Minerals Technologies Inc. (MTX) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Minerals Technologies Second 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 follow at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rick Honey, Vice President of Investor Relations. Please begin.

Good morning, everyone. Welcome to our second quarter earnings call. Today, Chairman and Chief Executive Officer Joe Muscari will provide some insights into our second quarter performance, as well as an update on the integration of the newly acquired businesses. He will then turn the call over to our Chief Financial Officer, Doug Dietrich, who will give you a detailed report on 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 will turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning everyone. We continued our strong financial performance in the second quarter recording earnings per share of $1.18 despite significant challenges in our Energy Services and Refractories business units. Five of our six businesses exceeded double-digit operating margins during the quarter and overall our margin improved 20%. When we look at our Minerals based businesses, we see an operating income increase of 56% year-over-year and on a pro forma basis this was a 34% increased. We continue to track well ahead of the synergy targets that we laid out after the acquisition and are on track to achieve the $70 million savings target by year end. Doug Dietrich will give you some additional detail later on this in a few minutes. I would also like note that we continue to make significant progress in reducing our debt, which as you know is a high priority for us as we paid down $50 million in the quarter. We also experienced an update of our credit rating by Moody's, which is a very positive sign and a testament to what we have been able to accomplish in just one year. On a business realignment note, as you show in our press release last night. We took a $16 million impairment charged in the Coiled Tubing business, which has been, it has been very hard hit by the decline in oil prices. We planned to actually exit this business in the third quarter and we will begin to realize an earnings benefit in the fourth quarter. Doug will also provide you with some additional detail around this. Overall, I would characterized the quarter as one that saw the continued to capture of the AMCOL acquisition synergies, which enabled us to maintain a very high accretion level and we also had relatively strong performance of our Minerals businesses, with both of these factors, for the most part offsetting the weak performance of our service businesses. This slide simply presents in graphic form the high level of accretion that we have been able to deliver from the acquisition. It truly has been transformational for MTI providing us with a stronger foundation for future growth, both organically and through acquisitions as we discussed in some detail with you at our recent Analyst Day. Now let us look at some of the highlights from the second quarter starting with our Paper PCC business. Volumes in Paper PCC grew slightly in the quarter, driven by most importantly a 15% volume increase in Asia. In the second quarter, our satellite PCC plant that the UPM paper mill in Changshu, started up and the 100,000-ton satellite for coating great PCC at Sun Paper is now being commissioned. In addition, we have four more satellite plants under construction in China, and are working with at least a dozen more paper companies to advance the value proposition of MTI's, PCC as we continue to seize the opportunity for growth in China. With the contracts we now have in place, we expect to have 10 satellites operating in China by mid-2016. Addition to the China market, we added another Fulfill E-325 agreement at our paper mill in India. Today, we have 21 agreements with paper mills worldwide for the Fulfill E and V high-filler technologies. Our performance Minerals business unit, which consists of specialty PCC, Ground Calcium Carbonate and Talc, had a strong quarter with a 6% increase in operating income. Performance Materials, which includes the Metalcastings, pet care, fabric care and Specialty Minerals businesses, also had a strong quarter increasing operating income margin through higher sales, productivity improvements and cost control. In Asia, Performance Materials sales actually grew 19%. We launched our Enersol Crop Enhancement Technology in China, and we recently introduced the private label brand of lightweight cat litter with our grocery chain in the Midwest. In September, we will be introducing another private-label lightweight litter for a major national retail chain. The Construction Technologies business grew operating margin by 56% over the same period last year through some increased sales, improved productivity and cost savings measures. Building Materials did especially well with a 9% increase in sales. Our more service-oriented businesses Refractories and Energy Services faced the biggest challenges during the quarter, weak demand and the worldwide steel markets continue to put pressure on our Refractories business, driving our sales down by 17% compared to last year. In our Energy Services business, we continued to see sales decreases and a profit decline in all service lines. However, our offshore service business is holding up relatively well with onshore parts of this business suffering the most. At current and projected the low price levels, we do not see much possibility for the onshore business to recover significantly for some time to come. Because of this outlook, we decided to exit the Coiled Tubing business. On the integration front, as I mentioned earlier, we continue to track well. We have moved the majority of our transactional activities into our shared services group and the implementation of the Oracle ERP system is underway in the U.S. and Asia. We have also just begun the integration of the former AMCOL businesses into our supply chain organization. On the operational excellence front, we continue to make good headway in the deployment of Kaizens. These are the highly focused improvement events, as well as the advancement of our suggestion system. To give an example of our progress, the entire company has received about 18,000 improvement suggestion year-to-date and nearly half of these have come from employees in the newly acquired businesses. On the technology and innovation side of the integration, the scientists from the heritage MTI and the former AMCOL are working together on a number of different projects to develop differentiated new products, the product market areas as focus so these works are adhesives and sealants, pet litter, casting and Refractories as well as textile nonwovens and we see the market potential of these initiatives as being in excess of $150 million. We also continue to make good progress in the consolidation of manufacturing facilities, especially in Europe and with integrating our organizations across all regions of the globe. We expect to be completed with these consolidations by year-end. Many of you attended our Analyst Day at the New York Stock Exchange in June 30th, where we unveiled our longer-term growth targets and initiatives. I would like to take this opportunity to simply restate and reinforce what we said about the growth potential we see for MTI. Our plan is to increase our revenue to at least $3 billion and we see the potential to reach $4 billion. We are also targeting to increase operating margin to 16%, EBITDA to 22% and return on capital to 12%, and we plan to do this though execution of our key strategies of geographic expansion, new product innovation and acquisitions. Key leverage points for us will continue to be our PCC growth opportunities centered in Asia, our strong performance materials positions in Asia and the U.S., the construction technologies opportunity space available to us in China, our Minerals knowledge base and the expanded acquisition opportunities that came to us through the AMCOL acquisition itself. All combined, with our strong high-performance operating system and our ability to integrate acquisitions effectively and rapidly. As we successfully work through the near-term challenges and opportunities that we have in front of us, I want to reinforce that we will also maintain a strong line of sight to achieving these goals and realizing the value potential that MTI has created for itself Now, let me turn it over to Doug.

