Minerals Technologies Inc. (MTX) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Minerals Technologies First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] As a reminder this call is being recorded. I would now like to turn the conference over to your host for today, Mr. Rick Honey, Vice President of Investor Relations. Sir, you may begin.

Good morning. Welcome to our first quarter 2015 earnings conference call. Today, Chairman and Chief Executive Officer Joe Muscari will provide some insights into our first quarter performance, as well as an update on the integration of the three businesses acquired last May. 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 2014 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’ll turn the call over to Joe Muscari. Joe?

Thanks Rick, good morning everyone. Today I’ll be providing a general overview of our financial performance and recent accomplishments, the inroads we’re making in integrating the new businesses acquired from AMCOL and then give you a closer look at our direction and progress to grow through new product development and innovations. Despite the challenges we faced with the Energy Services business related to low oil prices and the client utilization in the steel industry, we achieved earnings per share for the quarter of $1.07, which is 84% higher than the first quarter of 2014. This jump in earnings punctuates just how accretive the AMCOL acquisition is to us. We saw strong contributions from all three acquired businesses, and this growth was also aided by the synergies we've achieved – expect to continue to achieve. Doug Dietrich will go into more detail on the synergies, but it’s fair to say that we are well ahead of the targets we set and there is more to come. Overall as another testament to the value of the acquisition, our margins have improved by 20% over the prior year, and during the quarter we paid down $40 million of debt, which is a key point of focus for us. As you can see from this slide, the accretive effects of the acquisition are quite pronounced relative to our historical earnings, the acquisition is clearly transformational, not only in terms of the two excise change, but more importantly and as we’ll touch on later, we have a stronger foundation upon which to grow as we, wasn’t our base of both organic growth opportunities, as well as potential acquisition candidates. Let’s review some of the highlights from the first quarter, our Paper PCC business and our focus on growth in Asia especially opportunity laid in China continues to bear fruit. In early April I went to China to sign an agreement with the Sun Paper Group, China's largest privately held paper company for 100,000 ton PCC satellite for paper filling. This is our third commercial agreement was Sun Paper and noteworthy in this contract however is the provision that Sun will evaluate at least two of our fulfilled high filler technologies; E-325 and FulFill F. As many of you know these have been key pieces to tour FulFill technology platform of products. We also added another commercial E-325 agreement with the European papermaker in the quarter. We now have 19 commercial agreements for use of E-325 with paper mills around the globe and we’re actively pursuing an additional 18. We also signed an agreement in March with the North American papermaker for our FulFill V-426 technology, which is an alternative to the E-325 and it also provides higher levels of PCC Filler to replace high cost wood pulp. Sun’s agreement to evaluate the FulFill F technology is a major opportunity for us that could have significant long-term ramifications and for those of you who followed MTI over the years you’d recognize FulFill F by its former name, Filler Fiber. While E-325 and V 426 increased filler levels as their names imply by 3 to 4 – by 3 to 5 and 4 to 6 percentage points FulFill F provides a different technological approach to increase the fill rate by 10 percentage points or more which would translate into a 50% plus increase in filler rates from current paper-based load levels. As many of you also know, FulFill F has been previously successfully trialed in Europe, Asia and North America. However, you know in order to approve the long-term viability of the technology in investment in a commercial scale facility is needed. Of course this is early and we’re in the initial investigative stages with Sun Paper, but I believe this could turn into a major step forward for us. With the most recent Sun Satellite MTI now has five PCC satellites under construction in China, one of which is a new yield facility, new yield is the new technology platform that converts a papermill waste stream into usable pigment for paper filling. We’ll begin to operate operation of two satellites in the third quarter and three in the first half of 2016. These efforts will bring our presence to a total of 10 satellite facilities in China. One of those plans as mentioned previously is a 50,000 ton satellite for coating-grade PCC that marks our entry into the packaging market, a potential $100 million market opportunity for us. Let's take a quick look at the rest of the company. Performance Materials had a very good quarter with the North American metalcasting business delivering continued solid performance and the business unit also had good performance from household and personal care products. Refractory faced the challenge of a slowdown in the worldwide steel industry with the North American market being impacted the most, which reduced sales for the quarter. Imports of course are also playing a role here, but the business unit through various cost-saving actions was able to maintain an 11% operating income margin. Construction Technologies, which got off to a very slow start in January in the midst of the normal slow construction season, also was able to maintain double-digit operating income margin in the period. Consolidation of manufacturing facilities in this segment, primarily in Europe continues on track and we should be seeing improvements in production supply chain efficiencies later in the year. As oil prices remain in the $50 to $60 a barrel range and facing overcapacity with our onshore services, we’ve continued to aggressively reduce costs throughout Energy Services. The coil tubing business is a primary point of focus and we’re engaged in consolidating our facilities and restructuring the organization. These efforts have had helped Energy Services maintain a reasonable operating margin and profit level during this difficult period. Additional adjustments will be made as needed going forward and we’re obviously monitoring the situation closely. I should mention that the Filtration/Water Treatment business, which is core to this segment is holding up relatively well so for. Our Performance Minerals business, which typically has a slowdown in the first quarter had very solid performance with good improvement over the prior year. The immigration of former AMCOL continues to progress nicely on all fronts. Our efforts to introduce former AMCOL employees to our operational excellence processes are progressing and on track. As we’ve just completed Wave II training and are beginning to see such processes as 5S, standard work, daily management control and Kaizens being incorporated into daily work activities along with good safety practices. To date there has been a high level of engagement, openness and I’d say a willingness to learn by everyone involved, which is having a very positive effect on the overall assimilation process and company performance. In the area of technology integration, scientists from the heritage MTI and former AMCOL are continuing to conduct joint projects in sealants, adhesives, pet litter, and most recently metal castings. Joint marketing and penetration plans have also been developed for each of these various. The – I think as many of you know the most difficult part of any integration is cultural assimilation and transformation. I believe we’re also on a very good track here, but full integration of the MTI culture will take some time. Last month we brought together for the first time the top 150 leaders, the senior managers of the company to share our norms, values, business unit strategies, financial performance targets and to provide further insight into the MTI business system. I believe we are now ready as a company to begin to move to another level. Other steps we’ve taken include realigning and integrating the management structure for our operations in Brazil, India, and Europe. Finally we have a team that's focused on integrating all supply chain strategic functions that will be implemented through the course of 2015. I’d like to take just another minute or two to share with you what our current product development pipeline looks like. This slide provides both a look at the historical increase in new products under development, as well as the increase in opportunities that have come with the acquisition of AMCOL. As we look back at the heritage MTI had only 16 new product ideas in its pipeline in 2007. But by the end of 2014 and not including the ideas under development by AMCOL, we have 74 projects. With AMCOL we now have 178 and more than 50 of these have come in as new ideas since the acquisition. As a combined company we have a very healthy new product pipeline with a very disciplined stage gate development process that I believe will lead to higher levels of commercial success going forward. MTI’s heritage similar to AMCOL's was built on a foundation of solving customer problems through innovative uses of minerals; reducing customer costs, improving their quality or enhancing their product offerings will continue to be the basis for creating value as a company and R&D is truly the engine that drives this for us. For prospective purposes it’s worth sharing that the estimated potential value of this pipeline from stage III on is approximately $500 million and if you include new product that was developed recently over the last three, four years that’s still being commercialized, the total potential value is another $400 million to $500 million. On that note, let’s now turn it over to Doug Dietrich for a detailed look at the first quarter performance. Doug?

