Minerals Technologies Inc (MTX) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 Minerals Technologies conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rick Honey. Please go ahead.

Good morning. Welcome to our third-quarter 2015 earnings conference call. Before we begin the call today, I would like to point out that today is the 23rd anniversary of Minerals Technologies. And over those 23 years, the Company has generated nearly 10% compound annual growth rate in earnings.

Today, Chairman and Chief Executive Officer Joe Muscari will provide some insight into MTI's performance, and then he will 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.

But 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. And, Rick, that is a great note, the mentioning of our 23rd anniversary. That is a great note to start this call off with. Today, we are going to deviate a bit from the normal focus and format of my remarks during these calls and spend a few minutes discussing some areas that have surfaced as concerns from a number of you.

Over the last three or four weeks, Doug Dietrich, Rick Honey and I have met with over 30 of our top institutional investors representing nearly 40% of our shareholder base. The concerns and questions that were raised centered primarily around China and MTI's growth initiatives there. The oil and gas industry and its impact on our energy services business as well as the steel industry's outlook with its further potential impact on our refractories business were other areas of concern and questions.

To start with, let me first say that MTI's fundamentals have not changed, and the growth potential for the Company as reflected in our 2020 targets presented at our June 30 analyst day conference remain basically intact. The acquisition integration synergies continue to remain on an accelerated track. Our market positions and our key growth areas are holding or improving. Transformation process of the former AMCOL to becoming one company with MTI continues to go very well. The additional acquisition growth opportunities created by the merger are still in place, and our R&D new product pipeline remains very strong.

We certainly have our challenges at the moment, but as I said, we don't see them having much of an impact on our ability to grow. The China slowdown, for instance, has given rise to concern over our longer-term prospects there. However, our two major growth trajectories in China are centered in paper PCC and metal casting binder systems, both of which represent substitution strategies that are relatively independent of GDP growth and the respective growth rates of the paper and foundry industries. Our market penetration growth rates for both of these product areas are based on fundamental economic value propositions with limited correlation to the overall country growth rate. Both cases, we are penetrating these very large industries by helping them move up the value chain and become more competitive, lower-cost.

But before getting into further specifics on this topic, let's put the past 15 months into perspective and quickly look at some fundamental measures that help to frame our current position. As you can see from this slide, the acquisition has been highly accretive -- 80% growth since 2013. The Company's earnings per share has increased from $2.42 in 2013 to a forecast of $4.30 for 2015. This has been accomplished in spite of the downturn in oil and gas, with a commensurate loss of significant revenue from the energy services business, the drop in the steel industry and resulting impact on our refractories, and, more recently, the China growth slowdown.

Looking at it from another fundamental measure, EBITDA, we have been able to raise EBITDA from $171 million to $384 million, while EBITDA as a percentage of sales has improved from 16.8% pre-acquisition to our current trailing 12-months' ratio of 20.4%. This puts MTI in the higher tier of comparable companies when looking at groupings such as SMP mid-cap materials or specialty materials pierce.

With these as backdrop, let's go back to the China growth question and see if we can provide some deeper understanding around why we believe that we will continue to be successful there. This slide outlines the rationale for the growth of our paper PCC business in China. Our 2020 target is to increase PCC sales by $220 million by adding 1.5 million metric tons of PCC sales there. We have three strategic initiatives for the paper industry in China. The first is increasing the penetration of PCC and paper. This includes introducing our higher-value PCC products at paper mills, replacing other pigments such as ground calcium carbonate.

Secondly, our new technologies of NewYield and FulFill will drive additional growth in our new yield, which we recently launched successfully at Sun Paper, converts a paper mill waste stream into a usable pigment for paper filling. The FulFill technologies allow papermakers to increase the amount of PCC in paper, thereby reducing the amount of higher-cost fiber. And our third trust centers on entering a new market application, packaging, where we will be producing coating-grade PCC for container board.

Right now, 1.4 million tons of this 17.5 million tons of paper produced in China are filled with PCC, of which we have nearly 60% share. Over time, as has been the case in North America and Europe, papermakers will replace other fillers with PCC because PCC basically gives customers the ability to produce brighter, higher-quality paper, but at a lower cost.