Thanks, Joe. Good morning everyone. I will go through our second quarter consolidated business segment results. Through the remainder of the call, I will highlight the key market and operational elements of our results in each of our five business segments. Our second quarter earnings per share from consolidated operations were $1.18 excluding special items, a 26% increase from the $0.94 reported last year and within the range of the $1.15 to $1.20, we communicated on the first quarter call. Reported earnings this quarter were $0.76 per share, which included special charges of $0.42, related to the acquisition integration, debt refinancing costs and impairment charges to exit the Coiled Tubing service line. Foreign exchange had a significant impact on our sales and earnings this quarter compared to last year. Sales were lower by $26 million or approximately 5% due to currency. Effect translation had on our sales and earnings this quarter was approximately $0.07 per share. As you recall, the AMCOL transaction closed on May 9, 2014, so for comparison purposes, please note that the second quarter of last year included only 52 days of sales and income for the three acquired segments. Total sales for the quarter were $463 million, which were 10% higher than the second quarter of last year and as I just mentioned, currency had a negative impact on sales of $26 million. Portions of our business saw significant growth over last year. On a pro forma basis, our performance materials Asia business grew 19% over last year. We also saw growth in U.S. Metalcastings and U.S. building materials product lines. Sales in ground calcium carbonates grew 5% and volumes in our Asia PCC business were up 15%. These areas of the growth were offset by lower sales in Energy Services and Refractories over last year. Operating income excluding special items increased 32% to $72.3 million and represented 15.6% of sales, which is a 20% improvement in operating margin and 13% in the second quarter of last year. EBITDA for the quarter was $100 million excluding special items, which equals 21.5% of sales. Cash flow for the quarter was $95 million. We made a debt principal payment of $50 million. This brought our total debt repayments of $190 million over the last four quarters. We expect to maintain this pace of annual debt repayment and doing so will bring our net leverage below two-and-a-half times by the end of next year. We also re-priced our debt in the quarter fixing $300 million at 4.75% and lowering the variable rate on the remaining portion by 25 basis points. Sequentially, consolidated sales increased 2% from the first quarter with unfavorable foreign-exchange of $6 million or about 1%. All segments achieved increased sequential sales except for Energy Services, which continue to be affected by reduced activity in the oilfield industry. The synergies from the integration continue to track ahead of our targets and I will give you an update on our progress in a few minutes. Before we move on, let me outline the special charges in the quarter and bridge our earnings of the $1.18 to our reported earnings from continuing operations of $0.76. A special item this quarter included $2.7 million of additional integration related costs, on a $0.5 million of primarily non-cash charges related to our debt refinancing and $16.8 million in restructuring impairment charges in Energy Services of $15.8 million of which is related to the impairment of Coiled Tubing assets. I will comment more on some of the actions being taken in our Coiled Tubing business when I get to the Energy Services segment. Here is insight into our year-over-year earnings growth. This table bridges our earnings of $0.94 in the second quarter of last year to the $1.18 this quarter. The MTI base business was lower by $0.02 as unfavorable foreign exchange and lower refractory profits more than offset profit growth in Specialty Minerals. The acquired businesses contributed $0.35 per share this quarter. As I indicated earlier, our progress with capturing synergies continued ahead of our target these savings contributed $0.32 in the quarter. Incremental interest expense and amortization of deferred financing costs over last year were $0.13. The combination improved earnings by $0.24 or 26% over last year. Here is the chart showing the progress we have made with capturing synergies and our projections for the next couple of quarters. We achieved $16 million in savings in the second quarter, which is the level expected on last call. For the next two quarters, savings will continue to improve and we have got lines of sight to $17 million in savings in the third quarter and $18 million for the fourth quarter. This will put us at an annualized rate of about $72 million by the end of the year, ahead of our original $70 million long-term target. As Joe mentioned, integration is going well, we continue to progress according to plan. Our shared service organization continues to deploy globally, with further expansion into supply chain functions beginning this coming quarter. IT systems integration is also moving forward, with the deployment of Oracle ERP platform to the acquired businesses. Realignment of our business operations in Construction Technologies is well underway. We have completed the consolidation of several administrative offices around the world. Now, let us go through the financial results for each of the business segments and I will start with Specialty Minerals. Segment sales were $157 million, which was 7% lower than the second quarter of last year. Foreign exchange had a significant impact on sales, accounting for five percentage points of the decrease. Within the segment, paper PCC sales decreased 9% from last year, driven primarily by foreign exchange, which accounted for 8% and also from lower North America PCC volumes. Uncoated freesheet paper production in North America was down 3% from the second quarter of last year and several of our customers took unexpected extended maintenance outages. These lower sales were partially offset by growth in China from the new [ph] and Changshu satellites. Volumes in our Asia Paper PCC business increased 15% over last year. Sales in our processed minerals product line were 2% higher than last year, driven by 5% growth in ground calcium carbonates. Operating income for the segment was $27.1 million with an operating margin of 17.3%. Operating income was 4% higher than the second quarter last year despite the lower sales. Improvement came from sales growth in the GCC product line, good overhead expense control and 2% productivity improvement in the segment. Sequentially, segment sales increased 2% to the seasonally stronger sales in our process minerals product line, which increased 10%. Ground calcium carbonate sales were higher by 16%, our talc sales were 3% higher. Sequential sales were negatively impacted by foreign exchange, which lowered sales by $1.7 million or 1%. Paper PCC sales were higher by 1% when excluding the unfavorable foreign exchange. Operating income increased 17% from the first quarter, just slightly better than the 15% we expected on the last call. We are currently commissioning a 100,000-ton coating satellite with Sun Paper. We expect this facility to ramp up in the third quarter. However, we will not see significant volumes until the fourth quarter. Our next satellite to be commissioned will be the new yield facility with Sun Paper in September. Further out, we are building three additional satellites in China that are currently targeted to come online in the first half of next year. Moving on to our outlook for the segment for the third quarter, we expect our Paper PCC operating income to be similar to the second quarter. Higher volumes in Asia will be offset by startup costs associated with the with the new Sun Paper facilities. We will also see the typical summer paper mill maintenance shutdowns in Europe. In Performance Minerals, we expect operating income to be slightly lower than the second quarter. The third quarter is a seasonally strong period for this business. However, sales typically begin to slow in September. Overall, we expect the third quarter operating income for this segment to be about $1 million lower than the second. Now, let me take you through the Performance Materials segment. Sales this quarter were approximately $129 million and were 1% higher than the first quarter. Within the segment, Metalcasting sequential sales were up 10%, driven by the U.S. and Asia. Household, personal care and specialty products sequential sales were similar to the first quarter. Basic Minerals sales were down 24%, sequentially, driven by lower sales of drilling, iron ore pelletizing and chromite products, due to the weakness in the oil and gas and steel markets. Compared to last year, the segment saw areas of strong growth. Sales in Asia were up 19% on a pro forma basis, driven by pet care and fabric care where sales more than doubled. Operating income was $25.5 million for the segment, which was 7% higher than the first quarter and slightly better than we