Minerals Technologies Inc. (MTX) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Minerals Technologies Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like introduce your host for today's conference, Rick Honey, Vice President of Investor Relations. Please go ahead, sir.

Good morning. Welcome to our second quarter 2014 earnings conference call. Today, Chairman and Chief Executive Officer, Joe Muscari, will provide some insights into our second quarter 2014 performance, as well as a brief update on the integration of the former AMCOL. He will then turn the call over to our Chief Financial Officer, Doug Dietrich, who will give you a detailed report of our financial results for the quarter. Before we begin, I need to remind you that on Page 8 of our 2013 10-K, we list the various factors and conditions that may affect future results. Statements related to future performance by members of our management are subject to these cautionary remarks and conditions. Now I will turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. This is an exciting time at MTI, and the strong out-of-the-box showing this quarter is certainly an aspect of the excitement. So before we get into our financial performance for the second quarter, I'd like to provide a brief perspective on the company Minerals Technologies has become since the acquisition of the former AMCOL International. We've doubled our size, and are now a $2 billion company with an even greater global reach. Because of this increase in critical mass, we now have a stronger foundation for future growth. We're the world leader in 2 specialty minerals products: precipitated calcium carbonate for the paper industry; and bentonite, an exceptionally versatile mineral with multiple applications in worldwide markets. This combination makes us an even more formidable, U.S.-based international specialty minerals supplier. Both companies are research-based organizations that have expertise in mineralogy, fine particle technology and polymer chemistry. We believe that together, our scientists can leverage this expertise to accelerate commercial development of differentiated new products, faster than each entity could have accomplished alone. In the past, MTI had competed in the highly cyclical end markets of paper, steel, automotive and construction. This acquisition gives us access to the environmental, energy and consumer products markets, and provides MTI with a broader, less cyclical portfolio of products. Another benefit of the combination of the 2 companies is strong cash flow generating capability, just as you see this quarter, which is a key aspect of our strategy to reduce debt quickly. Now let's look at the second quarter financial performance, which includes 52 days of contribution from our 3 new business units. Since we closed on May 9, the acquisition, as we indicated to you last March, is highly accretive. EPS from continuing operations rose to $0.94 per share, a 49% increase over the same quarter in 2013. The 3 newly acquired segments made a solid contribution to that growth in the 52 days they have been part of MTI. In fact, all 5 of our business segments recorded double-digit operating margins. In the past 2-plus months, we've been very active in integrating these 3 new segments and maintaining the stability and continuity of Performance Materials, Construction Technologies and Energy Services. Right now, we're in the middle of an in-depth strategic review of all aspects of their operation. And after that review is complete, which should be in the next several months, we'll be able to better reset direction and strategy as needed. This slide illustrates the dramatic impact on earnings from only a partial quarter contribution from the former AMCOL. The $0.94 is a significant increase over the company's earnings performance a year ago, and reflective of the solid performance contribution of all of our businesses, old and new. As you're probably aware, our 2 major strategies for continued organic global growth are geographic expansion and new product innovation. I'd like to take a few minutes to provide you some insight into these strategic efforts across our business units. In early June, we announced that we had signed an agreement with Zhejiang Zhengda Paper Group for a 50,000 ton-per-year satellite PCC plant that will produce coating-grade PCC for packaging in China. This agreement is important because it is MTI's first on-site satellite plant to produce PCC for the coated packaging market. We'll be providing our coating PCC for high-quality boxboard that requires a smooth finish, which further enables the use of premium printed graphics. The boxboard is used to, by the way, package such products as electronics, jewelry and pharmaceutical. We also began operation of our new 22,000 ton-per-year satellite PCC plant in Jianghe papermaking facility in China's Henan province, and we have 4 additional satellite plants now under construction in China. Performance Materials is also continuing its initiatives to expand 2 of its product lines, metal casting and household, personal care and specialty products in India and China. Today, India is the third-largest global producer of ferrous-based castings used primarily for components in automobiles, heavy-duty trucks and other heavy equipment. Projected growth in consumer income and increased infrastructure spending in the country is expected to increase the demand for ferrous casting over the next decade, to the point that India will surpass the U.S. and become second to China in ferrous castings. MTI's bentonite green sand bond demand will increase with this growth, and additionally, there will ultimately be a migration to improve productivity at the foundries that manufacture these castings, and this will require higher-quality bentonite bond material and the technical expertise to operate effectively. MTI, through the positioning and recognition of the Volclay brand as the global standard in quality can fully capitalize on this emerging market, as well as continue to grow up the value chain in China, where we already have a strong position and plan to penetrate further. In our household and personal care unit, we are working closely with Procter & Gamble to expand our business in their dry laundry product lines. We've been a global supplier to P&G of functional and aesthetic additives for more than 30 years, and our initial target is a surfactant granule, which is a primary component of the detergent, and we've just begun to supply this key additive to them in China. Our Construction Technologies segment is beginning to gain momentum with its newest technologies in Environmental Products and Building Materials that have been recently successful in 4 major projects in the Middle East. We expect to see further growth of these products with a number of new projects that are now under development. The Energy Services segment continues to develop its business in Brazil, and is making headway penetrating the oilfield services business in Mexico. Our Refractories business continues to make progress as well, signing agreements with steel companies to provide refractory materials and services on a longer-term, cost-per-ton basis. This new business model for us, which we have been successful with at a greenfield steel mill in Bahrain, requires a