're prepared to react accordingly.
[00:42:50] And then secondly, it looks like your cash down, just like, you know, getting close to like 400 million dollars again. What are you going to do with all the cash you're going to, you know, begin to buy back shares so meaningful? What do you know? What are your capital allocation plans?
[00:43:13] Our capital allocation has remained, you know, similar to what it was we talked about that in the last call. Look, I think going into into April, you know, ensuring that our balance sheet was in solid shape was it was a priority and and making sure that liquidity was there and our debt maturities were, you know, proper for the environment. We took advantage of the markets, capital markets in June and we did just that. We pushed out maturities, 400 million dollar unsecured out eight years. We left some cash on the balance sheet. And, you know, right now where we stand, we think that's a great position to have to make sure that regardless what happens, this company's liquidity position is solid. We do have a solid cash flow year, which is good as we've made some adjustments in working capital. And and so we continue to put that cash on the balance sheet. I think right now our priority is making sure our debt positions we've paid thirty million dollars in the third quarter, I think will continue to steer our capital more to that direction. But as you know, we have a 75 million dollar authorization that we intend to execute on. And we have some cash on the balance sheet for, you know, opportunities. We're going to support these growth projects that I mentioned today and and and do things like, you know, small. We have our small hauling business that we acquired. We have a nice portfolio and profile of potential companies we think work for us.
[00:44:38] And so I think our balance sheet is in a good position for all of that, repay debt, execute on our share repurchase program and ensure that we have resources to support our growth initiatives.
[00:44:47] And so let me just add the free cash flow dimension to that. You know, and Doug talked about the strength of the story and you saw here in the third quarter generating another 40 million dollars of free cash flow. If you listen to the call from last quarter, we told you that we were going to generate about 100 to 120 million dollars of free cash flow in the quarter sorry, in the year. You know, based on what we're seeing now through the rest of the year, we're in the 140 to 150 million dollar range of free cash flow generation and Twenty twenty for the company. And that includes continuing to invest in the company from a sustaining and growth perspective. You know, that CapEx level is going to be in the 60 to 70 million dollar range. And so feeling good about, as Doug said, a very balanced approach towards the use of our cash flow generation.
[00:45:39] It seems like plenty of cash to buy back, you know, 70 million dollars worth of stock. Things are a good investment.
[00:45:48] Yeah, we think it is a good investment, Silca, so but that's not to say that, you know, we've always talked about our approach and making sure that our debt levels are down to target levels. First, investing in ourselves and our growth opportunities where we see the returns and fit our strategy. And and then, yes, we will balance returning cash to shareholders and also as acquisitions potential are there, as those change, we can steer more toward share repurchases. And as those opportunities, we steer more toward our inorganic opportunities. So we'll continue that approach. But I think the point is that making sure that we are in solid footing, regardless of what economy we're in, I think we have that position and being able to take advantage of opportunities, be it in the market for returns to shareholders or in the market for things that we think that our core capabilities from an inorganic standpoint.
[00:46:45] And thanks very much.
[00:46:47] Gives us a lot of options.
[00:46:53] All right. And the next question is from Rosemary Moore, Beli with G Research.
[00:47:01] Thank you. Good morning, everyone.
[00:47:03] Hi, Rosemary.
[00:47:05] So just finishing up on the cost side, how much of first of all, do you have a dollar amount in terms of how much you have been eliminating in terms of cost and then how much of that do you think is only temporary and know come back?
[00:47:27] Yes, OK, if you take a sorry, Rosemary. OK, we don't have an accent yet. Thank you very much, Rosemary. If you take a look at what we just showed you on a year over year basis with the effort of costs that we have taken out in terms of expenses, fixed costs, starting with the restructuring that took place in the middle of last year, where we told you that would be about 12 million dollars. Since that time, we've also seen expenses related to TNT and also other costs, meaning other headcount costs coming out that we haven't been backfilling and that we've been finding a way to be more efficient overall in our system so that we would not need to backfill those heads. When we talk about what's permanent and what's not permanent, we say that about two thirds of the overall cost benefit that we've been experiencing on a year over year basis is going to stay in place. And so we showed you here in the third quarter that that was about one hundred and eighty basis points worth of favorability. And and so you could expect that to continue on about a two thirds basis going forward.
[00:48:39] Thank you, that's helpful, and then still on the, you know, quick questions type of answers this last year of your 75 million dollars of authorization, you only bought back 50 million dollars worth of stock. Do you think that this year you could get closer to that full authorization?