expected. The operating margin of 19.8% of sales improved significantly from 12% last year. This performance was driven by the strong sales in Metalcasting as well as productivity improvements and operating and overhead expense reductions. Looking to the third quarter, we expect segment operating income to be about $2 million lower than the second quarter. We see continued strong performance in North America Metalcasting and household and personal care products, however, Basic Minerals product sales will be lower due to the continued weakness in the energy and steel markets. However, for perspective, this third quarter operating income performance will be 15% higher than last year. Now, let us take a look at the results in the Construction Technology segment. Sales for this segment were approximately $52 million and 34% higher than the first quarter as we entered the strong seasonal period for this business. Foreign exchange was significant in the quarter and had a negative 6% impact on year-over-year sales. Within the segment, sales in environmental products were 94% higher than the first quarter, due to the seasonal pickup in both, the environmental landfill and remediation markets. However, sales came in weaker than we had estimated and lower than last year in this product line, due to customer delays with some large riverbed remediation projects. Building materials, which also includes construction drilling products had another strong quarter with sales increasing 9% from the first quarter. We saw stronger sales in both the U.S. and Europe, where sales increased sequentially by 6% and 8%, respectively. Operating income was $8.3 million, representing 15.9% of sales. Operating margin improved 56% over the second quarter of last year, due to overhead cost reductions and manufacturing productivity improvements. Looking to the third quarter, we expect segment operating income to be about $1 million lower compared to the second quarter. Both, the construction and environmental remediation markets, will continue through their seasonally strong period. However, we are currently seeing some customer delays with some large environmental projects. Margins in the business will continue to be strong as overhead cost reductions and productivity improvements continue to improve profitability. Now I will turn to the Energy Services segment. This business had sales of $49.3, which was 16% lower than the first quarter. Sales for the onshore based businesses of Coiled Tubing and pipeline and nitrogen were 36% lower and our predominantly offshore-based services of filtration and well testing were 7% lower. On a pro forma basis, segment sales were 42% lower than the second quarter of last year. Operating income for the segment was $4.6 million, $1.2 million or 21% lower than the first quarter and in line with what we communicated on the last call. We saw continued solid performance from our filtration and well testing businesses. Despite the 7% lower sequential sales, combined profits for these two service lines increased 1%. We have been removing significant segment overhead cost for the past year and have continued to do so to reduce breakeven levels and maintain operating margins. As a result, the business was able to generate operating margins for the quarter at just over 9%, despite the significant decrease in sales. As Joe mentioned, we have decided to exit the Coiled Tubing service line given the continued losses in this business and several factors that indicate that there will not be any significant improvement in market conditions in the near to medium-term. We consolidated a number of our operating locations earlier in the second quarter and moved quickly to remove all other possible costs to reduce the losses, however depressed price levels and limited volume of work due to overcapacity in the coiled tubing market does not support continuing operations. To give you some dimension of the current state of this service line, coiled tubing sales in the second quarter were $6.3 million, which was over $10 million or 63% lower than last year, with an associated operating loss of approximately $3 million. As we take steps to exit coiled tubing through the third quarter, we expect additional operating losses as we wind up projects with customers. We will also record additional restructuring charges of up to $12 million as we shut down operations. However, going forward, savings are expected to be $8 million on an annual basis, which we will begin to realize in the fourth quarter. Looking to the third quarter for the entire segment, we expect operating profit to be lower than the second quarter as we ramp down our coiled tubing business. We also expect lower filtration profits as a large offshore project is being completed. At this point, we expect operating income to be $4 million lower than the second quarter, which would be approximately $11 million lower than last year's third quarter. Now let us go through the Refractories segment. Sales for the second quarter were approximately $76 million, which was 17% lower than the second quarter of last year, 8% of the decline was due to the negative impact of foreign exchange. Crude steel production was down over 9% in the U.S. compared to the second quarter of last year and both, refractory and metallurgical wire sales continue to be impacted by these weak market conditions. Within the segment, global refractory product sales were down 13%, driven by lower volumes primarily in North America. Metallurgical wire sales decreased 27%, driven by lower volumes in North America and Europe. Operating income for the segment decreased 21% from last year to $8.4 million. Foreign exchange had a negative impact of approximately $1 million or 8%. Despite the considerably lower sales, the business was able to maintain margins at 11% through an 8% improvement in manufacturing productivity and overhead cost reductions. Sequentially, segment sales were 3% higher due to a modest increase in volumes in both product lines. Operating income was similar to the first quarter and in line with our projections. Looking forward to the third quarter, we are seeing some stability in the U.S. steel market, but no significant improvement. Consequently, we expect sequential segment operating income to be around the same level as the second quarter. Our second quarter earnings of $1.18 per share reflect a solid performance given the challenges we face this quarter. 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, accelerating synergies, productivity improvements in all businesses and very good overhead cost control, helped to offset these challenging conditions. Let me summarize what we are currently seeing for the third quarter. We expect total company sales to be similar to slightly lower than the second quarter and approximately 15% lower than last year. Consistent with the first half of this year, the decreases are primarily due to negative foreign exchange and lower sales in Energy Services and Refractories. Additionally in the third quarter, we expect fewer large scale environmental projects in Construction Technologies compared to last year. Combined sequential operating income for our three minerals based segments will be about $4 million lower in the third quarter, due to satellite startup costs and Paper PCC, normal seasonal sales declines in performance minerals, weaker sales in the oil and steel markets and performance materials and some project delays in construction technologies. Each of these businesses will continue on a strong track with significant margin improvement over last year. For perspective, combined margins in these minerals based segments have improved nearly 30% over last year. For Refractories, sequential operating income will be similar to the second quarter as we see stability, but no significant improvement in the steel market. Energy Services, however, will see a $4 million sequential decline in operating income as we exit the Coiled Tubing business. Compared to last year, operating income will be down approximately $11 million. As I mentioned earlier, foreign exchange is and will continue to have a negative impact on the Company's sales and earnings. At current FX rates, currency translation will impact our third quarter earnings by $0.10 per share versus last year. In total, we expect our earnings for the third quarter to be between, $1 to $1.05 per share. I will conclude by saying that acquisition of AMCOL has been a positive one for MTI on many fronts. Not only has it been highly accretive to earnings with over 80% in the first year, but it has also expanded our growth avenues considerably. We are building strong momentum in our minerals-based businesses, particularly in Asia. Over the past year, we have improved operating margins by 20%, expanded EBITDA margins by 30% and made significant debt repayments. We have also set substantial growth and performance targets for ourselves, which we highlighted at our recent Analyst Day conference. I look forward to updating you on our progress. Now let us go to questions.

