Minerals Technologies Inc. (NYSE:MTX) Q4 2023 Earnings Call Transcript
Minerals Technologies Inc. (NYSE:MTX) Q4 2023 Earnings Call Transcript February 2, 2024
Minerals Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and welcome to the Fourth Quarter 2023 Minerals Technologies Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Lydia Kopylova, Head of Investor Relations, for Minerals Technologies. Please go ahead, Ms. Kopylova.
Lydia Kopylova: Thank you, Charlie. Good morning, everyone, and welcome to our Fourth Quarter 2023 Earnings Conference Call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik's prepared remarks, we'll open it up to questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on these slides. Our SEC filings disclose certain risks and uncertainties which may cause our actual results to differ materially from these forward-looking statements.
Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and an appendix of this presentation which are posted on our website. Now I will turn it over to Doug. Doug?
Douglas Dietrich: Thanks, Lydia. Good morning, everyone, and thanks for joining today. Let me start by giving you a quick outline for today's call. First, I'll take you through our fourth quarter and full year highlights. And as I do so, I'll walk you through the main drivers of our results and how they align with our long-term strategic initiatives. As you saw in our press release, we had a strong finish to a record year. I'm excited to share more details in the coming slides. I'm also going to take a few minutes to give you an update on innovation at MTI and highlight a few new products that made an impact on our year and then we'll continue to do so going forward. Erik will then review the financials and provide an outlook for the next quarter and I'll close out with an outlook for 2024.
We'll be sure to leave plenty of time to take your questions after our remarks. Let's get started with the fourth quarter. Overall, it was another great quarter for us and I'm happy to report that we set a few performance records. We generated record sales levels for our fourth quarter with broad-based growth across our portfolio. Our strategic positions in higher growth consumer markets and geographies more than offset the softness we saw in few of our end markets. Sales for the quarter were up 3% with growth coming from both our segments. Excluding the deconsolidation of Barretts Minerals Inc. this quarter, our underlying sales for the remainder of the company were up 6%, better illustrating the performance of the ongoing business. Within the Consumer & Specialties segment, the Household & Personal Care product line continues its stable growth trajectory across all geographies.
In the Engineered Solutions, our High Temperature Technologies product line drove this segment to another solid quarter. Operating margins expanded to 13.2% this quarter, a 450 basis point improvement over last year. Margins expanded in both segments as we captured input cost savings, improved productivity in our operations and tightly managed expenses. Our record level of sales in these expanded margins yielded $69 million of operating income significantly higher than last year and earnings per share came in at $1.28, which is another record for our fourth quarter. We continued to demonstrate the company's strong cash generation profile delivering $95 million in cash from operations. Other highlights for the quarter that we announced the doubling of our dividend, and at the same time, initiating a one year $75 million share repurchase program.
Let me move on to summarize the full year. And as I do so, you'll see how similar -- the similar themes of balance growth, margin expansion and cash flow generation laid out throughout the year and how they combine to yield a record performance. 2023 was an eventful year for us. We've started it by realigning our business segments with our key markets and core technologies to better reflect the MTI of today. This is a major change for the company and undertaken to unlock our hidden potential. Throughout the year, the realignment drove organizational efficiencies, tighter collaboration and faster decision-making, all leading to higher levels of performance. Back in May, we held an Investor Day where we outlined MTI's potential for you and communicated our five-year growth and performance targets.
One year end, right on track to achieve those targets and we made progress across each of the priority areas. Let start with sales. Sales for the full year were a record for MTI and driven by growth in both segments. Consumer & Specialties segment experienced the strongest sales expansion with high single-digit and double-digit growth in our cat litter, animal health and edible oil and renewable fuel filtration products. These products have strong positions in steadily growing markets, driven by macro trends like expanding pet ownership, increased demand for natural animal feed additives and the growing demand for renewable fuels. Growth in the Engineered Solutions segment is primarily driven by refractories, environmental waste water remediation and infrastructure drilling products.
Sales of these products were driven by the deployment of our newest technologies to support the growing demand for safer and more efficient manufacturing processes, environmental water clean-up and an increase in infrastructure projects global. This is the nature of some of the markets we serve and the geographies in which we serve them, we will see fluctuations in demand as economic cycles and other local factors play through. We've experienced a few softer markets this year, but despite these pockets, the portfolio performed as expected. Sales from our positions and higher growth consumer markets and geographies more than offsetting these areas of temporary lower demand. Our long-term growth should average between -- average 5% per year with economic and local market factors moving that number up or down slightly in any given year.