[00:49:05] I think, Rosemary, we were, you know, on track to, you know, to do the full 75 million dollar authorization, we suspended that in March after the first quarter, given the conditions. And so our faces and our intent was to fully fulfill that that authorization. So we took a pause over the summer making sure we preserved cash, making sure that we were in the right position, as I mentioned earlier, in our balance sheet. And then when we saw as the cash flow in our balance sheet resumed, that with with the remaining time that we had, we ended up with 50 million due to a bit of a pause, you know, as we have the cash on hand to be able to do that 75 million dollars. And I think we do intend to do that going forward.
[00:49:52] All right. Thank you. And still on the on the cash note, I thought that with your debt level as low as it is right now, you had kind of opposed the debt repayment. I suppose I was wrong how you feel. And if I heard properly, you are still planning in reducing your debt. So what is the net leverage target then?
[00:50:23] We've maintained a kind of a target level of two times, Rose-Marie, we've, you know, been around the two point one times for a while. I think I think as we as we went through the second and the third quarter, as we viewed kind of the economy and what was happening, we felt prudent, as I said, to make sure that we had a very strong balance sheet. And the priority was that. And so we put most of the free cash flow of the 40 million dollars in the third quarter to debt repayment. But the shareholders were comfortable with where our debt position is. We could make some additional debt payments going forward. But again, that balance sheet that we have gives us a lot of options to make sure that our debts are in the right position. We can steer our cash to shareholders, but also making sure we have resources for our growth opportunities. So we have a lot of options here. We might steer a little bit more toward debt given where we are in the economy, but we take that balanced approach and we're going to continue to do so.
[00:51:16] Ok, thanks. And now looking at your consumer driven markets, revenues into those markets overall are now 25 percent. And you are targeting that level to grow to 35, 35 to 40 percent if my memory serves me right. And that would include first doubling going from 200 million to 400 million. So can you talk about the timing and whether most of that growth is going to come from internal growth or whether M&A is actually the biggest chunk getting it to your goal?
[00:52:00] I think you're referring to a questionnaire from the last call, I think we answered, you know, how big could our consumer oriented businesses be? Look, I think it could grow to that size. I think we're certainly our strategy around of creating balance in the company from an industrial and consumer standpoint. As you mentioned, we're currently about 25 percent consumer oriented. And, you know, we look to grow some of our core positions. I think we're vertically integrated in our Petcare business. And a couple of years ago, we added to that with an acquisition called Sematic, which doubled that pet care business. I think, you know, you saw that the organic growth of that business is at 11 percent. And so we think that a large portion of those businesses are edible oil purification, our animal health business, our pet care business, our fabric, our businesses, those will continue to grow and we continue to develop new products and ensure that we have the right capital base there to have healthy returns. We will continue to grow those organically. And I think there's opportunities out there for us to continue to add to our consumer oriented product base to expand that. I think could it get to 30, 35 percent? Sure. That's going to be both a combination of growing our current core positions organically and adding to them inorganically. And so over time, I think that's a possibility to get to those types of levels. But we're certainly focused on on on growing those product lines, these core product lines that we have in those consumer oriented products.
[00:53:34] Could you get to that level faster just by reshuffling your portfolio of businesses, meaning that divesting some non consumer related operations?
[00:53:49] On a percentage, Grace, yes, that could that would do it. I think, you know, at the moment, I think we're looking at the moment, yes, that would do it. But at the moment, we're looking more toward adding and growing those businesses organically and potentially inorganically.
[00:54:06] Ok, thanks.
[00:54:11] All right, and your next question is from Mike Harrison with Seaport Global Securities.
[00:54:19] Hi, good morning. I was wondering if we could talk about the the EPS business. You said there was up 11 percent, but the business was flat overall on a year over year basis. So what's going on outside of Petcare? Was there some destocking or maybe declines from Serj buying that was happening earlier in the pandemic?
[00:54:43] Yeah, the that this is a product line is household, personal care and specialty, and in that specialty segment, there are some, you know, kind of high end additives for drilling products. So both in construction, drilling in oil and gas drilling. And that was the one product line that has been off mostly that oil and gas drilling, those additives for oil and gas drilling. So I believe every other portion of that product line had grown over last year with the exception of that.
[00:55:16] And then within the paper taxi business. Have you seen your printing and writing paper customers getting some benefit from from colleges and schools, getting back to some in-person learning, or is that not provided much pick up? And until we get to Philly in person, we don't see that, Susan.
[00:55:39] I think that some some of what's behind the demand growth recently, I think the majority of our growth from the third through the third quarter was really due to restarts. You know, we had a number of shutdowns in the second quarter for, you know, entire entire months. You know, India government restrictions and shutdowns for almost part of April and May. We had some shutdowns in South Africa and some of our plants in Europe. And so those restarted in the third quarter, which was really driving through that growth. I do think there is some demand improvement. A La Monica. We'll talk more to that about our conversations with customers, T.J..
