Good day everyone and welcome to the Third Quarter 2022 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Erik Aldag, Head of Investor Relations for Mineral Technologies. Please go ahead sir.

Thank you, Jenny. Good morning everyone and welcome to our third quarter 2022 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Matt Garth. Following Doug and Matt's prepared remarks, we'll open it up to questions. I'd like to remind you that beginning on page 15 of our 2021 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 Eric. Good morning everyone and thank you for joining our call. We've got quite a bit to go over today, so let's get started. First, I want to quickly mention that MTI celebrated its 30th anniversary this week. We debuted as a public company in 1992 with revenue of $400 million. Over the past 30 years, the company has grown and transformed into a global specialty minerals leader with operations in 38 countries and revenues of over $2 billion. I want to congratulate all employees of MTI, past and current, for their dedication and contributions to this journey. Now, a quick outline for today's call. I'll begin by walking you through our financial results for the third quarter and provide some context to put our results into perspective. I also want to walk you through the execution of our growth strategy and give some examples of how we're positioned to continue to drive higher levels of growth and performance. Finally, I'll share some perspectives on what's happening around our end markets and our near-term outlook. Then Matt will share details of our financial results and our outlook for the fourth quarter. Let's start with a recap of the quarter. Our track record of growth continued in the third quarter with sales up 22% on a constant currency basis to $542 million. Each of our segments realized double-digit sales growth, reflective of our efforts to position the company on a higher growth trajectory. In general, this is one of the more challenging quarters from a market and cost perspective and the risks to our guidance that we highlighted during our second quarter call came to pass. We saw softer-than-expected demand in Europe, higher energy costs, and a sluggish rebound in China. Foreign exchange rates were also a more significant drag…

Thanks, Doug and hello, everyone. I'll take you through the third quarter results, the performance of our segments and I'll also share our outlook for the fourth quarter. And then following my remarks, we will turn the call over for questions. And now let's review the third quarter results. Third quarter sales were $542 million 15% above the prior year and 22% higher on a constant currency basis. Starting with the sales bridge on the top left, you can see that foreign exchange impacted growth unfavorably by seven percentage points or $33 million. Acquisitions contributed 3% to the overall growth in sales, driven by Concept Pet our new SPCC assets and approximately one month of incremental sales from Normerica. Our continued selling price actions drove sales higher by 13% over last year, and improved volume and mix added 6% to sales driven by higher metal casting volumes, continued growth from new contract wins and refractories, higher levels of activity in our project-oriented businesses, as well as an increase in sales from new products. Operating income in the third quarter excluding special items, increased by $4 million over the prior year to $67.2 million. We continue to implement selling price increases during the quarter, amid the persistent inflationary environment. As Doug mentioned, the $51 million of inflationary cost increases was the highest level we have experienced, in any quarter this year. You can see in the operating income bridge on the lower left-hand side, that our selling price actions exceeded the inflationary cost increases by $8 million. Offsetting this was $2.6 million of unfavorable foreign exchange, and another $2.6 million of other costs including SG&A wage inflation and other operational costs. Now turning to the right side of the slide. The sequential sales bridge shows that sales were lower by 1%…

Thank you. [Operator Instructions] And our first question comes from Daniel Moore from CJS Securities.

Thank you, Doug and Matt thanks for taking my questions.

Hi Dan.

Good morning. Let me start with Performance Materials. If we just maybe talk about volume versus pricing for both household, personal, pet care and this kind of same question for Metalcasting what you saw in Q3.

Sure. Matt, do you want to take that or?

Yeah. Absolutely, so I think Dan, when you take a look the team did a really good job in continuing to drive price. If we break it down for the segment we're still net kind of $5 million ahead of the inflationary factors that they saw. But you are seeing very good year-over-year volume growth across Metalcasting, the pet care business that's helping to drive that and also other components of HPC and that specialty business where the team has been making advances. It might be good Jones if you want to give some color on some of those components?

Sure. You wanted me to highlight especially Matt.

Sure.