strong partnership with the steelmakers. We recently signed an agreement with Bhushan Steel Ltd. of India to provide cost-per-ton complete steel refractory maintenance for 2 of Bhushan's basic oxygen furnaces at its new steelmaking facility in the state of Orissa. This is actually the first CPT contract Minteq has signed in India. And we're also in the process of completing a similar agreement with a European steelmaker that we will announce soon. The second pillar of our strategy, new product innovation, continues to gain traction, and I'd just like to take a few more minutes to review some of the innovations with you. Earlier this week, we announced the introduction of a new technology that we've named NewYield. This exciting new technology takes a specific waste product from the paper mill and converts it into a functional, filler pigment for paper. The specific waste stream produced at paper and pulp mills is most prevalent in developing economies, and is dealt with by either sending the waste to landfill or by adding significant equipment to the process. The latter method is both capital and energy intensive and increases carbon dioxide emissions. Our NewYield technology allows papermakers to greatly reduce or even in some cases eliminate the material that now needs to be landfilled, and provides them with a filling pigment. This technology then gives them the ability to solve a waste disposal issue, while at the same time, provides them with a usable filler product in return. MTI and the papermaker will both benefit, as will the environment. In addition to announcing this new R&D platform, we're pleased today to also be announcing that we now have our first commercial contract for NewYield. We've just signed an agreement with the Sun Paper Group, the largest privately-owned paper business in China, to deploy our NewYield technology at their paper and pulp operations in Shandong Province. This facility, which will be operational in the third quarter of next year, will produce 60,000 tons of filler pigment from Sun's waste stream. We estimate the potential sales for this new technology to be $70 million to $80 million in China over the next 5 to 7 years, and has the potential to be double that for other applications. In addition, we also announced this week that we signed another commercial agreement with a North American paper mill for deployment of our FulFill E-325 high filler technology. This is our 17th commercial agreement and our fifth in North America, and we continue to be actively engaged with 20 other paper mills around the world. Switching gears to our Performance Materials group. They're in the early stages of commercialization of a product called Enersol, which promotes plant growth. MTI is now focusing on the need to feed more people with less land in an environmentally sustainable manner. The product, this product, which improves plant health and yield enhancement, will be able to achieve quick regulatory entry into many agricultural markets. Another significant area of new product focus is mercury removal from coal-fired power plants, something we spoke about on our last call. MTI has a partial ownership position and a bentonite supply and manufacturing relationship with Novinda, which developed a new cleaner technology for mercury removal. This non-carbon-based sorbent provides cost-effective mercury removal, and has the additional advantage of allowing the reuse of fly ash for use in such products as cement and gypsum. Fly ash generated from power plants using activated carbon mercury removal products needs to be landfilled. The Novinda product, on the other hand, will enable utilities to comply with the EPA's strict mercury and air toxic standards that actually go into effect in April of 2015. And I'd also like to note that in July, Novinda won an award from R&D Magazine that recognized the mercury removal product as one of the top 100 products introduced in the last year. By the way, our Construction Technologies segment is producing the product for Novinda. The Energy Services segment is also making advances. It's making advances on electrical coagulation technology that recycles 100% of the water used in hydraulic fracturing. The business unit is also developing new technologies in filtration media and zinc removal from water used in offshore oil drills. On the technology integration front, we've also initiated a pilot project on adhesives and sealants, a market area for both companies, but we've introduced this pilot with a team of scientists from both entities. This is a market, as I mentioned, we both are in, and we believe we can leverage the extensive knowledge of bentonite, PCC and GCC to bring differentiated new products to this segment. I'd like to just touch on, in closing, take a few minutes to bring you up-to-date on the integration of the acquisition. The transition is going well. I've been to our Energy Services operations in Louisiana and to the bentonite mines and processing facilities in Wyoming and South Dakota, where I met with capable and dedicated employees who are enthusiastic about moving forward as part of MTI. I'll also be traveling to Asia and Europe to meet our employees and customers there in the coming months. The integration itself is taking place on many fronts. We've established an integration team, for instance, for environment health and safety, to review all the processes and identify all gaps that need to be addressed in this area. And as a point of interest, an example of how we are approaching integration, this included 1-hour virtual visits via videoconferencing, conducted by 4 teams with 62 production facilities around the world. These teams, over a 4-week period, looked at all the safety practices and differing regulatory requirements in various countries, and will provide the basis for integration into the MTI environment health and safety system. We're establishing a similar approach to integrate our operational excellence Lean processes across Performance Materials, Construction Technologies and Energy Services. We're on track to target on the $50 million in synergies over 2 years that we communicated to you during our last call, and we're beginning to bring into focus further initiatives that can yield up to $70 million in total synergies. Two of the major projects in the integration now underway are transferring various transactional responsibilities to our shared service function, and we're also beginning the transitioning to our Oracle ERP system. We also announced a restructuring related to these initiatives, which Doug will give you more detail around shortly, and we'll certainly keep you posted on our progress in subsequent calls. I'd also like to just mention that in June, Gary Castagna, Head of the Performance Minerals business; Patrick Carpenter, who runs Construction Technologies; and Mike Johnson, the leader of Energy Services, were elected officers of MTI and members of our executive leadership team. Having these 3 experienced business leaders join the MTI team has enabled us to maintain continuity and stability, and to continue to meet the needs of customers of the former AMCOL. Overall, I'd say the transition is going very smoothly. Now I'll turn it over to Doug Dietrich, who will provide details on the financial performance for the second quarter. Doug?