Great example of what we call our balanced portfolio and how we see our topline performing over the long-term. We emphasized how improving margins was a priority focus area for us. And this year, operating margins increased by 100 basis points. We continue to create value for our customers, leverage synergies from the reorganization, capture input cost savings and drive productivity improvements. Worth noting is that our operating margin for the second half of the year averaged 13.6% above the target we communicated earlier in the year. Record sales this year were leveraged through these expanded margins to deliver record operating income of $280 million, up 11%, and record EBITDA of $370 million, up 8% over last year. Earnings per share were $5.21, another record for the company.
Full year cash flows improved significantly and we delivered $234 million in cash from operations, more than double last year, and $140 million in free cash flow. Used this cash to strengthen the balance sheet, reducing our net leverage to 1.9 times EBITDA. And, as I mentioned earlier, to return capital to shareholders. Drive our strategy and deliver consistent performance, it takes a dedicated and engaged team, a strong operating culture and an unwavering adherence to our values. Our team did a great job this year on all fronts. We have a very strong culture of operational excellence here at MTI. We've built an environment of continuous improvement thinking and have equipped employees with the tools and training they need to see, analyze and remove waste from any manufacturing or business process.
Our teams conduct over 30 problem solving Kaizen events every day around the world and provide suggestions at an extraordinarily high level. This engagement and continuous improvement by our employees is the essence of our high performance culture and something that sets MTI apart. In summary, 2023 was a transformational year for MTI. Our foundation is solid in every aspect and we intend to build on this year's record performance to deliver another one in 2024. There are a number of key drivers supporting our long-term growth. One of them is innovation. Innovation has always been a part of MTI's DNA and we've developed new technologies that are becoming an influential part of our story. Want to take a moment to highlight some of the tremendous work that's happening at MTI and point out a few of our newest products aimed at large market opportunities that offer us significant growth potential.
In the past several years, we've refined our new product development process to accelerate innovation at MTI, shortening the time from ideation to commercialization. We drove closer collaboration with our customers and focused our efforts on developing the highest valued products to meet their needs. Results of our efforts are evident on the chart in the middle with the percentage of sales from our newest products reaching 18% this year, a record level for the company. On the right, you can see how balanced the distribution of our innovation pipeline is across all four product lines. Let me highlight several of these new products and the trends that have driven their development. In the Household & Personal Care product line, we're creating new cat litter formulas aligned with the latest consumer trends and that offer better home hygiene, improved odor control and help owners with litter box training.
We're developing natural feed additives to improve farm animal health and higher performing filtration products targeted at the growing demand for renewable fuels. Specialty Additives, we're expanding our sustainable recycling technologies for white and brown packaging and developing natural mineral based barrier coatings for food packaging. In High-Temperature Technologies, our new MINSCAN Scantrol robotic units are transforming the refractory application process in electric arc steel furnaces. And, in association with these units, we're developing a software system to provide customers with real time process data analytics. In the Environmental & Infrastructure product line, we continued to improve our FLUORO-SORB technology aimed removing forever chemicals in water and soil around the world.
And we're developing new drilling fluid additives to support the growing demand for critical infrastructure projects like grid hardening and geothermal energy systems. Collectively, we have over 500 products at various development stages in our pipeline representing over $1 billion in potential future sales. Not every idea makes it all the way through, but the new products I've highlighted today are good examples of products that came through this development pipeline, leveraging our core technologies and applications expertise to create valuable solutions for large challenges in today's evolving marketplace. Now, I'd like to turn it over to Erik to review the details of the financials. Erik?
Erik Aldag: Thanks, Doug, and good morning, everyone. I'll begin by summarizing our fourth quarter and full year financial results, followed by a review of our segments and I'll also provide our outlook for the first quarter. Following my remarks, I'll turn the call back over to Doug for some additional perspective on the year ahead. Now let's review our first quarter results. Let me begin by saying that we had another strong performance in the fourth quarter, capping off a very strong year for the company. Sales of $525 million grew 3% and represented a record level for our fourth quarter. And if you adjust for the deconsolidation of BMI, underlying sales grew 6% year-over-year driven by growth in three of our four product lines.