Thanks, Joe. Good morning everyone. Let me take you through our first quarter consolidated and business segment results. This is the third full quarter results post-acquisition for our five reporting segments; Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services. I’ll highlight for you the key market and operational elements of our results in each of these segments. Our first quarter earnings per share from continuing operations were $1.07, excluding special items, it’s an 84% increase from the $0.58 recorded last year. Our earnings were slightly higher than $1.00, $2.05 range we communicated on the fourth quarter call, due to higher operating income in the Performance Materials segment and foreign exchange gains included in non-operating income. Reported earnings this quarter were $1.01 per share, which included special charges of $0.06 related to acquisition integration costs. Our sales for the quarter were $453 million, which was 85% higher than the first quarter of 2014. Foreign exchange had a negative impact on sales of about 4% or $18 million. We saw year-over-year and sequential sales growth in a number of our minerals-based product lines, which were offset by lower sales in Energy Services and Refractories segments. Operating income excluding special items increased 121% to $63.3 million and represented 14% of sales, which is 20% improvement in operating margin over the 11.7% in the first quarter of last year. EBITDA for the quarter was $90 million excluding special items, which equals 19.9% of sales. Cash flow for the quarter was $20 million. First quarter is typically the lowest cash flow quarter of the year due to a number of annual one-time cash outflows that occur only in this period. Each of our five business segments generated positive operating cash flow for the quarter, however we made over $15 million in incremental tax and compensation payments, as well as an additional interest payment made due to the timing of a debt principle payment. Operating cash flow will pick up significantly in the second quarter and we expect it to be around $90 million for the quarter. For the full year, we see continued strong cash generation with operating cash flow around $300 million and free cash flow of approximately $200 million. Also in the first quarter, we made a debt principle payment of $40 million, that’s brought our total debt repayment to $140 million of the last three quarters and demonstrates our continued commitment to paying down debt. Sequentially consolidated sales decreased 12% from the fourth quarter; 6% of decline was due to the fewer number of days in the quarter, and additional 2% was due to foreign exchange. The balance of the sales decline was from our service based segments of Energy Services and Refractories, which have been impacted by the slowdown in the oilfield sector and weak steel industry conditions. As Joe highlighted, the synergies from the integration are tracking considerably ahead of our targets and I'll give you an update on our progress in a few minutes. Here’s some insight into our year-over-year earnings growth. This table bridges our earnings of $0.58 in the first quarter of last year to $1.07 this quarter. The MTI-base business contributed $0.09 to the earnings growth; the increase in operating income in the Specialty Minerals segment more than offset the lower operating income in Refractories. You can see the acquisition continues to be highly accretive to MTI earnings; acquired businesses contributed $0.68 per share this quarter including the $0.30 in synergies. As I indicated earlier, our progress of capturing synergies is well ahead of our target and these savings contributed $0.30 in the quarter, more than offsetting the $0.28 of interest expense and amortization of deferred financing costs. In total, the combination of these elements improved earnings by $0.49 or 84% over the last year. Into little more detail on the sales and operating income contribution from each of the three new business segments. Total sales this quarter for the three businesses were $225 million and combined operating income was $33.7 million, which was 15% of sales. Performance Materials benefited from strong performances from the metalcasting and household and personal care product lines generating $128 million in sales and 18.6% operating margins. Construction Technologies continued its solid performance from last year with $39 million in sales and 10.5% operating margins. Energy Services has been affected by the slowdown in the oil sector, especially in the onshore markets, however despite the lower sales continued cost reductions in this business have kept operating margins at close to 10%. As I indicated earlier here is the view of the progress we've made with capturing synergies and what we project over the next two quarters. Our original targets shown below the chart were to achieve $50 million in synergies by the end of year two, and $70 million in synergies within three to five years of the acquisition. We achieved $15 million in actual savings in the first quarter, which was higher than the $13 million to $14 million we anticipated on the last call. We are currently at an annual run rate of $60 million, which exceeds our original two year target. For the next two quarters, we have lines of sight to $16 million in savings for the second quarter and $17 million for the third quarter, which will put us at an annualized rate of $68 million and in range of our original $70 million longer-term target. As Joe mentioned, the integration is going well and we continue to progress with deploying our shared service organization and have embarked upon the implementation of our Oracle ERP platform to the acquired businesses. Over time this will help drive additional synergies. The realignment of our business operations in Construction Technologies and the consolidation of several administrative offices is also progressing, and we recently started the integration of our supply chain functions. These initiatives are the drivers of the additional savings this year. Now let’s go through the financial results for each of the business segments, and I'll start with Specialty Minerals. Segment sales were $154 million, which was 4% lower than the first quarter of last year. On a constant currency basis segment sales were flat with the prior year. Within the segment, Paper PCC sales declined 7% over the last year, driven primarily by foreign exchange, which accounted for 5%, and also to lower North America PCC volumes. And for the free sheet paper production in North America was down 3% from the first quarter of last year, impacting our volumes and on a comparison basis we had some remaining volumes from the Courtland, Alabama satellite in the first quarter of last year, as it was shutting down. These lower sales were partially offset by growth in China from the ramp up of our Jianghe satellite and to the startup of our new 100,000 ton satellite with UPM Changshu. These two new satellites contributed 1% of sales growth over the first quarter of 2014. Sales in our Processed Minerals product line were 6% higher than last year, due to 8% growth in ground calcium carbonate and 3% growth in our talc product line. The segment achieved operating income of $23.1 million and an operating margin of 15%. Operating income was 7% higher than the first quarter of 2014 despite the lower sales. On a constant currency basis, operating income was 13% higher. The improvement came from the growth in the talc and GCC product lines, as well as the 6% productivity improvement in the Processed Minerals operations. Sequentially segment sales decreased 4%, due primarily to the six fewer days in the accounting quarter and unfavorable foreign exchange, which lowered sales another 2%. Excluding the fewer days in foreign exchange, sales would have been 4% higher. Operating income decreased 6% from the fourth quarter, which was slightly more than the 5% we expected on the last call. This was primarily due to foreign exchange, which negatively impacted operating income by 3%. As Joe mentioned earlier, we’re currently constructing five PCC satellites in China, one of which is a NewYield facility. The total capacity associated with these five facilities is approximately 400,000 tons. To give you some perspective on how this is contributing to our PCC growth trajectory in China by the end of 2016 with these existing contracts we’ll have a total installed capacity of 900,000 tons in China; said another way, by the end of 2016, our total