Thanks, Joe. Good morning, everyone. Now let me take you through our consolidated and business segment results for the second quarter. The company now has 5 reporting segments: Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services. I'll touch on the key market and operational elements of our results in each of these segments. I'd like to note that our results include only 52 days of earnings from the former AMCOL International businesses, as the acquisition closed on May 9. As Joe mentioned, our second quarter earnings per share from continuing operations were a record $0.94, excluding special items, a 49% increase from the $0.63 recorded last year. Our reported earnings were $0.48 per share, which includes special charges of $24.7 million, or $0.46, related to the AMCOL acquisition. I'll provide some additional details on these special charges in a moment. Our sales for the quarter were $421 million, which is 64% higher than the second quarter of last year, largely due to the acquisition. Operating income, excluding special items, increased 69% to $54.8 million from $32.4 million in the prior year, and represented 13% of sales. Each of the 5 business segments achieved double-digit operating margins in the period. Sequentially, consolidated sales increased 72%, again, largely due to the acquisition. However, the base MTI business segments, Specialty Minerals and Refractories, exhibited good sequential growth. Cash flow for the quarter was strong at $92 million, driven by solid operating results and initial improvements in working capital for the acquired businesses, as well as the legacy MTI segments. We also made good progress on capturing synergies in the short period post-closing, and I'll go deeper into our progress in a few minutes. This table reconciles our reported earnings from continuing operations of $0.48 to the $0.94, which excludes the special items. A number of special charges were recorded in the quarter, which included: costs associated with the acquisition transaction and integration; the retirement of pre-transaction debt; the one-time, non-cash inventory step-up charges; and the announced initial restructuring program. In total, these special items were $0.46 per share. The restructuring program we announced is associated with the initial deployment of our shared service model and the consolidation of various corporate functions and regional locations. This program will have an initial cost of $6 million, affect 5% of the total company's workforce and generate annualized savings of between $12 million and $15 million over the next year. We do anticipate additional future charges and associated savings as we continue to integrate the businesses and capture synergies. This table bridges our earnings of $0.63 in the second quarter of last year to the $0.94 this quarter. The MTI base business contributed $0.05 to the earnings growth, as both the Specialty Minerals and Refractories segments had higher operating income. For the 52 days of operations included in this quarter, the acquired businesses contributed $0.38 per share after purchase accounting adjustments made to depreciation and amortization. As I indicated earlier, our progress with capturing synergies is going well, and these savings contributed $0.05 since the acquisition closed on May 9. Increased interest expense and amortization of deferred financing costs were $0.17 per share. So you can see from these results, the acquisition is highly accretive to MTI earnings. Excluding the base business improvement this quarter, the partial month earnings contribution from the acquisition was 43%. As I just mentioned, the 3 new segments contributed $0.38 per share to our earnings this quarter, and this chart is a summary of the sales and operating income contribution from each, again, excluding the special charges. There are a few items that I'd like to call to your attention regarding these results: first, they reflect only 52 days of the full quarter; second, the operating income for each segment reflects the increased depreciation and amortization resulting from the purchase accounting adjustments; and third, they include a full absorption of all corporate expenses, which prior to the acquisition, were not allocated to the segments. Total sales for the 3 new segments for the partial period were $162 million, and combined operating income was $19.8 million, which was 12.2% of sales. On a full quarter pro forma basis, combined sales for these 3 segments increased 7% over the second quarter of last year. I'll go into more detail on each segment's performance in a moment. I thought it'd be worthwhile to show you the progress we've made thus far with capturing synergies and what we project over the next couple of quarters. If you recall, our target was to achieve $25 million in annual run rate synergies by the end of year 1 and $50 million in synergies by the end of year 2. We achieved $2.5 million in actual savings in the first 52 days following the close, which is an annualized rate of $17 million. We have line of sight to savings of $5 million to $6 million in the third quarter, which is an annualized rate of $20 million to $24 million, and expect that to grow to $6 million to $7 million in savings by the fourth quarter, or a rate of $24 million to $28 million. This would put us ahead of our first year target rate by about 5 to 6 months. As I mentioned earlier, we're in the early stages of deploying our shared service organization, which will leverage our global resources and continue to drive additional synergies. In addition, we see further synergy opportunities through the deployment of operational excellence and continued expense control. Let's go through the financial results within the Specialty Minerals segment. This segment achieved a record operating income of $26.1 million on about the same level of sales, with operating margin of 15.5%, which expanded 50 basis points from the second quarter of last year. Within this segment, Paper PCC sales declined 3%, driven by an 8% decrease in North America, which more than offsets sales increases of 3% to 5% in all other regions. North America uncoated freesheet paper production was down 4% in the second quarter -- over the second quarter of last year. Paper PCC North American volumes were impacted by the paper grade realignments, primarily within the International Paper production system, due to the closure of the Courtland, Alabama mill at the beginning of the year, and also to lower volumes from our Ashdown, Arkansas satellite. These lower North America sales were offset by a strong performance in our India PCC operations and sales growth of 6% in Processed Minerals, driven by volume growth of 10% in our talc product line and 7% in our ground calcium carbonates product line. Segment operating income improved 4% over last year, driven by strong performances in our talc, GCC and India PCC business. Operating income also improved due to higher pricing, good cost control and productivity improvements of 5% in Paper PCC and 12% in Performance Minerals. These improvements more than offset the lower sales in North America Paper PCC. Sequentially, segment sales increased 5% due to a 3% improvement in the PCC product line and a 14% increase in the Processed Minerals product line. Higher seasonal volumes in the construction industry were the main driver of the Processed Minerals volume improvement. Operating income increased 21% from the first quarter, which was in line with our expectations. Looking forward to the third quarter, we expect our Paper PCC operating income to be similar to the second quarter, as continued lower volumes in North America will be offset by the ramp-up of our new Jianghe satellite in China, which began operations late in June. In Performance Minerals, we expect operating income to be slightly lower, as we enter a slower seasonal period for this business late in the third quarter. But overall, we expect the third quarter operating income for the segment to be similar to the second quarter. Let me give you a quick update on our progress with new satellite construction and commissioning. We expect our next 2 satellites in China, one with Nanning Jindaxing Paper, and another with UPM Changshu, to be operational in the first quarter of 2015. We have a third satellite with Sun Paper, which will be operational in the second quarter of 2015. And the recently announced 50,00 ton coating satellite with Zhejiang Zhengda Paper Group should be operational in the fourth quarter of next year. In total, we are currently building or ramping up 5 satellites in China, with a combined capacity of approximately 325,000 tons, which will increase our installed capacity there by 75%. As I mentioned in the last chart, Specialty Minerals operating margins increased to 15.5% this quarter. The main drivers of the improvement were higher prices, volume increases in our talc and GCC West businesses, as well as productivity and cost improvements. These improvements were partially offset by higher lime and energy costs in the quarter, and the lower PCC volumes in North America associated with the reduced paper demand. As a note, the higher lime costs were contractually passed through with higher PCC prices in the quarter. Now let's go through the results within the Refractory segment. Sales were 4% higher versus last year, driven primarily by 3% growth in Europe refractories and 8% growth in metallurgical wire. We continue with our growth track in the Middle East, and have also captured new business with several customers in the U.K., Turkey, Germany, India and the Netherlands. Sales in North America were only 1% higher, but volumes were impacted early in the quarter due to the freezing conditions on the Great Lakes, as well as 2 production curtailments at U.S. Steel