Minerals Technologies Inc.

Good day, everyone, and welcome to the first quarter 2020 Minerals Technologies earnings call. Today's call is being recorded. At this time, I'd like to turn the call over to Matt Garth, Chief Financial Officer at Minerals Technologies. Please go ahead, Mr. Garth.

Thank you, David. Good morning, everyone, and welcome to our first quarter 2020 earnings conference call. Today's call will be led by Chief Executive Officer Doug Dietrich and myself, Chief Financial Officer Matt Garth. Following our prepared remarks, we will open it up to questions. I'd like to remind you that beginning on page 15 of our 2019 10-K, we list the various risk factors and conditions that may affect our future results and 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 for the introduction, Matt, and good morning, everyone. I'd like to first express my thanks and concern to everyone on the call. I know you're dealing with the recent challenges in your lives, and I appreciate you joining us today. As you can imagine, this call is being conducted a little differently than our regular earnings calls. Despite the current circumstances, we're doing everything possible to make this a standard call as each of our business unit leaders is on with us and able to answer your questions. This time, though, we'll be doing the call from our home, so bear with us as we go through the remarks and answer your questions at the end. While I'd normally begin by discussing our first quarter results, I'm going to start by outlining how COVID-19 is impacting our company and the actions we're taking across our operations. I'll then highlight our first quarter results. That will follow with more detail on our financial results and commentary on our capital structure and liquidity. I'll wrap up my prepared remarks with insight on the current end market dynamics, the state of our operations, and how we're positioned to manage through this environment. MTI is a global company with more than 150 locations in 35 countries, and we've been navigating through the realities of the COVID-19 outbreak since it was first reported in China in January. As we dealt with these issues in China, we developed plans to protect our employees manage our worldwide operations and support our customers, including heightened virus-related safety protocols, such as sanitary procedures and social distancing, arrangements for remote working, and contingencies for our global supply chains. Best practices that we developed early on in China helped inform the business continuity plans and safety and operating procedures that we've now implemented across the rest of the company. First and foremost, our focus has been and continues to be on the health and safety of our employees consistent with MTI's core values. We have teams in place at local, regional, and global levels to ensure the safety of our people and the continuity of our operations while monitoring the status of each location and recommending specific risk mitigation actions. I'm in daily contact with our business leaders to gather the most current information on how COVID-19 is affecting our people and operations so that we can take actions to help them manage through any potential issues. Right now, our operations have not been affected by COVID-19 related illnesses. Out of our employee base of approximately 3,600, we've had three confirmed cases. Each of these employees contracted the virus outside of the workplace and are doing well and have since recovered. Overall, Nearly all of our global production facilities continue to operate as our products have been deemed essential for the markets we serve. As we run our facilities, we've put in place standardized COVID-19 related protocols across all of our global operations. In addition, wherever possible, our employees are working remotely, adapting to maintain our business process continuity. Now let me give you more detail on which of our facilities were impacted during the quarter. and what we saw change toward the end of March. Out of 15 locations in China, our seven PCC plants remained fully operational with the exception of a short outage at one of them. The majority of the impact in China came in our metal casting business due to closures from foundry customers. In total, our one refractory and two metal casting facilities were down for about four weeks. In March, these facilities started to reopen and currently all of our locations in China are fully operational. Additionally, while our facilities generally have been exempted from government-related mandates, locations in a few countries were impacted by these circumstances. Specifically, our eight locations in India and three sites in South Africa were temporarily closed during the last few weeks of March and part of April due to the government directives. These sites are either now back in operation or will be coming online in the next week. A few other facilities, primarily paper PCC satellites, were temporarily idled in March due to customer-driven outages related to the virus and have since returned to production.

All told, the business disruption in China, as well as closures in other parts of the world, had a limited effect on our first quarter financial performance, with sales impacted by $7 million and operating income by $2 million.

With everything that we've had to overcome and adapt to in recent weeks and months, I'd like to recognize our employees for their efforts. Thanks to their unwavering focus and agility, our operations and business processes have not missed a beat. I credit our team for their engagement, their perseverance, and their people-centered focus, all key attributes that define our culture and our company. Let me now move on to our first quarter results. Overall, we had a solid quarter and our performance underscores the resiliency of our business through the diversification of our end markets and operations. It also reflects the benefit of the pricing and cost saving actions we implemented last year, as well as the ability of our team to execute well despite obstacles presented from the COVID-19 outbreak.

From a financial perspective, total sales in the quarter were $418 million,

and we generated $58 million of operating income. Our earnings per share of $1.13 was above our guidance range. We also delivered $30 million in operating cash flow. As we began the quarter, we expected similar market conditions to the fourth quarter with continued growth in many of our product lines, offset by slower conditions in others carrying over from 2019. And that's largely how things played out, apart from having to navigate through COVID-19 market issues in China. To touch on some of the growth highlights, we experienced continued favorable trends in several of our markets, specifically in the consumer-oriented ones. Our pet care business continued its strong sales momentum from last year through our robust private label portfolio in North America and Europe. In addition, this business saw increased demand related to COVID-19 consumer spending dynamics. As an example, our order books for our European pet care business doubled in March. and we ran at maximum capacity to meet this high level of demand. Our personal care business also experienced similar conditions with growth driven by strong consumer demand. Other pockets of strength came in our building materials business which was supported by higher activity in the construction market and energy services continued its positive trajectory by capitalizing on increased service demand in the Gulf of Mexico. We also delivered sequential margin improvement in each of our businesses. This performance demonstrates our continued focus on expanding margins through aggressive cost control, productivity improvements, and pricing actions, all of which we've been implementing over the last year. I'd also like to provide some context around areas of COVID-19 related weakening demand that happened toward the end of the quarter. Dynamics didn't have a noticeable impact on our first quarter results, but I thought it would be helpful to highlight a few of the trends because they will have a more pronounced effect on our results going forward. Areas where we saw slower sales late in the quarter came in product lines serving automotive, heavy truck, and steel markets in North America and Europe. In addition, we started to experience some delays associated with large projects in our environmental products business. All in all, the first quarter was a solid one. but given the rapidly changing dynamics at the end of the quarter, we are prepared to navigate through more challenging conditions going forward. I'll get into all of this in more detail when I take you through what we're seeing across all of our product lines and end markets at the end of our prepared remarks. But first let me have Matt give you all the details on our first quarter results, Matt.