capacity in China will increase by 160% over where we were in 2010 and we continue to have a number of other opportunities with paper customers that will add to this total. Moving on to our outlook for the segment for the second quarter; we expect operating income for this segment to increase approximately 15% from the first quarter. Paper PCC operating income will be similar to the first quarter as the continued ramp up of new satellites in China will be offset by the normal annual maintenance outages we will see and which typically occur in the second quarter in all regions. In Performance Minerals, we expect a strong quarter and increased operating income as the second quarter is typically the strongest seasonal period for this business. Now let me take you through the Performance Materials segment. The segment includes three product lines; metalcasting, household personal care and specialty products, and basic minerals. Sales were approximately $128 million and were 10% lower than the fourth quarter, primarily due to the fewer number of days in the quarter and foreign exchange, which combined accounted for 7% of the decline. Within the segment adjusted for the fewer number of days and FX, metalcasting sales were down slightly as strong sales in the U.S. and Taiwan were offset by lower sales in other parts of Asia. Household personal care and specialty products sequential revenues were up 6% due to strong U.S. pet litter sales. Basic minerals product line sales declined 17%, driven by lower product sales to the oil and gas drilling and steel markets. Operating income of $23.8 million for the segment, which represented 18.6% of sales; this performance was 11% higher than the fourth quarter and better than what we expected and communicated on the last call. Looking at the second quarter, we expect segment operating income to be similar to the first quarter. Volume growth in our global metalcasting businesses as well as continued strength in household and personal care will be partially offset by continued lower sales in basic minerals. Now let’s take a look at the results in our Construction Technologies segment, which consist of two product lines; environmental products and building materials. Sales for this segment were approximately $40 million and operating income was $4.1 million, which was about 10.5% of sales. Sales in environmental products were 40% lower than the fourth quarter, due in part to the fewer number of days in the quarter, but primarily due to a large riverbed remediation project we had in the fourth quarter of last year, which alone accounted for 25% of the sequential decline. In addition, the first quarter is the seasonally slowest period for landfill lining and environmental remediation markets. Sales in building materials, which also includes construction drilling products increased 7% from the fourth quarter adjusted for the fewer number of days. Strong waterproofing sales –product sales, particularly in the U.S. contributed to the sequential growth. Looking to the second quarter, we expect considerable improvement in the segment as this is typically one of its strongest quarters of the year, with a seasonal pickup in both the commercial construction and environmental markets. We project operating income to double from the first quarter levels. Now let’s turn to the Energy Services segment. This business had sales of $58.6 million, which were 23% lower than the fourth quarter, primarily due to our onshore service areas, directly associated with lower land-based drilling activity. Rig counts in our primary markets of Texas and Louisiana were down 50% over last year. This had a direct impact on our coil tubing business where sales dropped 47% from the fourth quarter. Operating income of $5.8 million was $7.4 million lower than the fourth quarter. This decline was slightly more than the $6 million to $7 million range we communicated on the last call. We saw solid performance from our offshore and international filtration and well testing businesses, as well as from our onshore nitrogen business, which offset some of the decline in coil tubing. As you might recall, directly after the close of the acquisition, we began removing significant segment overhead costs and have continued to do so, particularly in the coil tubing business. As a result, the business was able to maintain solid operating margins in this quarter at close to 10%. As Joe mentioned earlier, we’re in the process of consolidating several coil tubing operations to lower-cost further in anticipation of continued revenue declines. Looking at the second quarter, we’re not seeing any improvement in the weak oilfield services sector, and at this point we expect operating income to be lower than the first quarter, primarily due to continued lower coil tubing sales. Now let’s go through the Refractories segment; sales for the first quarter were approximately $74 million, which was 13% lower than the first quarter of last year. On a constant currency basis, sales were down 7%. Within this segment, global refractory product sales declined 8% and metallurgical wire sales declined 28%. Both refractory and metallurgical wire sales have been impacted by steel production declines in the U.S., Europe, and the Middle East. U.S. capacity utilization has dropped below 69% recently, down from 77% last year as many steel producers in the U.S. are curtailing production due to the high level of imports and falling steel prices. Operating income for this segment decreased 10% from last year to $8.3 million. On a constant currency basis, operating income was flat with the prior year. The business managed to offset the lower sales with overhead cost reductions and a 7% improvement in productivity. Operating margin improved to 11.2% from 10.9% in the prior year. Sequentially, segment sales were 20% lower. This was due to the six fewer days in the quarter, lower equipment sales that are typically highest in the fourth quarter, unfavorable foreign exchange of 3% and the steel market issues I just discussed. Operating income was lower by $3.8 million, which was in the range of $3 million to $4 million decline we communicated on the last call. Looking forward to the second quarter, we expect sequential segment operating income to be slightly lower than the first quarter as steel market conditions in the U.S. continue to be weak. Our first quarter earnings of $1.07 per share were slightly better than $1.00 to $1.05 range we communicated on the last call. We were able to overcome lower profits from our Energy Services and Refractories segments, as well as pressure on our earnings from foreign exchange through strong performances in our minerals-based businesses. In addition, the acceleration of capturing synergies, productivity improvements in all businesses and a very good overhead cost control up to more than offset these challenging conditions. Let me summarize what we’re currently seeing for the second quarter. For the Specialty Minerals segment, we expect operating income to increase approximately 15% from the first quarter. In Performance Materials, we expect operating income to be similar to the first quarter, as strong metalcasting and household and personal care sales are offset by lower sales in basic minerals. In Construction Technologies, we expect the normal seasonal improvement in our main end markets and we see segment operating income doubling from first quarter levels. In the Energy Services segment, we see continued weakness in the oil field services sector, and at this point we expect operating income to be lower than the first quarter, primarily due to lower coil tubing sales. Refractories; we expect segment operating income to also be lower than the first quarter. As I mentioned earlier, a weak steel market conditions in the U.S. will continue to lower demand for refractory and metallurgical wire products. In total, we expect earnings for the second quarter to be approximately $1.15 to $1.20 per share. Let me finish by saying that we see a strong quarter shaping up for our minerals-based businesses. On a strong track, we’re capturing synergies and improving business performance and we’ll continue to deploy the concepts and tools of operational excellence to drive efficiencies in the enterprise. These factors along with the continued high level of employee engagement will help sustain our positive momentum. Now let’s open up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Daniel Moore of CJS Securities. Your line is open, please go ahead.