[00:56:20] Yeah, I am. So some like the way were, you know, to generalize the statement, Doug is spot on that what we've been seeing is really just restarting and cutting coming up from the shutdown. There's a there's a general optimism that that has more and more schools come online and more businesses get to work, that that operating rates will improve. To just give you a perspective on this, you know, the operating rates as we we went in the twenty twenty were in the neighborhood of, you know, just below 90 percent. So somewhere between 85 and 90 percent in North America was right at ninety. Europe was a little bit lower than that. So as as things are coming back up, most people feel that North America is going to be back into that. You know, 80 plus percent operating rate by Europe seems to be a little bit slower. And the big question on everyone's mind is they know that going back to work are they they feel that as people return to the offices and more and more people go into the schools because a lot of schools are working on these hybrid things, that paper consumption will grow. What the what the question mark is, is how do the habits, how do the long term habits change based on this pandemic? And there's a there's a school of thought that says the longer that this lasts, the more likely people are going to be transitioning to more, I guess, electronic methods of keeping their their data or doing their work. So there's a big question, but what we've seen is about getting people back to work and and having the and having the shutdown stop. But but there's still a big question on long term demand, especially in North America and Europe. And then in Asia, the demand picture is the same. But for us, our growth story is more about penetration. And that's that continues to move forward. That does that help my.
[00:58:25] Absolutely, very helpful. And then last question I have is on the refractory business, it seems like utilization rates are starting to approach the 70 percent level. I feel like 80 percent is more the magic number where these these bills feel like they can run efficiently and profitably. Do you guys see 80 percent or 70 percent or any any specific utilization rate as a magic number in terms of a pick up in your refractory sales?
[00:58:58] Let me start then I'll ask Frederick is to comment. You know, historically in this business, you know, we thought that an 85 percent rate was necessary for this business to be, you know, really strong in terms of operating income. We've changed this business tremendously over the past couple years from a margin contribution margin technology, its portfolio of products. And so, you know, I think you saw last year in the mid 70s, late, late in the first quarter, mid 70s, this business is still very profitable. So we've changed that kind of the profile of the business over time. Brad, why don't you talk a little bit about what you see in the marketplace and where you think operating rates are going based on what you're from our customers.
[00:59:42] Sure, sure. Thanks, Mike. Yeah, right now we're looking at the market conditions, all regions, of course, are showing reduced rates from prior year, but that all showing gradual improvement. Doug and Matt both pointing out automotive is improving, really to precut of the levels in NAFTA. We're seeing steel and scrap prices in North America and Europe increasing, which is definitely beneficial to the steel industry. And right now, the US continues to show signs of getting back up, you know, to those to the better levels. Right now, it's just under 70 percent. For the past couple of years, we've seen 80 percent, which was very healthy at 80 percent. It gives the steel maker plenty of time to do maintenance, but also at a very healthy rate. I would anticipate that these rates will continue to gradually improve. But as they pointed out, it would be great to get back to. And I think we can we can get there assuming no further setbacks from some covid. But but overall, we are positioned pretty well to to operate even if we don't hit the 80 percent rate and continue on. There's also steel capacity that's coming on new plants. These new plants are starting out between the fourth fourth quarter and through twenty twenty one, which we're very well aligned to continue to to expand with them. They both just pointed out some of the new business growth that will be moving along with them in both refractory and metallurgical lines. So, yeah, I think we have a really good chance to get back to some reasonable rates and if not, percent were positioned well, Mike.
[01:01:44] All right, thanks very much.
[01:01:48] All right, and we'll take the next question from David Silver with C.L. King.
[01:01:57] Yeah, hi, good morning, thank you. Actually, I should say good afternoon. So I had a couple of a couple of, like, targeted questions here early on in your comments you mentioned regarding the 11 percent increase in pet care, you know, pet care sales this quarter, year over year and sequential. You made a reference to partnering. And I have to confess, I'd never, you know, come across that before. And also, as I come across that before in your commentary and, you know, the 11 percent I think is is significantly higher than maybe the three to five or four to six percent kind of numbers you've been targeting for that business for a long time. So maybe just a little bit of color on. Are you doing anything differently? Are these partnerships a little bit different and.
[01:03:00] What would be the ultimate potential to increase, you know, partnering opportunities in terms of growth growing, you know, that part of your pet care business like?
[01:03:14] Thank you. I think what I refer to partnering, we talk about, you know, we are a private label, Petcare supplier, and so partnering is producing brands for four others for their shelves. And so we're talking about partnering. We've been partnering with new customers around the world. You know, we have a growing business in China. Our business and civil matter continues to grow at solid rates in Europe and continuing to supply new brands to new partners there as well. I think the other comments were as we move and as you see the consumer buying behavior to be more online, we're also looking at and have started some online channels for ourselves. So there's a number of different partnering things that are going on. And that's not just in that's around the world. Those online channels are global and our main region. So when I talk about partnering, it's that it's being able to partner by being able to provide brands for those who want to work with us and are vertically integrated position as a supplier.