Thanks Doug. I'll now review our first quarter results, the performance of our four segments, as well as our liquidity and debt highlights. Before moving to the results, I'd like to note that the current economic environment is evolving rapidly, and I will provide you with insight on the impact of COVID-19 on first quarter results. I will then turn the call back over to Doug for some additional perspectives on our current operating conditions and the market visibility we have going forward. So now let's review the first quarter results. As you can see on this slide, We are presenting the year-over-year comparisons of sales and operating income on the left-hand side and the sequential quarter comparisons on the right-hand side. Given the rapidly changing market conditions, we believe the sequential view adds an important perspective on our business performance in the first quarter. First quarter sales were $417.5 million, 5% lower than the prior year. The bridge on the top left of this slide shows the sales change by major driver. on favorable foreign exchange contributed $6 million of lower sales in the quarter or two percentage points. COVID-19 impacted sales by approximately $6.7 million, primarily due to weakness in China and later in the quarter in North America and Europe. The remainder was due to the softer market conditions and metal casting and refactories that persisted from the fourth quarter. I'll note that while sales in China declined in January and February, driven by COVID-19 related shutdowns, It's worth highlighting that overall sales in China grew 2% in the month of March versus the prior year. The year-over-year operating income bridge on the bottom left shows we were able to partially offset the impact of lower sales with favorable cost performance, primarily driven by the actions we have taken over the last year. In addition, our pricing actions continued, generating $3.7 million on a year-over-year basis in the quarter. We have completed our restructuring program from 2019, and we are realizing the savings in our cost performance. Moving to the right side of the slide, sales were lowered by 5% on a sequential basis. The first quarter had four fewer days versus the fourth quarter of 2019. And you can see in the bridge on the top right that this contributed to nearly $19 million of the sequential change. Again, you can see the impact of COVID-19 sequentially and this was partially offset by continued growth in HPC as well as strength in specialty PCC, processed minerals and energy services. Operating income increased 10% sequentially as we benefited from slightly higher volumes as well as continued pricing actions and a favorable mix. Our overall cost performance was favorable due to ongoing cost control efforts and favorable input costs. Adjusting for the number of days in the period, operating income was up 15% including the negative impact we absorbed from COVID-19 shutdowns. Operating margin of 14% in the quarter was relatively flat versus the prior year and up 200 basis points sequentially. Now let's look at our quarterly EPS trend. First quarter earnings per share excluding special items were $1.13, 2% higher than the prior year. and 19% higher sequentially. Despite the COVID-19 impacts, our segments performed better than expected and this performance drove the improved earnings sequentially. In addition, our EPS benefited from favorable foreign exchange gains. Our effective tax rate was 20% in the first quarter versus 18.9% in the prior year and 17.6% in the fourth quarter of 2019. Let's now review the segments in more detail starting with performance materials. Performance material sales were 7% lower than the prior year, primarily driven by metal casting, including the impact of COVID-19. This was partially offset by strength in building materials. Sequentially, sales were 8% lower and only 3% on a same day basis. This was primarily due to the shutdowns in January and February in China. In North America, Metal casting market conditions remained similar to the fourth quarter. HPC demand remained stable throughout the quarter as we saw strong ordering for consumer-oriented products like pet care, fabric care, personal care, and edible oil purification. Operating income for the segment was $24.1 million and represented 12.9% of sales. Operating margin increased 140 basis points sequentially primarily driven by continued pricing and cost control measures. COVID-19 impacted sales in this segment by $5.7 million in the quarter, or three percentage points, primarily in metal casting, driven by foundry closures in China, as well as a slowdown in North America late in the quarter. The slowdown in North America occurred as automotive manufacturers began announcing downtime in response to weaker demand, and this continued into April. Building Materials and Environmental Products, both project-based businesses, started to experience delays in projects related to COVID-19 later in the quarter in North America and Europe. However, our consumer-oriented products have continued to perform well. Now let's move to specialty minerals. Sales for this segment were 5% lower than the prior year, primarily due to the previously announced customer paper machine shutdowns in North America in 2019. April PCC sales in Asia grew 4%, driven by 8% growth in China, as well as continued growth from our Indonesia expansion, which came online last year. On a sequential basis, sales were 3% lower and increased 1% on the same day's basis. The growth was driven by 14% higher specialty PCC sales and 10% higher processed mineral sales on the same day's basis. Segment operating income increased 5% to $20.3 million and represented 14.8% of sales. The increase was due to higher volumes of SPCC and processed minerals, continued higher pricing, and strong cost control. COVID-19 had a limited financial impact on this segment in the first quarter. However, we did experience COVID-19 related shutdowns and paper mills late in the first quarter in Europe, South Africa, and India. These shutdowns continued through most of April. SPCC and process mineral sales were also impacted late in the quarter due to a slowdown in residential construction and transportation end markets in both North America and Europe. And meanwhile, the 250,000 tons of new PCC capacity we're bringing online this year in Asia and Europe remain on track.

Now let's turn to the refactoring segment.