Gary Works due to a roof collapse. However, volumes improved in May and June. Operating income for the segment increased 26% to $10.7 million, and operating margin improved 210 basis points to 11.7%. This is primarily due to a strong performance in Europe and a favorable foreign exchange in Turkey, which more than offset the lower profits early in the quarter in North America. Also in the quarter, we announced a cost-per-ton contract with Bhushan Steel in India. This is a 3-year contract, which is expected to generate $2 million in annual sales. Sequentially, Refractories segment sales were higher by 8% due to a 9% increase in refractory products and a 7% increase in metallurgical wire. Operating income was 16% higher than the first quarter, which is better than we expected and communicated on the last call. This was due to a very strong performance in Europe in all product lines. Looking forward to the third quarter, we see stability in the North America and Europe steel markets, and we expect to maintain our strong performance into the next quarter. Here's a table of the 210-basis-point improvement in the Refractories segment operating margin. Margins expanded primarily due to a strong performance in Europe refractories, wire and equipment, coupled with the positive impact of foreign exchange in Turkey. The segment generated a 7% improvement in productivity over last year, which also added to the margin growth. These improvements were offset by lower volumes early in the quarter in North America. Now let me take you through the performance of our 3 new business segments. In this quarter, I'll just give you a basic outline of the segments' product lines and sales levels, and I'll give more color on changes in sales and income in subsequent quarters. Again, please take note that the results for each of the segments exclude the special charges, represent only a partial quarter, reflect the purchase price adjustments to depreciation and amortization and include full absorption of all corporate expenses. I'll begin with the Performance Materials segment, which includes 3 product lines: metal casting, household, personal care and specialty products and basic minerals and other products. Our Performance Materials segment is one of the world's leading producers and suppliers of bentonite and bentonite-related products. It also supplies chromite and leonardite, and operates more than 25 mining and production facilities worldwide. Sales in this segment were $75.8 million, with operating income of $9.1 million. On a full quarter pro forma basis, sales increased 4% over the second quarter of last year. Metal casting, the largest product line in the segment, recorded sales of $39.4 million. This product line was faced with significant rail logistics issues out of our Wyoming and South Dakota mines and processing facilities, which affected both sales volumes and operating costs. Due to the lack of rail car availability, we absorbed significant increases in operating and transportation costs due to adjusting our production schedules, and having to utilize higher-cost truck transportation to satisfy customer demand. As a highlight in the quarter, we commissioned a new Additrol facility in Shell Rock, Iowa, which will improve our sales and service to our foundry customers in the Midwest. Household, personal care and specialty products recorded sales of $23.4 million. This product line contains our pet litter, fabric care, health and beauty and agricultural specialty products. Basic minerals and other products recorded sales of $13 million. This product line contains sales of bentonite, chromite and leonardite to a variety of end markets and industrial applications, and also includes sales from our internal transportation and logistics group. Looking forward, we see stable demand across all 3 product lines, but will continue to face rail logistics issues and higher operating and transportation costs. In total, we expect a similar run rate performance in the third quarter. The next new segment is Construction Technologies, which consisted 2 product lines: environmental products and building materials and other products. Partial quarter sales for this segment were $37.2 million and operating income was $3.8 million. On a full quarter pro forma basis, sales increased 14% over the second quarter of last year. Environmental products sales were $17.3 million, and this product line includes bentonite base lining technologies and liquid containment products for environmental projects, such as landfill and mine waste disposal sites, as well as other environmental remediation applications. Building materials and other products sales were $19.9 million. This product line includes various active and passive products for waterproofing of underground structures, commercial building envelopes and tunnels. It also includes drilling products for commercial building and construction foundations and for horizontal directional drilling applications. This segment has generated strong momentum over the past several months through the deployment of new technologies in both product lines and to new geographies. It recently completed a large environmental containment project with Alcoa in Saudi Arabia, and is currently working on several major construction projects, such as the rail and subway tunneling projects in New York City. Looking to the third quarter, we see continued strong performance in this segment, as new environmental lining and waterproofing projects continue on track. The third new segment is Energy Services. Partial quarter sales in this segment were $48.6 million and operating income was $6.9 million. On a full quarter pro forma basis, sales increased 9% over the second quarter of last year. This segment provides products and services to the oil and gas industry, including a range of on and offshore water filtration, well testing, pipeline coil tubing and nitrogen services, primarily in the Gulf of Mexico and the surrounding onshore areas. This segment had a strong performance in filtration, well testing and pipeline services, primarily due to large projects that continued throughout the quarter. Coiled tubing, however, had a difficult quarter, with lower demand due to the significant amount of excess capacity that currently exists in the onshore market. Looking forward, we see lower sales and operating income for this segment in the third quarter. A number of larger filtration and pipeline service projects that were ongoing in May and June have been completed and will not reoccur in the third quarter. Also, the third quarter is typically a seasonal low period, as this segment is subject to weather conditions in the Gulf of Mexico, which can impact higher-margin offshore projects. I'll also caution that earnings in this forecast, due to the nature of the services we provide, many projects are performed on very short notice from our customers, yet can be sizable in nature. The combination of these 2 factors can lead to significant swings in segment profitability quarter-to-quarter. Let's now review our cash flow and capital spending for the quarter. You can see strong cash flows generated post acquisition. Cash flows from operations, including a partial quarter for the acquired business, was $92 million, and our cash balance ended the quarter at $208 million. We tightly managed capital spending, which was $26 million in the quarter, driven primarily by the construction of our new PCC satellite facilities in China. We also focused on working capital across the company, and a portion of the strong cash flow generated in the quarter was due to working capital improvements made in the acquired business. Cash generation will continue to be a major focus for us and we'll begin to aggressively delever the balance sheet beginning in the third quarter. Let me summarize what we're currently seeing for the third quarter. In the Specialty Minerals segment, we expect a similar performance to the second quarter, but we'll see the typical seasonal decline in performance minerals product line late in the quarter. In Refractories, we expect to continue the strong performance and generate similar sequential operating income. In the Performance Materials segment, we see continued strong demand across each of the product lines. However, we expect the difficult rail logistics issues to continue in the third quarter. In total for the segments, we see a similar level of run rate performance as the second quarter. In Construction Technologies, we also see continued strong demand and project activity in both product lines throughout the third quarter. As a result, operating income will continue to be strong, similar to second quarter levels. In the Energy Services segment, we expect operating income to be about $3 million to $4 million lower in the second quarter, as a number of large filtration and pipeline projects have been completed and will not reoccur. In addition, the third quarter is typically impacted by weather conditions and storms in the Gulf of Mexico, which disrupts offshore oil and gas production, which are our higher-margin projects. One other item that will affect our earnings over the next 2 to 3 quarters is higher inventory costs associated with the step-up I mentioned in my comments earlier. The utilization of this higher-cost inventory will reduce earnings by about $0.03 in each of the next 2 quarters. In total, we expect earnings per share to be approximately $1.05 to $1.10 in the third quarter, which will be 65% to 75% higher than the third quarter of last year. As Joe mentioned earlier, our focus over the next several quarters will be on integration, improving business performance, capturing targeted synergies and generating strong cash flows to begin paying down debt. Now let's open it to questions.