Thank you. [Operator Instructions] The first question is from Ivan Marcuse of KeyBanc Capital Markets. Your line is open.

Hi, guys. Thanks for taking my questions. The first one I have is on your margins - were very good or I guess it would be in the quarter. If you look at it on a longer term basis, meaning past the quarter, looking out the next year or so, was there anything special in those things like timing of orders or is this all pretty much productivity and you would expect as we flow through this sort of level of profitability absent I know some seasonality, maintaining at this point with the headwinds that you face over the next couple of quarters or year?

Sure, Ivan. Look, I think the margins are strong margins this quarter in all of our business, Energy Services are lower, and a reflection of what we have been doing over the past year with productivity improvements, the overhead cost reductions you are seeing and operating improvements in all the segments. I do think that 15.6%. This is a seasonally high period for us, so we are looking at a third quarter. In fourth and first quarter are probably going to be a bit lower than that, but we have also had some pricing that has affected that as well. I do think that this is a level that is probably achievable, although you got to look at the third quarter as one of the high points in the year.

Great. Then if you look over at the PCC business and the satellites that are coming on, how much should that contribute to sales looking at the next year? At what point do you think we hit that inflection, where you sort of get on the growth trajectory that you laid out on your Analyst Day within this business as start offsetting the headwinds that you have seen in North America and Europe?

We probably brought on about 290,000 tons of capacity this year. Again, 150 of that is coming up later this year, so you won't start to really see these two Sun Paper facilities contribute to next year. Then we are going to be building three more next year, which is another 250,000 tons. In total, the new capacity coming on next year is probably about $24 million. We have brought on about $25 million this year, so I think you are going to start to see some of that revenue growth come through the end of the this year, probably the beginning of next year and through next year. The reason you did not see that this year is, we saw those extended outages in North America in PCC, so that was relatively unexpected. Again, we thought we would start seeing some of that in the fourth quarter. We are going to be ramping up the Sun Paper a little bit later than we thought. It is going to take us through the fourth quarter to probably ramp that up. You won't see those volumes until later in the first quarter. Probably sometime in the first of next year, you will start to see the revenue growth, but again that depends on what happens with the North America paper industry.

