Good day, everyone. And welcome to the Third Quarter 2018 Minerals Technologies Earnings Call. Today’s call is being recorded. 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.

Thank you, Vicki. Good morning, everyone. And welcome to our third quarter 2018 earnings conference call. Today's call will be led by Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. Following Doug and Matt's prepared remarks, we will open it up to questions. 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 third quarter, and I then want to take some time to walk you through how the Company is positioned from a global trade standpoint. We've been getting a number of questions around how current and potential future tariffs impact us. So I thought I'd provide some information on the call today. I also want to take some time to review our growth performance, the multiple levers we're using to manage inflationary cost pressures and the margin expansion we're driving, and we'll continue to drive going forward. Then I'll turn it over to Matt for a more detailed discussion of our third quarter results and fourth quarter outlook. We had a stronger third quarter, with earnings per share up 7% to $1.27. Sales increased 9% to $464 million, which marked our fifth consecutive quarter of sales growth. Over this period, our topline growth has averaged 8%. And excluding foreign exchange and the Sivomatic acquisition, our real organic growth has averaged 5%. In few moments, I'll take you through aspects of what's behind this and how our teams are driving it. Combined sales in our Minerals businesses grew 9% over last year. We continued our solid performance in Metalcasting and Household and Personal Care, and had strong sales quarter in Environmental Products, Ground Calcium Carbonate and Talc. Sales in our Services businesses grew 12%, driven by our Refractories business, which is benefiting from stronger market demand and higher steel mill capacity utilization rates. Operating income grew on both a year-over-year and sequential basis to $69 million, and we achieved sequential margin improvement across all of our segments. While we continue to be impacted by inflationary cost pressures, we offset all of the higher incremental costs in the…

Thanks, Doug. And hello, everyone. I'll review our third quarter results, the performance of our four segments and also provide you with our outlook for the fourth quarter. Third quarter sales grew 9% versus the prior year, or 11% after adjusting for foreign exchange. Our sales growth was driven by higher pricing and higher volume across several product lines, as well as the acquisition of Sivomatic, which generated $23.3 million of revenue, or 5 percentage points of growth in the quarter. In the third quarter, we continued to face inflationary increases in our raw materials, freight and energy costs, which has reduced our gross margin year-over-year. Strong business performance gains offset these higher costs. And in a few minutes, I'll show you how the actions we are taking are offsetting increasingly more of these inflationary costs and driving margins higher. We continue to tightly manage SG&A and have reduced both the absolute and percentage expense year-over-year, including the addition of Sivomatic. SG&A costs were 10.9% of sales in the quarter, a 1.1 percentage point reduction from the prior year. You can see, from the operating income bridge on this slide, that our business performance, including higher pricing and strong productivity improvements, delivered $13.6 million and more than offset higher inflationary cost of $12.9 million. Operating income rose 1% to $68.8 million, and operating margin was 14.8% versus 16% in the prior year. On a margin basis, pass-through items such as freight sales combined with the higher inflationary costs to more than offset the margin benefit from our actions. Earnings per share were $1.27, a 7% increase from the prior year, driven by the strong operating performance as well as the tax rate change. Our effective tax rate was 19% in the quarter, which was relatively unchanged sequentially. Now let's take…

[Operator Instructions]. And we will take our first question today from Daniel Moore with CJS Securities. Please go ahead.

Wanted to start, Environmental Products saw a nice uptick in revenue in the quarter. The projects that drove revenue higher in Q3, are those largely complete? Did some that spill into Q4? And more critically just talk about the pipeline and the outlook there for increased activity as we look into '19.

Yes. Dan, let me start off and I'll pass it over to Jon. We did have some nice sales increase in the quarter. We've had some larger products -- larger projects. We're also starting to see some sales, as I mentioned, in some higher margin products and new technologies that we've been releasing. Some of these probably won't move into the fourth quarter. I think, what we see is the third quarter being a peak and time of landfill lining and other lining. The weather gets a little bit adverse for doing this type of work in the fourth quarter. So I think we've completed most of those. Jon, you want to talk a little bit about what you see in the pipeline going forward?

