Good day, and welcome to the First Quarter 2018 Minerals Technologies' Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Cindi Buckwalter, Vice President of Investor Relations and Corporate Communications for Minerals Technologies. Please go ahead, Ms. Buckwalter.

Thanks, Abby. Good morning, everyone, and welcome to our first quarter 2018 earnings conference call. On today's call, Chief Executive Officer, Doug Dietrich will provide an overview of our results, growth strategies and the acquisition of Sivomatic; and Chief Financial Officer, Matt Garth will provide a more detailed review of our financial performance. I would like to remind you that beginning on Page 13 of our 2017 10-K, we list the various risk factors and conditions that may affect our future results. And I'll 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 conditions. Now I'll turn the call over to Doug. Doug?

Thanks, Cindi. Good morning, everyone. I'll start off today by covering the highlights from our first quarter, and then I want to take some time to review the progress we're making against our growth strategies. As part of that, I'll take you through our recent acquisition of Sivomatic, the details of the transaction, a description of the business and how it fits into our existing pet litter business. Finally, we'll turn it over to Matt for a more detailed discussion of our first quarter results, and second quarter outlook. We had a solid first quarter with earnings per share up 6% to $1.13. Sales also increased 6% with growth in all four segments across all geographies and in the majority of our product lines. We saw some benefit from favorable foreign exchange this quarter, however our underlying sales momentum has continued from the second half of last year. As we mentioned last quarter, we exited our bulk chromite business in South Africa. The reduction in these sales in comparison to last year impacted operating income in the quarter by approximately $7 million. We offset this by delivering strong profit growth across the majority of our businesses. Excluding the change in chromite sales, year-over-year sales in the remaining product lines increased 9% and operating income increased by 10%. Let me take you through what's behind this performance, and also some of the challenges we faced during the quarter. Specialty Minerals, our Paper PCC business had a strong quarter. Sales increased 4%, and income rose 17%, driven by the execution on our restructuring program as we focused our resources on growth regions. In Performance Materials, sales increased 10% driven by our metalcasting business, which delivered 19% sales growth and 16% operating income growth from solid demand in North America and continued growth…

Thanks, Doug, and hello, everyone. I will review our first quarter results, the performance of our four segments, and also provide you with our outlook for the second quarter. We delivered sales growth of 6% in the first quarter, or 9% excluding bulk chromite, driven by increases in every segment of the company and in all regions. Foreign exchange accounted for four percentage points of growth. Operating income was 1% lower than last year, double-digit operating income growth across many of our Performance Materials businesses was more than offset by the decline in bulk chromite, which as Doug highlighted, impacted year-over-year operating income in this segment by approximately $7 million. In Specialty Minerals, Paper PCC had a strong sales and operational performance, while Performance Minerals was lower due to challenging operating conditions. Energy Services was slightly lower while Refractories delivered a record level of margin in the quarter. The operating income bridge shows that, adjusting for the year-over-year bulk chromite impact, our business performance was strong. We managed what was in our control. We raised pricing, drove higher volumes, increased productivity and maintained strict cost control to overcome significant raw material and energy increases and delivered 10% operating income growth. Also note that we have adjusted our financials to conform with the latest pension accounting requirements, the net result of which had a minimal impact on the current and prior year quarters. SG&A was 11.7% of sales on the first quarter, down 5% from last year, and earnings per share excluding acquisition-related costs, was up to 6% to $1.13 per share. Our EPS benefited from lower interest expense, higher equity earnings and a lower effective tax rate, which was 19% for the quarter. For the full year, we expect our effective tax rate to be 20% to 22%. Next, let's…

[Operator Instructions] And we will take our first question from Jeff Zekauskas with JPMorgan.

This is Silke Kueck for Jeff. I was wondering whether you -- so two questions. The first is, do you have a cost target in mind that you're trying to achieve this year? And that is, your sales are flat sequentially, but the SG&A is down 7%. And I think, year-over-year, your sales are higher and your SG&A relatively flat? So I was wondering whether you had like a target mind as to what you're trying to achieve this...

We have plenty of cost targets and it's -- Silke. We -- I guess, I tell you, setting targets around cost control, variable cost control, fixed cost control, including overheads, it's just kind of part of our DNA. I think we've talked about it before. We go into every year planning on productivity improvements. We plan on productivity improvements, and we set the bar at 10%. We look for opportunities to improve productivities around the world and we've shown that practice generally gets us around 5% to 6% on average every year for the past 10. We look at variable cost control targets. We set them by business every year, largely meeting them and we look at tight cost control and overheads. So I think though, where your question might be coming from, is you're looking at some of the margins, and saying, okay, so how are the -- where are these margins going? I guess, I'll frame it this way, maybe Matt can jump in, but the margin decline in the business and the company in total was largely related to the chromite. And I know we keep talking about that but excluding that, margins actually grew last year. And so our productivity, our variable cost control, and yes, as you saw this quarter, our tight expense control, is just kind of what we do every day. Does that help?

