Minerals Technologies Inc. (MTX) Earnings Call Transcript & Summary

Thank you for joining us today. My name is Elle Boyd and I work with Aaron Rosenthal in the high-yield chemicals team here at JPMorgan. It's my pleasure to introduce Minerals Technologies. Presenting today, we have Doug Dietrich, Chairman and CEO. And with that, I'll turn the podium over to Mr. Dietrich.

Thank you. Good morning, everyone. Yes, I'm Doug Dietrich. I'm the Chairman and CEO of Minerals Technologies. I'd like to take you through a presentation quickly and then hopefully, for some Q&A at the end. Obviously, some cautionary remarks, forward-looking statements. So please take note of those. Okay. So who is Minerals Technologies and what do we do? We're a global specialty minerals company, about a little over $2 billion in sales, 4,000 employees. We operate globally. We operate in 34 different countries. We have 146 locations. So quite a lot of scale to the company in terms of breadth around the world. We also are high technology focus. I'll talk about those in a moment, where we have 12 R&D centers. We're in main -- 2 main minerals, bentonite. We're the largest global bentonite producer. We both mine, process and sell in various forms. I'll get to those in a moment but also in calcium carbonate and also forms of ground calcium carbonate. And also we engineer crystals called precipitated calcium carbonate. So I'll talk about that in a moment as well. We have #1 positions across most -- all of our product lines. We create value for customers by taking these very versatile and unique raw materials, these minerals and adapting them, in many cases, adding some technology to them, whether we're changing their surface or we're blending them with other things or we're -- because of their uniqueness, where they're adding a functional capability to our customers' products. And so both on the consumer side and the industrial side. So I'll take you through both of those 2 segments for the company. And we have a number of different solutions. A lot of our growth is being driven by sustainable solutions. Now we're getting pulled into natural ingredients and raw materials and that has been a part of our growth driver. But what do we do? I mean, like trying to encapsulate what Minerals Technologies is, it's -- you probably come across us in your life, from the time you get up to the time you go to sleep, where we take these technologies, they actually become an essential part of your life. We're in your home. We're in your paints and coatings, your floors, your roofing tiles, all your construction materials. We're in your water, not exactly in your water but we help clean your water. We're removing PFAS chemicals out of your water. We're remediating groundwater. We're protecting river beds that have been contaminated and we'll clean that up. So we're helping with your water. We're in your food. We're in your toothpaste. We're probably in your nondairy beverage, so calcium fortification through very small particles of pure calcium carbonate, which go into food and beverage. And we're helping your pets. We're the largest private label cat litter provider. It's a sodium bentonite clumping cat litter. We're the largest packager globally for the private label markets and that's a big growing -- that's a growing business for us. Also in transportation, a lot of our foundry products and steel products, automotive is an end market for us, off-highway, heavy truck and agricultural equipment. So a lot of transportation products and also in infrastructure. Bentonite is used, a lot of steel and infrastructure. We help the steel manufacturers make steel but a lot of bentonite is used in drilling products, so tunnel drilling, subway systems, underground projects, horizontal directional drilling for hardening of the grid, geothermal drilling. These are all applications for our bentonite products. So in your home, in your water, in your food, your pets, your transportation and in your infrastructure, you're probably seeing either purchasing something we make directly off the shelf or we're helping something that you're consuming be made in the first place. Okay. Take a little deeper into that. Just a quick look at our portfolio across the markets and regions. We have 2 segments. We call it a balanced portfolio because half of the company is consumer-based, consumer-oriented. These are things that either go into something you consume like on the shelf, like pet litter or a pharmaceutical or food and beverage, as I mentioned, or it's in something that you're consuming, like a box, boxboard, paper, things that go into your automotive sealants, things like that, construction sealants. The other side is the Engineered Solutions, about 47% of the company. These are more industrial applications. It's not something you would consume. We're actually helping that product be produced. We provide refractory solutions for steelmaking, in the linings of the inside of those high-temperature furnaces. We provide bond systems to make brake rotors. These are the molds that foundry parts are made in. So that is our system that we've designed that helps foundries make those. Or we're, as I mentioned, cleaning up water, we're remediating groundwater or we're in building and construction products, waterproofing of subgrade products with bentonite. So one side, you're consuming it. The other side, we're helping things being made much more industrial. Balance of the company, you can see through the different end markets. And about 56% of the company sales are in North America, 24% EMEA, 17% in Asia as well. We operate in 2 segments. I mentioned them, one is Consumer & Specialties. The other is Engineered Solutions. Again, one more consumer-oriented consumption, the other one is more engineered, helps things being made. We operate in 4 product lines. The first is household and personal care. This is mineral -- I mentioned many of these, these are mineral to market products that serve consumer markets like cat litter and health and beauty, skin creams, pharmaceuticals, et cetera. Those are part of our product line in Household & Personal Care. In Specialty Additives, these are things that go into something you consume, paper and packaging. These are where we -- we call it crystal engineering. We are able to take a calcium substrate and grow a crystal into whatever shape becomes functional. And then sometimes in paper and packaging, that shape is very big because it displaces wood pulp. And sometimes it's very small because it needs to be a rheology modifier for things like sealants. And when their robot is laying a sealant on a automotive car, it has to come out very quickly but it has to stay there. And that's the technology we to many different industries. So that's crystal engineering, the Household & Personal Care. These are just clumping -- bentonite is clumping cat