The factory segment sales decreased 7% versus the prior year due to lower demand from steel mills in the United States, lower laser equipment sales, and the impact of foreign exchange. This was offset by higher sales of metallurgical products. Sequentially, sales were 6% lower, or 2% on the same day's basis. Sales were better than we had expected due to the delayed maintenance shutdowns at some customer facilities, primarily in the United States. We expected to see furnace relines that did not occur in the quarter, and this led to higher demand for refractory products. Segment operating income increased 8% sequentially to $11.2 million and represented 16.2% of sales. The impact of COVID-19 was limited for this segment in the first quarter. Two laser equipment sales were moved out from the first quarter in China, but the lay-laters were offset by some steel customers who pulled forward orders to build inventory in Europe and North America. Now let's turn to Energy Services. Energy Services had another solid quarter. Segment sales rose 24% versus the prior year and 7% sequentially. The increased sales were driven by higher well testing activity in the Gulf of Mexico and increased international sales. Operating income increased 28% sequentially to $3.2 million and represented 12.7% of sales. The impact of COVID-19 was not material in this segment in the first quarter, although we did experience some delays in projects in Malaysia and the United Kingdom, and one of our customers chose to demobilize an offshore platform in the Gulf of Mexico earlier than scheduled. With that review of the segments, let's now turn to our cash flow and liquidity. As Doug mentioned, we generated $30 million of cash from operations in the first quarter and $14 million of free cash flow. This was up slightly from last year. We repurchased $23 million of shares in the first quarter, bringing the total to $43 million under our current program. Our net leverage ratio stands at 2.2 times EBITDA. In times like these, we are taking a close look at our liquidity, cash flow, and debt obligations. I can tell you from the multiple scenarios we have been analyzing that the company is in a strong financial position. I'd like to highlight a few key messages around this. First, the company has $418 million of liquidity, including $218 million of cash. As you know from our discussions around markets and products, we have a geographically and industrially diverse set of businesses, and this diversity provides balance for consistent cash flow generation. In addition, we have many levers to maintain cash flow through an economic downturn. Second, we have a broad and diverse accounts receivable profile without significant customer concentration. We monitor changes in customer credit risk on a daily basis, and we will continue to do so as the economic impact of COVID-19 continues to evolve. And last, we have manageable near-term debt maturities. Our liquidity position combined with our ability to continue to generate cash gives us confidence with respect to meeting our upcoming obligations. We continue to maintain a balanced approach for the use of our free cash flow. At this point in time, we are prioritizing debt reduction and capital for our facilities. We are looking at our capital spend closely to minimize expenditures this year. While we do not have an immediate need to refinance our debt structure, We are looking at ways to take advantage of favorable interest rates given our strong credit position. All in all, we are well positioned to navigate what lies ahead. Now let me turn it back over to Doug to discuss our current end market conditions. Doug?

Thanks, Matt. I wanted to take some time before moving to questions to provide an update on the current state of our operations, our end market conditions, and what we can see from where we sit today. As you can imagine, With the COVID-19 pandemic constantly evolving and the duration and broad-based impact hard to predict, our forward visibility is limited at best, and the information we do have is changing regularly. For reference, customers have told us they would be taking outages for three weeks, only to come back online in a week, or it's gone in the other direction. And we prepared to adjust to government directives for plant reopenings, and that could alter our current operating conditions and plans. With that overview, I felt the best way to organize this discussion would be by taking you through each of our four segments. I'll start with the performance materials, which is our largest and most diverse segment, with a presence in a broad range of end markets, including consumer, transportation, environmental, construction, and agriculture. Our household and personal care product line, which serves consumer-oriented markets, has continued to run at strong demand levels, with similar growth rates to what we've been delivering in recent quarters. As you know, this is a business that serves markets with stable long-term growth potential, and we've invested in building unique capabilities, resources, and value-added products to serve our customers. Our order books continue to be full in North America and Europe for many of our products, including pet care, fabric care, personal care, and edible oil purification, extending the momentum from the first quarter. While some of the sharp uptick in demand we saw in March has tempered slightly, demand levels through April remained very strong. As I mentioned earlier in my remarks, we're seeing the most pronounced impact from COVID-19 conditions in our metal casting business. Production curtailments in the automotive and heavy truck sectors in North America, which began at the end of March, became more noticeable in April as our foundry customers started to take down time and reduced shifts to adjust to the lower demand. For context, in April, our metal casting facilities in North America operated at about 60% of normal demand levels. Based on the latest indications from our founder customers, we expect these rates to improve to 80% to 90% in June. However, it's still a bit uncertain as to how this trajectory might unfold. In China, metal casting volumes were strong in March and grew 4% over last year, driven by our tailored Greensend bond products. and we expect this trend to continue through the quarter. After a strong first quarter in our building materials business, the timing of ongoing shipments for our active projects is moving around. At this point, it's difficult to predict how much of our active order book will be completed in the second or move to the third quarter. Our pipeline of future projects is robust But we do see the potential for some delays relating to softening construction market conditions in North America and Europe. And in environmental products, we continue to advance our high-value portfolio of specialized technologies, which has enabled us to secure more complex remediation projects. Some of this momentum has been impacted by more challenging conditions, as several large projects were pushed out of April, likely into the back half of the year. Now let me turn to our specialty minerals segment. This segment's revenue is driven by paper and packaging, as well as construction, automotive, and food and pharmaceutical end markets. I'll start with paper PCC and our operations in Asia. As I mentioned earlier, all of our facilities in China continue to operate and are running at near normal production levels. Our six PCC facilities in India that were closed in March due to government mandates are currently back in operation or they plan to be within the next week. Our facilities elsewhere in Asia have been operating at normal levels. In total, we expect our volumes in Asia for the second quarter to be similar to the first quarter. Regarding North America and Europe, the second quarter is typically when paper producers in these regions take seasonal maintenance outages and we're seeing some facilities extend these outages for several additional weeks. As a result, our second quarter volumes in North America and Europe could be around 10% lower than the first. Again, this outlook may move around as we've already experienced facilities come back online sooner or take further outages. The construction of our new satellites and expansions, totaling 250,000 tons of capacity, continue to move forward. One of these satellites in India is now complete, and the remainder are on track to come online this year. From a business development standpoint, our pipeline of new filler and packaging opportunities, as well as for our latest technologies, is intact, and our discussions with customers continue to advance. In our specialty PCC business, sales for our pharmaceutical and food and beverage products have been strong. but our products that go into automotive sealants have been impacted by lower build rates in North America and Europe. Sales in our process minerals product lines, which serves primarily construction and automotive markets, have seen a mixed impact so far. There have been areas of strength and weakness in both our ground calcium carbonate and talc product lines. Now let me move on to the refractory segment. Following a stronger than expected first quarter, we are now experiencing customer production curtailments. North America's steel capacity utilization rates have declined from 77% in the first quarter to 56% currently, with European utilization rates at similar levels. Refractory sales typically follow these utilization rates. However, in times like these, furnaces that are running usually run longer and harder and consume more refractory material, so these rates are not a direct correlation on our sales. While we continue to have a strong full-year order book for our ferrotron lasers, some of these are likely to be delayed from the second quarter into the back half of the year. I'll now finish the segment review with energy services. While the energy market has gone through significant volatility recently, our service order book for offshore projects remains largely intact. We are seeing some impact from COVID-19, resulting in early demobilization for virus-related issues, as well as projects being shifted out of the second quarter. I'll remind everyone that this business operates solely offshore, so the price of oil takes longer to change the demand level for our services there. Energy services is a small piece of our portfolio and profitability, and therefore we expect these dynamics to have a limited impact on our financials. As I just described for you, we're dealing with several evolving market dynamics, which

which have many puts and takes.