I think it answers it a little bit and I can follow up. Secondly, the way I understood what you said about Sivomatic, you said it will add 4% to 5% growth to second half EPS. And so like last year, I guess your earnings in the second half were something like $2.30, and if you grew 4% or 5% and that's sort of like, something like, somewhere between like $0.09, $0.10, $0.11. And even though there's like $50 million EBIT on an annualized basis, and you probably realize half of that -- I understand there's some interest cost. Why isn't earning's accretion higher than that?

So I think what Matt gave you is the annualized accretion. We see about 4% to 5% on an annualized basis.

Annualized basis. Okay, then that clears it up.

Yes, that helped you. And Silke, look -- back to your question, I think, what you're looking for is what's our target margins. We've had a target margins of 16% as a total company. We've set that as part of our growth objectives as well, both sales and margins. Full year last year, it was about 15.7%, and we're going to be working our way, we have the opportunities in front of us both from the cost targets that I've mentioned, but also as we work through some of these new expansions, we've absorbed a lot of startup costs in our plant in Turkey and these expansions, we have some additional growth in Asia with our Indonesia satellites coming online. Those will all contribute -- contribution margin to the company, we're not adding a lot of overhead, but we do need to move through those. And so I do see these margins moving back to those target levels through the end of this year. That gives you some help on what we're targeting.

And let me just add, Silke, on Sivomatic. As you look at it, the acquired EBITDA, you know that we will go through some purchase accounting assessments. We're taking a look at that right now. That's why we told you, for the second quarter, really, what we're looking at is a number of potential offsets as we bring in Sivomatic and integrate it as well as the purchase accounting impact. So really looking for the accretion to start in the second half of the year.

We'll take our next question from Daniel Moore with CJS Securities.

This is Pete Lucas [ph] for Dan. Just a question. Metalcasting growth remains robust. Can you talk about adoption rates in China? And remind us where we are in the conversion to green sand bonds? And how long of a runway you continue to -- you have to continue to grow market share?

So let me kick it off and then I'll pass it over to Gary Castagna to answer. So an idea, just kind of market sizes here. The China market is the largest metalcasting market in the world. I think the India market has now surpassed the U.S. as the second and I actually think the China metalcasting market is 4x the size of the United States?

Yes.

So if you think of two different products, you think of base clay that we sell in China and then what we call our engineered blended product. In the United States, a market that's about 25% the size of China, I think the consumption of a blended engineered product is probably 90% of the market. When you look -- and look at the portion of the market in China that consumes a blended product versus a base clay, that's probably about 20% to 25%. So when you look at the size of the market and the penetration of our blended solution, we've got a long way to go, right? And so really it's been what's the rate of that penetration and the development of our engineered solution for the tier -- the higher end tiers, more sophisticated end of the market. That's similar to the automotive industry and supply base that we have here in U.S. and Europe. So that's the size, so the opportunity is very large, that's what's really behind this growth. We see it continuing. Gary, how about some flavor on what's behind that conversion and the pace that we are moving at?

Sure, Doug. Yes, I think that Doug kind of led it off in the broader context that the foundries that are in China are evolving. They adopt a, very much of the same equipment that are used here in the U.S. and technology really drives the use of the green sand bond in that portion of the process. And so as there's more sophistication coming to the market, the adoption rate has continued to increase and somewhat accelerate. As Doug pointed out, and quite important to note, a very small percentage of the overall market at this point. So quite a bit of white space there in terms of working with the customer networks to essentially show them the value of essentially converting to a total bond solution. The strategy though, in the last year or two that it has fueled the growth, it has certainly been to put the footprint in at the facilities with our base product and that still is a large majority of our sales. And of course, the profitability and whatnot is commensurate in terms of what end of the portfolio we're selling. As we get more involvement with the foundries then we work with more trials. So to give you an idea, we probably have as many as 15 different foundry trials underway at this point at the higher end of the market, that we're selective as to where we do this. So that we can work with existing customers, who we today sell a basic solution to and move them onto a more sophisticated solution. So as the years have progressed, today where it's perhaps maybe 15% to 20% of our revenue in China, to give you an idea, where the target is, in the U.S, it's over 90% of our sales. So there is no reason not to get there. Timing and trajectory are always the challenge points, but the value proposition is there and it's just continually working at day in and day out to show that value proposition in use. And one last thing, it's also important to have the footprint, and we've been investing in China to make sure that we have the footprint to serve in the markets as well. And we're getting better at that and we'll continue to expand on that, which also enhances the proposition to customers.

