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Text: Today's call will be led by Chief Executive Officer, 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.
We appreciate you taking the time to join today's call and I hope you are all staying safe and healthy.
Let me outline a brief agenda for the call.
I'll begin by taking you through our third quarter highlights, including improving trends in our sales results, strengthened operational and financial profile, and progress made on the business development front.
First, I want to comment on the 8-K we filed this week related to a ransomware attack we recently experienced which impacted access to some of our company's IT systems.
We have procedures and protocols in place for situations like this.
Immediately after detecting the incident, we implemented our comprehensive cyber security response plan, including taking steps to isolate and carefully restore our network to resume normal operations as quickly as possible.
We've notified law enforcement and have been working with industry-leading cyber security experts to conduct a thorough investigation.
Throughout this situation, we operated our facilities safely and met our customer commitments.
Before going through the third quarter review, I'd like to note that I'm very pleased with how our global team and businesses have performed in what continues to be a complex and challenging environment.
We remain focused on managing our company with an unwavering commitment to keeping our employees safe, operating our plants efficiently and serving our customers with value-added products.
Dedication, engagement and resilience of our employees has been nothing short of exemplary during these times.
Let me take you through how our third quarter unfolded.
As we previewed in July, we anticipated that demand conditions in our end markets would improve with the second quarter having the most acute impacts from COVID-19, and that's largely how the quarter played out as we were prepared to respond to the volume recovery, which led to sequential sales growth in nearly all of our product lines.
Overall, we had a solid quarter from an operational and commercial standpoint.
These results reflect our team's disciplined execution related to cost control, pricing and productivity, which resulted in higher sequential and year-over-year operating margins.
We also demonstrate how our strong product portfolio and end market mix has enabled us to capture opportunities with existing and new customers.
From a financial perspective, total sales in the quarter were $388 million, an increase of about 9% sequentially, but still at lower levels compared to last year.
As we indicated on our last call, our July sales were trending upwards and demand conditions in several markets continued to strengthen throughout the rest of the quarter.
We generated $52 million of operating income and earnings per share were $0.92.
In addition, we delivered $54 million in cash from operations, continuing our solid cash generation profile.
After experiencing volatile conditions in our businesses that serve industrial-related end markets through the second quarter, we saw considerable demand improvements in the third quarter, one with continued strength in our consumer-oriented product lines.
Let me touch on some of the highlights.
Metalcasting business continued to rebound as our foundry customers in North America ramped up production to meet the demand increase in the automotive sector.
At the end of the third quarter, our Metalcasting facilities were operating at about 95% of last year's levels, a noticeable improvement from the reduced levels seen earlier.
In addition, penetration of our pre-blended products remains on a strong growth trajectory in China as sales increased 20% over last year and this momentum should continue moving forward.
Sales in our portfolio of consumer products which includes Pet Care, Personal Care, and Edible Oil Purification remained resilient, led by an 11% year-over-year growth in Pet Care.
We continue to strengthen our robust private label Pet Care portfolio in North America and Europe and have expanded our presence through partnerships with several new customers.
Another area to highlight is our global PCC business which benefited from satellite restarts in India and North America, combined with an improved demand environment from the low levels in the second quarter.
As we indicated on our last call, July volumes were trending approximately 15% higher compared to June, and these dynamics continued through the third quarter.
Of note, Paper PCC sales in China continue to deliver a solid performance with 18% growth over last year.
In addition, Specialty PCC sales increased sequentially as automotive and construction demand strengthened through the quarter and food and pharmaceutical applications remained at strong levels.
Other pockets of strength came in our Talc and GCC business as demand improved for our products used in residential and commercial construction, as well as automotive applications.
And in our Refractories business, we see steel utilization rates increased in the U.S. from a low of 50% in the second quarter to 65% at the end of September.
While many of our businesses returned to a positive trajectory, we've had some challenges in our project-oriented businesses, such as Environmental Products, Building Materials and Energy Services, which are still experiencing volatility in order patterns and timing delays.
Energy Services was further impacted by several hurricanes that occurred in the Gulf of Mexico during the quarter.
As our volumes began to trend upward through the quarter, we were able to leverage these sales into income, resulting in overall operating and EBITDA margin improvement on both a sequential and year-over-year basis.
We've maintained our focus on operational efficiency, including variable cost adjustments and structural overhead savings, as well as on continued pricing increases, capturing favorable raw material costs and increasing sales of higher-value products.
As markets continue to recover, we are well-positioned to expand margins further on increased volumes.
Our focus on strengthening our financial position also remains a priority with an emphasis on tightly controlling our cash generation cycle and creating more flexibility around our capital structure.
We delivered another quarter of strong cash flow generation, the majority of which was used to pay down debt.
