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Text: Today's call will be led by Chairman and CEO, Doug Dietrich; and Chief Financial Officer, Matt Garth.
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.
I do appreciate you joining our call.
We've got a lot to cover today.
I want to take you through the highlights of a very strong quarter and discuss our acquisition of Normerica.
Matt will then review our financial results in more detail and our expectations for the third quarter.
Let me start with a recap of the quarter.
Building on the momentum generated over the past few quarters, we delivered a strong second quarter with several financial and operational highlights that I'll take you through.
First and foremost, this was a record quarter for our company with earnings per share of $1.29.
This milestone reflects robust demand across our markets, strong operating performance by our team and continued execution on our growth projects.
For perspective, many of our product lines have now reached or exceeded pre-COVID sales levels, but others still have room to improve.
Let me give you a feel for how the demand trends, our performance and strategic initiatives across each of our segments led to these results.
In Performance Materials, our Metalcasting business continues to perform very well with strong foundry demand globally and our broad portfolio of consumer-focused businesses and household personal care and specialty remained on their steady growth track.
Specifically, sales in our personal care business nearly doubled as we introduced new private label skin care formulations and expanded partnerships with major retail brands.
Another large contributor to the segment sales growth in the quarter was the rebound in project activity in both Environmental Products and Building Materials.
Within our Specialty Minerals segment, we delivered another quarter of sales growth across all product lines.
Paper demand continues to improve in all regions, and we're benefiting from the ramp-up of our new satellites.
Paper mill operating rates in Normerica have reached nearly 95%.
And to underscore the current supply and demand situation, one of our customers in Normerica recently announced plans to restart a mill to meet the increased demand.
In addition, our Specialty PCC, GCC and Talc businesses benefited from a robust activity in consumer, automotive and residential construction markets.
Our refractory segment also had an impressive quarter marked by steel utilization rates, which are now above 80%.
We've also secured several new contracts, which will drive growth in the second half of this year and into next for both our refractory and metallurgical wire product lines.
A combination of these positive trends and business development actions in our segments yielded sales of $456 million, with growth in every segment and geography.
We drove these higher sales into operating income of $64 million, up 53% compared to 2020, and margins expanded to above 14% as we expected.
Our team's disciplined operational execution through pricing actions, productivity improvements and strong cost control enabled MTI to deliver these results.
We also navigated challenges related to increased input and logistics costs that accelerated during the quarter.
Our global teams have done a great job maneuvering through a more dynamic supply chain environment, which includes navigating logistics challenges and energy and raw material inflation.
We're well positioned to offset these costs with pricing actions that we've been effectively implementing across our portfolio, and Matt will discuss this more in his comments.
Generating strong cash flow, further strengthening our balance sheet and maintaining flexibility with how we deploy our capital to the highest return opportunities are priorities for us.
Through the first half of the year, cash from operations and free cash flow were both up 25% over last year.
We've been using our cash flow to pay down debt and bolster our liquidity.
And we finished the quarter with our lowest net leverage ratio in the past six years.
In addition, we've continued with our returns to shareholders through our $75 million buyback program and anticipate fully completing the program under the authorized time frame.
Financial strength also provides us the capability to pursue acquisitions as we have demonstrated with the purchase of Normerica.
We advanced our growth initiatives this quarter, focused on new product development and geographic expansion.
Let me highlight a few specific areas.
On previous calls, we mentioned several positive trials and interest with our FLUORO-SORB product that addresses PFAS contamination in groundwater.
And I'm pleased to share that during the quarter, we were awarded our first major sale for a large-scale project at a North American department of Defense location.
The project has been going very well as FLUORO-SORB efficacy has been demonstrated commercially.
We have several other similar type projects in our sales pipeline as well as for waste municipal wastewater treatment sites, and we have the manufacturing capacity and technical capabilities to pursue them and further grow sales.
On the front, we are ramping up production at our new satellites in Asia, which came online at the end of 2020 and represent 200,000 tons of new capacity on an annualized basis.
We have another approximately 130,000 tons of capacity coming online now through the middle of next year, including our 40,000 ton expansion for a packaging application in Europe, where we will begin realizing the volume benefit in the third quarter.
We are finalizing the construction of our 40,000 ton satellite in India, which will start-up late next quarter, and we have also begun construction on a new 50,000 ton satellite in China, which should be operational in the first half of 2022.
And finally, we announced the acquisition of Normerica this week, which I'll go through in a moment.