I think that -- Pete, I'll just one add one thing. I think that it speaks more to Silke's question. Why we're so kind of bullish on our margin growth over time? It's because we're making these investments, and we been making them today, we're selling a relatively -- that growth that you're seeing is -- we're selling a lower margin product right now to establish that base, and we see that conversion to that higher margin blended product over time and that's what that and some other higher margin products that we're deploying today in some of our capacity expansions, that's what's going to fuel that growth in both margin and revenue.

Extremely helpful. Just jumping to PCC; can you update us on the pipeline of new potential projects and opportunities? And penetration in China has a been a little bit slower than expected. Just wondering if there's been any impact from the rhetoric around trade and tariffs had on potential opportunities there? And what you're hearing?

Some, let me give it to D.J. Monagle, who'll give you some color on that.

Glad to. So when we spoke of this last time, I had indicated there were 12 or so projects in the pipeline. That number still remains and is growing a little bit. Didn't obviously close any satellite contracts during the process, but of that group, a fair amount of them are in China, and I'll give you some more flavor on what's going on in China. But the majority of those are in printing and writing grades with our traditional PCCs, but as we highlighted last time, something that's kind of different about that portfolio, that pipeline is that we've also got quite a few more packaging targets. When we think of packaging as a grade, I tend to break that down into white boxes and brown boxes. And so we've got a couple of opportunities that are developing in white boxes. One or two on filler and a couple more in coating of those white boxes. We think we've got a differentiable value equation there. And then on top of that, we've got some new products that we're trialing for the packaging industry that are going after the brown boxes. So there is a quite a bit of activity going on with packaging. Now you had asked about the China, and specifically regarding tariffs and those items, we don't see tariffs affecting the rate of penetration, the rate of change for the paper industry from China. What we do see though, is there are some environmental issues that China is dealing with and controlling through Beijing, where especially as it relates to CO2 emissions and water contamination. Where they've actually been shutting down some paper machines and some mills and then relocating those. That relocation has caused some disturbance in the industry right now. The overall demand and overall consumption looks to be what we projected but exactly where those -- that manufacturing base is going to be and how people are going to go deploying their grades is something that's caused somewhat of a delay.

The other thing I'll add to that just to give you some color. We have two Paper PCC contracts with customers, existing, where we haven't built the facilities; and to D.J.'s point, the reason we haven't built them is because we're waiting to figure out where that paper machine is going to be moved to, and it's been sometime that we've been waiting, but we're not going to deploy the capital. So it's a different issue than just a demand base. The demand is there, the penetration opportunity of PCC still remains, but a couple of different factors that we face in China. Again, we're not just filler though, we have expanded our portfolio into other coating applications, packaging applications. And we've got a really healthy pipeline of new technologies like NewYield and FulFill that we continue to deploy. So there is other opportunities including filler -- base filler in China and the rest of Asia for that matter. That help?

Our next question comes from Rosemarie Morbelli with Gabelli & Company.

Just following up on this question regarding the location of the new manufacturing facilities for Paper PCC. Isn't that going to affect packaging FulFill and NewYield as well? And are you seeing an impact there?

It could. I do think though that some of our new technologies are -- like NewYield, are focused more at some of the established and current customers that we have. So I think those opportunities -- and we're keeping very close touch with the security of location of those facilities. So it's really around some new machines that are coming in. Some existing, but new machines that we've been looking at putting satellites. There could be some impact, Rosemarie, but right now we're keeping close eye on our technologies with existing sites that are secure at the moment.

And you talked in your prepared remarks about $300 million worth of potential from new products. Can you help us visualize the timing of that additional $300 million?

We've commercialized products that have the potential for $300 million, and they do develop and they expand as they penetrate in the market. Give you some dimension, last year, $125 million of that revenue from those new products was realized. We see that growing at least 15% this year, as I mentioned in my remarks. And so we're probably halfway through that penetration, and if they continue to generate the value that we see them valuing today over the next two to three years, we think we can hit that full run rate.

And I presume that those particular revenues carry a higher margin?

Some do. We are focused on creating more and more value to customers. I'd say, probably on average similar margins, our new Bleaching Earth product is probably, potentially a little higher margin, it's a specialty product geared toward a very sophisticated consumer edible oil market. And others are -- some of them are add-ons to existing, like our Refractories business, I think I mentioned, some of our hybrid products that we're putting out are actually helping steelmakers save money, lower their cost of operations at similar pricing. So similar type margins profile.

And you mentioned, also, expansion in the U.S. on the paper category. Could you give us a little more details as to what you're doing? What is picking up here considering that production of paper is actually declining?