Okay. Then the last question and I will jump back in the queue. If you had upgrade in your debt, so what is your interest, I guess, your expected interest rate looking out the next several quarters based on the new rating?

Yes. Actually, our total interest rate is about the same as it was prior to the re-pricing. We had about a 4% rate and it was all variable. We have taken about $1 billion of that down by 25 basis points and $300 million of that up by 75 basis points, so net-net we are about the same. What that did is it put a ceiling on $300 million of our debt, so our interest expense is going to be about the same until we see LIBOR rates increase past 75 basis points, so we expect next year to be about similar to this year.

Okay. Thank you.

Thank you. The next question is from Jeff Zekauskas of JPMorgan. Your line is open.

Good morning. With the exiting of the coiled Tubing business, it seems that will like another $8 million and for lack of better words savings to your cost savings targets. Do you expect by the middle of next year to be at an $80 million run rate basis or like in the $72 million-plus 8?

Yes. I mean there are cost savings and what we are looking is reducing the losses, so by exiting the business, looking at operating income improvement through removing not only the variable and the fix costs and overheads associated with that business, so the net incremental improvement will be about $8 million on an annualized basis. It is going to come through both cost savings and other factors.

As you look at the business longer term are there any of those things that or there any of the improvements that you think over time can be achieved in the Refractories business. As you look at the business five years out, do you think it would still be part of Mineral Technologies?

Well, as we discussed during the Analyst Day, there are some very good longer term initiatives that we are actually engaged in right now with regard to new products that could have a significant effect on the business in a very positive way. We do not have any plans at the moment to sell the business. As we describe the 2020 to you, projections that we made included the Refractories business.

In general, are there any types of raw material cost savings that you are realizing either from magnesia costs in the Refractories business or otherwise?

We have had some energy savings, call it raw material, but in our Performance Materials and Performance Minerals businesses, we have seen about $2 million of quarter-over-quarter savings there. MGO pricing given the lower demand for refractory has products has probably put about $1 million into Refractories in terms of cost savings. Again, also you get some pricing pressure in Refractories as a result as well.

Okay. That's helpful. Thank you.

Thank you. The next question is from Rosemarie Morbelli of Gabelli & Company. Your line is open.

Thank you. Good morning, everyone.

Good morning, Rosemarie.

Congratulations on the great quarter.

Thank you very much.

It looks as though we have to lower our expectations for next quarter, so am I reading this properly?

Yes. That is exactly what we are sharing with everyone today. Yes.

Let us look at the new base, whatever it is for the third quarter, I have not done the math yet. Then looking at the fourth quarter, is seasonality in Q4 going to diminish that particular potential for the fourth quarter versus Q3? Are there any changes in the seasonality because of AMCOL?

No. Seasonality is in the base MTI business of paper and Refractories. You do see the seasonal decline in Performance Minerals and I highlighted that. You will see some declines in construction technologies as well. Those two businesses have their strongest periods in the second and third, so yes, we are going to see some seasonality going into the fourth and first quarters. Offsetting that, again, I mentioned, as we ramp down the coiled tubing business we will start to see some savings in Energy Services come through in the fourth quarter. I am not prepared to give you the guidance on what we see in the other businesses right now, but hopefully that answers the seasonality piece of it.

Sure. Do you anticipate the basic legacy minerals technologies business to improve year-over-year? I mean, this quarter was a negative 2 pennies. What are we looking at in the next two quarters to the best of your guess?

Yes. Look, the two pennies really came from foreign exchange and Refractories from a year-over-year basis, so 11% margins in Refractories, I think the business is doing pretty well with what the market has given it. In terms of going forward, we will see how the steel market continues to progress. We have not seen any substantial improvements in terms of production, but that will obviously help that business if the steel market improves. Then in Specialty Minerals, even though process minerals will start to hit the seasonal decline, we are going to be bringing up that Sun Paper facility, two Sun Paper facilities, which will start to contribute to operating income growth over last year, so yes I do see some improvements in the businesses. Refractories' margin is strong given what revenue they are getting. That should improve the steel market.

You had a great quarter and I am looking for more margin improvement going forward, but I just wanted to make sure that I was looking at it correctly. Then I was wondering, Joe, if you could talk a little bit more about the innovations on the adhesives and non-woven side. What do you have that will go into those two markets?

Yes. The latest area that we brought the scientists together was in the adhesives and sealants area. We have John Hastings with us who heads up our technology lead team. I am going to let John give you a little further insight into some of the work that was done and what we actually have in the market right now. John?

Thanks, Joe. As we have highlighted we had four innovation retreats. The adhesives and sealants is the one that has progressed the most thus far. We have introduced a product. It is commercial. We expect about 1.5 million sales this year. It's a sealant product in Europe, goes into construction sealants. That was a direct result of the innovation retreat and the ideas that were generated by the team. Most recently, we have had our fourth. We highlighted three during the recent Analyst Day. The fourth was in textile non-wovens. We got our team together and again we are looking across the portfolio as to the different types of technologies and opportunities that we have to further our product line and to expand some of our sales into textile non-wovens as well so more to come. Again, the ideas there are nascent, we are progressing, we put them into our stage gate program and we will report more as we get further development.

Those are derived from the AMCOL polymer technology? Am I correct?

Yes. It would be combination. We have got capabilities on both sides of the house, so we look to bring the technologies together and actually have something very unique in the marketplace.

Okay. Thank you.

Thank you. The next question is from Daniel Moore of CJS Securities. Your line is open.