[Operator Instructions] And our first question comes from Daniel Moore from CJS Securities.

I just wanted to clarify, in the chart that you had there, Doug, on synergies, you had about $0.05 of benefit in the quarter. So on a run rate, looking more like $0.08 or $0.09, is that the -- that's the already experienced out of the $50 million of synergies that you hope to achieve over the first year or 2? Just want to make sure I'm not kind of double counting here?

Yes, that's correct. So we expected -- our target was to achieve $25 million in run rate synergies for the first year. So you can see that as we ended the quarter, we're at that -- we're at $17 million run rate. And so we expect that to grow next quarter to about a $20 million, $20 million to $24 million run rate, and we think we'll be, at the end of the year, at about a $28 million -- a $26 million to $28 million run rate, so that's where we get ahead of our target, our first-year target by about 6 months.

Perfect. It sounds like, shifting gears here, in the PCC side of the business, some of the volume from Courtland that you thought you'd get back maybe taking a bit longer, do you still expect that to recover, most of that loss volume? Has some of it sort of remained offline or slipped to competitors, maybe any color there?

Yes, we did. You're right. We expected that to be absorbed within the IP system throughout the quarter. We didn't see that happen. We will note that we did see paper production was down 4% in North America over last year, and we also saw an uptick from imports, paper imports. And so we expect some rebound in that volume, but as of the second quarter, we didn't see it, and we think some of that may have been picked up with some imports.

Got it. And lastly, and I'll jump back in the queue. Joe, tremendous color. You've seen most of the facilities in North America, now heading out to Asia and beyond. What have you seen thus far that has surprised you significantly, either positively or negatively, relative to 5, 4, 6 months ago, when we were just getting started?

Dan, I'd say, right now, we really -- I haven't seen any major negative surprises. Things in terms of, let's say, with opportunity areas or issues or challenges are pretty much what we thought they would be. And in terms of the trips I've been making and meetings I've had with both management and employees, it's reinforced the potential that we saw in the company, in terms of the growth potential, the potential to integrate some of the MTI systems around operational excellence. And there's a, I think I had mentioned, before the acquisition, we felt that the manufacturing base was pretty solid. And so far, what I've seen, it reinforces that, which means that we should be able to go faster, from an operational excellence, full operational excellence integration standpoint, as contrasted to MTI when we started out in 2007. So it's been more reinforcing as opposed to some surprises, basically triangulating what we thought. And on the customer side of things, things have just stayed right on track. I don't think we've missed a lick on the customer side. The biggest challenge we've had, and Doug talked about it, is the rail car issue. There've been -- those challenges were there in the first quarter for AMCOL, and they continued into the second quarter. But overall, that's why I mentioned in my remarks, that it's just tracking very, very well.

And our next question comes from Ivan Marcuse from KeyBanc.

Real quick, from a -- I guess these are more questions for Doug. If you look at your CapEx and your D&A, now that you've been able to do the accounting, where do you see that for 2014, 2015?

Sure. So with the purchase price adjustments and the amortization changes, depreciation and amortization changes, total annualized depreciation and amortization is about $112 million for the entire company. That's about $14 million incremental on a pro forma basis, and that's where we landed on. Again, things are still moving around a little bit, but that's where it's -- that's what it's looking like, our planning [ph].

And then on the CapEx?

Well, CapEx for the quarter was $26 million. For 2014, we're estimating $100 million to $110 million for the combined company.

Okay. And then on your cost savings, you got $2.5 million. Was that at any particular segment or was that just more on the corporate side? And where do you see sort of the -- sort of how do you see the cost savings, I guess, flow through the different businesses more as we move through the year?

The first $2.5 million were more duplicate corporate expenses, professional services, things like that, fees that were redundant and duplicate. Going forward, though, and -- but some of that was due to shared services implementation. It's kind of hard to give you exactly how that's happened across the segments, but what we're doing is we're absorbing transactions and organizing into our shared service model, and that's a combination that's coming from a combination of the 3 different business segments. But the synergies that you see going forward, will be more of that. There'll be more in terms of continued deployment of the shared services. You noticed we announced our restructuring program that's dealing with the deployment of our shared service model, and there'll be some headcount reductions, and I mentioned about 5% associated with that. So that's where the continued progression of synergies will come over the next several quarters.

And then if you look at -- you have 5 reportable segments now, is this sort of a reporting structure that you want to keep going forward? Or do you see, as you sort of integrate this business, consolidate down to maybe less than 5?

Yes, as you noticed, 5 is a lot, right? So we're going to continue with 5, we think for a while, and see how it goes. We wanted -- we felt that would be the best way to continue to describe the business, how we operate the business. There may be some changes later on, but for now, that's -- we're going to continue with the 5.