Hi, Dan. Especially, we've got a nice balance of unique product positions. Certainly, we've got our personal care, which we talk about, embedded in that business. We also have talked to -- at length about edible oil. Both of those are growing, we look for opportunities to continue debottlenecking our plants to push more capacity through. So as demand continues to grow we have the ability to serve. We've got other specialty segments as well. So we're in human health. We're in ag. We're in -- we have a segment called Advanced Performance Additives. We're also in drilling products for both oil and gas and water well drilling. So it's a wide variety. And certainly, we've got growth across the entire portfolio. This is predicated on our strategy. Our strategy is very consistent across the company, but it's really playing out in specialties. It's geographic growth, its growth through innovation. We have about 50% of our new products in this segment going through that specialty business. So a lot of factors all coming together with great demand and well positioned with high-value products.

Yes. And one other thing, Dan, as far as metalcasting goes, if you take a look, what we talked about was on a regional basis, really good performance in North America. Again John has talked about the mix of end markets that we serve there, with automotive continuing to trend well, but those other markets performing very well amongst our customers. And then China, what we talked about is, yes, it wasn't as strong as we expected, but we did see a nice uptick in the third month of the quarter so in September with really nice demand coming back into place. So that helped to really set some of the trajectory that we were looking at for the fourth quarter of continued improvement in metal casting.

And if I could add to that, Matt, we do see -- we track our daily sales and what we've seen in metalcasting, daily sales in Asia, ever since May every month has increased. We had a nice increase like you highlighted in September. Going into Q4, again, we see that demand continue to increase. A little slower than what we expected, but still very well positioned. And we're not sleeping there, as the markets have been slow, that team, and we've got a great leader a great team and their positioning with customers and we've won some new customers. So our share positions are continuing to increase with our blended products and our positions with those customers.

You kind of read my mind, I was going to just dig into metalcasting, given the strength of the outlook that you described, maybe, try to get a sense of how much is increased penetration or set assume the way share gains versus positive market outlook.

Yes. So we're seeing, Dan, this is Doug, as Matt and John kind of mentioned, volumes are still remaining very strong in North America. We see that automotive demand, heavy equipment is going to continue to drive volumes through the fourth quarter and we see into next year. I think, China is the weakest spot of the year, so far. However, the uptick that we saw in September is going to, we think, continue at a moderate pace. It's not going to rebound. We don't see that drastically, but it's going to continue to grow through the fourth quarter and into next year. A lot of that is coming from our positioning, and you mentioned, price before. Our ability to price is coming some from our ability and our applications of these green sand bond products, our blended products in China. And as they become much more of a staple to more modern casting processes our ability to drive more value and therefore, continue to drive more price is behind that. So we're positive on that, both the pet care and the metal casting as we showed from that slide going into the fourth and into next year.

Perfect. Maybe one more, just digging down into the edible and purification oils. Any sense for, kind of, what run rate revenue we're at? And just, who are your primary customers? Is it larger CPGs? Is it smaller niche companies? Where are you gaining the most traction? And is it mostly North America or pretty well balanced in North America and Europe, since we're hearing more about that quarter-in quarter-out. Thank you.

Yes, these are -- so our business is largely in Europe, right now. Our production and sales are in the Europe region for edible oils. That's grown from zero a couple of years ago, as we've entered into this market we're growing -- so this will be probably in the $20 million $25 million range growing very quickly, as I mentioned this quarter. Customers are large ag, oil producers, were talking the Bunges others of the world like that. So big ag customers that are into soybean and oil production. And so we've seen our business grow along with them. As I mentioned, we've developed some new products very high efficient purification products, which helps them in their processes process speed, their capacity utilizations and therefore also and I guess, I'll call it purifying or cleaning up the oil to levels that extend shelf life. So, real value for them and efficiency value for them and a nice premium product for us. We continue to look to expand that business. John mentioned debottlenecking. We've done a number of investments to continue to maximize the asset utilization for what we've invested in. And we're also looking to continue to invest in that business so that we can grow at this pace along with our customers. Does that help?