litter. It swells when it's in the box, it's a functional additive. And we'll go into that more in a moment. On the Engineered Solutions side, High-Temperature Technologies, this is foundry and steel. We're providing mineral blends. We take bentonite or we'll take other minerals that we own, we'll combine them into maybe 9 different blended parts into a blended product that becomes a very functional additive in making steel or foundry product. And then I mentioned Environmental & Infrastructure. It's the smallest product line but growing quickly. This is where we'll take a particle of usually bentonite and we'll modify the surface to do something functional. In many cases, it's for water remediation. One of our growing businesses right now is in PFAS remediation. I'll answer some questions around that but we've modify the surface to attract specific PFAS chemicals. We're currently in 7 different water utilities in the United States. We'll probably be in 10 more by the end of this year. And as the regulations continue, we'll probably be in hundreds of them as they develop throughout the United States. So Consumer & Specialties, Engineered Solutions and 4 product lines for the company. So what do we do? We take these, what we call core technologies, crystal engineering, being able to understand our particles that we mine that are functional in nature into whatever they go into, engineered blends and particle surface modification. We take those and apply them to deep mineral reserves. We own reserves around the world. We have 50, 70 years of reserves and we continue to find more. Around the world, we -- so we're really mine-to-market. We have large reserves in most of the regions that we operate. We don't ship things around the world. We can operate locally. But we have these technologies globally. And so we take these technologies, apply them to our mineral reserves and we apply them to our customers. So it's that deep understanding of our customer and the industry needs. It's global research through those 12 R&D centers in these core technologies and we try to accelerate new products to customers. I'll give you an example. By taking these core technologies on these minerals, 10 years ago, maybe 10% of the company's revenue was new products. It took us 4 years to develop something, decided that was way too slow. Today, 20% of our products -- 20% of our revenue is generated from new products commercialized over the last 5 years. And we're able to innovate by taking these technologies on these minerals and get them to customers in 14 months. So we've cut the time -- 4x the time to get them to market and we've more than doubled the impact from that. And we continue to speed up that clock. We're really aligned with customers. So it's that deep understanding of our customers' needs, whether it's packaging or mold or steelmaking or drilling products or new sustainable issues that they may have or need and very quickly be able to apply these technologies to our vertical reserves and get them a new product. And that's why -- that's how the company has been growing over the past couple of years. That formula of taking those core technologies, applying it to those mineral reserves and the fact that we've positioned ourselves in growing markets like consumer markets that tend to grow, while maintaining our #1 positions in these industrial markets, that combination has yielded about a 4% to 7%. We see a long-term growth rate for the company in the 4% to 7%. Past couple of years, markets have been cycling down last year. So it's on the lower end of that range but we see that reverting back as markets continue to rebound, residential construction, transportation markets as they grow and they continue to strengthen, we will revert back up to the higher end of that range. But it's that expansion in these higher-growth consumer markets is the #1 tenet of our strategy, deepening our positions in our core markets through added value through that innovation engine and developing new products quickly is what's behind. Those are the 3 prongs of our strategy to drive that 4% to 7% kind of long-term growth rate. So where is that really going in specific? So that growth is really driven by pet care growth. So in that Household & Personal Care, we've built a pet litter business. 5 or 6 years ago, it was about a $70 million business. It's now over a $400 million business. Pet care markets around the world grow at about 4%, 5%, largely driven by growth in Asia, up on the high end, around 8% or 9%. But they are -- they're stable growth businesses and we have a large position in that. And so we are growing with that market that's -- at that 4% to 5%. Private label is growing faster than branded products. And so we see us being at the higher end of that range. That's one big driver. So as we grow and we facilitate new products for private label retailers, we're going to grow. And as we grow into Asia, that will be one of the higher growth drivers for the company. Market share growth in specialty products. We're the only specialty PCC, precipitated calcium carbonate producer in North America. We're one of the largest in the world in that specialty. And so as we innovate around specialty products, as we innovate around packaging, in particular, as we're adding value to boxboard, white boxboard, even brown boxboard, those markets grow. And as we continue to penetrate in those markets with new technologies, that's a driver for those growth. Another area in our specialty products is bleaching earth. I don't know if you've -- we've talked about this. We use a bentonite-like product to remove -- we filter edible oils. So if you have a corn oil or soybean oil or other vegetable oil, that was how we started in the business. We operate this mostly out of Europe. But recently, aviation fuel and biofuels have grown very quickly. So now almost half of our business is geared towards sustainable aviation fuel and biofuels. It's growing very quickly. It's growing about 15% per year, this business. And so as we've been innovating and being able to develop new products that help that growing industry, that's been a large growth driver. So Household & Personal Care, big growth area, consumer base but also specialty products that are going into high-growth markets. I mentioned some of the specialty additives in paper and packaging, growing share there. In high-temperature technologies, you would think that these are not super high-growth markets, foundry and steel. But recently, we've been growing very quickly in them with new innovations around moving from conventional steelmaking furnaces to electric arc furnaces. We've got some new semi-autonomous equipment that sits on top of that. We call it a MINSCAN LSC. It combines a laser measurement system to scan the inside of furnaces. We've had that technology. But marries that scan every 15 minutes of