Minerals Technologies Inc (MTX) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and 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). And 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, and 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'll 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% increase. 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 on this in a few minutes.

I'd also like to 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 upgrade of our credit rate by Moody's which is a very positive sign, and a testament to what we've been able to accomplish in just one year.

On a business realignment note, as you saw in our press release last night, we took a $16 million impairment charge in the coil tubing business, which has been -- it's been very hard hit by the decline in oil prices. We plan 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'd characterize the quarter as one that saw that continued 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've 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's 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 at the UPM paper mill in Changshu started up and the 100,000 ton satellite for coating grade 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 ten satellites operating in China by mid-2016.

In addition to the China market we added another FulFill E-325 agreement at a paper mill in India and 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 metal casting, 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 Material sales actually grew 19%.

We launched our ENERSOL crop enhancement technology in China and we recently introduced a private label brand of lightweight cat litter with our grocery chain in the midwest. And in September, we'll 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 in the worldwide steel markets continue to put pressure on our Refractories business, driving our sales down by 17%, compared to last year. And in our Energy Services business we continue 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 oil price levels, we do not see much possibility for the onshore business to recover significantly for some time to come. And because of this outlook, we decided to exit the coil tubing business.

On the integration front, as I mentioned earlier, we continue to track well. We've moved the majority of our transactional activities into our shared services group and the implementation of the oracle ERP system is underway in the US and Asia. We've 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.

And to give you an example of our progress, the entire company has received about 18,000 improvement suggestions 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 of focus for this work are adhesives and sealants, pet litter, castings and refractories, as well as textile non-wovens. 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 competed with these consolidations by year-end.

Many of you attended our Analyst Day at the New York Stock Exchange on June 30, where we unveiled our longer term growth targets and initiatives. I'd 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're also targeting to increase operating margin to 16%, EBITDA to 22% and return on capital to 12%. And we plan to do this through 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 US, 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 performance, high-performance operating system and our ability to integrate acquisitions effectively and rapidly.

So 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. Now let's go through our second quarter consolidated and business segment results. Through the remainder of the call I'll 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 recorded 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 and integration, debt refinancing costs and impairment charges to exit the coil 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. The 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 pro forma basis, our Performance Materials Asia business grew 19% over last year. We also saw growth in US metal castings and US building materials product lines. Sales in ground calcium carbonates grew 5% and volumes in our Asia PCC business were up 15%. These areas of 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 from the 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 and we made a debt principal payment of $50 million. This brought our total debt repayment to $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 2.5 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 continues to be affected by reduced activity in the oilfield industry. The synergies from the integration continue to track ahead of our targets, and I'll give you an update on our progress in a few minutes.

But before we move on, let me outline the special charges in the quarter and bridge our earnings of $1.18 to our reported earnings from continuing operations of $0.76.

The special items this quarter included $2.7 million of additional integration-related costs, $4.5 million of primarily non-cash charges related to our debt refinancing, and $16.8 million in restructuring impairment charges in Energy Services, $15.8 million of which is related to the impairment of coil tubing assets. I'll comment more on some of the actions being taken in our coil tubing business when I get to the Energy Services (inaudible).

Here are some insights 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 continues ahead of our target and 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's the chart showing the progress we've 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 we expected on the last call. For the next two quarters, savings will continue to improve and we've 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 and ahead of our original $70 million long-term target.

As Joe mentioned, the integration is going well. We continue to progress according to our 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 the Oracle ERP platform to the acquired businesses. Realignment of our business operations in Construction Technologies is well underway. We've completed the consolidation of several administrative offices around the world.

Now let's go through the financial results for each of the business segments, and I'll 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 the sales, accounting for 5 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 [Jinghur] 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 dollars, with an operating margin of 17.3%. Operating income was 4% higher than the second quarter of last year despite the lower sales. Improvement came from sales growth in the GCC product line, good overhead expense control, and a 2% productivity improvement in the segment.

Sequentially, segment sales increased 2% due to the seasonally stronger sales in our Processed Minerals product line which increased 10%. Ground calcium carbonate sales were higher by 16% while 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 unfavorable foreign exchange. Operating income increased 17% from the first quarter which was slightly better than the 15% we expected on the last call.