Looking at what is happening in China today, our PCC sales increased 52% in the third quarter over last year and are 34% higher this year to date. For the last two quarters, paper PCC volumes worldwide increased because of our new satellites in China, despite the continued secular decline in paper production in North America and Europe. And that growth -- we see that growth will continue to grow as we are currently ramping up 2 new satellite PCC plants there and plan to start up 3 more next year. By the end of next year, we will have 10 satellite plants in place and operating. Our new opportunities for PCC satellites are also still very robust as we were in discussions with more than a dozen papermakers there.

Now let's move on to metal casting. Our growth strategy for the metal casting industry in China where we supply green sand molding products and technology to the foundry industry is similar to that of PCC: penetration through substitution. We're targeting $55 million in added sales in China by 2020, and we expect to achieve that by providing the Chinese foundry industry with our higher-value products that save them money. Again, an economically driven value equation that underpins our growth rate targets and which will occur independent of the foundry industry rate growth. Let me explain.

The current-market Chinese foundries buy bulk bentonite and blend their own green sand mold formulas with a variety of materials such as sea coal and binders. MTI produces an engineered, pre-mixed package of green sand bond solutions for ferrous casting operations that reduces scrap and increases foundry throughput. In the United States, for example, 90% of the foundries use these pre-blended products, and it is also where MTI has a very strong position.

As China moves up the competitive value chain and the consolidation of foundries there continues, the market will move to the higher-value pre-mixed blends as well for their casting operations because it saves them money. Although we have seen some impact on our current metal casting business this quarter from the recent slowdown in China -- and Doug will review this further with you in a few minutes -- the long-term, economically driven faucet forces will foster conversion to a pre-mixed bond solution.

Let's also now take a look at the growth in pet care and fabric care, two businesses in our consumer products line where we also plan to grow in China and which has become a more significant part of our product portfolio since the acquisition. In June, we established a $30 million growth target for our pet care business that will follow MTI's basic growth strategic architecture of geographic expansion and new product development. And, as we think about pet care in China, you can see from the chart at the top right the number of domestic pets historically increases as GDP expands and living conditions improve. In this case, we are looking at just cats. Whereas we related to you at our analyst day, China has a relatively low number of cats and offers significant potential for growth as consumer spending growth -- an area, by the way, that China has been paying more attention to through various forms of stimulation.

New products also play an important role in our growth strategy here as we are rolling out a new lightweight cat litter around the world. Last quarter, we began to supply major US retail chains with our lightweight litter under their brand name. These initiatives have resulted in a 10% increase in sales year to date, and we experienced 15% in the third quarter.

Fabric care has also done very well in China and overall in Asia, where there has been a significant increase in the use of washing machines as incomes have improved and the middle class rapidly expands in the region. In the third quarter, fabric care sales increased 76% in Asia, with China leading the way at over 100% on a year-over-year basis. And sales have doubled in the region over 2014 year to date.

So to summarize, near term, we do expect to see the effects of a China slowdown primarily centered in China and limited to our metal castings business. However, we also expect to see continued growth near term in our other product lines there. Further, the longer-term targets that we set remain very much achievable.

With regard to the concern about our service businesses, energy services and refractories, both are under pressure right now, as you know. We don't expect industry conditions to improve materially in the near term. [NEG Services], which now represents about 9% of MTI's sales, have been hit the hardest as a result of the oil price decline, a 52% drop in sales. Doug will also go into a lot more detail on this segment in a moment as well.

But as we look forward here, which, frankly, is a bit difficult in terms of determining where oil prices will go -- but we do expect to maintain a minimum level of profitability, and we will continue to make whatever adjustments are necessary to do so. I should mention -- I should also mention that we actually do see some new international offshore opportunities infiltration which we are pursuing very aggressively. In refractories, the global steel market remains weak, but steel utilization rates have somewhat stabilized. And, despite these conditions, we continue to deliver double-digit operating margins as a result of our ongoing efforts to control costs and improve productivity. The refractories product line delivered 10% productivity improvement in the quarter through improved efficiencies. As we look forward, we expect to basically remain around these profit levels, depending on how utilization rates go.