Sure. Dan, hi, it's Jon. I guess a couple of things. Like Doug said, the growth was really in two sectors. We serve a variety, but the focus over the quarter was in mining and also in remediation. In mining, what we saw is continued progress with our base GCLs. In the remediation, it's using some of our specialty products. So, fairly well balanced. And as we go forward, what we're looking at is a construction market that's expected to slow somewhat, but we still expect to continue to outpace the market and that's because of some of the innovations that we're bringing forward. We've launched our Fluoro-Sorb, we mentioned that on the highlights. We've launched the Fluoro-Sorb technology that's aimed at water remediation, and we continue to innovate and tailor products specifically to the needs of the customers. So again, we continue to see some growth going forward.

Helpful. And then switching gears to the bigger piece, PCC. Doug, what would you -- how would you characterize the sort of worldwide outlook for sales in 2019? And then given the 250,000 tons coming online for your business, just kind of remind us when you -- we would expect revenue growth to inflect positively once again?

Yes. So we're currently building, as I mentioned, those facilities, three facilities. We've got 450,000 tons under contract we'll probably be building. We expanded 40,000 tons already this year at one of our facilities in Indonesia. Another 250,000 tons, we feel, coming online next year, and that last one in Indonesia. Right now, we're looking at working at the mix of products. It might not only be a pure filler plant, we might be looking at mixing in some of our newer technologies like NewYield into that one. That one is a little bit delayed only because we're working through exactly what products the customer and technologies the customer would like to use. We see that adding growth all throughout next year. I mentioned that in my comments. I think the inflection point you'll see probably coming in the second -- late second quarter as these start to come online into the third. We're still getting some year-over-year impact in the first quarter from the shutdowns we experienced this year. So I think, in the second and third quarter, you'll see those come online, you'll see that inflection. Overall for paper, the market has been pretty stable right now in China. Seen some good results here in North America as well, and we're benefiting from that. But as you know, our demand growth and how we grow internationally has been on conversion of existing products. So, even if the paper market remains slow growth in China and India, we're growing very quickly by converting other pigments to PCC. We've got a strong pipeline. I want to let D.J. take you through a little bit of the pipeline for those projects and also our new technologies.

Yes. Thanks, Doug. Dan, thanks for the question. So, Doug hit 2019 pretty well. But I'd also start off with saying that there's an awful lot of conversations. When I say an awful lot, it's something in the neighborhood of five to 10 locations, where we're just talking about some incremental expansions. They range -- a couple in the US, but there would be further expansions in the Asian market. On top of that, we're actively pursuing several satellites that we think we can capture in the coming months. So, it's hard to predict exactly when those come in. As we've highlighted before, the pipeline is pretty robust anywhere. Right now, pretty active conversations between half a dozen and a dozen paper makers going around the world, China, India, some in the US even, and some conversations in Brazil and Europe as well. And they are the standard PCC products. But also advanced conversations with both NewYield that Doug alluded to earlier and ENVIROFIL. And in regard to ENVIROFIL, we believe -- we know we'll be commercializing ENVIROFIL in Europe in the coming months. And then, I guess, to cap it off, we've been doing an awful lot of work in packaging, and it's packaging in white boxes and brown boxes. And we're in advanced conversations on some new satellites that would support business in the packaging sector. So, quite a bit going on that Doug highlighted, the 2019 outlook, but we think we'll be bringing on some even more to take us beyond that.

Excellent. Very helpful. Lastly from me, I'll jump out. Maybe a question for Matt. Slide 10, I thought, was really helpful. Maybe just delineate the improvement in business performance sequentially. How much of that was price versus operating efficiency improvements?

Yes. Of the $13.6 million, about $11 million of it was price and the rest was split between other productivity improvements.

Next is Rosemarie Morbelli with Gabelli & Company.

Thank you. Good morning, everyone. Doug, if you eliminate the shutdown of some machines in the US on the paper machines, what was the PCC growth in China versus the decline here?

Year-to-date PCC volumes, I believe, are up about 2% to 3% in total for the year. I've got to make that's the correct number. I think that we've seen higher -- we've seen volume growth in Europe. We've seen flat PCC volumes in Latin America. Net-net, I think our volumes are slightly down for the year, but that's largely due to those tons that came out of North America. So the rest of the regions have been up despite that North America in the beginning of the year.

Do you have a number for the growth rate in China?

Matt, give our growth rate in China.

Yes. Let me calculate that for you. Sales were up about 13% in China, Rosemarie.

Okay. And no real price in that. Was it mostly volume or is it half and half?