Great. And then my last question is more on the NewYield product, which looks fairly interesting. What kind of -- and you may have said this, and I apologize if I missed it. What kind of sales do you anticipate this producing? And is there any way to quantify the opportunity in China and India that you identified in terms of revenues and your ability to capture that? And what do you see sort of as the timing of those revenues or how long does it take to commercialize this product to a fairly meaningful level?

Yes, Ivan, I think I mentioned in my remarks that for China, we're targeting around $80 million. That's what we see as the potential. And the platform itself, will have, let's say, other product applications. And that overall, beyond China and in the other application area, that it could be double that. So we could be looking at a potential of $150 million to $160 million. And keep in mind, this is something we've been actually working on. We've talked about, from time to time, that we were focused on the papermaker processes, and the ways to save them energy or process steps. So this is something that has been in our pipeline, that we've touched on, and we're -- it's -- it is the fact that we have a commercial agreement, I think, is quite significant for the company. And so we are expecting to be able to do more with it. It's going to take a little time to prove it out at the first site, but there are other identified sites that are right behind it. I'm going to ask D.J. Monagle to kind of give a little more to it, because he's the one that's been leading this. D.J.?

Ivan, I'm going to try and take you back to some discussions we had back in January, to go along with that pipeline, but we were talking about addressing with a couple of different products that are in energy and sustainability. This NewYield is the branding that's associated with that thrust into this area. In addition to what Joe said regarding the market side, I guess I'd like to emphasize 2 other things. Although it is a different manufacturing process and a different product, well, it still holds true to our satellite model. So we are on-site, in this case with Sun Paper to start out, and so the basic business model stays the same. It's on-site. It's very intimate, and it's very much formulated in partnership with the customer. And then we'll be deploying this by location as we go forward. But we're quite excited about the NewYield platform.

And our next question comes from Al Kaschalk from Wedbush Securities.

I wanted to focus on the rail car matter in particular, in Performance Materials. And specifically, what -- have you seen any ease come in the July, August timeframe here? Or how long do you think this plays out?

Al, this has been a tough problem for the business, and we recently actually took advantage of the fact that -- as part of the integration, but we've run some kaizens, both at our Lovell facility and our Colony facility. And I'm going to ask Gary to kind of give you a little more perspective around it, but we have developed a plan to work this down, but it's a complicated problem. It's not one issue. It's a number of issues that the teams that participated in the kaizen have now developed a very aggressive action plan around. And I'm going to turn it over to Gary Castagna to kind of walk you through it a little further. Gary?

Al, yes, the situation is that, in terms of the most recent period, as you asked, actually, from the rail supply standpoint, there's actually not been a great amount of improvement. However, referencing to Joe's point on the team work on the -- and our kaizen process, we do expect through different management initiatives to be able to narrow the problem down, the extent to which is still under evaluation as to where we can get there. Because ultimately, the issue is, is that the rail companies, and we're talking about 2 rail companies here, one being the BNSF, the other being a subsidiary, the Genesee & Wyoming, having independent issues with respect to rail car supply availability, most of that to do with just the other demands on the supply chain.

Meaning there's higher economic use for them, so your rate would elevate, or you would need to pay up for it?

I don't think I can speculate it's even that, Al.

I think it's fair to say the team that worked on these, that has developed a plan, that we do see daylight, we do see a pathway to getting to a much better place in a reasonable period of time. Some of these can't be solved overnight. Some of them are chronic issues within the rail companies themselves that we're working in addressing at a different level. Others are things that the management teams have under their direct control, that they can change and affect, and those are putting into -- being put into place right now.

The observation is coming because the operating margin, even adjusted, seems to be below, or quite a bit below, and I'm sure not at the level both Gary's accustomed to, but also, obviously, that you're expecting, Joe.

Yes, so you have to remember a couple of things. Also, the increased depreciation, amortization, the purchase price adjustments, but also, that number is reflected on a fully allocated basis. You might be familiar with past results, where there was a corporate center reported separately, all of that corporate expense has been allocated to the 3 segments now.

Fair enough. On the organic growth side, Joe, can you give a little more details? And I don't mean for the next quarter, but maybe it's the next year or so, if there's an update on some of the commercialization of these products. It sounds like the Novinda one has moved along quite nicely from a publicity standpoint, but I'm wondering about the revenue standpoint.

Yes, well, they are getting orders, and they're close to some additional orders, and that's what we're seeing right now. We are seeing some additional orders coming through, and we're actually getting ourselves ready for higher demand towards the latter part of this year, early part of next year. We're even at the point right now where we're looking at additional capital to expand capacity. So it isn't -- I mean, it's beginning. We haven't felt the full impact yet, but we're looking at more of the customer contracts side, and beginning to see more contracts lining up, that as they become signed, are going to translate into -- could translate into significant volume for us. But we don't expect to see that, as I said, until the fourth quarter or so. Some will be in the third quarter, but actually, expecting it to start to come in, in the first quarter next year. Does that -- Patrick, does that sound about right?

Yes, we -- Patrick Carpenter here. We know through Novinda that we've got, Al, we've got 4 contracts. A significant energy company in the United States is about to sign the fifth. We're in the final details of that. So the contracts will be, by the end of the month, at 5. And the mass drive for that regulation will fall in place at the end of Q1 '15. So we expect a significant ramp-up of utilization of this technology to meet that regulatory drive towards the end of the quarter 1. So '15 would be a significant pickup, and then well into '16 and furthermore.

Right. And finally, if I may, it looks as if the Energy Services had a nice benefit from what I think is the critical technology there, the filtration side. Can you elaborate if that was some new wins or is it placement? What transitioned there from maybe since your ownership?

Al, this is Doug. Yes, the 3 areas -- 2 main areas that really had really strong performance in the second quarter was the filtration and also the well test. We had a large pipeline job as well that continued through, and that was -- it was really an offshore -- large offshore projects that continued through, through the quarter. So those 3 main product lines did very well in the quarter. I did mention though that, as you probably are familiar with the segment, these very large projects can come on and go off. We're not seeing those sizable projects in the third quarter, but it was filtration. It was traditional filtration. I'll pass it over to Mike to give you a little bit more color on that. Mike Johnson, to give a little bit more color on the type of projects that happened in the second quarter.