That’s helpful Doug. Yes, it does. I will jump back within it maybe one or two follow-ups. Thank you.

Thanks Dan.

And our next question comes from Mike Harrison, Sport Research Partners.

Hi. Good morning.

Hi, Mike.

I was hoping that we could dig in a little bit on the margin performance particularly in specialty minerals and refractories. I guess, first of all, on specialty minerals. It seems like you've kind of taken a step back in terms of that price/cost recovery trajectory. Maybe just flesh out in a little bit more detail what you guys were seeing in terms of cost and maybe how we should see margin track over the next couple of quarters as those higher costs are passed through in some cases contractually.

Yes, absolutely. I'm going to start off and then I'll give it to Matt to give you some more details. This is definitely and has been all year the segment and the product lines that have been impacted the most from currency from energy inflation raw material inflation number one. Number two, it's as we talk about all the time, this business has the most contractual nature to its sales. And in that in those contracts the timing of our ability to pass through pricing. So what you saw you've seen this year as we've seen persistent inflation, persistent energy we absorbed that in our income statement until we can pass that through and that lag can be three months to six months. And so years passed that happened both up and down, and we'd absorb in the kind of hundreds of thousands of dollars of kind of range. What you're seeing this quarter is in the million. Matt will describe those types, but I want you to know that they do get passed through contractually. So there is this delay. It weighs on our current quarter. We see that in our margins, but then in about three months probably January, a lot of this gets moved through into our customers. Now those margins will rebound, and they'll rebound as inflation starts to plan over our pricing catches up contractually and you'll see those margins rebound significantly. Matt do you want to give some details of the…

And that's exactly what we spoke to. I mean, take for instance, again, we talked about it in the prepared remarks. We saw about $21 million of inflation in that segment alone a net of which, I said was probably $2 million to $3 million that will come with a lag on it. So we will capture that. And if all else stays equal Mike that goes back to sort of recovering and establishing the margin. I think the broader point and I know you talked about refractories as well, but let's just step back for a minute and talk about the company's journey over the past two years. So coming out of 2020, we've absorbed $75 million of inflation in 2021. So far in 2022, we've absorbed about $135 million in inflation. So that's $210 million inflation in two years. And although, we've captured most of that in pricing that in itself is dilutive to margin by about 200 basis points. So the company generating about 14.5% back in that early 2020 time frame and now this quarter around 12.5%, 12.4%, 200 basis points of that difference is the dilution in the margin from passing through these inflationary costs. So that speaks to one, do great work by the team to capture those costs pass them through. Two, if you recall we came into this year expecting about $40 million of pricing. That 40 million was to catch up on inflationary costs from 21, but also $20 million to reestablish our margin. We'll continue to work on that as we go forward. Again, capturing those inflationary costs. Yes, but then reestablishing our margin based on all the things that you heard Doug talk about the great position of our products the great position and technical capability we have with our customers and also introducing new products. So that's what gives us the confidence that, as those inflationary factors start to plan over about 35% of the company has contractual lags in that pricing that will come and the teams are working on the other 65% to reestablish that margin as we move forward.

All right. And then over on the Refractories segment you mentioned a couple of times the higher costs that you're seeing in Turkey. Maybe give a little bit more color on what you're seeing there? And then also curious on the MGO market in terms of the raw materials that you're using in refractories, I believe that you stocked up on some of that material before we saw a big price run-ups? And I'm just curious kind of where you're seeing the -- how you're seeing the cost structure for refractories raw materials play out as we get into 2023?