Good morning.

Hi, Dan.

Let me just start by saying congratulations on the progress that you’ve made, it’s hard to believe that it’s only been a year or less than that, since you bought AMCOL. Maybe just focusing a little on Energy Services, obviously, I think it’s fair to say that the 10% operating margin given near-term headwinds is more than reasonable. Q2 you talked about it being down, can you give us perhaps a little bit more color you expect to maintain profitability and if they are sort of a near-term target margin in mind, given those headwinds continue?

Dan, we do see a little bit lower coil tubing sales continue to decline from where they were we saw in the first quarter. As Joe mentioned, we’re making – continuing to make adjustments in that business to remove costs, or goal is to sustain that type of margins we saw in the first quarter albeit with the lower sales that could be resulting in lower total operating income.

I think Dan the challenge we have and others who are in this segment is just visibility. There is different points of view looking out right now that relate both to the price of oil in terms of where it may settle out, what it’s going to do through the quarter and to the third quarter. There is one point of view that suggest that there could be some settling in the second quarter, potentially the bottom is there, but it's really a question of visibility and uncertainty around the market, and I think that's why we’re being a little bit cautious with our outlook for the Energy Services business.

Fair enough. And in switching gears to Performance Materials, the margins kind of jumped off the page to me, are high teens margins in that business sustainable?

Well let me turn this over to Gary, who is the – Gary Castagna who is the business unit head and he's got the best historical perspective of what the business has been able to do over time, Gary?

Hi, Dan. In terms of the performance of the quarter it's really been on that trend line as we finished last year in various notes part of course is the cost structure changes commensurate with the acquisition, and as well as really the focus on from the growth areas that we have brought in over the last few years, principally the Asian base metal castings business, the household and personal care are areas that we’ve focused on in the last couple of years, also in Asia. So the combination really of both the cost structure, as well as where the growth in the product lines has come from is added into the improvement in the margins.

Excellent. And one more I’ll jump back to queue, perhaps for Doug, I think I heard you say $200 million in free cash flow this year, is that right? If so, we’re approaching $6 a share in free cash. How much – does that include all of the remainder of the sort of working capital benefits that you hope to glean from AMCOL or is there still perhaps a little bit less to come?

Yeah, you know, I think there is still some working capital work to be done, I think we still have some benefits to gain, we haven’t been through a full cycle as you know. What I projected was about strong cash flows, $300 million in operating cash flows, we’re seeing CapEx right now at about $80 million to $100 million. I’d give you approximately $200 million depending on what CapEx was.

Thank you. Our next question comes from the line of Jeff Zekauskas of JPMorgan. Your line is open, please go ahead.

Good morning. It’s Silke Kueck for Jeff, how are you?

Hi, Silke.