To sum up the quarter, it was a very productive one with many positive highlights.
We navigated through challenges over the past 18-plus months and created opportunities for ourselves on all fronts, has put our company in an advantageous position to continue to drive profitable growth going forward.
As I mentioned on the previous slide, the exciting news this week is our acquisition of Normerica, and I wanted to spend time discussing who they are, why we pursued the transaction and how Normerica fits into our global Pet Carebusiness.
Acquisitions are an important component of how we plan to grow and move MTI to a higher return, more balanced portfolio, and we've discussed our pipeline of opportunities that align with our strategic initiatives.
Normerica was one of those opportunities as it continues to shift to a more balanced sales portfolio and aligns extremely well with our overall growth strategy in pet care.
For background on Normerica, the company was founded in 1992, headquartered in Toronto, Canada, and is a leading supplier of branded and private label Pet Care products in North America.
Normerica has a long history as a well-run company with an impressive track record of innovation, customer service and profitable growth.
Product portfolio consists primarily of bentonite based cat litter products, which are manufactured in facilities in Canada and the United States.
Normerica has about 320 employees, and in 2020, generated revenue of approximately $140 million.
Let me give you some more details on the transaction and its rationale.
The combination is highly complementary from a geographic, product portfolio, customer and operating perspective.
Normerica's portfolio of branded and private label bentonite based cat litter products fits well within our North America business.
In addition, Normerica's strategically located footprint throughout the U.S. and Canada, combined with our vertically integrated mine-to-market model, gives us a unique position in the cat litter market.
We are now one of the largest vertically integrated private label pet litter providers globally with a strengthened position in North America.
We see further benefits as we can provide enhanced value in terms of consistency and quality and are positioned to serve a broader customer base more efficiently.
The purchase price for the transaction was $185 million on pre-synergy EBITDA of approximately $20 million.
We will realize synergies from the transaction by leveraging our combined operational footprint and vertically integrated model and through the deployment of our business processes.
On a post-synergy basis, we expect the transaction to be about 7.5 times EBITDA, similar to the Sivomatic transaction and earnings accretion to begin in the fourth quarter of this year.
We expect to fully integrate the business, employees, systems and processes over the next few quarters, and accretion will ramp up to 5% to 7% on a full year basis in 2022.
Let me step back and describe our existing Pet Care business.
We've been profitably growing this business since the acquisition of Amcol in 2014.
Our acquisition of Sivomatic in 2018 gave us a differentiated mine-to-market private label presence in Europe, Normerica is an extension of that private label growth strategy.
Pet Care sector provides stable growth rates and attractive dynamics as domesticated cat ownership continues to rise globally.
We are uniquely positioned to serve this market and have invested in expanding our vertically integrated capabilities and product portfolio globally.
In addition, the strength and resiliency of our Pet Care business was demonstrated during the past year when demand was at an all-time high during a period when our businesses serving industrial markets were impacted.
On the lower left of the page, you can see how our Pet Care sales have grown organically and inorganically since 2017.
And with the addition of Normerica and Sivomatic, our Pet Care business has grown from $78 million to $350 million, and our household and personal care business is now the largest product line at MTI.
This represents a significant shift in our portfolio toward noncyclical, consumer-oriented markets, positioning our company to drive growth rates above our historical averages, and we see opportunities to further balance our portfolio.
In sum, Normerica is a great strategic fit with our company, and this transaction provides many compelling opportunities for growth and value creation.
I'll review our second quarter results, the performance of our segments as well as our outlook for the third quarter.
And now let's begin with the second quarter review.
Sales in the second quarter were 28% higher than the prior year and 1% higher sequentially as demand remained strong across the majority of our end markets, and we started to see higher levels of activity in our project-oriented businesses.
Operating income, excluding special items, was $64.1 million, 53% higher than the prior year and 9% higher sequentially.
Operating margin improved from 13% in the first quarter to 14.1% in the second quarter.
The sequential margin improvement played out largely how we expected as we benefited from the incremental margins of our project-oriented businesses, a more normalized level of corporate expenses and continued pricing actions and productivity, all of which helped to offset higher-than-expected inflationary cost pressures.
As you can see in the operating income bridges on this slide, we saw higher costs in the second quarter.
The higher costs were primarily driven by energy, logistics and certain raw materials such as lime and packaging.
Our teams have done an excellent job managing through these challenges, and we are in the process of implementing additional price adjustments in the third quarter, which will help mitigate the impact on our margins going forward.