[01:04:22] Ok, so sorry I didn't associate partnering with Private Label. But thank you for clarifying that. I wanted to maybe shift over to the PCC business in particular, and in particular the volume growth that you cited in China this quarter.
[01:04:45] I think it was 18 percent or so, but I was scratching my head and I'm trying to kind of relate that that growth this quarter with the upcoming new project for Chien-Ming, which I guess has not started up. And I was wondering if you could characterize the full growth, all of the growth in China as related to, you know, the legacy satellite unit you have there, or might there have been some products produced at other locations, but maybe shipped over to the Chien-Ming location, you know, maybe to get things started there ahead of your full scale startup. So, in other words, was any was that or was the growth in China all related to legacy plants or was this, you know, somehow, you know, part of it, part of the growth related to Chien-Ming, I guess maybe preproduction, preproduction or pre startup volumes that that are maybe required.
[01:05:53] That the the growth year over year growth in China was all from our legacy operating facilities there, so we saw some, you know, strong demand year over year from our legacy. So give you an example that the Chien-Ming facility will be about a hundred and fifty thousand metric ton facility coming online that has not come online. So none of those volumes came from that facility that should be commissioned in December and ramping up through, you know, kind of the first quarter of next year to give you an idea. You know, our installed base of capacity in China is probably 850 thousand tons and Chien-Ming will represent another 150000 tons. So, you know, bringing us to close to a million tons of tons of capacity in Asia. So in China, so when you see that, you know, 18 percent growth and we're adding another almost, you know, 16, 17 percent to our capacity base, which we think ramps up next year. That's why we're very enthusiastic about our growth in Asia and the paper business, because that penetration story and then also in India as we're building, ramping up one and another facility next year. So, T.J. talked about those opportunities and penetration really driving our growth in this business in Asia. That's where it's coming from. So we see those type of growth numbers continuing through next year in Asia. David, hopefully that helps a little bit.
[01:07:17] Yeah, thank you. Just that one million metric sorry, one million tonnes installed out of, you know, some you'll have a little bit over three million total. That's kind of China's share of your overall installed base.
[01:07:32] I think the million tons installed is in kind of our Asia base, a million tons in Asia and the majority that's been in the morning that's been in China. However, India has been growing very quickly over the past five years.
[01:07:47] Ok, and then just maybe one one other question, this time on the foundry business, but, you know, for for many quarters now, you've been highlighting the growth in China related to the custom blends that you offer there. And, you know, again, just probably a gap in my understanding. But should I assume that that the types of products that custom blends that you sell in China are similar to the ones that are marketed regularly to, let's say, North America or Western Europe or, you know, is it the case where customers, you know, in other regions maybe like to blend their own? In other words, you know, is the value proposition the same in China as it is in North America and Europe or, you know, either due to custom or the types of products you're selling? Is it. Is it. Qualitatively or quantitatively different as you go region to region.
[01:08:57] It's not it's very much, very much the same in terms of concept, and so I guess, you know, they're not exactly the same formulas. And the reason behind that is because we are tailoring a formula to, you know, that customer's equipment, what they're trying to make, the quality requirements and dimensions of that that that that car's product. And so but being able to, you know, develop a system and a blend and an additive blend that that meets the requirements to help them, whether it's through their scrap or reduce their scrap rates to very low levels to improve the throughput through those those casting machines, we're able to tailor that. So, you know, the blends may not be exactly the same, but that is our value proposition of being able to, from a technical standpoint, go in really deeply, understand and help that foundry, you know, improve many aspects, reduce costs, improve quality, and then be able to deliver that blend kind of real time. I mean, in North America, we're delivering trucks on an hourly basis to our customers, our foundry customers. It's that and if they have an issue, they can pick up the phone and talk to us. Our technical experts will go through and make sure we understand what the change we can what what the issue is. We can make a change to our blend and delivered on the next truck. It's that level of capability. And that's exactly the type of value proposition, the technical capability and the know how that we're developing around the world. And China, that's what's driving, you know, kind of a lot of our growth in China.
[01:10:32] Ok, great. Thank you very much.
[01:10:38] And once again, that is star one to ask a question. All right, it appears there are no further questions at this time, I'd now like to turn the conference back to Mr. Dietrich for any closing remarks.
[01:11:01] Thank you very much, I do appreciate everybody joining the call today, and I hope everyone in your families remain safe. Thank you again.
[01:11:12] This concludes today's call. Thank you for your participation, you may now disconnect.