I was wondering if you could tell us about your headcount versus the end of the first quarter, and whether all of the identified headcount reduction have been completed or whether they are need to be done and also whether there are remaining cash flows that are still there related to restructuring accrual you’ve taken in 2014?

Headcount at the end of the quarter is approximately 4,500 people, Silke. We still have a restructuring liability on the balance sheet is about $11 million. Those will be funded probably over the next 18 months, some of them are longer-term items associated with the closure of the facilities that will happen throughout the year; 4,200 employees, Silke at the end of the quarter.

How many more [indiscernible] through the course of the next 18 months?

It’s probably about 300, about – so about 100 people, Silke, but that number you know as we’ve gone through with coil tubing we’ve made some major adjustments in coil tubing over this quarter. So right now we have about 100 people remaining of the total to come out.

Do you think with the coil tubing admission, just maybe more to come beyond the 100?

We’ll see how coil tubing plays, I think there is some other areas that might become affected, but right now that’s what we have line of sight to.

And I had a question regarding the components of the cash flow statement led to like the negative free cash flow in the quarter, is that something, can you just like identify what the items are, like what working capital was, and what the other outlays were? And that’s look like a seasonal thing that we will see every quarter in the first quarter going forward?

Silke, the first quarter if you look back in our history, MTI history and AMCOL history, the first quarter has always been very low quarter seasonally. AMCOL prior, former AMCOL was even lower than our cash flows, so it’s not a typical to see this low cash flow in the quarter given the changes in income as it goes through the fourth and first quarter. The big issue we have in the first quarter is really the one time payments that go out in the first quarter, which are not typical in other quarter's; compensation payments, we make tax payment, there is a lot of funding of that goes out in terms of matching, there is number of payments that go out in the first quarter that lower operating cash flow. This quarter we actually had an extra interest payment funded due to the timing of debt, which is about $4 million. So the first quarter is typically low, but when you look at those one time payments, it's – we were at a pretty high level of cash flow adjusted we’re up in the $80 million range if you would apply that to a second quarter and that's why we see with the earnings growth and continuing working capital reductions our projected $90 million for the second thing, and we see strong cash flows for the year, $300 million in operating cash flow.

And if I can last question, so some of the guidance for the second quarter seems conservative because obviously I understand the issues from the Energy business and on the steel side Refractories business, if you look out for the year, which business do you think you have best ability in and which – in terms of improvement going throughout the end of the year?

Look I also mentioned our minerals based businesses, I think some have some strength to them. I think with North America metalcasting, the paper is always subject to European and North America paper declines, but sure that we’re bringing on two satellites in the third quarter in China, plus ramping up the first one in North America, so that should continue strength for us throughout the year. Construction Technologies is moving into their highest seasonal period in the second and third quarter as is our Performance Minerals business. So I think our mineral-based businesses we have a pretty good line of sight to some strength throughout the rest of the year, the uncertainty as Joe mentioned is in Energy Services and the continued where the price of oil is and on and offshore activity and in Refractories. Right now we’ve seen utilization rates continue to decline in April, should that stabilize that may help, but right now we’re not seeing that happen.

Thanks very much. I’ll get back into queue.

Thank you. Our next question comes from the line of Al Kaschalk of Wedbush Securities. Your line is open, please go ahead.

I want to start on the Performance Materials, please. I think during the quarter you had an announcement with Glencore, and then you commented in the presentation materials that the exit plan is progressing as it relates to chromite in South Africa. Just a little bit bigger-picture question here. This from a business standpoint is to facilitate – or the moves you're making, I believe – are to help facilitate supplying your materials to customers. If I recall correctly from the AMCOL days, this piece of the business was not performing exceptionally well. It was under a rework that took the write-off. So the question here is, a, could you elaborate on the benefit of this joint venture or agreement, and then, b, sort of a follow-on to an earlier question, benefited to having in the margin for the quarter, particularly going forward?

I would describe it this way the issues that were part of the past, the plan with the – agreement with Glencore is really designed to get that totally behind us and get that business segment up to a much better level, a sustainable profitable level, and it’s something Gary and his team have been working on in recent months and it's going well. I’m going to let Gary talk about this a little more because I don't think this is other than those who covered or followed AMCOL before are that familiar with, but Gary perhaps you could give a little more color to what's actually happening and where we’re going with it.

Yeah, the history there is that clearly the operating risk associated with mining and processing everything to do with South Africa and relative to competitive position in the industry, certainly had left the results in the past to be volatile and generally underperforming. So as Joe really again said here, the design if you will of the transaction is really to enable us to retain what we do really well out of this, which is really on the backend of the marketing distribution and the application expertise that we've been known for in the us steel casting industry. So what we have is a much more stable cost structure that enables us to move on and be able to continue to just exit out of the operational manufacturing and ultimately mining that goes on in South Africa. So benefit is not there yet, but it will likely come further down the road, Al, as we get fuller implementation of the agreement with Glencore.

I appreciate that color. Your product is going to be supplying customers primarily in the Asia geographic region or where is the targeted?

It’s actually a global agreement with – in specific parts of each of the geographies of the region, so for instance in Latin America, North America, and all across Asia, we've got essentially a global footprint in that in the agreement with certain provisos in areas where Glencore will have other representation or other plans.

Al, this is Doug. I’ll add on to that. Part of your question was what impact was in the quarter, seen in the quarter. There was very minimal benefit in the quarter from chromite, but that’s something that will – as we work with Glencore will probably benefit later in the year as it ramps up again, while the chrome goes to the steel industry. So there's some impact there. So probably later in the year, we’ll see more of an impact from that.