what's happening in that furnace with an automated system to patch the furnace. So we've removed every person from anywhere near that furnace but that's a piece of equipment that our customers will buy. And then with that comes a contract to use the -- consume the refractories that we put through it. So it's a very good business for us. It's become a very high-margin business for us and it's become a large driver of growth in that product line, so that high temperature. So new innovations across the board. I'm giving you examples of a few in high temperature and paper and pet care. In Environmental & Infrastructure, I mentioned this again earlier, growth driver here is really around water. We waterproof things. We remediate ground water but water and drinking water in particular and remediation of groundwater largely through PFAS is what's driving quite a bit of growth in this business. We also have some offshore oil and gas technologies. Again, we call them environmental because what we're doing is, we're cleaning up the water that comes through flowbacks and offshore oil and gas rigs and also providing other services while we're there. Also a very high-margin business and one that uses our technology for water. So it's drinking water, whether it's flowback water or whether it's groundwater, we have technologies that we've had in developing every day to grow that business in the future. A quick financial profile. Company is in a good liquidity position, about $724 million of liquidity. That's through both cash and available revolver. Maturities are at the bottom with our bond coming due in 2028 to Term Loan B that's out in 2031. Net leverage is about 1.7x at the moment. So the balance sheet is in good shape. The company has always generated free cash flow, good healthy free cash flows. We've been in that 6% to 7% average range for most of our history. So 6% to 7% of sales, we convert to free cash flow. And we steer that free cash flow about $150 million on average a year. We steer it when we're below our 2x leverage targets, kind of notional target. Balance sheet is in that shape, we steer 50% of that back to shareholders usually through share repurchases, some dividends and the other 50% we keep on the balance sheet for inorganic growth. We can toggle that back and forth. If we see inorganic growth opportunities, we'll pull back on that returns to shareholders and steer that to what we think might be a higher value inorganic opportunity. And if they wane, we can steer more back to shareholders. But that's generally the capital deployment policy and strategy of the company. 2026, well, we'll see how it goes after Saturday. But right now, we're predicting pretty stable markets. We've had some challenges globally. Markets have been softer last year. We don't see them getting much stronger through the first half. We expected them to get stronger a bit in the second half. We'll see if that plays out. A lot of the strength that we had predicted coming in the back half of the year were more residential construction growth, commercial construction growth with lower interest rates, some of our interest rate-sensitive businesses. That may still happen but going through another period of volatility here. But in North America and Europe, our 2 main markets, we didn't see much growth in our business or much rebound at least for the first half. But what's really going to drive our business this year are some of the investments we made last year, what I think are some really well-timed investments. And that is along those growth strategies that I mentioned, where we have been developing, investing to expand our cat litter business in North America. We've upgraded and expanded 2 facilities here. We opened a new facility in China to support the high growth that we're seeing in cat litter consumption in China. We've expanded our -- that edible oil purification, that bleaching earth facility in Europe. We expanded that, that's [indiscernible] our third expansion of that facility. And so we did that last year in anticipation of some growth in sustainable aviation fuel. We're investing in those MINSCANs. We're installing another 5 or 6 MINSCANs on top of electric arc furnaces to drive growth in our high-temperature business. And so we've made a lot -- we put about $50 million of investments in last year that generate about $100 million of annualized revenue. And that will start to come in here in the end of the first quarter and through the second and third quarter, we're going to see probably about $50 million to $60 million of that growth this year. And so even if markets stay relatively stable where they are from late last year, we see a significant -- a lot of this growth coming through this year. We're targeting probably about mid-single digits growth this year with stable markets. I don't know if our markets will continue to go down but I think automotive and a lot of our big markets will probably stay relatively stable this year. We'll see. But should they stay where they are, we see a pretty strong year just from the investments we made last year in some of our high-growth businesses. We had some 5-year targets. As I mentioned, that kind of mid-single-digit growth rate, margin improvement to 15% by 2025. We achieved that. Operating income growth of 10%, free cash flow of 7% of sales and then maintaining that strong balance sheet. And I think the company is set up right now for 15% operating income margins. We did that last year. We had some volume challenges last year with some of our markets but we should be on track to hit that. And I think with some of these high-growth businesses, high-margin businesses, we should start to exceed that 15% by next year, again, market-driven. Organic sales growth of 5%, little bit lower. We're probably going to be a little bit about a year behind that target, maybe 18 months, given what happened with markets recently, especially through 2025. But the company is structured to generate that mid-single digits growth. And with that 15% operating income, that should generate 10% CAGR in our income margin. That's probably been about 5% on average, over 5% to 6% over the past 4 years. We're already at that 7% of free cash flow generation. And as I mentioned, the balance sheet is in great shape right now, which is a good place to be, a strong cash flow generation. So that gives you where we are. I think we're still on target to hit some of these. They might be a year later than we thought given some of the cyclicality we've seen in our market. But the company is built for this and it's probably built for stronger margins going forward as some of these high-margin businesses that are growing quickly continue to grow and become a more substantial part of the company's top line. That's what I have, left about half the time for questions or so, or less. Anybody have any questions?