All of this contributes to a lack of clear visibility going forward, but I wanted to provide you with as much detail as I can at this point. The latest information I can give you is that these operating conditions in April have led to a sales trend that is approximately 10% lower than what we experienced during the first quarter. Looking at the remainder of the quarter, there are aspects of our outlook where we where we expect to see some improvement to this current sales rate, but also other areas where there is more uncertainty given how fluid the environment has been. We are working through the evolving challenges of today while also keeping our focus on our values, our longer term goals and strategies, which includes taking measures to strengthen our foundation and the long term health of our company. The underlying fundamentals of our business are intact and we remain committed to our long-term growth strategy. Our business model, along with our cash generation, is resilient, supported by diversity in geographies, customers and markets. We are confident that our team's experience and agility, disciplined execution, cost management focus and strong balance sheet position us to navigate through this period of uncertainty. Our team has effectively managed challenging times in the past and we will make the necessary adjustments to align our business to market conditions as they evolve. With that, let's turn the call over to questions.

Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. Using a speaker phone, please be sure your mute function is turned off. Allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We'll take our first question from Daniel Moore with CJS Securities.

Doug, Matt, good morning. Thanks for taking the questions. Hopefully you can hear me, and hopefully you're all well and safe at home.

Thanks, Dan. We can hear you.

To start with PCC, I'd note down 10% sequentially. Thank you for the color. We see that likely continuing through the majority of Q2. Do you see at this stage any shifts or changes in paper usage in North America or Europe as a result of COVID potentially leading to more capacity closures later in the year?

Let me start that off. The 10% was for North America and Europe. and that's largely where we're seeing a number of the kind of extended curtailments or extended outages for maintenance reasons. Some of those typically I think we see two weeks in Europe at this time of the year and in North America and some of those outages have been extended to four. A couple have been longer, a couple might be shorter. We expect that 10% to be kind of that rate throughout the quarter in those two regions. Offsetting that, our demand in Asia has remained largely intact. We're running at pretty much close to normal demand levels throughout our Asia businesses, China, and now that India is back up, we expect them to run at that level as well. Regarding kind of demand trends, yeah, we've absolutely seen some, we'll see some demand trends. You know, DJ has been really close to kind of the customers and his team. So why don't I let DJ give you a little bit of color on what we're seeing in both North America and Europe dimensions.

DJ, are you there? Yeah, I am, Doug. Thanks. And thanks for the question, Dan. Look, Dan, as far as the flavor I can give you regarding what we're seeing in this quarter is probably the best I can do. And we'll talk a little bit about what we see going on to the next. The outages that we're seeing and what Doug was referring to were taken by some industry leaders with some pretty big machines. So in Europe, Navigator has been public on taking several of their machines out. One of those is associated with our product. In North America, it was Domtar, PCA, Jackson. So they took out some pretty big outages, which I think sent us the proper signal to the rest of the market. that they're making the adjustment for them in this quarter. Also helping North America in terms of the long term stability of the market is and we have been affirming international papers plans to shut down the machine in Selma, Alabama at the Riverdale complex. So those tons had already been planned to come out and convert to a packaging operation. So that Doug's projection of this quarter is we think going to hold for the quarter. It's hard to say how that third quarter looks, you know, until we really start seeing how habits or practices have changed. I know that the industry is affected by school consumption, office consumption, and in-mail advertising, which all, you know, that consumption is all down. So it's a matter of how quick that consumption will come back. Hopefully that provides you the call.

It certainly does.

The only thing I'll add is, yeah, I think with demand levels, what we look at is operating rates. And so right now I think operating rates are in the 90s. They've moved down to the 85. We'll have to take a look at where they are through the quarter and how they rebound or not in the third quarter. I think as they get lower in the 80s, you do have the potential for a closure, but I think we always have that, and so we'll continue to watch it. Right now, like I said, we can see kind of our estimate through the second. We'll give you more color after that for the third.

Perfect. One of the certain bright spots, continuing bright spots, is household and personal. Saw a nice uptake in March, certainly. Any guesstimate, gut feeling as to how much of that is sort of stocking up and one time in nature versus a maybe more sustainable uptick?

Yeah, we certainly saw a real sharp uptick in March, kind of the beginning of March. And we think some of that was probably pulling forward largely in our pet care business. I think fabric care has been a little bit steadier. So some of that pet care was probably pulling forward, and we've noticed that those, you know, I mentioned our order books in March in Europe kind of doubled. The pool was tremendous, and we ran flat out, and we still are filling those books, filling those orders. You know, some of that has come off a bit, so that indicates that that's been buying forward, but I have to tell you, through April, we've continued to run at very strong levels. You know, certainly at that kind of rates we were delivering plus, from last year. So we'll see. But through April, we see going through the quarter, both North America and Europe touch our business remaining at very strong levels.

Helpful. And just shifting gears, environmental products and building materials kind of separately. Maybe just talk about the conversations with customers, projects being delayed, any talks of cancellations at this point? Do you feel pretty confident that It's more likely just being pushed out to the right.

It's a little hard to see right now. What I will do is, you know, John, why don't you give a little color on the projects and kind of, you know, some of the movement around in this quarter and then where we see things probably pushing up till later in the year. Okay.