It's mostly -- well, it's probably equal price and volume. We do have some price pass-through from higher line, but it's probably balanced between price and volume. Volumes are up in our Asia region.

Okay, thanks. And then moving onto Metalcasting growth in -- it seems to be softer in -- currently than it was in the first half. So, can you go over the reason other than auto slowing down? But then you said that you are substituting. So what is really happening in terms of the level of the growth second half versus first half, or Q3 versus first half?

Yes. We see another strong quarter in the fourth quarter Metalcasting in China. The third quarter was a little bit slower. I know we've been giving you kind of double-digit numbers over the past couple of quarters in terms of growth in China. August, it was a very slow period for automotive, and just in general, it wasn't just automotive, it was industrial production, and it typically does that in August in China. So we saw that this year and so our growth was about 7%. I think, in the second quarter, it was probably 12%. So, we don't see that that's due a major slowdown. We do see that automotive has started to slow. That will impact our demand somewhat. I still think we can maintain the 7% to 8% type growth rate on an annualized basis, despite the automotive slowdown. And like I said, this quarter that was driven by the conversion of customers to our engineered products. And so, those are higher margin, higher revenue type tons. And so we've been successful in that conversion and we continue to do so. Jon, you want to give a little more color on how we're doing that?

Sure. And talking about China, specifically, you'll see that our sales going in couple different sectors, Rosemarie. The first is auto that we talked about, but we also have the engineering segment that remains very robust year-on-year. I think, it's grown about 50%. So, very good strong growth there. Also, we sell into the construction industry. That remains flat, but all those foundries right now are running at capacity, so we see that continuing. Of course, the way we do this is, we work with our customers, we understand what their lines are, what their rates are, as far as any imperfections in the foundries themselves. We tailor our products specifically through them. And we work with them once we actually commercialize and implement the products going forward. So, we kind of continuously tailor our products, the blends and the composition of those blends. We do have a sales team that's focused on continued growth. And like Doug said, as we look out to Q4, although we had a bit of a slowdown there in Q3 due to some heat related events, we do see high-single-digit growth going into the fourth quarter.

Okay, thank you. And then lastly, if I may, on the margin side, you have been improving margin sequentially, and obviously the actions you are taking in-house plus price increases are offsetting some of your raw material cost inflation. When do you think you will be able to fully offset the inflationary environment and go back to prior year margin?

We said that we do lag a little bit, some of it contractually, Rosemarie. We are going to absorb lime cost increases as we typically do in rising cost periods in the fourth quarter. And we won't be able to pass those through until the beginning of the year, the first quarter. So, there is a lag. We are -- we feel we'll be getting ahead of this. It will be into next year, but that will depend on how these inflationary costs continue to taper or start to taper. We've seen some of that in the fourth quarter, but we are facing higher costs in other areas, logistics, energy, and as I mentioned just lime. I think as we get through the first quarter of next year, I think we're going to be on track to catch back up to those historic margins. I will caution you though that some of our product mix has changed. And so you do see, with chromite, we've highlighted that before and some other product mixes, has changed our mix a little bit. But nonetheless, we still see kind of that 15% -- plus 15% to 16% range possible for the Company over the coming quarters.

Next is Silke Kueck with JPMorgan.

So, in the quarter, I guess, your sales grew like 9.5%, and your SG&A was down little bit, and I think your R&D was down like $1 million, like 15%. Is that still like a level that you can maintain? So like the cost controls were really noticeable in the quarter. Is that something that you'll -- that we'll see in the fourth quarter and that you'll continue to manage in this way?

Yes, Silke. I think, we've proven this year we've been able to significantly lock down on SG&A expense. And like I said in the prepared remarks, we were able to absorb Sivomatic SG&A and still generate lower overall SG&A for the Company through the course of the year. The split there, like you said, SG&A is holding, R&D is coming down a little bit. So -- and I think, Doug also laid out for you, and Doug will probably want to share a few more words on this, how we're improving through operational excellence, our R&D program and the product development pipeline.