Yes. You have a lot of products. As an outsider, it's really hard to see which ones matter the most. Could you just sort of list the biggest products in terms of sales and operating income, the 4 or 5 products that move the needle the most?

Sure. We'll talk about all the children. I'm not going to give you a favorite. But the largest product lines are our pet litter business and our paper and packaging business and our refractories business. Those are the 3 largest in the steel. Right behind that would be our foundry business, would be the -- #4 in line. And then -- but from an important standpoint -- and they're all very important, they're all very good cash flow businesses. They're good margin businesses, some of them higher than others. All of those have contribution rates, incremental contribution in the 30s. And so they all deliver strong margin with volume growth, they deliver strong margin contribution. Importance, though, I would say, some of the smaller businesses are also equally important because they're growing very quickly. So in that specialties business with -- that bleaching earth business is growing at 15% per year. These are contribution rates up in the 40s or 50s percent range. So very high margin, very high growth. Smaller parts of the portfolio but they're growing very quickly with that margin. And those are important because they start to rebalance the company more into this kind of growth, these consumer-oriented growth and they bring really strong margins with them. Animal Health. So the trend toward more natural ingredients, when I talk about animal health, we put feed additives into animal feed to remove toxins in their stomach because of the absorptive qualities of our product. As we move from chemical-based fillers to more natural-based fillers, that is growing very quickly and that also has very strong margins to it. And so that's been growing almost 20% -- I think it grew last year at 20%. So these smaller businesses that are kind of attached to trends like sustainable aviation fuel, it was a 0.5% additive rate requirement in Europe that's moved to 2%. So you're talking about a quadrupling of the regulation and that's driving tremendous growth across the industry and our product, in particular, because we're very strong at that challenging application. So big businesses, big anchor businesses in the company but smaller ones like this water remediation and FLUORO-SORB, our FLUORO-SORB product for PFAS remediation, small today but you can imagine the challenge that PFAS has in drinking water and we're only just getting started with that product line in terms of putting it out in utilities that is a change because it's a media that's going to get changed out continuously as you get to regulation of taking it to 0 or non-detect levels of PFAS. So these big anchor businesses, they're great. We're pushing them and driving them deeper into the markets they serve. But these smaller ones that are from the new technology engine are really high margin, really high growth and they're going to become substantial parts of the company as they continue to grow.