Yes, I think, I'm going to refrain from actually giving where the location and the customer is. There are expansions in the 10,000-ton range, it's as -- what's really happening is as paper mills -- we've kind of talked about it, as paper mills have shut down in the United States, some of those grades are moving through their system. Because of our position in the United States, typically we pick up that overflow at another facility and that requires us to expand it. So we're also having -- we've had some expansions over the past couple of years to support FulFill where we have higher filler, so we're putting in expansions to increase our volumes to the mill and some shifting of grades. That's where that's coming from at least in the United States. Expansions overseas are coming more from demand growth. We're seeing demand growth in India, we expanded our facility in Indonesia due to demand growth. We're putting two facilities in Indonesia to support conversion and some demand growth to PCC. So it's a bit of -- it's a mix of reasons, but in the United States, it's to support some shifting paper grades mainly.

Our next question comes from Curt Siegmeyer with KeyBanc Capital Markets.

Can you talk a little bit more about how you characterize the market opportunity in the Pet Care market? Are there additional M&A opportunities? You talked a little bit about your pipeline of opportunities. Just kind of curious if that scenario, you'd look to grow via additional acquisitions and just sort of longer term how you view that as a fit with the company?

Sure. Well, I'm not going to -- I think I'm going to avoid talking specifically about other targets, but I will give you an idea why we're attracted to the market. We do see pet ownership -- domesticated pet ownership growing. Growing rather quickly in emerging markets, which is why our position in Southeast Asia and China. We see stable growth in more mature markets, but that's also the attraction. It's a very stable type of demand profile in North America and Europe. I think one of the other reasons is that we're vertical in it. The mineral that's used, the clumping nature of that cat litter is sodium bentonite or it's calcium bentonite that's activated, but it is that absorption or adsorption effect that we own those mines and, we're vertical in it. And so we see attractive economic returns in that value chain when we have that position, both to supply customers in many different channels, we have the capability to supply retail outlets and so we're utilizing that capability through -- and building upon that capability through this acquisition. So it's core to our mineral. We like the economics and the demographics, I guess, of the end market, and we have the capability to serve it, serve that market and serve it globally. And so it's attractive for a number of reasons, and we think there's some value to be generated through our participation, and broader participation in the market.

And then if I could ask just on raw materials; the impact in the quarter was almost as big as the bulk chromite impact of op income. So just curious what your outlook is for raw materials in terms of the impact going forward. If you expect that to taper off at this point or any other potential pricing actions you might be taking to mitigate that?

Yes, thanks, Curt. So when you take a look at it, that $6.3 million to go back to the operating income bridge, it did have in it about $1 million to $1.5 million of energy. We're really looking at a continuation of higher energy prices into the second quarter, as we look out further in the year, that may begin to mitigate, but here, over the next three months, expecting the energy inflation to continue. The other raw materials, the purchased raw materials, if you would, that go into many of our products, the sea coal, the coal ash and other various components, as well as the MgO that I mentioned, they're going to continue as well. So we're expecting to see that through the remainder of the year. Now what we've done is, obviously, put in places, and I talked about all of our mitigation programs that exist and you can see by what we showed as our business performance, we're over deploying and getting ahead of the raw materials that we're facing. In Minteq that will be a little bit harder, sorry, that's the Refractories segment with the higher MgO, that's going to be impacting us in the second quarter, that's the driver of that segment going down. But we are pursuing every single angle we can to come above the raw materials. The only other thing I'll talk about is logistics. Logistics remain very challenged for us across both in the Minerals businesses. Those are higher prices in logistics that we are facing because of the tight conditions, but it's also the availability just to shift goods through preferred lanes to our customers, where we want to be on rail and having the opportunity to have the railcars that we want, where we want them, when we want them, is a bit constrained given the weather and the tight conditions in the logistics market that we've been seeing. So looking for that to free up a bit here as the weather improves over the next few months.

And Curt, the only thing I'll add to that is, we did see -- we are absorbing, not absorbing but facing significant raw material increase. And I think that's across the industry right now. I don't -- you're hearing a lot about logistics, you're hearing a lot about inflationary pressures. I think though it is important to note that we've done well with that this past quarter. It's a challenge, we're fighting through it, but it's also a testament to some of our positions with our customers and being able to figure out how to continue to drive value for them while facing pricing pressures. So the teams have done really well with that this quarter, and we're going continue to have to face it, we think, for the rest of the year, but I think we're well positioned to do so.

We have no additional phone questions at this time, so I would like to turn the call back to Ms. Buckwalter for any additional or closing remarks.

Thanks, Abby. Thank you, everyone for joining us today. We look forward to speaking with everyone again soon. Have a great day.

Thank you.

Ladies and… (Call ends abruptly)