So the cost increases that you saw in refractories this quarter was as you mentioned in Turkey it's energy related. And so, we do produce our own magnesium oxide. We buy magnesite ore and Centre ourselves in Turkey. And it supplies roughly 35 to 50% at times of our base raw material production for Europe our refractory production in Europe. And so that cost came in in energy as we center and we're moving that through in pricing to customers, but that was a large increase that we saw through the quarter. Magnesium oxide prices in general, we do source from around the world. We source from China. We source from other regions. Last year, you're right, we did take advantage of some dislocations and dislocations, but some lower pricing in the market and we stocked up and that was done for two reasons. One, we found some good opportunities for pricing and also we wanted to buy ahead of if you remember the Olympics that were in China to make sure that we loaded everything out of the country before that potential disruption. We've largely used through that. But again, we're in a position now where, given the conditions in China we're starting to see some good pricing taking advantage of things not just in magnesium oxide, but in other raw materials. And so therefore we're looking at making some opportunistic purchases this year to extend us into next year. So, there are some areas that we are seeing some planning over of inflation. We're taking advantage of them, but I think the vast majority of what we saw in the quarter and what we think we're going to probably see in the fourth quarter is energy-related and energy-related here in the United States and in Europe. Does that help Mike?

Yes, very helpful thank you. And then my last question is on the Metals litigation. I'm curious, if you can let us know how many cases were settled and how many cases are still pending? And I'm also curious of the $31 million charge, how much of that is a cash impact and how much of that is a reserve that is a noncash expense for now?

Yes. Sure, let me take you first through the charge so to clarify that. As Matt mentioned there's three components to that it's both defense costs in the quarter some settlement costs and then a reserve to establish. Let me outline a little bit for you in talc. I think I mentioned on the last call that talc it's about a $50 million business for us. And the cases that we have against the talc business right now are against our legacy cosmetic talc and cosmetic talc has been $2 to $3 million is a tiny piece of that business, a very small piece of the company. We discontinued those products in 2016. And so, because of that we have a relatively limited number of cases. But when we've been defending ourselves over the past several years actually, I mentioned that on the last call that we've been incurring more litigation costs. And as we went into the quarter, we made the decision to settle several of them. But also looking at the litigation environment in general, we said well look we have about 450 remaining cases against the company. We wanted to take a look at that and make sure that we assess any potential future liability that, that holds given our litigation strategy. And so, we felt it was prudent to take the reserve this quarter. So it's a portion of that 31%. Now I don't want to break out for you the components. I want to you know a portion of that 31 is that reserve for these potential future liabilities. But I don't want to give you that, that's part of our litigation strategy. As far as cash flows, a portion of the cash flows in the third quarter within our cash flows will be a bit more in the fourth quarter, but the bulk of it is noncash, that will be set aside for resolving these cases as going forward as Matt mentioned. Does that help to mention it for you?

That's very helpful. Thank you very much.

And our next question comes from David Silver at CL King.

Yes, hi, thank you. I think I just, if you wouldn't mind, I'd like to just go back to the talc question for just a moment. But maybe just to clarify, but of the cases at issue here, are the parties all focused on I guess the cosmetic use of talc or is there some litigation that might be related to industrial or non-cosmetic use of the product? Just what is the range of the parties, who are filing the suits, just what parts of the talc business are at issue? Okay. I'll stop there. Thanks.

Hi, David. These are cosmetic talc applications as I mentioned a very small portion of the talc business, not the industrial application. And they're all associated with lung issues and that's right. I'll stop there. Does that help?

Okay. Great. Okay. Thank you for that. So next question, I think I'd like to ask you is about the PCC businesses. So they showed a very nice revenue gain sequentially and whatnot and year-over-year double digit. And I was just wondering, if you could characterize a little more detail the source of the increase. So, in particular, I'm wondering if there are some new project or new satellite plant start-ups in there or if it's just higher utilization from your existing network? In other words, what it seems like there's a lagging price effect. So, maybe if you could just talk about the source of the double-digit year-over-year increase? Thank you.

Yes, sure. I'll start and then I'll pass to DJ to give you some more details. Look, we've seen, as you know we've built a number of PCC satellites in India. We've got a new one ramping up in China over the past several years. And what we saw in the quarter is really just the stronger volumes from those new satellites. And you also see strong demand in Europe. I will tell you utilization rates, paper machine utilization rates are very high in the United States. We are selling just about every ton of PCC we can make here in the United States that's behind that. A little bit slower in China, but we still see a really strong pipeline of opportunities. I'll let D.J. kind of highlight more of those and some of the business development activities.