Yes. Silke, I think when you look at the R&D number, it is a bit lower. Part of our R&D spend what goes in there is trial activity and so you might see a quarter that has a number of trials that we're -- that have come across our -- with customers throughout our Company. And this quarter, I think, might have been a little bit lighter. But I wouldn't read too deeply into that lower R&D. Like Matt said though, it's part of our -- I kind of mentioned a culture of the Company to maintain costs and we look to keep our overheads as tight as possible, something new comes in that we want to spend money on and we think that there's probably something that's out there that we shouldn't be doing any more, and we eliminate it. Something in, something out, but we do that as just as a matter of course to hopefully get that leverage from all those new sales that are coming internationally. As you know, we've got a shared service environment in the Company. We leverage that through integrate -- through acquisitions. Matt just mentioned, we took on Sivomatic and yet expenses are flat, and that's largely because we found ways to offset that increase by leveraging the existing system we have in place. And so, that's how we do it. I think, you're starting to see the higher sales over a similar base, drop that ratio, and that's what happened in the quarter.

Secondly, it looks like, for the quarter, price or price mix is maybe up 3%, or maybe it's up 3.2%. How much of that is freight pass-through and how much of that is price/mix?

Yes. The freight pass-through is about $6 million in the quarter, Silke. And that, if you remember, is similar to what we had last quarter. So, on the revenue line, that's where it puts you. Freight ended up being about $7 million increase, when you look at it on a year-over-year basis. So that's part of that higher raw material freight and energy cost bucket about $1 million related to freight.

Okay. In the Performance Materials segment, with the chromite business now exited, it's sort of like in the $24 million and $25 million. Is that like the right run -- level of sales you expect for the particular subdivision in Performance Materials?

I'm sorry, our current….

I apologize. So there's a Basic Minerals segment within Performance Materials and you said the chromite business in it. And like it looks like it now sort of generates sales of like $24 million and $25 million a quarter. Is that the right -- is that sort of like the way to think about it going forward, or is there more fluctuation than that?

No, that's -- the chromite, I think that's the current run rate. We do see some increase in sales in the Basic Minerals. What's in there is our three major items or two major items. One is our Drilling Products, so oil and gas drilling, that's basic bentonite that's sold into that market, but also iron ore pelletizing, and so you'll see possibly some increase as steel activity but also as drilling activity increases. Those are in those categories. But yes, this is the probably good adjusted run rate, now that chromite, which used to be in that category is now out on a full year basis.

Yes. And in Building Materials, there's sort of like the seasonal slowdown -- but other companies have talked about their building products division slowing, like DowDuPont talked about it, I think, like, Sherwin-Williams talked about it. Are you beginning to see that business is generally softer in the US end market?

We've seen a little bit, I guess. Last year, we had a lot of major projects, mostly in the West Coast, and so a lot of our waterproofing projects kind of around the world are sizable. We do have some smaller projects that come on here and there, but these are pretty sizable projects. So what you saw, at least, this quarter over last was more of a year-over-year comparison for something we had in California last year that didn't repeat itself. We had a really strong -- we're having a pretty strong year in Europe. And so far, this year in North America, it's been OK. We are cautious though that we're going to start to see some slowdown in construction, but we haven't seen it yet, Silke. I do think that our pipeline of projects, as Jon just mentioned environmental, will probably carry us into the beginning of next year, but beyond that, that's about the time frame of our pipeline that we can see in terms of what's really out there. I'll probably have a little bit more information if things are changing after the fourth quarter, but right now it looks pretty solid.

And at this time, there is one name remaining in the roster. [Operator Instructions]. And we will now go to Curt Siegmeyer with KeyBanc Capital Markets.

Hey, guys. Nice quarter. Most of my questions have been answered, but you talked about a 5% higher volume growth in your Talc business, driven by auto and constructions. So I was just wondering, given some of your commentary around being a little bit more cautious around those end markets, if you think that volume growth in that business is sustainable over the next couple of quarters.

There's a couple other components to that. Heavy truck is where we supply Talc into catalytic converters has been very strong, it's also off-highway, and that's a global business. We do ship our Talc globally. So it's not just automotive. The automotive piece of the Talc businesses is plastics, which still is remaining fairly strong. We have a sizable position of that market in North America. And so -- and we've been growing it with some higher quality Talc products. So, right now, we see that that's pretty solid. Like I said, it's not just automotive, we've been seeing some very strong markets in heavy truck as well, which has really been driving this past quarter's growth.

Got it. And then your balance sheet is in pretty good shape under 2.5 times leverage post acquisition. So just wondering how you'll be thinking about M&A in 2019?