We're currently commissioning a 100,000-ton coating satellite with Sun Paper. We expect this facility to ramp up in the third quarter. However we'll not see significant volumes until the fourth quarter. Our next satellite to be commissioned will be the NewYield facility with Sun Paper in September. Further out we're 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 start-up costs associated with the new Sun Paper facilities. We'll 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, metal casting sequential sales were up 10% driven by the US and Asia. Household personal care and specialty products sequential sales were similar to the first quarter. Basic mineral 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 metal casting 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 metal casting 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's 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 US 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're 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 let's 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 coil tubing and pipeline and nitrogen were 36% lower and our predominantly 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've been removing significant segment overhead costs for the past year and have continued to do so to reduce break-even 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've decided to exit the coil 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 coil tubing market does not support continuing operations.

To give you some dimension of the current state of this service line, coil 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 coil 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'll 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 coil 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's 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 US 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're seeing some stability in the US steel market but no significant improvement. Consequently, we expect sequential operating segment 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 faced this quarter. We were able to overcome lower profits from our Energy Services and Refractory segments as well as pressure on our earnings from foreign exchange through strong performances in our minerals-based businesses. In addition, accelerating synergies and productivity improvements in all businesses, and very good overhead cost control helped to offset these challenging conditions.

So let me summarize what we're 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 and 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 start-up costs and Paper PCC, normal seasonal sales declines in Performance Minerals, weaker sales in the oil and steel markets in 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 coil tubing business.

Compared to last year operating income will be down approximately $11 million. As I mentioned earlier, foreign exchange is -- we 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'll conclude by saying the acquisition of AMCOL has been a positive one for MTI on many fronts. Not only has it been highly accretive to earnings at over 80% in the first year but it's also expanded our growth avenues considerably. We're building strong momentum in our minerals-based businesses, particularly in Asia.

Over the past year, we've improved operating margins by 20%, expanded EBITDA margins by 30% and made significant debt repayments. We've also set substantial growth and performance targets for ourselves which we highlighted at our recent Analyst Day conference. We look forward to updating you on our progress.

Now let's go to questions.

Thank you. (Instructions). And 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. They were very good, I guess would be -- in the quarter. So 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 level of profitability absent I know some seasonality, maintaining at this point with the headwinds that you face over the next couple of quarters of your year?

Sure, Ivan. Look, I think the margins -- the strong margins this quarter in all of our business -- Energy Service is a little lower, and a reflection of what we've been doing over the past year with productivity improvements, the overhead cost reductions you're seeing, and operating improvements in all the segments.

I do think that 15.6% -- this is a seasonally high period for us, so we're looking at a third quarter. Fourth and first quarter are probably going to be a bit lower than that. But we also had some pricing that's affected that as well. So I do think that this is a level that's probably achievable, although you got to look at the third quarter as one of the high points in the year.

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

Yes. We're bringing on -- we probably brought on about 290,000 tons of capacity this year. Again, 150,000 of that is coming up later this year. So you won't start to really see these two Sun Paper facilities contribute until next year. And then we're 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've brought on about $25 million this year. So I think you're going to start to see some of that revenue growth come through the end of this year, probably the beginning of next year and through next year.

Now, the reason you didn't see that this year is we saw those extended outages in North America with -- in PCC. So that was relatively unexpected.

So again we thought we'd start seeing some of that in the fourth quarter. We're going to be ramping up the Sun Paper a little bit later than we thought. It's going to take us through the fourth quarter to probably ramp that up. You won't see those volumes until later in the fourth quarter. Probably sometime in the first half of next year you'll start to see the revenue growth. But then again that depends on what happens with the North America paper industry.

Okay. And then the last question and I'll jump back in the queue. If you had an upgrade in your debt, what's your expected interest rate looking out the next several quarters based on the new rating?

Yes. Actually the rate -- our total interest rate is about the same as it was prior to the re-pricing. We re-priced -- we had about a 4% rate. It was all variable and we've 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're about the same. But what that did is it put a ceiling on $300 million of our debt. And so interest expense is going to be about the same until we see rates -- 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. Was the exiting of the coil tubing business -- like, it seems that will add another $8 million and like I said, for lack of better words, worth savings to your cost targets. So do you expect by the middle of next year to be at an $80 million run rate basis? Like the $72 million plus 8?

Yes. So I guess -- I mean there are cost savings. What we're looking at is reducing the losses. So by exiting the business, you're looking at operating income improvement through removing not only the variable and the fixed costs and overheads associated with that business. So the net incremental improvement will be about $8 million on an annualized basis. And it's going to come through both cost savings and other factors.