Higher selling prices contributed to growth across the portfolio and we benefited from continued volume growth in Household & Personal Care and High-Temperature Technologies. Fourth quarter operating income was $69 million, up 57% versus prior year and operating margin was 13.2% of sales. Earnings per share was $1.28 excluding special items and free-cash flow was very strong at $73 million in the quarter. Before I move to the full year, I want to highlight our operating margin performance against the target we set for ourselves for 2023. At our Investor Day last year in May, we projected that we would exit 2023 with 150 basis points of margin improvement versus 2022 on a run rate basis. Given the typical seasonality we experienced in the fourth quarter, the second half of the year is a good indication of where we are from a full year run rate perspective on margin.
Our operating margin for the second half of 2023 was 13.6% of sales, 170 basis points above the full year 2022. We achieved this target margin improvement primarily through price cost recovery as well as productivity and variable conversion cost improvements at our recent cat litter acquisitions. And this performance in 2023 puts us squarely on track to achieve our targeted 14% run rate operating margin in 2024 and 15% in 2025. Now let's take a look at our full year financial performance. We delivered a solid performance in 2023 with records for sales, operating income, EBITDA and earnings per share, excluding special items. Sales of $2.2 billion were 2% above last year. Looking at the sales bridge on the right side of the slide, you can see growth in both segments as well as in most of our product lines, demonstrating the balance of our portfolio during mixed end market conditions.
Operating income increased 11% to $280 million and operating margin improved 100 basis points to 12.9% of sales. EBITDA was $370 million for the year and represented 17.1% of sales. Our full year earnings per share, excluding special items, was $5.21, a 7% increase compared to 2022. To give a little more perspective, you can see in the EPS bridge on the bottom left that our income performance contributed $0.70 of earnings growth, which more than offset a $0.37 headwind from higher interest expense. Our effective tax rate for the year was 22%. And for 2024, we expect our rate to be approximately 23%, a slight increase, primarily due to the changes in global tax laws. Free cash flow for the year returned to a more normal level for the company of $140 million or 6.5% of sales.
Now let's review our segment performance in more detail, beginning with Consumer & Specialties. Fourth quarter sales in the Consumer & Specialties segment were $280 million, up 3% and up 8% versus last year excluding BMI. Our Household & Personal Care product line continued on its strong growth trajectory with sales increasing 13% year-over-year. Demand for our cat litter products remains strong and we saw growth in several high margin specialty products, including double-digit growth in animal health as well as in edible oil and renewable fuel purification. Underlying sales in our Specialty Additives product line were 3% above prior year, ex-BMI, as sales from our newest paper and packaging satellites in Asia offset lower volumes in North America.
Fourth quarter operating income was $36.6 million, a significant increase over the prior year and operating margin was 13% of sales. The improvement in operating income was driven by volume increases in our Household & Personal Care product line, selling price adjustments and favorable input costs compared to the inflationary spike in energy and logistics that we absorbed last year in Europe. Turning to the full year stats on the right side. Segment sales of $1.2 billion grew 3%. Our Household & Personal Care product line delivered 9% growth on continued strong demand for cat litter. While customer destocking impacted sales for some of our high margin specialties products, we saw 34% growth in animal health and 9% growth in edible oil and renewable fuel purification.
In Specialty Additives, underlying sales were 1% higher. Three new paper and packaging satellites were ramping up in 2023, including our newest satellite dedicated to serving the growing packaging market in China. Despite significantly lower paper volumes in North America and Europe, sales to paper and packaging customers increased, primarily driven by the new satellites in Asia and contractual pricing adjustments. Demand for specialty additives into other end markets, such as construction and consumer products, has been mixed with residential remodeling activity helping to offset softness in new construction and some destocking in food and pharma. Operating income for the segment rose 24% to $141 million in 2023 and operating margin improved to 210 basis points to 12.2%.
Looking ahead to the first quarter, we expect another strong sales performance from Household & Personal Care, driven by demand for cat litter and improving demand for our specialty products. In Specialty Additives, we expect to see improvement in North America paper and packaging and additional volumes in Asia driven by the ramp up of our new satellites. However, we remain in the seasonally slower period for construction activity. Segment operating income for the first quarter is expected to be up slightly sequentially. Now let's turn to the Engineered Solutions segment. Fourth quarter sales in Engineered Solutions increased 4% versus the prior year to $243 million. In High Temperature Technologies, we continue to see steady demand for foundry and steel applications in North America and we delivered significant growth in Asia foundry volume.