Thank you very much. What is the approximate magnitude of the restructuring costs you expect to incur in Q3 for exiting Coiled Tubing and is that included in your guidance?

That is not included in our guidance. We expect kind of up to about $12 million of potential charges depending how we work through some of the remaining costs in that business.

Got it. You just mentioned adhesives and sealants. In prior calls, you have laid out the sizeable or size or various opportunities you had in the biotechnology production pipeline anything else that you can see as potential meter-mover or contributor to 2016 or perhaps shortly thereafter?

Yes. In terms of the growth discussions we had on the Analyst Day, the area that continues to resonate in a very positive way continues to be China. In spite of the fact, that there are current concerns about some growth slowdown, but what I would reinforce is that our positions that we have there both, in metalcastings and in some of the personal home care area, home products area, are very strong and we expect to benefit from fabric care is the area that I was trying to articulate. We do expect those areas to continue to grow, even if China slows down and right now it is a question mark in terms of the impact that that may have on us, but it comes from having strong positions but also having new products, modifications to products that are going to enable us to grow in that region off of a pretty strong base. The same goes for PCC. PCC is in a very strong position with regard to the satellites not only coming up, but the things we have in the harper [ph] that also relate to the new products that we have, like NewYield. We expect to see in the course of the coming months, but primarily in 2016, you can expect to see some announcements of additional satellites and facilities around those products as well.

Okay. Very good, and lastly just turning to the balance sheet, obviously you have been in deleveraging mode for multiple quarters now. At your recent Analyst Day, you laid out 2020 goals that included a fair bit of potential M&A. Just talk about when we might be in position to look at alternative uses of capital both, your own stock and potential acquisitions.

Yes, Dan. I commented that we look to keep up the pace of our deleveraging, so about $180 million a year and at the pace we on, probably keep that up through the next 18 months and that will put us probably in a net basis below two-and-a-half times. I think we have been focusing on deleveraging getting ourselves to the right place, which is for the company, I think, around two times. If we keep up the pace, improvements in the business might get us there a little earlier, but probably 18 months out before we get a balance sheet in place where I think we could do something substantial. Now, we certainly have enough cash on hand and around the world to do some of the projects that John Hastings outlined at the Analyst Day. There are some smaller ones on there that will help our growth. I think we have the capacity and the cash on hand to do some of those things, but something significant. We will have to de-lever a little further.

Okay. Thank you again.

Thank you. The next question is from Steve Schwartz of First Analysis. Your line is open.

Hi. Good morning, gentlemen.

Hi, Steve.

If I could start in the PCC area, you mentioned and listed the volume being up 1%. When I look at what the overall revenue was down. It almost implies that pricing was negative. I think I heard Doug say pricing was flat, but can you reconcile that for me?

Sure. Steve, total volumes were up 1%. You saw 15% increase in Europe although obviously a smaller base and that was offset by the lower volumes in North America. Revenues were down 9%, but 8% of that was foreign exchange. Okay, so you got 1% decline in revenue. Some of that is a bit of difference. If you look at the difference between price per tons in Asia and price per tons in North America and Europe and that is largely driven by differences in lime costs and things that are the basis of some of our PCC prices. In China lime can be less costly than some places in Europe or North America and that translates into some of the price differences. However, from a margin standpoint, those contracts were designed to have very similar operating income. I think as we ramp up, you will start to see some change occurring. Most of the facilities we ramped up in China are filler satellites. There is new Sun Paper satellite and a coating satellite. That is a much higher price point on average than our other filler satellites, so that mix may change a bit as we ramp that up fully over the next couple of quarters.

Okay. It is a mixed impact that is slightly negative, but it sound likes from a profit standpoint that is nothing we need to be concerned about?

No. That is right. We will see some. Again, those contracts are designed on an IRR basis to deliver cash flows and operating income. There are price changes based on volume and price point differences in China versus North America versus Europe versus South America.

Is the FulFill program expected to improve price and mix or is it merely a volume improvement program?

Yes. Look the FulFill products for us is, it help us in two areas right? It improves our margin, because it is tied to - as these contracts have technology fees associated with them, we do not disclose what those fees are, so we get the technology fees plus we get additional volume with each of those contracts that come off of our existing facility. Built into some of the improvements you are seeing in margins, you are seeing higher levels of FulFill come through and have a positive effect on that.

Okay. But not necessarily in a per unit volume basis. It is because of the technology fees?

It is both. It is maybe 70-30 Doug?

Yes.

60-40? Probably it is in that range, but it is primarily technology fees with some volume as well.

Correct. Remember, Steve, a 3% kind of percentage point increase in a sheet of paper, which is what the FulFill E does. It is 15% more volume out of that satellite, so you are getting those margin on 15% higher volume okay, but on top of that we are getting a technology fees, so it is both kind of operating income and boosted income from the tech fees.

Okay. Got you. Then if I could ask as a follow-up, I realize you may not be able to be specific about this, but I will ask if there are any other product lines out there like Coiled Tubing where you are looking at losses at the profit line and maybe considering doing the same as we have done with Coiled Tubing?

Yes. As you are aware we have talked about this on previous calls. We have been making reductions adjustments in the Energy Services business and the various product lines for quite some time now. There is another product line we have not really talked much about that pipeline actually started in the previous quarter, but during the quarter we have really realigned, readjusted how we go about selling pipeline services and that has been significantly reduced to a very narrow window that centers around equipment leasing, so the service part of that business has really pretty much gone to zero right now. To answer your question, the answer is yes, but we have been making adjustments to that.