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

Well, as we discussed during the Analyst Days there are some very good longer term initiatives that we're 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 don't have any plans at the moment to sell the business. And as we describe the 2020 to you, projections that we made included the Refractories business.

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

Muscari^ We do have some -- we've had some energy savings -- call it raw material, but in our Performance Materials and Performance Minerals businesses we've seen about $2 million quarter-over-quarter of savings there. MGO pricing given the lower, I guess, demand for refractory products has probably about $1 million into Refractories in terms of cost savings. But then again that's also -- you get some pricing pressure in Refractories as a result as well.

Okay. That's helpful. Thank you.

Thank you. And 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. Am I reading this properly?

I think that is -- yes, that's exactly what we're sharing with everyone today, yes.

And so then when -- so we -- let's look at the new base, whatever it is for the third quarter. I haven't done the math yet and then looking at the fourth quarter. Is seasonality in Q4 going to diminish the potential for the fourth quarter versus Q3? Or are there any changes in the seasonality because of AMCOL?

No, the seasonality is -- in the base NCI business of Paper and Refractories, you do see the seasonal decline in Performance Minerals and I highlighted that. You'll see some declines in Construction Technologies as well. Those two businesses have their strongest periods in the second and third. So yes, you're going to see some seasonality going into the fourth and first quarters.

Offsetting that, again, I mentioned, as we ramp down the coil tubing business we'll start to see some savings in energy services come through in the fourth quarter. So I'm 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. And do you anticipate the basic legacy Minerals Technologies business to improve year-over-year? I mean this quarter was a negative $0.02. What are we looking at in the next two quarters, to the best of your guess?

Yes, I think -- look, the $0.02 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'll see how the steel market continues to progress. We haven't seen any substantial improvements in terms of production. But that will help -- obviously help that business if the steel market improves.

And in Specialty Minerals, even though performance -- the Processed Minerals will start to hit the seasonal decline, we're 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 if the steel market goes up.

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. And 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. I'm going to -- we have -- on 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'm 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've had the four innovation retreats. The adhesives and sealants is the one that has progressed the most thus far. We've introduced a product. It is commercial. We expect about [1.5 million] sales this year. It's a sealant project -- or product in Europe. It goes into construction sealants. So that was a direct result of the innovation retreat and the ideas that were generated by the team.

Most recently, we've had our fourth. We highlighted three during the recent Analyst Day. But the fourth was in textile non-wovens. We got a team together and again we're 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're progressing. We put them into our stage gate program and we'll report more as we get further development.

And those are derived from the AMCOL polymer technology? Am I correct?

Yes. A combination. I mean we've 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. And the next question is from Daniel Moore of CJS Securities. Your line is open.

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

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

Got it. And you just mentioned adhesives and sealants. In prior calls, you've laid out the sizeable or the size or various opportunities you have in the technology product pipeline. Anything else that you can see as a potential meter-mover or contributor to 2016 or perhaps shortly thereafter?

Yes. On the -- 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. And in spite 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 metal castings 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.

So we do expect those areas to continue to grow, even if China slows down and right now it's 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 satellite not only coming up but the things we have in the hopper that relate to -- also relate to the new products that we have, like NewYield. So you can 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've 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. So I commented that we're going to -- we look to keep up the pace of our deleveraging. So about $180 million a year is the pace we're on. Probably keep that up through the next 18 months. And that will put us probably in a net basis below 2.5 times. I think we have been focused on deleveraging, getting ourselves to the right place, which is for the company, I think, around 2 times.

So if we keep up the pace improvements in the business might get us there a little earlier. But we're probably around 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'd have to delever a little bit 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 or listed volume being up 1%. When I look at what the overall revenue was down, it almost implies that pricing was negative. I did think I heard Doug say pricing was flat. But can you reconcile that for me?

Sure. So, Steve, total volumes were up 1%. You saw a 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. So you had 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's largely driven by differences in lime costs and things that are the basis of some of our PCC prices. And 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 are designed to have very similar operating income. So I think as we ramp up, you'll start to see some of those changes. Most of the -- some change occurring, most of the facilities we ramped up in China are filler satellites. This new Sun Paper satellite is 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. So it is a mix impact that's slightly negative, but it sounds like from a profit standpoint that's nothing we need to be concerned about?