Thanks, Doug and Dan. Appreciate the question. both environmental and building, as you know, are affected because they are a project based business. And what we're seeing is that our pipelines are remaining intact. You know, the number of projects that we have in the pipelines and the number of projects that we intend to complete in a quarter are fairly consistent. But what we're dealing with is, you know, especially as we got into the latter part of Q1 and now into Q2, We do see some worksite shutdowns. We've got some delays of some project starts, and we're also starting to see some projects being put into question as far as timing from a funding perspective. All of that, basically for both segments, what that means is that what we're seeing are delays. and it's really like Doug said it's hard to really predict right now because what we see is these projects get delayed but then all of a sudden they start up or the orders come in and they want them delivered relatively quickly so it's pretty volatile. We do see you know going forward in the quarter most likely some of those delays and shifting into the latter part of the year the second half of the year but again we're watching this closely and we're nimble enough that we can supply as needed. So probably some delays that'll impact Q2 but the pipeline stays intact.

Very helpful. Lastly for me, you took some pretty significant cost reduction actions last year given the onset of COVID. Any additional restructuring or cost mitigation initiatives that you're considering and in any areas of the business that you would, you know, that you're sort of monitoring that could warrant more permanent cost reductions. Thank you for the color and certainly I should have said it, but nice job managing through the Q1 in a tough environment.

Thanks, Dan. Sure, you know us, we will be prudent with managing discretionary expenses pulling the levers that we need in terms of working capital, capital expenditures, being prudent where we spend our money. We'll do all of those things. I do want to say that I want to make sure, look, we've got a fantastic team in this company, tremendous employee base, engaged, seasoned, and I really want to make sure that I look through short-term issues to make sure that the long-term health of this company is safe. So I do think there might be some areas, Dan, that we'll have to make some adjustments based on structural changes that are long-term.

We'll be prepared with that.

But I want to also make sure that this company comes through this with our team ready to take on challenges for growth that will resume once we're through it. So we'll make the right decisions and we'll make sure we balance short-term with long-term here.

Very good. That's it for me. Appreciate the call.

and next we'll go to Silk Gyuk with JP Morgan.

Good morning. How are you? Hi, Silk. Hi. I have a couple of questions if I may. Is the 6.7 million headwind to sales from the COVID outages, is that a net number? Does that include the outages and is that like net of the pre-buying and and many more. Thank you.

you would have seen higher sales being generated across the other product lines that we spoke about. In particular, as we talked in refractories where we did have some type of COVID impact from lasers being moved out, you did see have an offset in that the some refractories were pulled forward, but the net downs would have been in that $6.7 million. And again, I don't know that we dimensioned it, but let me give you a little more color about The majority of that impact, that 6.7, is coming from the China shutdowns that occurred impacting the metal casting business. The rest of it is what we saw from the shutdowns that started to take place at the end of the quarter in North America.

That's helpful. And if you had to guess, like if you look at your – If you look at your household care products, do you think the results would have been positive excluding of pre-buying? It's hard for us to tell. I don't know if you can tell, but I was just wondering if you can quantify the benefit. And I was also wondering how long your lead times are, specifically for items that you sell online. and many more. and the consumer companies that we service. It takes us a while to see what will happen on the reorder side and we can't quite tell yet what will happen in May. So I was wondering whether you have a view. You might not have, but I'm just curious.

Well, Silke, let me try that one first. I guess what I'm not going to do is guess. So what we... Let me give you a perspective. In the past several quarters, our business has been the pet care business has been growing at about 3% to 4%, I think it is. I think some quarters have been 2%, but it's been in that kind of steady 2% to 4% growth rate, and I think this quarter we saw 6%. So I think we did see, I think there's that underlying trend of growth that's still there in that business, and it's been over the past several quarters in pet care. So I think you're seeing that continue. and that's just fundamentals of cat ownership and people using and moving to clumping cat litter and switching to premium products like we have in Europe. So that's that baseline. I do think there's been some pre-buying and I think that absolutely in March that helped probably a couple of percent maybe that increase. But then I have to say when we look at our order books into April, you know, they've probably come off of that, you know, the doubling of order books. I can't say they're staying doubled right now in Europe but as we move through that backlog of orders that could, like you said, in May, shift things a little bit further down May and June. Right now through April, we're still running at very strong levels. I would suppose that we probably won't maintain that 6% rate throughout the quarter, and some of that might back off to more of our normalized rates of 4%. So we'll see that probably later in the quarter. I can't see it right now, to be honest with you. Our lead times are pretty instantaneous. We're able to except for in March now in Europe, we're able to take in an order and turn it relatively quickly. We have stock on hand of most of our raw materials that we're able to get it out as fast as we can get trucks. So lead times and turnaround are pretty quick, a little bit longer in March, but those will be coming in and we'll have a better feel for May and June as we get through this month. So hopefully that gave you some color. I guess I can't tell you what those order books are going to be, but I would expect them to come in a little bit. given the pre-ordering that we saw in March and the strong sales in April. But back to our normal trend rate of probably 4%.

That's very helpful. Thank you for the detail. And if I can ask the last set of questions on cash flow and bed debt expense, I was wondering whether you took any additional bed debt reserves in the quarter and whether you can quantify it. and I was also wondering whether you have a revised CapEx target or free cash flow target for the year. Thank you.

Sure. Thanks, Silke. Go ahead.

Yep.

So, Silke, let's address what's taking place on the receivable side. I think during my prepared remarks, you heard me outline the fact that we have a daily program in place. That extends obviously throughout all circumstances. right now it's very important to monitor what's taking place from a receipts perspective and by the way on a payments perspective across the company and so in that process we're tracking customer conversations and customer payments on a daily basis and we have yet to see really any type of change in our delinquency pattern we continue to maintain a very good Payment Practice and again, not yet seeing any type of deficiencies or delinquencies in the payments. The cash flow for the company, like we said, remains in that position of generating slightly higher than what we did in the first quarter of last year. If we were to look out through the second quarter, what we would tell you is that it's probably good to think that we could repeat the free cash flow performance that we had Thank you very much. and so on, relative to what was taking place on the top line. And so the company can and will continue to generate good levels of free cash flow. From a CapEx perspective, I think you heard me say it as well in the prior remarks, we are pruning that back a bit. I think we came into the year telling you that, again, it would be about that $70 to $80 million level of spend split fairly evenly between the sustaining projects and growth projects. Right now, we're looking more in the $55 to $60 million range, pulling down some of the spend and prioritizing, again, investment in the facilities, maintaining the sustaining capex there, the necessary EHF spend, while also continuing to pursue, as Doug said, the growth capability of the company.