Just the second question and just if you put the stuff back, I think, Doug you had provided a reconciliation from Q4, I’m sorry Q4 of 2015 to Q1 of 2015. And this may go to more of a broader question, but if I look at the acquired business contribution and I think back to AMCOL standalone I think about the aggregate where they were running at. It seems like the business season is healthy from a top line and therefore an EPS contribution as it was performing, and that’s before of course synergies. And I realize a big piece of this is probably Energy, but could you maybe just address some of the areas that may be still challenged, particularly from the top line perspective.

Well I think you’re looking at on a quarter basis two areas, first is construction technologies and I tried to highlighted, it’s hard to give you a year-over-year comparison because we don't have or have published last year first quarter, so I’m giving you more sequential, but there similar. Construction technologies had some very large projects in Saudi Arabia last year, they contributed to the top line, which didn’t occur this year and they had a project in the fourth quarter that gives you the sequential decline. So I think, you know but the business unit has some very healthy prospects and a pipeline in terms of large projects to come through and we see a number of them lined up for the second quarter and throughout the year. So we do see a healthy top line for the Construction Technologies and you’ll see that probably more in the second and third quarter because those are the seasonal period. The other area that you have to note is just Energy Services with noted the 47% decline just in coil tubing that’s a significant impact on revenue in that segment. I think from a margin standpoint though the three business units together combined 15% operating margins is much healthier than what I think they’ve seen historically in the business. So the revenue has been impacted, I think you’re seeing the profitability improve in that business, and remember that 15% operating margin is on a fully allocated basis, so if you are looking at historical AMCOL results they did not have that corporate allocation in that margin now they do, so that 15% is fully absorbed on their cost allocation. So I think the productivity is significantly improved over the past 10 months.

Fair enough. And then, thank you for that Doug. And one follow-up if I may, on Energy Services are you willing to share sort of a spread or the mix of business between the three or the major service lines as a percentage of that segments revenue, obviously about filtration and coil tubing, could you share with us a little bit of where the current mix of revenue is?

Yeah, obviously we don’t publish the product line revenues. I can give you one piece, offshore sales contributed about 60% of the revenue in the quarter was offshore versus 40% onshore. I’d say the well testing and filtration businesses are probably about 60% of the revenue of the business unit and the majority of that is offshore. There is some other smaller offshore nitrogen business et cetera, some coil tubing. So that gives you an idea about 60% of the revenues come from filtration and well test and the majority of those two businesses are offshore. The other 40% are pipeline nitrogen, and the coil tubing business and that's really primarily onshore revenues.

And also another way to kind of maybe look at this and think about it, as you look at it historically is that the least profitable part of the Energy Services business is being impacted the most. So that what that basically what we have happening is a product rationalization process that's happening right now that at the end of the day is going to end up being better for the business it could end up with less revenue for the long-term, but it's going to be more profitable because the coil tubing business historically has been marginal at best for Energy Services, so that’s just another factor to keep in mind.

And in the quarter Al, the majority of – the profits came from our offshore businesses, kind of as we predicted they would be more stable in the downturn we’ve continued with filtration and well test work, it’s been relatively strong so far.

I appreciate that and obviously one quarter isn’t the trend. And I would think as you rationalize the business that a 10% EBIT even in sort of the environment we’re living with high barriers of entry technology, we could actually see that climb higher as a percentage of segments revenue.

It could – little bit few more, absolutely spot on.

Look forward to seeing that improvement. Thanks a lot guys.

Thank you. Our next question comes from the line of Rosemarie Morbelli of Gabelli Company. Your line is open, please go ahead.

Thank you and congratulations on a great quarter.

Thank you, Rosemarie.

Following up on Energy; your filtration and well testing is the part that has the highest margin and did the best, but as I understand if I am correct those are long-term contracts, are you seeing some of those contracts being completed and what is the backlog looking like in terms of new contracts in this environment, so we continue to see progress in that particular site?

Actually Rosemarie, there really aren’t long-term contracts in those offshore filtration and well testing businesses. What they really are, kind of longer duration projects. So number one, they’re very qualification on those type of projects, is very strenuous and so – and especially with our filtration technologies being able to operate with those technologies that differentiate us in an offshore platform is very, somewhat unique. So what that allow us though is some of the projects in especially in deep water they run for several months, I think we’ve had a number of projects that have run close to a year. So there are some barriers certainly that we take advantage of, but it's more just long-duration projects than they are kind of contracts, you’re qualified by the of the customer to operate on that platform.

So any of those long-term contracts coming to completion and are there any replacements that you have that are waiting on the sideline?

Maybe another way to look at this or least as we look at it and I’d ask Mike Johnson to jump in as well. As you think about the spectrum of types of drilling and you move from onshore to offshore and then within offshore you have shallow offshore and you have deep offshore. The company, the Energy Services business is well positioned in the deep offshore and that also is the area that is being impacted the least with regard to the drop in oil prices. And as you think about projects, I’ll use the of the Saudi Aramco project for us that’s starting up in May, this is something that a new contract, I think we announced that earlier in the year. It’s an example of a position we will have in Saudi Arabia supplying Saudi Aramco that is designed because we also have a partner there to be long-term, and so – and it will be a series of contracts and work with Saudi Aramco. And in this particular case is in the region where you know Saudi Aramco is actually continuing to invest. So even during this very severe downturn, you have parts of the world and you have companies that are going to continue to invest in drilling and fortunately we’re very well positioned in some of those parts of the world, it would be Brazil in spite of the troubles that Petrobras has had, we’re well positioned there. We have other positions in places like Malaysia, Nigeria, that are being less impacted, in fact the impact is less right now, it’s around 5% or less from a relative standpoint. The biggest impact to us, as Doug mentioned is on the onshore, which we've been responding to and making the adjustments downward from an organizational and workforce standpoint as quickly as possible.