In some cases, the price increases are contractual as with the pass-through arrangements in Paper PCC and in other cases, they are negotiated based on the value that our products provide.
Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 11.3% versus 11.7% in the first quarter and 13.1% in the prior year.
Earnings per share, excluding special items, was $1.29, a record quarter for the company and represented 52% growth above the prior year and 10% above the first quarter.
Our effective tax rate for the quarter was 18.9%, excluding special items, and we expect our effective tax rate to be approximately 20% going forward.
And now let's review the segments in more detail, starting with Performance Materials.
Second quarter sales for Performance Materials were $238.4 million, 24% higher than the prior year and 3% higher sequentially.
Metalcasting sales grew 52% versus the prior year as foundry demand remained strong in North America and China.
Sales were relatively flat sequentially, and were only modestly impacted by the global semiconductor shortage, which caused a limited number of foundry customers to take downtime in the quarter.
Household, Personal Care and Specialty Products, our most resilient product line last year, grew 17% versus a relatively strong prior year quarter.
Demand for our consumer-oriented products has remained strong and growing, driven by continued new product development and expansion into new customer channels and geographies.
We also saw higher volumes of our specialty drilling products, which are benefiting from a rebound in construction, infrastructure and oil drilling activity versus the prior year.
Environmental product sales grew 6% versus the prior year and were 53% higher sequentially, driven by improving demand for environmental lining systems, water and soil remediation and wastewater treatment.
As Doug mentioned, we also delivered on the first major commercialization of our FLUORO-SORB technology for PFAS remediation in the second quarter.
Building Materials sales grew 17% versus the prior year and were up 12% sequentially on higher levels of project activity.
In North America, we are seeing more commercial construction and infrastructure projects move forward.
While in Europe, projects have been slower to advance as countries are still in varying stages of reopening.
Operating income for the segment grew 55% from the prior year to $34.7 million and was 16% higher sequentially.
Operating margin was 14.6% of sales versus 11.7% in the prior year and 12.9% in the first quarter as higher volumes and our strong operating performance drove incremental margin improvement.
Now looking ahead to the third quarter.
We see continued strength in household and personal care and foundry demand remained strong for Metalcasting, with lower volume sequentially due to seasonal foundry outages.
Meanwhile, the pipeline for our project-oriented businesses, environmental products and building materials continues to improve in North America, and the current outlook for the third quarter looks strong.
However, we remain cautious on some of our international projects given the potential for a slower reopening outside the U.S. due to COVID.
I'd also like to note that we are seeing higher costs for the plastic and fabric components of our environmental and construction mining systems.
While this presents some near-term margin pressure, we expect to fully offset these higher costs through the ongoing efforts of our supply chain team as well as through pricing adjustments.
Overall, we expect another strong quarter for this segment with organic sales and margins at similar levels to the second quarter.
In addition, Normerica is now part of the Performance Materials segment, and the acquisition will contribute two months of sequential sales growth to the segment in the third quarter.
As Doug stated earlier, we expect modest earnings per share accretion to begin in the fourth quarter this year as we move through the integration period, ramping up to full run rate accretion over the next 12 months.
And now let's move to Specialty Minerals.
Specialty Minerals sales were $142.7 million in the second quarter, 30% higher than the prior year and 3% lower sequentially.
Paper PCC sales grew 31% versus the prior year on recovering paper demand and the continued ramp-up of three new satellites.
Specialty PCC sales grew 24% versus the prior year and higher demand from automotive, construction and consumer end markets.
Overall, PCC sales were 5% lower sequentially, primarily due to temporary paper mill outages in India related to COVID-19 and the typical seasonal paper mill outages we experienced in North America.
Process Mineral sales were 31% versus the prior year and 2% sequentially on continued strength in residential construction and consumer end markets.
Operating income for this segment grew 31% to $20 million and represented 14% of sales.
Inflation impacted this segment the most, primarily driven by lime and energy cost increases.
We have been managing the impact with our supply chain team, and we have been adjusting pricing throughout the first half of the year accordingly.
We expect the inflationary cost environment to continue, and we will also continue with our price adjustments throughout the second half.
As you'll recall, the price adjustments for Paper PCC are contractual, and they follow a predetermined schedule.
Now moving to the third quarter, we expect higher volumes for Paper PCC on higher sales in India and the ramp-up of our packaging expansion in Europe.
We also see continued strength in specialty PCC and processed minerals.
And overall, for the segment, we expect the third quarter to be similar to the second quarter.