Thanks, Doug. Al, it's Mike. Al, I guess the big improvement for oilfield services was the deepwater business with filtration, and the high-pressure work with well test, plus the online -- I mean, the online pipeline work. We also had -- we restructured Malaysia, but also, we also secured the contracts in Brazil. So all those helped improve Q2.

And our next question comes from Rosemarie Morbelli from Gabelli & Company.

Joe, looking at that NewYield technology, or D.J., as you are going to provide the paper, the paper mill with some new fibers or filling pigments that you will extract from the waste, isn't that going to be cannibalizing some of your other PCC business in that particular location?

No, it actually -- I'm going to let D.J. give you a little more depth on this, but actually, it's additive. So because it's providing actually more product in terms of what the papermaker needs than they're currently getting. And actually, it's going to make a nice combination for us. I'll call it a trifecta, if you think in terms of base filler satellite, a high-yield process and FulFill 325 on top of that, it paints a picture of, particularly in a place like Sun, where we're starting, where you could see all of the 3 different technologies that we have, our base, our NewYield and our higher filler technologies coming into play in a very coordinated and integrated way. D.J., you want to add a little more to that?

Glad to, Joe. Rosemarie, a couple of things. First, there's a unique situation with Sun. And when you think of Sun Paper, you need to think of millions of tons of paper that are produced at one location. So this application of NewYield is only additive to us. There's no cannibalization at all that goes on there. More importantly, as we look at the rest of the market, those numbers that Joe and I were sharing are all incremental growth. It's letting us into some paper mills that would have been tough to get into based on the value equation of their current filler pigment. It's primarily targeted at emerging economies, where their papermaking process is not as environmentally friendly as what we see in North America and Europe. So this is all growth to us. The only thing that is -- and as I mentioned before, it's a satellite opportunity. The only thing that's different is that the value equation's a little bit different. We provide a highly-engineered filler, that part's the same, but by reducing the papermakers' landfill and environmental costs, that's additional value that's created. And also, the raw materials that go into this are much different and have a different cost profile. So all those things are different.

So once you put it all together, the margin on those revenues is not going to be different from what you have. You gain on some sector and then lose it in another?

I don't know about the losing it...

Well, you have a higher cost of raw materials, if I understood what you said. No?

No, no, lower. Bordering on free, for the main conversion of raw material that is typically a waste product. So what we have is similar returns for the capital, and we'll have very good revenue, and more importantly, good margins that come from that.

Okay. And looking at AMCOL, Doug, are you going to provide us with some pro forma numbers and going back to the first quarter of this year? And adjusted, of course, for that corporate expense that they used to exclude and that you are putting into those segments?

Well, we did put out the pro formas of the combined companies with the purchase price adjustment. Those were published prior, obviously, to these results. And it's difficult to go back, Rosemary, and give you -- the segments are different in terms of how we've constructed them, slightly different. The basis of their operating income is different, given that they're now fully allocated with the purchase price adjustments done to each, different amortization in each. So no, I wasn't going to provide you a bridge of these results to say the first quarter. But we did publish that, and it should give you a good feel for the adjustments that were made to the company -- the companies, and I can provide that for you again, if you'd like, and we can take you through those in a subsequent call.

So if we look at the second quarter contribution of $0.38, adding back that $0.05, adding to it the $0.05 of synergies, and then taking out the interest expense, is that more or less -- and then, of course, put it on a full quarter basis, is that more or less what we should be expecting, going forward, except for the fact that the synergy part is going to increase?

Well, yes and no. So yes in the sense that your math is absolutely correct. That is the contribution. And putting it on a full quarter basis, again, there's going to be some seasonal-ization to that number. As I mentioned, you're going to go into the third quarter, and we do see the decline in the Energy Services business. I'll also say you're going to see -- I tried to mention that you'll see some increased inventory costs, as we draw down the higher -- the marked up inventories. You're going to see about $0.03 per quarter over the next few quarters in terms of higher inventory. So on a run rate basis, I think, we're -- you can use those numbers adjusted for what I see in Energy Services and the inventory cost.

Okay. And then lastly, if I may, on the railroad issues. Is one of the solution to truck everything? Or what else are you thinking about if the railroad are making more money on servicing other customers, and therefore, you don't have the availability of the railcar that you need?

Yes, Rosemarie, we have been. Trucking is the countermeasure. It's a costly one, but that's what we do to ensure that we don't miss any customer orders and all the orders are basically getting filled. So the issue is not fulfillment. It's getting back to a lower-cost and more stable supply chain system. Because this has disrupted our supply chain, we've had to do things we normally don't do, and that's why we've got pretty high expectations out of the work that the kaizen teams have put in place. But it's -- like I said, it's a number of issues that should result as we're successful in just getting back to a more stable place, but also getting the costs back to where they should be from a transportation standpoint.

I understood that you are more or less at the mercy of the railroad companies.

Well, we can truck -- I mean, you can trans-load. You can truck to another railroad. We're looking at things like that, and we can truck as far as we want, but it's more expensive than rail. And they have had a very good system in place that's been stable, served them well. But when the car shortage issue came up, it's caused a lot of the disruption to the whole system.

And our next question comes from Steven Schwartz from First Analysis.

In your prepared remarks, Doug, I think you mentioned in PCC, a Domtar facility, the Ashdown satellite, was seeing weakness?

We did. They actually had a prolonged outage in the quarter. It was unplanned. They saw some -- the lower demands -- so we saw the Courtland facility, that's the main driver of the lower volumes in North America. But then, yes, that is a Domtar facility. It took an extended outage. D.J., the main issue there was?

Yes, so a couple of things. And so we didn't actually highlight Domtar, Steve, but yes, they have a facility that is where we're co-located. We service a couple of customers from there. One of the locations that we used to service, that was an announced shutdown, was at Georgia-Pacific in Crossett, Arkansas. So that took away some volume from us at Domtar, and there were some curtailments that Domtar had done in general, and I can't provide much more color than that, but what the volume effect that we saw was concentrated at that Ashdown facility.