That is very helpful, thank you. I was – then moving over to the paper side, the overall – when we talked last quarter, the overall decline in tonnage was 130,000 tons, you gained 50,000 tons with your new satellites leaving a decline of 80,000 tons. Are we with new satellites ramping up, are those coming on stream by the end of this year or maybe earlier if you could give us a better idea for the timing. Is that’s when we actually start overlapping the decline in Europe and North America with the growth in Asia?

I think, I mean right, you know we’ve been kind of projecting at the end of this year you’d start to see the true, probably with some movements, probably early next year you’ll start to see growth, let’s keep in mind we have added 100,000 ton satellite here in North America, we will have by the next 18, 24 months, 900,000 tons of capacity in China, which is approaching 50% of what we have installed in North America. So with that kind of growth you’re going to see some of the timings of the satellites as they come online and as you see the ramp-up so volumes through those satellites it’s probably going to be somewhere around the first quarter of next year. And again that depends on kind of what we see in terms of volumes of paper consumption volumes in North America and Europe, that’s always a factor that we’re conscious of could happen between now and then. But I think you have it right, probably early next year you’re going to start to see the volume and revenue growth come through.

And looking at North America, I mean, you obviously seem to be making progress on the FulFill application. So would – is anything like this happening in Europe and would that be enough to offset to a certain degree, the structural decline?

It does, so you know, a FulFill contract here in North America, FulFill E contract here in North America will generate somewhere 15% to 20% additional volume out of the facility. And so as we see some of the larger contracts in North America and Europe that does help offset some of the decline. It has an eclipse, it hasn’t eclipsed it yet, but it certainly offsets significant portion of it.

And I’d also add, having just come back from China where recently I had a chance to meet with the CEO of Sun Paper and signed this recent agreement, but my observations from the trip were that the, although the China paper industry, you might see some consolidation with some of the smaller players is – actually the industry is quite healthy, and its focused on continuing investment in more modern mills, but also in investing in technologies that allow them to move up the quality curve for paper, which bodes extremely well for us. So I think right now we have somewhere between 12 and 14 additional targets for satellites in China alone, so what Doug described as what will be coming on in 2016 or the total capacity, we’re going to be adding to that in the coming years.

In India, Joe, anything happening? You haven't talked about the paper in India lately.

Yeah, India is very healthy. Again, they are going through some growing things. We have solid position there and with additional potential there as well, I'll let DJ talk about that a little bit. But India offers us some really unique opportunities for growth, not only for paper, but for the Performance Materials business, specifically the metalcastings where our position is relatively small, and I may have mentioned this before, but the size of the foundry business in India is almost the same size as the U.S. where we have a very strong position. So part of our game plan, part of Gary Castagna’s game plan with his team is to take the position we have there and grow it as fast as possible because the value equation we have that has worked extremely well in China is going to work extremely well, we believe in India also. DJ you want to talk about the PCC?

Glad to Joe. Thanks Rosemarie. Just to give you some dimension on India and kind of comparing it versus what Joe is saying for China, for thinking that there's an immediate 12 opportunities, 12 for 14 that we’re pursuing in China, we probably have half that many that we’re pursuing in India. It tend to be a little bit smaller, but we've made great strides there with the presence of our brand, our reputation is growing, and also FulFill is starting to make some inroads in India as well. So we've established a good relationships with some key papermakers. We see that overall that market is not as big as China, but it seems to be a steadily growing one, and we’re well positioned to take advantage – continue to take advantage of the growth.

Thank you. Doug, when you talked about your target of reducing debt by $160 million to $200 million in 2015, is that still a good target? Do you think you can do better than that, given the strong cash flow generation?

Actually I’ll refine that a little bit, we’re targeting about $180 million this year, Rosemarie. I think we’re going to try to do better than that, I think that will – we’re going to be looking at opportunistically taking some dividends into the U.S. to fund even more debt payment than that. Right now we’re looking at about $180 million, those dividends will affect our tax rate a little bit, but our focus has been making sure that we use all of our free cash flow around the world to pay down debt.

And on that same vein, are you going to update the synergies above that $70 million, which you are going to reach way ahead of schedule?

Actually Rosemarie, we’re working on that, but actually we are – we have scheduled an Analyst Day at the end of June, and our plan will be at that point in time to provide further insight, only to the to the synergies, but also as we’ve talked about in the past we’ll be sharing some long-term targets across all the business unit, so I would invite you to join us on that day and we’ll have an opportunity to talk a little more about the future and provide some more dimensioning around what we see for the company.

I would not miss it for the world. Thank you.

Thank you. Our next question comes from the line of Eugene Fedotoff of KeyBanc Capital Markets. Your line is open, please go ahead.

Thanks for taking the question. I actually have just a few follow-ups. First, I guess on the paper business in North America and Europe, I believe the closure of two paper mills, you should anniversary that in the second quarter this year. Do you expect any – continuing consolidation in the paper market, do you expect any further mills closures in North America or Europe this year or maybe next year?

So your first question yes. The anniversary will be after the first quarter on the Docelles mill and Courtland mill, we did have some volume in the first quarter last year. Right now, we know one of paper mill closure, actually it’s conversion and ash down one of their paper machines will convert, not the mill in total, but that will be in 2016. So we don't right now see anything this year, remainder of this year.

Okay, a follow-up on the energy, what percentage of that business – thanks for providing the breakdown between offshore and onshore. What percentage is U.S. versus international for energy business?

That’s probably around 85% is more domestic, domestic base. So it’s highly concentrated North America onshore and U.S., Gulf of Mexico. The 15% international is really offshore, primarily offshore. That’s in Malaysia, in Scotland, Nigeria and in Brazil.

Okay. And just a follow-up on that, then, I'm looking at some industry data we are seeing in the U.S., the rig count for offshore they had declined significantly just recently. Is that a concern?