No, that's right. So we'll 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?

Dietrich^ Yes, FulFill -- look, the FulFill products, for us, is -- it helps us in two areas, right? It improves our margin because it's tied to -- as these contracts have technology fees associated with them, we don't 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 facilities. So there is -- built into some of the improvements you're seeing in margins, you're seeing higher levels of FulFill come through and have a positive effect on that.

Okay. But, yes -- but not necessarily in a per unit volume basis; it's because of the technology fees?

It's both. You have -- it's maybe 70/30, Doug?

Yes.

60/40? It's probably -- it's in that range. But it's primarily technology fees but some volume as well.

Correct. Remember, Steve, a 3% increase -- percentage point increase in a sheet of paper, which is what FulFill E does, that's 15% more volume out of that satellite. So you're getting those margins on 15% higher volume, okay? But on top of that we're getting a technology fee. So it's both kind of operating income and boosted income from the tech fees.

Okay. Got you. And then if I could ask a follow-up. I realize you may not be able to be specific about this but I'll ask. If there are any other product lines out there like coil tubing, where you're looking at losses at the profit line and maybe considering doing the same as you've done with coil tubing?

Yes. We have been aggressively -- as you're aware we have talked about this on previous calls. We have been making reductions, adjustments in the Energy Services businesses and the various product lines for quite some time now. There is another product line we haven't really talked much about. That's pipeline.

During the -- actually it started in the previous quarter but during the quarter we 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. So yes, 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.

Hi, Al.

I just wanted -- as a follow-up on the energy side, if we take the actions that have been I guess communicated, what's the pro forma run rate revenue on the energy business?

So we're $42 million right now in the second quarter. Now as we ramp down coil 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's a 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's some other business out there for the fourth. So probably that $38 range at least with these oil prices is probably a level we might be at for the next couple of quarters.

Okay. And is that fairly stable across the quarters, or is there the seasonality of what you expect to have left -- is that -- that is pretty consistent on a quarterly basis, is my question?

There's not a lot of seasonality. I think the seasonality that ?- and I didn't mention, but the seasonality comes more in the third quarter.

Yes.

Which is due to weather and off shore weather that could confuse things. If you hit a storm in the Gulf Mexico, it could change things temporarily. And Al, what I gave you -- I'm sorry -- 42 was the percentage decline over last year. Revenues are running about 36, 37. So minus the 6 you're probably going to be around below 30s of the sustainable -- sorry make that correction.

But that level is highly driven by the offshore and international locations which are filtration and well testing. So that's not going to have the seasonality that's probably that level over the next couple of quarters. Like I said, until we see volume of work ramping up over the -- through the oil industry.

But to your point, technically what is left or will be, the Q3 is generally, as I recall, higher volatility because of hurricanes and things like that that could come up. And historically I think the company has been the first off and the 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, sort of a $500 million run rate, it looks like we're very close to 20% EBIT margin. And I guess I'm trying to appreciate, because that's substantially higher even though you've have done a more push-down, if you will, of the cost relative to the legacy business there. So what's driving, from a business standpoint, the mix of business I guess that really strong margin performance?

I think there's a couple things. First, a lot of overhead savings and operational cost savings in the business. I think that's been a major driver of the improvement. A couple other drivers are just metal casting 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. So I think that's been driving quite a bit of the improvement.

So you've got metal casting in Asia that's grown. I mentioned 19% growth of that business in Asia alone. And a lot of that came from pretty high margin stuff with the fabric care. So I think it's a combination of things. It's higher sales, good mix of new products and then the overhead reductions that you've 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 of revenue to get you to that 16% is -- I think it's not an easy task but it seems pretty conservative based on where you're sitting today.

So I guess the question is -- what's driving -- what will, I guess, prevent you from coming on and adjusting that number? But more importantly, why wouldn't it be expected to see that north of 16% given the actions you're taking and the -- some of the nature of the business lines that are seeing some tailwinds?

Yes, I think. There are a couple of things. I think to answer your question directly, if you're asking do we have the potential to exceed that? The answer is yes. What we were trying to take into consideration -- by the way, it's important to keep a perspective of the middle two quarters of the year for us are a seasonally high period. So you're going to have a slightly higher margin number for these two quarters. And so we were presenting an average for a year there.