[indiscernible]

Our specialties business right now is about -- so pet litter is $400 million in our specialties, that -- the bleaching earth and those animal health, it's about $200 million but it's growing at about 10%, right? So yes, I think in 4, 5 years, you're going to see that being a $300 million, $400 million business as it compounds. And so -- but it has the addressable market to get there. And same with that water remediation business. It's participating in a huge addressable market, both in remediation cleanups and in drinking water that's going to continue to grow. And so I think they are the next big anchor businesses of the company. And I think they supplement the ones we already have. And that's -- so that's how -- why -- that's why we're confident that this company over time grows in that kind of mid-single-digit range. We don't think 15% is a cap for our margins. We think that, that can drive -- as these get bigger, that drives up to 16%. But I think we've maintained a portfolio through steel and paper and pet litter and these growth businesses that generates that cash, right? So we're generating -- even though we're directing capital to those high-growth businesses, the company is still throwing off 6% to 7% free cash flow sales. And that's what I -- I like that. So it gives the company a lot of options. Yes.

Can I just ask a question about, I guess, the ability to ship and transport these products. It's been a while since I looked at the company and you've made a enormous amount of progress. But -- so PCC, I've always thought is like aggregates, like probably doesn't really ship very far. That might not be right. But as you buy your technology and increase the value to weight effectively, I'm imagining that some of your finished products can be shipped. I know you said it's sort of a local regional business. But could you just give us some color on to what extent you do face competition from any overseas jurisdictions? Is capacity or anyone behaving sort of irrationally? Yes, just can we think of this as a truly regional business from raw materials to finished products? Or is there something more I'm missing there?

Yes. We ship very little around the world. We do move some of our minerals. I mean, Wyoming bentonite is unique globally. There are customers that demand that high quality and we will ship it to Asia. We'll ship it around the world. But we're also able to find and identify -- one of the capabilities of the company is to be able to characterize and identify minerals locally and so we've kind of built the company around having local vertical integration. So even though some -- minerals are different everywhere, we're able to satisfy the end market with our knowledge and our technologies locally. And so we have local mines, local processing, local sales. And so tariffs aren't a big thing for us. We will move and import some things. We'll pay tariffs on but it's -- I think it was $5 million last year. So it's not a big -- and we can pass that through. We have a lot of pricing power. So it's -- we're not a tariff driven. We don't see big disruptions in shipping and logistics, aren't -- we don't get affected unless it's regionally. We operate in a regional place. PCC is a great example of that. We -- the PCC model, precipitated calcium carbonate model is a completely localized model. We have 56 of these PCC for paper and packaging around the world. We enter into a contract and we build a facility fit for purpose on that packaging site or that paper mill. We enter into a 15-year or a 10- or 15-year agreement. And so we'll put in the capital in exchange for a 10- or 15-year agreement. It's priced at a return. We're targeting sometimes 15% IRRs on that over that period and then it just operates. And so it's not only local, it's there on-site It's our facility but it's on-site We have 56 and that's a great business because once you're on-site it's like that MINSCAN. Once it's on top of that furnace and once you have that PCC site on-site, it's really hard to displace you, right? You don't just -- you have a contract, you can renegotiate that contract. I think we've only lost 2 or 3 PCC sites ever unless the mill closes because they do repeat and you just renew the contract. And so it's a great annuity kind of structure. And that's part of that cash flow story for the company.