Okay. Very good. Thank you.

Thank you. The next question is from Al Kaschalk of Wedbush Securities. Your line is open.

Good morning, guys.

Hey, Al.

Hey, Al.

As a follow-up on the energy side, if we take the actions that have been communicated, what is the pro forma run rate revenue on the energy business?

We are $42 million right now in the second quarter. Now as we ramp down Coiled Tubing. That was about $6 million in the quarter, so that will be ramping down through the third. The rest of that business primarily at this point is offshore filtration and well test. It is much more stable base of revenue. I mentioned we have one project that's going to be coming off large project coming off in the third. There is some other business out there for the fourth, so probably the $38 million range. At least at these oil prices it is probably a level we might be at over the next couple of quarters...

Okay. Is that fairly stable across the quarters or is there the seasonality and what you expected to have last? Is that, that is pretty consistent on a quarterly basis is my question?

There is not a lot of seasonality. I did mentioned, but the seasonality comes more in the third quarter, which is due to weather and offshore weather that could confuse things. If you hit a storm in the Gulf Mexico, it could change things temporarily. Al, what I gave you 42 is the percentage of decline over last year, so revenues are running about 36, 37, so minus the 6 you are probably going to be around below 30s as a sustainable. Sorry, make that correction. That level is highly driven by the offshore and international locations, which is filtration well testing, so that's not going to have the seasonality that is probably that level over the next couple of quarters. Like I said until we see volume of work ramping up through the oil industry.

To your point, technically what is left or will be, the Q3 is generally if I recall higher volatility, because of hurricanes and things like that that could come up. Historically, I think the company has been the first off and last on in terms of work coming back. To transition to performance materials, which did a tremendous job, I guess the question I have, as you look at this business at sort of a $500 million run rate it looks like we are very close to 20% EBIT margin. I guess, I am trying to appreciate, because that is substantially higher even though you have done a more pushdown, if you will, of the cost relative to the legacy business there. What is driving, from a business standpoint, the mix of business that really strong margin performance?

I think there is a couple of things, first, a lot of overhead savings and operational cost savings in the business. I think that has been a major driver of the improvement. A couple of other drivers are just metalcasting in Asia has strengthened. I mentioned the fabric care in Asia as we have moved to some higher value products in Asia, have been higher margin products as well. I think that has been driving quite a bit of the improvement. You have got metalcasting in Asia. That has grown, I mentioned 19% growth of that business in Asia alone, and a lot of that came pretty high margin stuff with the fabric care. I think it is a combination of things. It is higher sales, good mix of new products and then the overhead reductions that you have seen through the operating performance.

Okay. Good. Joe, just a step-back question, if I may, in the quarter the Company did 15.5% EBIT margin. You laid that out at the Analyst Day, multi-year target of 16% for the corporation. There are a lot of moving parts here with some of the business, but 40 basis points on the next dollar revenue to get you to that 16% I think it not an easy task, but it seems pretty conservative based on where you are sitting today. I guess the question is, what is driving? What will, I guess, prevent you from coming on and adjusting that number, but more importantly, why would not it be expected to see that north of 16% given the actions you are taking and some of the nature of the business lines that are seeing some tailwinds?

I think. There are a couple of things. I think, to answer your question directly, if you are asking do we have the potential to exceed that, the answer is yes. What we were trying to take into consideration, but by the way it is important to keep a perspective of the middle two quarters of the year for us are seasonally high period, so you are going to have a slightly higher margin dollars for these two quarters, so we were presenting an average for a year there. It also projected significant growth in terms of over that five-year timeframe of adding $1 billion to our base and as we shared with you that $1 billion at minimum is going to come from a number of different places, some of which would be acquisitions, some is going to come from our base business growth, some will come from new the product growth and some of that will be at high margin levels. Some is going to be at lower margin levels. I can't give you specifics around those right now, but as we thought about areas that, for instance, were going to be moving into where we do not have significant position, sometimes in the early years of going from no position to developing a position, the early year's margins not going to be as high as the later years. That is going to move around over time, but we felt a target based on what we are shooting at right now it felt reasonable, but yes, I think the potential for us is there to exceed it over time.

Got it. Then if I may, one final question. I know it's a broader comment, but the metalcasting business, the growth there is particularly targeted at Asia. How do we think about sort of this moderation in China's GDP? I guess structurally there is still the migration of people from the farm to the city, so the middle class development is still there, hence the demand for this greensand if you will is still very much on track despite the global commentary. Is that fair?

Yes. I think two things to keep in mind relative to the business portfolio we have. As you think about the metalcastings' business and you think about PCC, both of those major business segments in China, they represent for the world 50% of the company, but both of them represent major growth opportunities. There are growth opportunities regardless of the rate of growth in China. Meaning, if China moves from 7% to 5%, it will have a small effect on the growth targets that we set for China and the reason for that is, that both of those product areas did not have enormous penetration potential at the existing volume levels, so we have smaller positions within a very a large market and with a value equation that will allow us to penetrate further. Just as we have done in PCC over the last four years, just as we have done in the castings business over the last seven years, we have moved into the higher value end and we are going to keep moving up that chain and it is based on an existing market size. Now, the reality is that market will continue to grow. It is just a question of is it going to keep going at seven, is it going to be five, is it going to be four? That is one of the things that when we talk about growth, that is a little bit different about some cases, a lot different about the products we are selling into those markets, because they are value-added differentiated products and the potential for those is enormous.