Thanks for that. I'll get back into the queue.

And next we'll go to Rose Marbelli with G Research.

Thank you. Good morning, everyone. Hi, Rose. Doug, I was wondering if you or maybe DJ could touch about on the paper side whether you are in this environment if customers are taking advantage of the slowdown and increasing the number of trials regarding, you know, using full-fill packaging products, your, you know, reuse of fibers in the waste systems and so on, or has everybody, everything kind of shut down in that particular end?

No, we haven't seen that shut down. But let me, DJ, you want to take that one and give a kind of purview or some color on the activity that you're seeing right now?

Glad to. So, Rosemary, we had a terrific first quarter in this regard. Really happy to see the progress on the pipeline. You know, I always speak to that pipeline in about 12 very active activities. You know, at any one time, there may be 15 to 20 different conversations. But if we look at those activities, this first quarter saw us running pretty significant full-scale commercial trials of new yield at two locations. One of those is a packaging manufacturer, one of those a print writing manufacturer, and they were good trials, so we're trying to figure out when the next time is we can demonstrate the value. We have advanced significantly conversations with a major European paper maker regarding Envirofil, now that they've seen the success of our of our first Envirofil launch that happened last year in Germany. And then we also have quite a bit of interest and pull from our standard PCC products, printing and writing grades, and those are primarily in Asia. So a great pull, terrific first quarter, lots of trial activity. I would say that the customer interest is not diminished at all in this process. We're a little bit challenged right now with actually having people or experts travel to a given location to properly run those trials. So I would say that this, you know, we've got a little bit of a, I'll call it a hiccup, that is slowing down what started off to be a blazing rate in the first quarter regarding progress with that pipeline. But now we're just trying to reassess when we can, you know, run these extended trials and close out some commercial agreements, but that's in the confines of travel restrictions and less about the broader commercial activity. Hope that helps.

Yes, it does. So this is not something that you can do virtually.

Certainly not the full-scale commercial trials. It's a matter of equipment and we've got some world-class experts that can work with the paper makers to show maximum value on that paper machine. The other, the standard PCC opportunities, we are able to make some progress virtually. And so I'm optimistic that we can still have a couple of new PCC contracts signed in the coming months, but so we're able on this traditional product we are but on these new highly advanced products it takes some regional expertise or global experts rather going into these regions to demonstrate the value fully.

All right thank you and then I'm sorry go ahead.

No sorry Rosemary I was just going to add I think that kind of our product development or our new business development You know, as you know, most of these products are cost savings opportunities for our customers and they're displacing something that's currently existing. So you saw that in March as China kind of reopened in March, we saw a 4% volume growth in our metal casting business. And that was largely driven by the green bond products that, you know, that blended engineered product that kind of helps with quality and productivity and cost savings. And so You know, filler for PCC filler, a new yield products, all of these have that same aspect. They're displacing something that's currently being used and they save money. And so we think that the pool for our products, yes, there might be some challenges in terms of travel temporarily, but we think the pool for our products, both in strong demand times and weaker economic conditions, is solid and intact. So I thought I'd add that.

Thank you. And then brings me to metal casting. The growth that you are seeing, is it mostly substitution and obviously re-opened factories? Or is it linked to actually an increase in the number of trucks and autos being manufactured in China? Let's call it for the domestic market at the moment as opposed to exports.

Yeah, I'll start and then maybe John, you can give some color, right? You know, it's both. I would tell you that, you know, in current demand environments, it's probably more substitution. So our penetration of our metal casting products in Asia, China, India, right now, given the growth environment is more substitution. And that's that demonstration of that cost savings value proposition and higher quality foundry operation that we can offer. In the past, back in, I guess, normal growth percentages in China and India, it was both. We were expanding our products through new foundries, deeper into the foundry, and then converting from other products. I don't know, John, maybe I just stole that, but you want to add anything to that?

No, you're absolutely right, Doug, and hi, Rosemary. Just a couple things to add to that. Yes, we continue to see the substitution and that's really what's helping us fairly significantly here in March and April as that market rebounds. I will say that the team has stayed very agile from a production perspective, cost perspective. They're very innovative and it's times like these where we're demonstrating our value to the foundries. and they're looking to take costs out where they can and stay very productive. So our value has been recognized and certainly by the customers that we have and some new customers as we continue to expand. You did mention for China, for example, a lot of domestic consumption. We see the rebound primarily in domestic consumption. We're watching the exports because those exports do go to both Europe and North America, especially for auto. but so far what we've seen is a very robust rebound from a very dramatic decline that happened in the February timeframe. But like I said, the value proposition, the innovation, the interaction that we have with the customers, even working remotely, we've done a really good job. That team's done a great job in maintaining those customer relationships and it gives us the opportunities to grow where we can.

Thank you, very helpful. And then lastly, if I may, on the M&E front, I mean, I do realize that now the name of the game is cash conservation, but are you seeing additional properties potentially coming into the market given the current environment and potentially issues with those properties that you were hoping would come up for sale and at a lower price?

No, I can't say that we've, you know, our focus has been obviously over the past quarter and managing through this. And as you mentioned, you know, ensuring the continued operations, safe operations and, you know, focusing on our cash flows. That said, I think, you know, I think the expectations of buyers and sellers widened out quite a bit right now, given where we are until things become a lot clearer. I'll also say that, you know, right now until we see a little bit more certainty out there that, you know, we're not looking to do anything major. But we do have, you know, and we've always said we've had a nice kind of portfolio of things that we think fit very well in the company. That said, there are some small things out there that we've been looking at and continue to work through. There can be small things with cash on hand in the region that can be accretive very quickly to both earnings and cash. And those things are still opportunities for us even in these periods. But I won't say that we're going to go too far right now until we see a lot greater visibility to how this economy, how things are playing out. There are opportunities, Rosemary, but we'll probably keep things small, very accretive, quickly if we did anything.

Does that help? Yes, it does. Thank you.

Great. Our next question. Next, we'll go to David Silver with CL King. Mr. Silver, your line's open. Go ahead.

David, you might be on mute.