While navigating through the current environment, we've remain focused on advancing our growth initiatives and made further progress this quarter on several fronts.
Let me go through some of these highlights in more detail.
The commissioning of two new PCC satellites scheduled for the fourth quarter continue to move ahead, currently ramping up production at our 45,000 ton facility in India, our 150,000 ton satellite in China should be operational by December.
We will also be resuming production in November at our previously closed satellite in Wickliffe, Kentucky to support Phoenix Paper's restart of that mill.
During the quarter, we made a small acquisition of a hauling and mining company to further strengthen our vertically integrated position at our bentonite mines in Wyoming.
This transaction improves our cost position and enhances our flexibility with our mining and/or transportation in the region.
In our Refractories business, we signed two new five-year contracts to supply our refractory and metallurgical wire products in the U.S. These contracts total approximately $50 million or about $10 million of incremental revenue on an annual basis.
Our new product development efforts are progressing well as we look to accelerate the pace of commercialization and drive new revenue opportunities.
We commercialized 36 value-added products so far in 2020 with contributions from each of our businesses.
12 of these products were introduced in the third quarter.
We kept at a similar pace to last year, while conducting many of these product development activities virtually.
All in all, there are a number of positives about our performance in the quarter, especially, how we've executed as a company, while navigating through difficult conditions.
There are still some challenges ahead.
With strong momentum across many of our businesses and with an enhanced cost profile, we expect to continue to deliver improved profitability as volumes recover.
I'll now review our third quarter results, the performance of our four segments, as well as our cash flow and liquidity positions.
Now, let's get into the review of the third quarter results.
Third quarter sales were $388.3 million, 9% higher sequentially and 14% below the prior year.
Gross margin, EBITDA margin and operating margin all improved sequentially and versus the prior year, driven by our continued pricing and productivity actions.
SG&A expense was flat with the second quarter, and also contributed to the margin expansion.
Earnings per share, excluding special items was $0.92 and we incurred special charges of $3.2 million after-tax in the third quarter or $0.09 per share.
Our effective tax rate for the quarter was 19.8% versus 19.1% in the prior year and 16% in the prior quarter.
Going forward, we expect our effective tax rate to be approximately 20%.
Now, let's review the changes in sales and operating income in more detail.
On this slide, we are presenting the year-over-year comparisons of sales and operating income on the left side, and the sequential quarter comparisons on the right side.
Third quarter sales were 13% lower than the prior year on a constant currency basis.
Slowdown in economic activity brought on by the COVID-19 pandemic continue to impact our volumes on a year-over-year basis in the quarter.
The operating income bridge on the bottom left shows we were able to significantly offset the impact of lower sales versus the prior year, the favorable pricing and cost performance driven by the actions we have taken after the last year.
These actions resulted in higher operating margin versus the prior year despite the lower volume.
On a sequential basis, we saw significant improvement in demand with sales up 7% adjusting for currency and up 9% overall.
Conditions improved across most of our end markets and we maintained pricing levels across the company.
On our last call, we told you that sales rates in July were trending approximately 5% higher than June, and this trend accelerated through the rest of the third quarter.
Daily sales rates in August were 6% higher than July and September was 7% higher than August.
Operating income increased 18% sequentially on a constant currency basis, primarily due to the improvement in our end markets and continued cost control.
Operating margin was 13.3% in the quarter versus 13.2% in the prior year, and 11.8% in the second quarter.
Now, let's take a closer look at the operating margins and how they have improved on the next slide.
On this slide, we are showing year-over-year and sequential operating margin bridges for the third quarter.
Starting with the prior year comparison, our pricing and cost actions contributed 190 basis points of improvement, which more than offset the unfavorable volume impact.
On a sequential basis, we leveraged additional volume into 60 basis points of margin improvement and our continued cost control contributed another 70 basis points of favorability.
The actions we have taken on pricing, productivity, cost control and new product development have positioned us well to leverage incremental volumes into improved margins going forward.
Another margin related highlight for the third quarter was that EBITDA margin improved by 70 basis points versus both the prior year and the prior quarter.
Now, let's turn to the segment review, starting with Performance Materials.
Performance Materials sales increased 10% sequentially and were 8% lower than the prior year.
Metalcasting sales grew 26% sequentially as foundry production improved in North America and demand remained strong in China.
The improvement in North America was primarily driven by the ramp up of automotive production.
China Metalcasting sales grew 11% sequentially and 20% versus the prior year on continued strong demand from our customers and continued penetration of our specially formulated blended products.
Household, Personal Care and Specialty Product sales remained resilient, up 7% sequentially and flat with the prior year on continued strong demand for consumer-oriented products.