Maybe just one more, excuse me. So despite having a lot of sort of consumer defensive end markets, you still do have like quite a lot [ to ] steel and housing, in areas that have been depressed. So how should we think about that if there is any sort of material recovery in volumes in your ability to service? Is there operating leverage? Or is this more of a specialty business where we shouldn't really look and think of that?

Yes. I think we're almost completely specialty. These are not commodity minerals whatsoever and we make them more specialty by taking that specialty mineral and making it even more functional, doing something to it. So -- but we used to be -- 6 years ago, the company was almost completely industrial. I mean it would -- not completely, had some consumer -- small consumer businesses. But part of the strategy at the time was to invest in technologies and also in acquisitions to build out that consumer space because we saw that we had these small businesses but they weren't being developed. And so we decided to acquire and to invest capital and now they're 30% of the company's revenue. So we've kind of positioned the company. I like that industrial business because the industrial businesses are very -- they're very big. They're very -- #1 positions, really good cash flow and margins but they would cycle, as you probably remember. And so we've added this piece of consumer -- I call them consumer. It's just more stable growing businesses, right? They're higher value and we've built that out. And so now we have this component that, like I said, there's probably -- pieces of it are growing at 15%, 20% per year. Others are growing at 4% but they're stable growth business and good margin and they provide that balance for the company. And so like I -- this year, we're not really counting on a lot of cyclical reversion from some of those businesses. But if that does happen, I think it takes us to the top end of that kind of growth range for the year. We see some rebound in residential construction. If automotive hangs in there, commercial construction continues its kind of rebound. We're starting to see some of that move forward, at least in our products. It's going to -- it could be a great year for us. We'll see what happens with interest rates now. We'll see what happens with home buying. We'll see what happens with risk. But again, we've already sold out a lot of our investments that we made last year. So if well timed, I think that's going to serve the company's top line pretty well this year regardless.

For your 2026 outlook, I know on the 4Q call, you mentioned implementing price increases or trying to. How should we think about the volume and pricing assumptions making up your organic sales outlook?

Yes. This year, I think -- we're usually net positive price. It's not going to be the major driver. It's -- our year is going to be -- we usually cover our costs and pricing and then some to maintain our margins. So there will be pricing that goes where we have strong pricing. This year will be much more volume driven. Again, volumes that could come through some market improvements. But even without that, the organic volume growth we have through the investments and the secured contracts, we have to fill up those investments. So it's going to be more of a volume story this year but there always is -- we always pass through pricing, cover our costs and maintain our margins. Anything else? Sure.

[indiscernible] organic growth opportunities that you talked about, is there anything that stands out that you're looking at?

There's a couple of things that stand out. I mean, I think the pace of some of this sustainable aviation fuel and biofuels is growing rapidly. I think we're only scratching the surface. It's becoming a much bigger piece of a large kind of oil -- natural oil filtration market. I think we've -- our product has kind of been tested to be a workhorse. These are some challenging applications to go into aviation fuel and our product is really good at doing that. And so I think we're seeing a lot of demand. We've just actually signed up our first -- one of the largest refineries in the world in Singapore is a big customer of ours. So I think that's going to grow and I think that's really exciting. I think our PFAS remediation, trying to temper expectations a little bit because regulations in North America don't go into effect until '29. But we are testing in over 250 utilities in North America and now into Europe as well. We're converting, we'll probably be in 17, 18 utilities by the end of this year that are using our product. It's going to be used in conjunction with other technologies, either in the beginning or by itself but it's proven to be a very potent removal of PFAS. And that's because it's engineered to target specifically that molecule and capture it chemically and not let it go, meaning -- so it's a very, very potent. And I think as we get closer to some of these deadlines, I think that will start to accelerate. I think that's a big market and we have a good position. So those are 2 that I think, back to the earlier question, those are 2 things that are bentonite-based, right? And we're vertically integrated around the world that are applied through our technologies to these challenging applications in growing -- fast-growing markets and high margin at that. So those are 2 that are really exciting. They're small today but I think they're going to get bigger and they're going to become much more of the anchor businesses in the future. Thanks for the questions. Thanks, everyone. Appreciate the time today.