Glad to Doug. So David a couple of things. Regarding new satellites, nothing really significant yet, but you're going to start seeing in this quarter and really ramping up in the early part of 2023 is the new satellite that we had previously mentioned. Bayona's about a 50,000 ton satellite. In January, we're going to have another satellite turn on in India. And then just a reminder, we had announced last year a major new product for us in packaging, white packaging and that is a GCC satellite in China and that is still on track to kick in on the second half of next year. So those are all things in building in commissioning of things to come. On top of that, I look at the pipeline, there's pretty significant pipeline that's still underway. It's reasonable for you to think, it's about 15 to 20 sort of discussions that are going on, split between Asia and Americas and Europe pretty evenly. In Asia, it's traditional PCC, plus some penetration in the packaging. And in the Americas and Europe, it tends to be these newer products, these environmentally focused products and packaging, so that's kind of where the pipeline is evolving to. But in terms of what you're seeing now, the big part of it as Matt mentioned is price with still more to come to recover on that energy, and then the volumes on those projects will start kicking in really early part of next year. I hope that, gives you the color.

And yeah, no thank you for that. And if I could just follow up quickly, but from your experience DJ, does the prospect of like a slowing global economy, let's say, impact the capture rate for these new project opportunities. How do customers typically respond to a slowing economy, when they're considering a new satellite project or a packaging conversion?

So in general, it creates more opportunity for us certainly the urgency of the conversations cranks up during these periods. There's two things driving that. The first thing is most of the customers look at it as a chance to reposition and upgrade on their quality. The second thing, especially when you're dealing with these energy prices, we've had big price increases, but it's against the increases that they're seeing in their pulp. It's against the increases that, they're seeing in drying their paper, and our products help with both of those parts of the value equation. So I would say that, what I've been experiencing most recently is an increase in interest on the traditional products, and our newer products. So that's what's still holding out now.

Okay. Great. And then, I did have one more question on, within Performance Materials on environmental products, in particular. So second quarter and third quarter together that's over $100 million of revenue from that product line. And I mean, that historically that's a very strong trend. So, just a couple of questions about that. But first, could you just kind of speak to let's say the backlog or the order book for new environmental products based project work? And then secondly, if you could just give us an update on fluoro sales and beta testing and development like that? That would be helpful. Thank you.

Sure. Let me start, and then I'll give it to John. We have seen some really good growth in this business. As I mentioned, several years or for several years this is our Environmental Products business has been based on lining systems. So, geosyntheticaliners for municipal and industrial landfill use. Over the past couple of years, we've spent a lot of time and innovation in more water applications remediation applications. And our PFOS product, our FLUORO-SORB products is one of those outcomes. And so we are moving this business and we've seen a tremendous amount of growth on the water side of things, and even more so looking at drinking water applications. And so a lot of our newest technologies are on that remediation. We think that, it's obviously a growing market. There's a number of factors there. One obviously the consumer side of it, in terms of protection of drinking water, but also the municipal side of it, which though there isn't a regulation necessarily to a level of remediation cleanup by the government, there is municipal interest and local interest in cleanup efforts and we've been taking part in that. So a real shift toward more of the water side of things and remediation side of things. And John, you want to give more detail on some of the flouro and the projects that we have in the backlog.

Sure. I appreciate the question. I guess, think about the magnitude of what we're doing and who we're working with. First, put it in terms of pilots. We've had about 100 successful pilots demonstrating the activity of the product and the success of the product. And that certainly sets the stage for commercialization. We've been talking about that for quite some time. We have started to see the ramp-up of commercialization. So it's broken into a couple of different segments. If you think about in-situ soil stabilization, this is what we've been doing with some of the defense department. And we've got a major installation with the DoD site. We've had two industrial sites. We've got two mobile filtration units that were moving around all generating sales and revenue. The second segment is drinking water like Doug described. This has the potential to just be continuous business, as they use the media and we replenish the media. And right now we've got two orders for full-scale water purification systems and that will be we suspect a great entry into the utility segment. Once we demonstrate full-scale commercial success, we believe others will be watching that and we have the potential to continue to grow that. And then the last segment is landfills. And during the quarter, we had two systems go in. We've got another order for another system. We've had one in place for over a year now so again that's kind of our bed and butter as well. So three segments all have significant potential. We believe that what's really going to drive this is regulation and once regulations get in place with the technology being fully demonstrated, we'll have the ability to grow that exponentially. I hope that provides some color

I like the word exponential. Okay. Thank you very much. I appreciate all the color.