Sales should increase modestly on a sequential basis.
However, we do expect margin pressure to persist due to ongoing higher costs and the timing of Paper PCC increases.
And now let's turn to the refractory segment.
Refractory segment sales were $74.5 million in the second quarter, 33% higher than the prior year and 1% higher sequentially, as steel utilization rates continue to strengthen in the second quarter.
Segment operating income was $11.7 million, 98% higher than the prior year and 3% lower sequentially, and operating margin was strong at 15.7% of sales.
Steel utilization rates have improved to 84% in North America and 77% in Europe, up from 78% and 72%, respectively, in the first quarter.
Steel production at these levels, we should continue to generate strong demand for our refractory products and the productivity that they provide for our customers' furnaces.
As Doug mentioned, we see growth ahead for this business as we signed two additional long-term contracts in the second quarter.
We've now signed a total of seven new contracts worth $80 million over the next five years, which will provide $16 million of incremental annual revenue ramping up through 2022.
Looking ahead, strong market conditions are expected to continue in the third quarter.
We should benefit from a few additional laser equipment sales in the third quarter.
However, we expect the bulk of our laser equipment sales to occur toward the end of the year as our teams are able to perform more on-site installations.
And overall, for this segment, we expect a similar performance sequentially.
Now let's take a look at our cash flow and liquidity.
Second quarter cash from operations was $67 million versus $64 million in the prior year, bringing year-to-date cash from operations to $118 million versus $94 million last year.
This was a 25% increase.
We deployed $22 million of capital during the quarter on sustaining our operations, mine development and other high return opportunities.
We continue to expect capital expenditures in the range of $80 million to $85 million for the full year, split evenly between sustaining and growth capital.
Year-to-date, we have used free cash flow to repurchase $37 million of shares.
And in total, we have repurchased $54 million under our current $75 million share repurchase program.
As of the end of the second quarter, total liquidity was over $700 million, and our net leverage ratio was 1.6 times EBITDA.
For the acquisition of Normerica, we used $85 million of cash on hand and $100 million of our revolving credit facility.
This will initially bring our net leverage ratio to approximately 2 times EBITDA on a pro forma basis, and we expect to pay down the incremental borrowing over the next 12 months.
Our balance sheet remains in a very strong position.
And this strength provides us with the flexibility we need to continue to invest in high value, high-return growth opportunities.
We expect strong cash flow generation to continue in the second half of the year, and we see free cash flow in the range of $150 million for the full year.
And now let me summarize our outlook for the third quarter.
Overall, we see similar conditions in the third quarter across our end markets to what we saw in the second quarter.
Our consumer-oriented businesses remain robust and paper demand should continue to improve through the third quarter.
We will have the typical foundry customer maintenance outages, and our project-oriented businesses should continue their recovery.
We continue to watch for potential COVID related shutdowns that may impact some of these projects.
Inflationary cost pressures will continue in the third quarter.
We are keeping pace with higher costs through pricing actions, some of which we have already implemented and other price adjustments, primarily in the paper business, which will be implemented contractually through the second half.
Overall, for the company, we anticipate another strong performance in the third quarter with a similar level of operating income to that of the second quarter as well as continued strong cash flow generation.
I'll note here again that we also see two months of sales from the acquisition of Normerica in the third quarter, along with purchase accounting adjustments and integration costs.
Accretion from the acquisition will begin ramping up in the fourth quarter.
With that, I hand it back over to Doug to give you the highlights of our latest sustainability report.
Before we conclude, I'd like to take a quick moment to highlight the publication of our 13th annual sustainability report.
This year's report is a significant step forward in terms of reporting and outlining the significant progress around our broad range of sustainability goals.
You'll see in the report that we've already exceeded our reduction goals in four of six targets -- or six targets related to emissions, energy and water and are on pace to achieve the other 2.
In addition, we provided more details regarding our safety culture, how we've evolved our product portfolio toward more sustainable solutions and initiatives around employee engagement, diversity and inclusion and community outreach.
I'm very proud of the progress we've made advancing our objectives, which is a direct reflection of our employees' involvement and dedication to sustainability at MTI.
I encourage you to review the report, which is available on our website.
With that, let's open it up to questions.

user
compname reports second quarter 2021 earnings of $1.23 per share, or $1.29 per share excluding special items, a record quarter for the company.
q2 sales $456 million versus refinitiv ibes estimate of $458.7 million.
q2 earnings per share $1.29 excluding items.

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