Thank you, Joe.

Hey, Al. This is Doug. Before you jump off, I have got to correct a number I gave you. Energy Services ran at the first half at about $108 million, so it is at a pace of about $200 per year even if you take out the Coiled Tubing that I gave you, so think of it as a run rate of about 50 a quarter. That could go up and down based on some projects and nitrogen and pipeline, but it is about a $200 million annual pace at this point.

Okay. That should be somewhere in that 10%-type of margin as you maybe are a little higher given the filtration and well testing services?

Yes. That filtration and well testing are higher margins, but right now the predominant source of revenue is that filtration well testing, so I think if you are in the 9% range is probably a good place. We are continuing to look at every cost in that business to remove it, so - maintain it could go up a little bit. That is kind of a representative quarter except for Coiled Tubing.

Great. Thank you. Good luck, guys.

Thanks.

Thank you.

Thank you. The next question is from Ivan Marcuse of KeyBanc Capital Markets. Your line is open.

Hi. Just a quick question, the environmental business that you said got delayed, do you expect the hit in the fourth quarter or is that sort of hopefully hits in 2016?

Yes. I am going to ask Patrick Carpenter, who is the business unit Head of Construction Technologies to walk us through that, please.

Good morning, Ivan. A portion of those projects will come by year's end and some have been delayed into 2016, mainly the large remediation projects based on funding or if it has been a situation where a client or owner has to go through other regulatory challenges, so a portion will delay into 2016 and some will finish out this year.

Okay. Thanks. Then, Doug, a quick question, You just mentioned that the second and third quarter are much bigger in terms of seasonality, so if we look at going to the fourth quarter versus the third quarter sort of these projects, the lumpiness, would you still expect a normal seasonality pattern where you usually have a decline from fourth quarter to third quarter or is the synergies, exiting of the coiled business and these projects hitting in the fourth quarter maybe box that trend a little bit?

Yes. You will see probably a slight decline in our margins. I mean, but what is seasonally declining is our performance minerals business [ph] high-margin products in there, so you will see a decline. Some of that will be offset but the incremental synergies from the third to the fourth are about $1 million bucks, so we are going to see - typically the third, the fourth and the first quarter are lower margins and the second and the third are higher margins. Last year that equated to about 14%. It could be a little bit better than that on an annualized basis this year.

Great. Thank you.

Thank you. The last question comes from Rosemarie Morbelli of Gabelli & Company. Your line is opening.

Thank you. I was just wondering in terms of the offshore business, Doug, you already mentioned that there was one coming down the line in the third quarter. How much of a window do you have? Can you see a lot of projects coming into play in 2016 or is the window only you have a couple of months before you know that the new well is going to need to be tested?

Yes. Rosemarie. This is Mike Johnson. We have a lot of strength in the offshore well test and filtration market, but we do not have a lot of line of sight except in Brazil and then with the deep water projects in the Gulf of Mexico. Even though we do have a project coming off, we have other projects coming on, so we feel pretty strong with our Gulf of Mexico work, Brazil and Malaysia work and filtration.

Okay. Thanks. Doug, I was wondering, now that you are ahead on the synergies side are you changing the target? I mean, I know it was $70 million off of the first couple of years you were ahead and then another $50 million over five years. Where do we stand on that $50 million?

Well, we have surpassed the $50 million. We should end the year ahead of our $70 million. We still have some opportunities for further cost savings as we go through the deployment of ERP systems globally. I mentioned that we have just started integrating the supply chain functions and the transactional pieces of that shared services to provide some additional savings. I am not going to give you a higher target right now than the 72 that I can currently see. As those initiatives develop, we will be highlighting the cost savings that come from them on future quarters.

You do not have a ballpark number as to you can get another $10 million to $20 million, for example?

At this point, I am not going to give you $10 million to $20 million, Rosemarie, but I do think that we will achieve higher savings than the 72. What I am hedging for is, we got to get that Oracle implementation. It is progressing. We are about 25% through it. When you put in that kind of a system, and we are really able to move and shift work around, so we are working through exactly how that is going to be. Some of the businesses are changing as you can see in energy services and that supply chain function over time as we integrate that and the shared services piece of it delivers. It does not delivery immediately, but as we generate efficiencies and supply chain that is something, that's a structure we have put in place that will continue to provide savings year-over-year as we become more and more efficient. Right now, until we get that in place and really have an idea, but I do think we are going to see higher savings than the $70 million.

Thank you. Just lastly if I may, any progress on the adoption of E-325 in Europe and in North America? In this difficult environment, one would think that the paper mills would do their best to lower their costs.

Hi Rosemarie, it is D.J. Thanks for asking. As a matter of fact, we have been getting some better traction with E-325 and that traction is and that growth rate is coming from places where we did our early deployments. You will recall when we were frustrated at the rate of growth earlier on; I worked through this grade-by-grade qualification. We have achieved those qualifications in a lot of our base much of that is in North America and Europe, so we are seeing pretty good growth with E-325.

Enough to offset the secular decline in those two regions, forgetting the growth in Asia if you would just look at North America and Europe?

I believe so. Right now, just to give you a dimension, we are looking at contribution that is north of $4 million from E-355. That is what I would imagine it is by the end of this year. As we are looking at what the lower rate of degradation of those markets are, we believe, that we will be able to offset that decline.

Okay. Thank you. Good luck.

Thank you. There is no further question in queue at this time. I will turn the call back over for closing remarks.

That is all we have. Thanks for your interest in Minerals Technology and have a nice afternoon.