Where the oil price is, it’s a concern, but right now, we haven’t seen. We have continued with some, like I said, long term projects with our filtration business offshore and offshore deepwater and well testing particularly our deepwater well testing has performed very well. Our revenues in deepwater have actually almost doubled from last year first quarter.

Got it. I'll just try to ask a synergy question differently, I guess. $70 million run rate that you probably will hit by the end of the year, and that was your three to five year target, so the integration, is that going much faster than you expected or there are just more synergies then you initially thought there would be?

I think it’s a combination of things, I wouldn't have enough time to enumerate them all, but it really is, a, management dedication and focus throughout the company, you know on achieving the target condition that we have for the acquisition as fast as possible, some of that is you know identifying additional areas for savings, but it also speaks to in extreme degree of the tight cooperation, it’s a difficult period for the company. We've been able to not only maintain the stability of the businesses, but actually grow in some areas as well as lay the groundwork for future growth. So it really is a combination of many things coming together, the management teams of each of the former AMCOL businesses have been – are on team, and they've been on the team from day one, that's been a major factor. We have a strong lead team for the integration led by Jon Hastings. So it's all of those things together. And then moving as quickly as we were able to identify that we could move, and so we've been able to bring it to the bottom line as fast as possible, which is the idea.

Got it, thank you for this color. And just a last question, Doug, for you, I think, and I'm sorry if I missed if you talked about it. The $3 million reported in other income, can you provide a little bit more color what was in it?

I’m sorry, $300 million for operating cash flow?

No, no, it was $3 million you reported in other income in the quarter.

Oh, the $3 million. Those are foreign exchange gains that are not part of operating income. There are a variety of items, there are translation of payables and receivables in that, we had some are euro based liabilities here in North America that get mark-to-market, we had some U.S. dollar based small holdings for payments overseas that get valued differently. So, just a number of items that are throughout the balance sheet that get translated and in this month – for this quarter it translated into a gain.

Got it. Thank you.

Thank you. Our next question comes from the line of Jay Harris of Axiom Capital. Your line is open, please go ahead.

Good afternoon. I have questions on two areas. One area is Energy Services and then your primary product serving the steel industry. What do you think your options are with respect to this unused inventory of coil tubing devices?

Well there are number of options that start with idling, selling, returning, some are leased, some we own, you know as we consolidate to a smaller footprint Jay. And that's what we're working at on right now, that’s what we’re reviewing as we scale back.

Is there any opportunity either offshore or internationally to move some of this equipment into new service areas?

I’ll let Mike Johnson who is on the call. Mike you want to take that.

Yeah. Thanks, Joe. Yeah, Jay, there are some options, but with the decreased oil prices there is really not a lot of opportunities that we see out there. I think our best option is for us just to stack what we have now, and try to utilize and consolidated the land-based ones in Texas. That’s our plans right now.

Do you anticipate waiting until capital spending starts to pick up onshore again, or will you look – or do you think that's going to occur too far in the future and you'll be looking at some of the other options you just mentioned?

Our focus right now is to, you know the planning scenario is to assume it’s going to stay down for a while and get ourselves to a breakeven point, and depending on how fast we’re able to do that that will determine what other options paths we’re going to take.

Fair enough. On your business with the steel mills, is the growth in China and then opportunities in India, do you see that at some point in a reasonable future time period starting to make this a stabilized business and a growth business again? And if so, where do you put that on a timeline?

Actually China has had a very little effect on the company's bottom line for the last four to five, since we restructured our China operations in late 2007. We've been looking for a partner for China, have not found the right partner, so we’ve basically been in a, you know a sort of a low volume structure for running the operations there. We do have a very good operation in Japan, we have some linkage between the Japan operations and the China facilities, and we are still looking for a partner there, but Jay, China does not from a steel standpoint the challenge for the Refractories business has always been the value proposition, which we take a total cost of ownership to the market. The china market is not ready for that, and the company made a mistake back in early 2000's when it invested more than it should've. And you know, it's not something I see changing in the short term, but as I said, it has very little effect on the company.

And then, an accounting question. Is there an exchange rate, let's say with the euro, which would cause auditors to raise questions about write-offs?

No, Jay. I don’t see that’s the case we have, sustained cash flows on all of our operations that justify the asset holding values in those currencies. So no, I don’t think that’s the case.

Thank you very much.

Thank you. Our next question comes from the line of Daniel Moore of CJS Securities. Your line is open, please go ahead.

Thank you, again. I realize we are running late, but Joe, something caught my ear, which was the opportunity with Sun Paper, the discussions with filler fiber. Obviously, that could be enormous. In North America, it's proven challenging over the years to push adoption. Are the hurdles similar or different in Asia? And maybe just talk about your confidence, what's the same, what's different, what's the opportunity to really ramp up that by another 50% over time?

Look I really have to restrain myself a little bit in this area. Part of what I came away with is Sun Paper specifically I think there is a willingness to take more risk, let's say than we've seen in the past from some of the western papermakers, and I'm not saying that in a negative way, it's just the nature of Sun Paper and its private ownership, it's run by a very farsighted strong entrepreneur who's gotten good returns on his investments over time, and he has been willing to take more risk, we've developed a large position with him. That – you know I came away from this trip with an even – I’ve always had a positive feeling from the investments who’ve already been making there and started, but this recent trip reinforced that. So a long-winded way to say, you know this could lead to more, but we have to be careful. It’s very early as I said in my remarks and we need to take a step at a time, but this has a higher probability than some of the others, let's say of finding of papermaker that would actually be willing to share in the investment risk with us.

We'll stay tuned. Thank you.

Thank you.

Thank you. And I’m showing no further questions. I’d like to turn the conference back over to management for any closing remarks.

That's it for the conference call today. Thank you very much for your interest in Minerals Technologies, and have a nice day.

Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.