Sales in our environmental and infrastructure product line were 6% lower driven by softness in commercial construction. Despite some market challenges, the segments delivered another strong operating performance. Operating income in the fourth quarter was $36.7 million, an increase of 16% over the prior year and operating margin improved 160 basis points, 15.1%. For the full year, segment sales grew 1%. The High-Temperature Technologies product line delivered 3% sales growth. Demand conditions remained steady through the year in North America, while soft steel market conditions in Europe persisted. And demand in Asia foundry gradually improved through the year following a slow start in China. In Environmental & Infrastructure, sales were 3% lower as construction market conditions affected demand for our waterproofing and environmental lighting systems.
Sales for remediation and wastewater solutions were a bright spot, increasing more than 40% compared to last year. We also saw double-digit growth in our drilling products sales, driven by an uptick in demand from sustainable geothermal energy projects and from infrastructure projects. Full year operating income improved 3% to $151 million in 2023 and operating margin improved 30 basis points to 15%. Turning to the first quarter, we expect to see mostly similar market conditions across both product lines and we expect operating income to be similar to the fourth quarter. Now let's review our balance sheet and cashflow highlights. We delivered strong cash flow in the fourth quarter with $95 million of cash from operations and $73 million of free cash flow, bringing our full year free cash flow to $140 million.
Capital expenditures were $94 million for the year. Our strong free cash flow in 2023 marks a return to more normal levels of cash flow generation for the company as the inflationary impact on our working capital has subsided. As we look ahead to 2024, we expect another solid year of free cash flow generation in the $140 million to $160 million range. During the year, we used our cash flow to pay down $49 million in debt and we returned $22 million to shareholders through $14 million of share repurchases and $8 million of dividends. The balance sheet remains very strong. We ended the year with total liquidity over $500 million and a net leverage ratio of 1.9 times EBITDA. Now I'll summarize our outlook for the first quarter. Overall for MTI, we expect a similarly strong performance in the first quarter.
In Consumer & Specialties, we see continued strong demand in Household & Personal Care. And in Specialty Additives, higher sales in paper and packaging driven by new satellites and improving demand in North America. And similar conditions to the fourth quarter for other end markets. In Engineered Solutions, we expect similar demand conditions in High-Temperature Technologies across North America and Europe with sequentially lower volumes in Asia due to typical seasonality around the Lunar New Year. And in Environmental & Infrastructure, we will experience similar seasonal conditions to the fourth quarter. Overall for the company, we expect operating income of approximately $70 million, up around 10% from the prior year and EPS between $1.25 and $1.30, which would also represent growth of at least 10% from last year, continuing on our profitable growth trend and continuing our solid earnings trajectory.
Now I'll turn the call back over to Doug for some additional perspective on 2024.
Douglas Dietrich: Thanks, Erik. As we move into 2024, our priorities are clear. Further strengthening the MTI business model by continuing our penetration into higher growth markets, developing new and innovative products, expanding margins and maintaining strong cash flow generation. On the sales front, as we head into the year, we're seeing generally stable and, in some cases, more positive trends across our end markets. Our consumer-oriented markets like pet litter, animal health and edible oil and renewable fuel filtration remain strong and will deliver another year of high single-digit to double-digit growth. Our businesses in Asia will also continue to grow in 2024 with the ramp up of our newest packaging satellite and stronger foundry markets compared to last year.
One additional item to highlight, since our last call, we've signed two additional long-term contracts for paper and packaging satellites in Asia, one in India and another for ground calcium carbonate and new yield for a packaging application in China. These will be constructed over the course of this year and likely start up late this year or early next. Other markets such as automotive, steel and residential construction are expected to remain stable in its similar levels to last year. Markets which show improvement this year are North America paper and packaging and personal care as the destocking we saw last year comes to an end and volumes in these businesses rebound. One area where we haven't seen much change is the commercial construction market, though we could see some recovery in project activity in the second half of the year.
As Erik mentioned, we're targeting a 14% operating margin by the end of 2024 and are on track to achieve this with strong pricing, a higher margin product mix, diligent cost control and continuous improvement in our operations. Sales growth and stronger margins will continue to generate higher cash flow. This gives us the resources we need to keep the balance sheet in a solid position, while at the same time providing us with the flexibility to pursue both M&A opportunities and return capital to shareholders. In summary, I see 2024 setting up to be another strong year for MTI. The combination of our positions in growing markets, differentiated technologies and applications expertise, financial stability, global mineral reserves and a strong culture is what truly sets MTI apart and a formula that will continue to drive long-term value for shareholders.
I'd like to thank our teams at MTI for a great year and thank you for joining the call today. Now let's go to questions.
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