Well, M&A is a core piece of our growth strategy. Yes, we'd like to highlight the fact that we can -- we feel we've got a balance sheet that's strong enough for something like Sivomatic to buy it, integrate it, and pay for it all in the same year. And I think you'll probably see that happen this year. So that's the first piece. The second piece is, so continuing to keep the balance sheet in a good spot for enable us to act on something that an acquisition that comes our way. Right now, like I said, we've got a good pipeline of targets. We're pretty patient though with that. We know what we're looking for, and not always -- that's not always for sale, as we've seen. But we have a good pipeline, we meet weekly as a team to go through those activities, and yes, keeping the balance sheet in shape to not only act on an acquisition but also in shape to continue to position the Company for organic growth and to weather cycles, if that make -- come our way in the next couple of years. So, yes, it's a strategic part of what we do, and we got a good -- we have a good pipeline of targets out there that we can act on with our balance sheet.

And Curt, let me just add on to that. I think, you probably know, but for everyone's edification, the target is to be 2 times levered, net leverage against EBITDA. And as Doug said, we have a pathway to get back to around 2 times over the coming quarters, which will allow us over the course of a full year of owning Sivomatic to have it paid down.

Does that help, Curt?

And Rosemarie Morbelli with Gabelli & Company has a follow-up question.

Thank you. I was wondering talking about M&A, if you are seeing a decline in the valuations, or if people -- I mean, property owners still want the high valued -- if they are going to sell?

There's a little bit of fewer transactions in the past couple of months. I think in the first half this year over the summer, like we mentioned, I think on the last call that multiples were pretty high. It looked at some opportunities, but things have been going for north of 13 times, which is something that we just felt it's obviously not something we're going to be able to generate a return on. So, I think they could be coming down into more reasonable levels. I haven't seen that yet. But right now, stuff that we've seen transacted are pretty high, still pretty rich in terms of multiples, so.

Thanks. And then lastly, could you give us a feel for the internal growth at Sivomatic year-over-year?

Sure. How about I let Jon talk about that?

Yes. Rosemarie, Sivomatic on an annual basis is now growing at about 8% per year. That's a little bit north of where we predicted, but they've done some really nice things. They've have got a really unique ore deposits in Turkey that they leverage in all the markets in Europe. They've -- they continually innovate with that ore position. They introduce new products on a fairly frequent basis and targeting that in high end. So they're customizing and they're going into the high end of the -- or the market in Europe. So, continued growth. We do look to other potential geographies within the European continent to enter. And also, we're thinking about what we might be able to do with that ore in other regions of the world. So, it's been a very nice position for us, and the growth has been very acceptable.

And I'll add to that, Rosemarie, that we talk a lot about just Europe and the new position in packaged cat litter in Europe, but also in Asia. We've been introducing -- we talked about -- we haven't talked about in a few calls, but China and Southeast Asia, where we're introducing new fragrance packages, our lightweight cat litter program, and so we've had some nice growth there as well. So this is -- it's shaping up to be a nice business for us. We like that consumer product business. We're now a bigger footprint around the world, where we have dialogs with global consumer products companies, and it puts us in one of the larger positions from a private label cat litter business. And that's a good position to innovate from, to drive premiumization, and now we have kind of a global spot to do that from. So we like the acquisition, as Jon said, and we're looking at other ways to leverage it from those mines in Turkey.

You didn't say anything about introducing it in the US. Is it that the US market would not be interested in vanilla smelling cat litter, for example?

We have, I know, how many variations? I probably shouldn't say it. We probably have too many SKUs in North America, but we will -- we like to customize and meet customers' demands. And so we've got a number of different categories of cat litter for our customers. I can't say vanilla is one of them, but we have the capability to pretty much meet what our customers are looking for. I'd say we are taking -- Sivomatic is very good at what they do, as Jon mentioned. And so we are leveraging some of that knowledge and that marketing capability, that -- or they've accomplished in Europe and North America. Little bit different business for us here. We supply all channels. We have our own brands, we supply private label to customers and we sell bulk throughout the United States to other branded customers as well. So a little bit different business for us here, but a nice position in both regions.

Okay. Thank you very much.

And there are no other questions at this time. I'd like to turn it back to Ms. Buckwalter for any additional or closing remarks.

Thank you, Vicki. Thank you all for joining us today. We look forward to speaking with you again very soon. Have a good day.

Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and you may now disconnect.