But it also projected significant growth in terms of over that five-year time frame of adding $1 billion to our base. And there are, 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 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 don't 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.

So that's going to move around over time but we felt a target based on what we're shooting at right now it felt reasonable. But yes, I think the potential for us is there to exceed it over time.

Got it. And then if I may, one final question. I know it's a broader comment, but the metal casting business, the growth there is particularly targeted at Asia. How do we think about this moderation in China's GDP? I guess structurally there's 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 -- and they represent for the world 50% of the company, but both of whom represent major growth opportunities. They're 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 have enormous penetration potential at the existing volume levels. So we have smaller positions within a very large market, and with a value equation that will allow us to penetrate further. Just as we've done in PCC over the last four years, just as we've done in the castings business over the last seven years, we've moved into the higher value land and we're going to keep moving up that chain. And it's based on an existing market size.

Now, the reality is that market will continue to grow. It's just a question of is it going to keep going at seven? Is it going to be five? Is it going to be four? So that's one of the things that when we talk about growth, that's a little bit different about -- in some cases a lot different about the products we're 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've got to correct a number I gave you. So energy services ran at the first half at about $108 million. So it's at a pace of about $200 million per year even if you take out the coil tubing that I gave you.

So think of it as a run rate of about $50 million a quarter. That could go up and down based on some projects and nitrogen and pipeline. But it's about a $200 million annual pace at this point.

Okay. And that should be somewhere in that 10% type of margin as you -- maybe 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 you're in the 9% range is probably a good place. We're continuing to look at every cost in that business to remove it and maintain it, it could go up a little bit. So that's kind of a representative quarter except for coil tubing.

Thank you and good luck, guys.

Thanks.

Thank you.

Thank you. And the next question is from Ivan Marcuse from KeyBanc Capital Markets. Your line is open.

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

Yes, I'm 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 remediation, the large remediation projects, based on funding or if it's 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. And then, Doug, a quick question. I know that there's -- 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 as far as these projects, the lumpiness, would you still expect the normal seasonality pattern where you usually have a decline from fourth quarter to third quarter? Or is the synergies, the exiting of the coil business and these projects hitting in the fourth quarter maybe bucks that trend a little bit?

You'll see probably a decline, slight decline in our margins. I mean what's seasonally declining is our performance minerals business (inaudible) and high-margin products in there. So you'll see a decline. Some of that will be offset but the incremental synergies from the third to the fourth are about $1 million.

So we're going to see -- typically the third -- the fourth and the first quarter are lower margins and the second and the third are the higher margins and 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. And 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 don't have a lot of line of sight except in Brazil and then with the deep water projects in the Gulf of Mexico. So 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 in filtration.

Okay, thanks. And, 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 over 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've surpassed the $50 million. We should end the year ahead of our $70 million. We continue -- we still have some opportunities for further cost savings as we go through the deployment of our ERP systems globally. I mentioned that we only have -- we've just started integrating the supply chain functions and the transactional pieces of that industry and services that provide some additional savings. I'm not going to give you a higher target right now than the [72] that I can currently see. But as those initiatives develop, we'll be highlighting the cost savings that come from them on future quarters.

So you don't have a ballpark number as to you can get another $10 million to $20 million, for example?

At this point I'm not going to give you $10 million to $20 million, Rosemarie. But I do think that we'll achieve higher savings than the [72]. What I'm hedging for is we've got to get that Oracle implementation. It's progressing. We're about 25% through it. And when you get -- when you put in that kind of a system, and we're really able to move and shift work around. And so we're working through exactly how that's going to be.

You know, 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 doesn't deliver immediately. But as we generate efficiencies and supply chain that's 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. So right now until we get that in place I really have an idea, but I do think we're going to see higher savings than the $70 million.

Thank you. And 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's 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. And you'll recall I worked through, when we were frustrated at the rate of growth earlier on, I worked through this grade by grade qualification. We've achieved those qualifications and a lot of our base -- much of that is in North America and Europe. So we are seeing -- we're seeing pretty good growth with E-325.

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

I believe so. Right now, just to give you a dimension, we're looking at contribution that's north of $4 million from E-325. That's what I would imagine it is by the end of this year. And so as we're looking at what the lower rate of degradation of those markets are, we believe it will be able to offset that decline.

Okay. Thank you. Good luck.

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

That's all we have. Thanks for your interest in Minerals Technology and have a nice afternoon. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.