Thanks, David.

I almost had to hold John back there on the exponential number but yes no good growth.

[Operator Instructions] And we'll take our next question from Daniel Moore at CJS Securities.

Hi, Dan, are you there? Operator, did we lose Dan?

No. We still have Dan connected Dan, your line is open. Would you like to go ahead and ask a question or maybe we did lose him. Would you like to go to the next question and possibly have Dan requeue.

That would be fine.

Okay. Our next question comes from David Silver at CL King.

I'm not going to say I had anything to do with that but anyway when I have to get a follow-up and I'll go to any extreme. Anyway sorry about that. I just wanted to touch base real quickly. Thanks for laughing that's all I could come up with on short notice, but okay. So cash flow and in particular, working capital. So, I would just say over the last several quarters, there has been a pretty significant buildup in the use of working capital. And certainly, there's been some buffer inventories and some accommodations to supply chain issues and whatnot. But I'm just wondering, if I look over the last four to six quarters, I mean the net increase in working capital build, it’s been pretty substantial. And I'm just wondering if you could, two things, I mean could you cite maybe the strategic rationale behind that? And then secondly, how do you anticipate that level of working capital progressing, let's say, over the next quarter or two. Thank you.

Sure. Yes. Thanks, David. A few things. One, we look at it on a multitude of factors. And like you said, as we move through the course of the period you just laid out, we did have strategic inventories that we put in place. We've managed through some of the higher revenue periods in the second and third quarters. And then we have strategic inventories that go back in place ahead of the winter months on the mining businesses. But in all of that, you need to take a look at the efficiencies. And from a days on hand perspective, we're essentially flat year-over-year. And so, what does that tell you? It tells you that we are inventorying as we need for the revenues that we are generating. Now, the inflationary inputs that we've been experiencing have been driving that, yes, both on the revenue side and on the inventory side. But the net efficiencies, so the actual units of what we're holding, are pretty much in line with where they needed to be and where they've been over the past several quarters. So as those inflationary factors -- that's what we said in the prepared remarks and what we've said over the past couple of quarters, is as those inflationary factors abate that working capital will release. And remember, we kind of have sort of 60, 70-day terms. And so you would see that take place in that type of time lag. And so, a few factors there for you to consider. One inflationary impact has been in that 70 to 90 million range, depending on if you're going year-over-year or six quarters back. And then, that will work itself out on a 60-day basis once you start to see those inflationary factors stabilize.

And David, I'll just add we don't see. There's no change to the characteristics of the company in terms of its cash flow generation potential. As a matter of fact, as we continue to add product lines that we feel less cyclical, higher margin, we should enhance that going forward. I think like you're seeing and I think many companies are seeing this inflation being parked on the balance sheet. And as it starts to plant over, we will revert to normal kind of cash flow yield type characteristics. So, it is -- as I mentioned, we thought that that would probably be a little bit more in the second half of this year. But as we continue to experience inflation and we continue to buy our higher lows and put them in that balance sheet, that's going to take a little bit of time to a little more another quarter or two to release but that's the dynamic. I don't see there is anything in the characteristics of the company and our historical cash generation that's changed at all.

That's kind of where I was so -- that's kind of what I was wondering, so thank very much. I appreciate. Again, I appreciate the detail.

Thanks David. End of Q&A:

It appears there's no further questions at this time. I'd like to turn the conference back over to Doug Dietrich for additional or closing remarks.

Thanks Jenny. Thanks everyone for joining the call. We do appreciate the questions and the attention today. We'll talk to you in another three months. Thanks.