Yeah, hi. So I'm just going to let you know my phone connection is very poor, unfortunately, and my computer, the webcast, is better, and I'm switching between one and the other, but there might be a delay just as I listen to your answers on a delayed basis. So thank you. But I had a few questions. The first thing I was hoping you could comment on or add some color to was pricing power. So I think in Doug's prepared remarks, you cited selected areas where there is pricing power. And I was wondering if you could highlight them and in particular, if you could maybe characterize whether it's the classic demand outstripping supply or whether it's due to something, maybe a disruption at an alternate supplier or you mentioned some pre-buying. So the pockets of pricing power, if you could maybe point those out, please. Thank you.

Sure, David. I guess there's two pieces to the pricing mechanisms in the company, mechanism and part of the company, and those are contractual pricing. We have longer-term obligations in parts of the business and contractual pricing obligations in paper PCC, for example. We price on different input costs based on volumes, et cetera. And so as you saw over the past couple of years, in an inflationary period, As we take on higher costs of raw materials, we pass those through in higher pricing to our customers. There's usually a delay in that. It could be sometimes three to six months. But anyway, that gets passed through in a delay. And the same thing happens on the other side. As input costs start to decline, we delay on the way back down. But those are formulaic. Those are the way we run those contracts. So a significant portion of that company is based on those contractual obligations. Refractories also has a longer term kind of six month type pricing mechanisms that we negotiate. The majority of the company is based, our pricing is based on value, delivered value. So we look at the value we provide, we look at the cost savings or enhancements that we provide, those products provide, and we work to, you know, obviously be valuable to that customer at that price. And I think your question may be, do we continue to have pricing power going into this type of environment? I think many cases our products do. In most cases, we still provide that cost savings opportunity. Will there be pressure?

Do we expect there to be pressure? Yes.

I think as companies, our customers continue to navigate through this, they're going to be asking for us in price. And so we will work with that. We're used to that. We're used to demonstrating the value. There are some segments, you know, that like in the consumer oriented businesses where that price is well established and well established by some other largers in the market. And so we're a price taker there. But where we're number one positions, we usually set the price and we usually set it based on that value. So I think we do have a lot of pricing power. I'm sure it'll be challenged. as we get into going forward, but we're well prepared to deal with it. I hope that helps. I don't want to go product by product, but I wanted to give you a kind of a feel in general.

Okay. No, thank you for that. My next question would be about the broader PCC capacity transition, I guess, that's ongoing. It seems like To date, the closures in, let's say, North America and Europe are moving a little quicker than the new capacity is coming up in Asia. I looked at my list, but I was wondering, I think the century plant in India and the large Chinese project are due for completion at some point in 2020. and then there's, I guess, the specialty, the packaging-oriented 50,000-ton project in Europe, I believe. Could you just give us an update on your best thinking about the timing of those and your expectations for a normal ramp-up, a slower ramp-up? Just characterize that capacity development, please.

Sure. Right now, that Century paper satellite is scheduled to come up in Q3. I think it's probably a few months. I think we're thinking the end of Q2. I think right now, given where we were in India through the first quarter and into April, it'll probably be Q3. Our satellite, that large satellite, about 165,000 ton satellite in China, our new one, is going to be coming up toward the end of this year. I think it was, we were looking at that being kind of end of third quarter. It's delayed probably about a month, and so that'll be coming up in the beginning of the fourth, middle of the fourth quarter, hopefully. And so those are, a slight delay on that one. We have another satellite in India, and we also have an expansion kind of opportunity in Europe that we've signed a contract in packaging. and those are also on track to come up this year. So all four of them should be on track or are on track for this year, David, and I think that's about 250,000 to 260,000 tons of new capacity coming online. So not too much of a delay, not too much of a delay.

Okay, great. And then one more question on share buybacks. I think in one of the slides there was a 23 million dollar number for the buyback activity this quarter and according to my records I mean that's the biggest dollar amount devoted to buybacks in a very long time for your company and I'd also say you know anecdotally I have that that's really counter the trend that most of my other companies So I was wondering if you could maybe talk about that, whether those purchases are all within the repurchase authorizations or maybe they're outside the authorizations as some equity holders sell down to pay taxes or other kind of more specialized situations. So just some thoughts around the elevated level of buyback activity this quarter would be great. Thank you.

Sure, not too much been elevated. Let me just refresh where we are. We're under a $75 million buyback authorization that began late October of 2019, so a one-year program. We purchased $20 million in the fourth quarter, $23 million in the first quarter, so we're $43 million through a $75 million program. You know, given the changes that we saw coming at us with both the economy, COVID related issues, you know, we're taking a pause on that right now. And making sure that we have good handle on, as Matt mentioned, those cash flows and making sure that we're prioritizing that cash toward the maintenance of our facilities and safety of our facilities, as well as to debt reduction should we see that so we can manage our maturities a year plus from now. That said, we have time left on that authorization if needed, and we think that we'll see how things go and can complete that authorization if the cash flows and things change in a positive fashion toward us through the end of the year. We have ample time to do that. So I don't know if it's outsized yet, David, I think pretty much at pace with that $75 million authorization last year, but right now we're, like we said, we're going to be prioritizing on our CapEx internally and making sure our debt maturities are in good order.

Great. Thank you very much.

Thank you, David. And next we'll go to Edward Marshall with Sudodian Company.

Hey, Doug, Matt, rest of the team. Hope this all finds you and your family as well. Good to help. Thank you.

I've sat on various industrial calls this earnings season.

Definitely a difference in the pace between, say, Asia and North America, Europe in April timeframe. And I guess my question is, when you kind of start to restart, when you restarted your Asia facilities and What did you learn? How do you apply that to the rest of the world as you kind of pass through the difficult or the toughest part of the curve now? And maybe also including that speak to the tempo of the orders recovery you're seeing between, say, maybe China, Asia versus kind of Europe, North America right now. Thanks.