Meanwhile, Environmental Products and Building Materials continued to experience COVID-19-related project delays, and sales remained below prior year levels.
Operating income for the segment was $28.2 million, up 34% sequentially and up 5% versus the prior year.
Operating margin was 14.8% of sales, up 270 basis points from the second quarter and up 180 basis points from the prior year.
Continued pricing actions, strong cost control and expense reductions, more than offset the operating income impact of lower sales versus the prior year.
The chart on the bottom right shows daily sales rates by month this year compared to the prior year.
This segment experienced a clear rebound in demand and sales increased steadily throughout the third quarter.
We would normally expect a seasonal decrease in sales for this segment between the third and fourth quarters, driven by our construction and environmental end markets.
However, this year, we expect to offset the typical seasonality with continued positive momentum in our other markets.
Overall, we expect fourth quarter sales to be similar to the third quarter, despite the typical seasonal effects.
I'd also like to note that we experienced higher mining and energy costs, while operating in colder months, and this will temporarily impact segment margins in the fourth quarter.
Now let's move to Specialty Minerals.
Specialty Minerals sales were $125.1 million in the third quarter, up 14% sequentially and 13% below the prior year.
PCC sales increased 14% sequentially as paper mill capacity came back online in the U.S. and India, following temporary COVID-19-related shutdowns.
Paper PCC sales in China grew 11% sequentially, and 18% over the prior year on continued penetration and strong customer demand.
Specialty PCC sales increased 16% sequentially as automotive and construction demand improved through the quarter and consumer-oriented products remained strong.
Processed Minerals sales increased 13% as end market steadily improved through the quarter.
Operating income excluding special items was $18 million, up 18% sequentially and 17% below the prior year and represented 14.4% of sales, which compared to 13.9% in the second quarter and 15.2% in the prior year.
The impact of lower volume versus the prior year was partially offset by continued pricing actions and cost control.
Daily sales rates charged for this segment also shows improving conditions through the third quarter and we expect this trend to continue into the fourth quarter as paper production in the U.S., Europe and India continues to ramp up.
In addition, we are bringing online new capacity in the next several months and most of this capacity will come online late in the fourth quarter.
The sequential improvement in Paper PCC will offset the typical seasonality we experience in the residential construction markets served by the other path lines [Phonetic].
Overall, for the segment, we expect fourth quarter sales to be similar to the third quarter.
Now let's turn to Refractories.
Refractories segment sales were $59.3 million in the third quarter, up 6% sequentially as steel mill utilization rates gradually improved from second quarter levels in both North America and Europe.
Segment operating income was $7.3 million, up 24% from the prior quarter and represented 12.3% of sales.
Again, you can see improvement in the daily sales rates through the third quarter.
We expect continued improvement in the fourth quarter as steel utilization rates improve and laser equipment sales pickup.
And, overall, for the segment, we expect a modest sequential improvement in sales in the fourth quarter versus the third quarter.
Now let's turn to Energy Services.
Energy Services segment experienced significant customer project delays in the third quarter.
These delays were related to COVID-19 restrictions, as well as several weather-related shutdowns in the Gulf of Mexico and what has been a very active storm season.
As a result, sales were $13.3 million and operating income was breakeven for the third quarter.
The daily sales rates chart shows the solid start to the year, followed by sales levels that have remained low relative to the prior year.
We continue to see a strong pipeline of activity and we expect sequential improvement for this business in the fourth quarter.
Now, let's turn to our cash flow and liquidity highlights.
As Doug noted, third quarter cash from operations totaled $54 million and free cash flow was $40 million.
We continued our balanced approach in deploying cash flow, paying down $30 million of debt and we resumed our share repurchases acquiring $3 million of shares in the quarter.
We continue to repurchase shares in October and completed the expiring program with $50 million of shares under the $75 million authorization.
As noted earlier, the Board of Directors has approved a new one-year $75 million repurchase program.
Our net leverage ratio is 2.1 times EBITDA and we have $682 million of liquidity including over $375 million of cash on hand.
And before I hand it back over to Doug for the market outlook, I'd like to summarize my comments on what we are expecting for the fourth quarter in each of our segments.
In our Minerals businesses, we expect continued improvement and many of our markets to offset the typical seasonality, and we expect sales to be similar to the third quarter.
Margins will remain strong on a year-over-year basis, though, sequentially, margins will be impacted by seasonally higher mining and energy costs.
In our Services business, we expect continued gradual improvement in Refractories as utilization rates improve and we expect sequential improvement in Energy Services as delayed projects resume and activity levels pick up.
Overall, we expect MTI sales in the fourth quarter to be similar to the third quarter.