Okay. Well, sorry to put you on the spot there, D.J., with your customer.

No problem.

Anyway, okay, but it's isolated to the quarter, in other words. So IP Courtland is really the only ongoing concern we should have, it sounds like?

Yes, I mean, the Crossett volume was a machine shutdown last year, so that's some of the comparable year-over-year. But going forward, it's really the Courtland volume that's out, and then we'll be looking to continue to be taken up in the IP. But as I mentioned earlier, we haven't seen that happen, Steve.

Yes, and so if you had to estimate, you've got so many great initiatives in developing your volumes in Paper PCC in development. Even for a couple of quarters though, the North American issues have outweighed those. So when do you get an inflection point, do you think? Is it just 2 more quarters until we lap the start of Courtland?

Well, I don't -- we haven't been -- the North America sales decline -- North America and Europe combined have not been greater than what we've added in Asia. Actually, we're ahead of that curve. We're keeping pace. Let me put it that way. We've kept slightly ahead of pace of what's come out of North America and Europe combined with our building in India and China. And if you look at going into next year, we should have about $38 million to $40 million, $43 million worth of new revenue. Well, it will ramp up through next year, but that's what we're installing in those 5 contracts, those 5 ramp-ups in constructions next year. So look, we do see the occasional mill come out, but within the next year, we should be well ahead of that pace.

Okay, well, then that was a misunderstanding on my part, so I appreciate you setting me straight there. Just as a follow-up question, with respect to the NewYield program, so are there capital requirements with each new site, capital requirements on MTX?

Steve, it's D.J. again. Yes, there are, and it is similar to what we experienced with our filler satellites today. It's just a different manufacturing process, but again, the same basic business model that goes in. So with every new location, it will be a -- some sort of a capital needed to deploy that technology.

Okay. Is it significant enough for us to want to pay distinct attention to?

No, not any one deployment would require significant capital spend. You're looking at, going forward, our plan is that, as we're building and proliferating, what our need for capital is will be commensurate with what we've been doing over the last couple of years in China, where we're building 5. So you're talking about a few million dollars, Steve, to frame it up.

We do have a follow-up from Daniel Moore from CJS Securities.

Just a follow-up to the last question. The return profile for NewYield, pretty similar to kind of a new PCC satellite, greater, lower?

Slightly better at this time. Again, we'll -- as we deploy further, this is the alpha site. But right now, we would look at it as equal to or slightly greater.

Great. And obviously, with the synergies running ahead and the cash flow that you've generated in the quarter. Is $265 million still sort of an accurate target for year 1 in terms of cash flow from operations? Or should we think about that being ahead of that goal as well?

That's probably about right, Dan. We'll probably be a little bit ahead of that, but I think you got about right.

Okay. And then one more. Quickly, just on the metallurgical wire side and just refractories in general, really, pretty significant uplift over the last couple of quarters. You put it all together, just what you're seeing in terms of outlook, you've mentioned it's sustainable for Q3. Are these types of levels sustainable and can we grow from here over the next 2 to 4 quarters?

Yes, we're looking right now sustainable in the third, and that's really due to a number of the projects that have come on in the Middle East. We've had a new -- some new equipment sales there, which are delivery of new refractory products to a couple of customers in the Middle East. We have some new share gain in India. I mentioned in my remarks a number of new basic oxygen furnace business throughout Western Europe as well. So that's all new business for us, and some of that came on in the second. We expect it to continue, some more to come on in the third. We do think that, that's sustainable. And then as you see, we have the one new CPT contract with Bhushan in India, will contribute about $2 million per year. And we're close to another one, another contract in the U.K. So yes, I do see it sustainable over the next several quarters at this -- at kind of these sales levels. Does that help?

It certainly does.

And we have a follow-up from Rosemarie Morbelli from Gabelli & Company.

I was wondering if the turmoil in -- and the issues between Russia, Ukraine and Europe is going to affect some of your operations? Do you have a feel for it?

Yes, Rosemarie. This is a question that came up on the last call as well in that we do...

But it's getting worse since the last call.

Yes, it is, but I'd say we are well-prepared. We do get some supply in wire, as you'll recall, some calcium metal from Russia. That could be affected and Han Schut and his team has put some things in place to abate that, should it occur. Han, would you like to comment on that, please?

Yes, Rosemarie, thank you for the question. Of course, first of all, we have our Canaan facility, and in our Canaan facility, we produce calcium ourselves. So we're the only producer in the Western hemisphere whose actually backward integrated. And what we have been actively working on is to increase our self-sufficiency and to reduce our dependency on Russia. And of course, also, we have made sure that we have increased our inventory levels, that if there would be a sudden change, that we're covered for our customers.

So at the moment, Russia doesn't want any of our chickens. I don't know what it is that they don't want from Europe, but obviously, there is a big trade agreement between the 2 of them. So could it be that if they don't take some, and I'm going to pick anything, cars, airplanes and so on, coming from Europe, then their steel production comes down and that would affect your operations, right?

Well, Rosemarie, we have a small portion of our sales into Russia. We do sell into Russia, but it's not a real significant portion of our sales. So from a sales side, it will have some impact, but not significant. I think, to -- on the supply side, as Han mentioned, it's probably a little bit more of an issue, but again, we're backward integrated in our calcium production in Canaan and working to make sure that we have mitigating processes if something were to happen, severe.

And the improvements you have recently seen in Europe, could that suddenly go away?

I don't think so. A lot of that has been really in the Middle East. It's been in Western Europe, and as I just mentioned, India. So -- and a lot of that -- those supply chains and those production facilities, again, we have our Turkish facility supplied through Turkey and into ourselves. We have some integration, a vertical integration there. And our facility in Ireland is also supplied from Turkey, as well as we do buy some magnesium oxide from China. So I think that growth that I just mentioned to Dan should be sustainable, barring an economic-type downturn that could happen in Europe.

And I'm not showing any further questions. I would now like to turn the call back to Rick Honey for any further remarks.

That concludes today's call, and thank you for your interest in the new MTI. Have a good day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.