To your question, we learned quite a bit in Asia and China in particular, specifically. As we went through this, and I think we mentioned on our call in February, we saw this beginning in January. And I have to tell you, our team there in China, the leadership and the group employees there reacted very quickly. And they put in worked with them and they put in practices to make sure that we were protecting employees. As we moved people from home offices, we worked with them to put in remote operations, remote working capabilities, safety protocols that were put in, the plants that remained operating were developed in China. The reopening of those facilities was very rigorous in terms of what had to be put in place, both Chinese regulations. And so we had to pass checklists and tests put in place from the local and the region governments before we could reopen those facilities. We put in supply chain monitoring. So we had all of our raw materials and inputs, inventory levels, what's on the road, status of our suppliers, all put in place and monitored on a daily basis. And those reports were coming in. We put in a number of tools that we literally just poured it out and moved through Europe and into North America that really guided how, again, some adaptations and enhancements, actually, but we really guided how we wanted to operate and the protocols we were going to use, the standard protocols that we wanted to use if we were going to remain open in our facilities.

This is how we were going to operate, and those are in place today and affirmed on a daily basis.

also the capabilities were put in place for remote operations in China we worked through making those putting those in place around the world and what we're operating under today we'll probably be using those same protocols of course anything's more specific and government mandated will follow but we'll be using those those pretty strict protocols as we as we and when we and that's unsure right now when we go back to more normal operations in Europe and North America. I don't see that right now, but we will use those same standards and that we used in China and that we're going to be rolling out throughout the world before we make sure that our employees are safe and going back. We've, you know, staying in touch with customers, the protocols, how we did that. We had to do that virtually. Again, we did that in China, stayed very close. were able to actually enhance some of our products and demand with those customers because of that closeness throughout the downturn in China. And we're doing the same thing in Europe and North America. So right now I don't see, all of our facilities are operational. We're not moving back from remote working yet. We will have procedures put in place for when we do so and how we wanna operate once that becomes clear. but anyway I hope that gives you some idea of how we've kind of evolved it and moved it but it was really pioneered by our folks in China and we moved it around the world.

Very thorough. Thank you. The few quarters now you've been talking about metal casting and the slowdown that you're incorporating there. I just want to get some context around I guess in one of the slides you talked about getting back to 90% in June and I just want to get the sense are you referring to kind of Back to pre-crisis normal levels, or are you referring to prior expectations? How do I frame that 90%? Sure.

I would say probably pre-crisis levels.

Again, there was an underlying demand in kind of North America metalcasting and China metalcasting that we came into kind of the year with, and we felt that the first half of this year, well, how far January looks from it right now, but As we came into the year, we felt that the first half of this year from a demand standpoint was going to look kind of like the second half of last year. And so I guess that's the demand profile that we had kind of forecasted being in this year. And we ran largely at those levels through the first quarter in metal casting until obviously in China in January and then late in the quarter in North America and Europe. But we expected to get right now. Again, this is it's quite uncertain. But right now, the indications are that given the ramp up or startup of automotive in Europe and then in North America and that profile of demand, we're starting to see that pool remains to be seen if it stays stable and what it goes back to. Fair enough, fair enough.

The last one for me, I'm surprised a little bit by the energy and the order book, the statement the order book's intact. And I went back to 15 and 16 and looked at the slowdown that might have occurred there, especially in 16. And I'm curious as to kind of maybe what might have changed in that business as, you know, we're kind of going through a similar period, maybe even a little sharper of a decline now, and how the order book's remaining intact. Thanks.

Yeah, tell you what, let me start it and then I'll pass it to Andy Jones, who's on the call. But I'll tell you that business is a lot different now than it was then. No doubt the energy market is going through some very challenging times right now. But, you know, back in 15 and 16, we had a very large portion of that business was onshore based. It also had a number of different product or service offerings in coil tubing and nitrogen delivery, etc. Those have all been, we've gotten out of all those businesses. Back in 2015 and 16, we kind of really put this business on the offshore, and not just offshore, deep water offshore basins around the world. Much higher technology, higher level of service, a little bit more stable from an ups and downs. and so we're much different cost base, much different service base and we put ourselves in that really what we feel is that's just sustainable competitive place offshore. As far as the order book and it's kind of intactness, let me, how about Andy, you want to, how's it feeling right now? I know it's a bit challenging but how's it feeling right now from your order book, Andy?

Yeah, it's feeling pretty good and thanks for the question, Ed. I mean, the thing is you have to look at the difference here between offshore production and land production. It's much, much easier for operators in times like this to shut down onshore production. Wells offshore are multiples higher in terms of cost to put in place, up to 100 times that of a land well. But the production is so prolific compared to an onshore well, perhaps 10 to 30 times the production. The last thing you want to do is shut down a high-producing, deep water, high-temperature well offshore. The reason you don't want to do that is once you shut it in, it's very, very difficult to bring it back online because you will cause all kinds of damage to the reservoir and to the wellbore itself as you shut that well in. So we are predominantly focused in deepwater basins. As Doug said, we do hardly any work on land. We have some work on land in Saudi Arabia. That's a slightly different story. But otherwise, we're in all of the deepwater basins in the world. We're still seeing a good order book. We're still seeing orders coming in, contracts being signed, even in April, for new and upcoming work in the Gulf of Mexico. So, so far, we're safe there. We do see some disruptions because of COVID virus, mainly because operators want to see a consistent crew going offshore, so we have to give names up front and we have to keep to that crew. and so on.

I do caution that as oil prices and as production as it continues to go longer term, that will and can have an impact on our order book. We don't see that through the second quarter. Right now we've got some things moving into the third. But I wanted to say as we see that and if we see that happen, like I said, the cost base of this company is not only Much different than it was. This business is much different than it was. It's also very much regionalized. So what we used to have is a very large center of fixed costs kind of in North America that now that fixed cost base is spread out around the world. And so I think we can react to changes in different basins. And that's usually what happens. Things don't happen exactly in one basin versus the other. So well positioned to make sure we can handle it if that occurs.

Got it. Guys, thanks very much for your comments. Good luck navigating the current environments, anything but mundane, for sure. Good luck.

Have a good weekend.

Thanks. I appreciate it, Jonathan. Thank you.

That does conclude today's question and answer session.

Okay. Thank you very much, everyone. I do appreciate everyone joining today. A little bit long, but I hope everyone and your family stays safe and well and appreciate, again, you joining today. Thank you very much.

That does conclude today's conference. We thank you for your participation. You may now disconnect.