Before beginning the Q&A portion of the call, I wanted to take some time to provide a little more insight into the conditions across each of our businesses and where we see opportunities to drive incremental growth.
The improving market trends experienced across most of our businesses will likely extend through the rest of the year, while our project-oriented businesses may continue to face persistent challenges with uncertain customer order patterns.
In addition, as we build on the momentum from the third quarter, we're also executing on a wide range of attractive growth projects which will accrue to revenue in 2021.
Let me now take you through what's happening by business segment, starting with Performance Materials, our largest and most diverse segment.
Our Household and Personal Care product line will continue on its strong sales trajectory as demand for these products stays high and we leverage our expanded channels and presence with new customers.
Specifically, we're growing our portfolio of premium Pet Care products in both North America and Europe with the expansion of new online retail channels with larger customers, and the introduction of new products such as our 100% carbon-neutral Eco Care product in Europe, an example of how we're satisfying customer preferences, while also contributing to our sustainability efforts.
In addition, sales of our Edible Oil Purification products have more than doubled since last year as we grow this business through an expanded global customer base.
In our Metalcasting business, we expect to continue to benefit from the automotive demand rebound in North America.
Noted earlier, we expanded our customer base in China through the continued penetration of our higher value blended products, which led to sales growth of 20% over last year.
Our solid growth trend there will continue for the rest of the year and into 2021.
I'll touch on Environmental Products and Building Materials together as they are both experiencing similar dynamics.
While each maintains a robust and active pipeline and continues to introduce more specialized products, these businesses have been impacted by timing delays around when customers will commence larger remediation and water proofing projects.
Switching to the Specialty Minerals segment where I'll begin with Paper PCC.
With paper demand in North America and Europe gradually improving, we expect sequential volume growth in all regions in the fourth quarter.
Asia and, China more specifically, will continue its solid growth trajectory.
We'll also benefit from the ramp up of our satellite in India, and our new satellite in China should be operational in December.
On the horizon, we have two new facilities coming online in the first half of 2021, one for a packaging application in Europe, and another for a standard PCC facility in India.
Overall, we're bringing online 285,000 tons of new PCC capacity over the next three quarters.
We also maintain a very active business development pipeline across our broad portfolio of PCC technologies, including high filler, packaging and recycling.
Each of these opportunities could add to our overall volume total next year.
In our Specialty PCC, GCC and Talc businesses, sales for our pharmaceutical and consumer products, including food applications will remain strong.
Demand for our high-performance sealant and plastic products that are used for automotive applications should strengthen as build rates continue to improve in North America and Europe.
And sales for products used in residential and commercial construction applications should stay steady.
For the Refractories segment, current steel utilization rates in North America and Europe are around 70% and 65%, respectively, and we expect these rates to gradually improve in the upcoming quarters.
In addition, our order book for laser measurement equipment remains strong in the fourth quarter.
As I mentioned earlier, we've recently signed two five-year contracts totaling $50 million to supply our broad portfolio of refractory and metallurgical wire products, which will start to accrue to revenue growth in 2021.
Finishing up the discussion with Energy Services, where we maintain an active pipeline of offshore services, while COVID-19 and adverse weather conditions have led to some early demobilizations or postponements from our larger offshore projects, some of these projects have been rescheduled to resume in the fourth quarter.
In addition, we've recently been awarded new large projects in the Gulf of Mexico, which we expect to commence over the next few quarters.
We're focused on navigating through a highly dynamic environment and our culture of continuous improvement positions us to do so.
Over the past six months, we've been successfully implementing virtual tools to help improve productivity, efficiency and connectivity with our employees and customers.
And I've been impressed with how quickly we've adapted to the changing environment.
These tools have enabled us to run our business smoothly as we connect seamlessly with our operating facilities for meetings and site visits, conduct problem solving Kaizen events and collaborate and communicate efficiently with our global customer base.
Many of these new ways that we're operating on, on a daily basis will become permanent and we'll balance them with in-person activities.
As we look ahead into 2021, I'm confident in the direction we're heading, the solid foundation we have in place to leverage improved market conditions and the growth projects we have in hand.
While COVID-related uncertainties still persist, our end market conditions continue to show signs of improvement.
With the operational actions we've taken, we are well-positioned to drive improved profitability.
In addition, strength and flexibility of our balance sheet provides solid resources to support both organic and inorganic growth opportunities.
With that, let's open the call to questions.

user
compname reports third quarter 2020 earnings of $0.83 per share, or $0.92 per share, excluding special items.
q3 earnings per share $0.92 excluding items.
q3 sales $388 million versus refinitiv ibes estimate of $386.1 million.
incurred special charges of $3.2 million after-tax in q3, or $0.09 per share.

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