As we look at this quarter, the performance of the Company was basically quite solid, and we expect to continue on a path of solid performance. Our operational excellence, lean initiative, which has yielded significant productivity and efficiency improvements, is being integrated into the former AMCOL businesses. And we are seeing significant indicators of progress. In this quarter, for example, the entire company improved manufacturing productivity by almost 10% over last year. Our safety performance has held relatively steady in spite of all the changes occurring across the company. Employee suggestions as another indicator of a simulation assimilation were 27,000 year to date. This 100% increase from 2014 has been driven primarily by former AMCOL employees who have submitted over 13,000 suggestions year to date.

As we look forward, MTI will continue to execute on its major growth strategies of geographic expansion, new product development. The new-product pipeline is robust as the acquisition of AMCOL has provided us with many new ideas that have gone into the pipeline for future minerals-based innovations.

We have also begun to again put potential acquisitions on our radar screen. And while our primary focus for the use of cash will continue to be to reduce debt and support our organic growth initiatives, we are actively analyzing new potential acquisition prospects, which would primarily be minerals-based entities that have a technologies-based approach to the markets that they serve.

As I have discussed earlier, the fundamentals of the Company are very solid. Operating performance, cash flow generation, new-product developments, market positions, employee engagement, as well as having multiple levers for growth -- these are all still in place. Near term, over the next several quarters we do expect to encounter continuing challenges in energy services and refractories, but we also expect to continue to deliver solid performance while advancing our growth opportunities.

Now let's turn it over to Doug.

Thanks, Joe. Good morning, everyone. Now, let's go deeper into our third-quarter consolidated and business segment results. Through the remainder of the call, I will highlight the key elements of our results in each of our five segments. And I will update you on the progress with -- we are with making synergies, cash flow and debt repayment.

We saw some significant areas of growth over last year, particularly in Asia. Sales for our combined businesses in China grew 20% over last year, driven by a 52% increase in paper PCC and a 6% increase in sales in performance materials, driven by higher sales of fabric care products, which increased 148% over last year.

Outside of Asia, we saw strong growth in processed minerals products, which increased 5% over last year, and pet care and personal care products, which increased 15% and 32%, respectively. Operating income, excluding special items, was $63 million and represented 14% of sales. Four of our five business segments delivered double-digit operating margins in the quarter. Year to date, our operating margin is 14.5%, which is 9% higher than the 13.3% we achieved year to date in 2014.

I would also like to highlight that our minerals-based businesses continue on a strong track with significant margin improvement over last year. For perspective, combined margins for these three segments have improved nearly 30% over last year on a pro forma basis.

On the lower right-hand side of this slide, you can see a chart that I have added which shows our consolidated, actual, and pro forma sales and operating income by quarter for the past three years. Beside that is a chart that shows pro forma operating margins for the combined Company before the acquisition compared to this year. You can see the significant improvement in profitability that we have been able to drive over the past several quarters, with our current operating margin 41% higher than the pro forma combined Company prior to the acquisition.

Moving on, EBITDA for the quarter was $92 million excluding special items, representing 20.4% of sales. Operating cash flow for the quarter was over $80 million and free cash flow was $58 million. We made a debt principal payment of $50 million, which brought our total debt repayment to $240 million over the last five quarters and our net leverage ratio to approximately 2.9. We expect to maintain this pace of debt repayment, which should reduce our leverage ratio to below 2.4 by the end of next year. Also in the quarter, the Board of Directors authorized a $150 million share repurchase program.

This slide shows our sequential quarterly earnings over the past several years and illustrates the high level of accretion that we have been able to deliver from the acquisition. We have offset lower profits and energy services and refractories and the negative impact of foreign exchange with accelerated synergies and overhead reductions, as well as through manufacturing cost improvements and productivity increases.

Here is the chart showing the progress we have made with capturing synergies and our projection for the fourth quarter. We achieved $17 million in savings in the third quarter, which is the level we expected from the last call. As Joe mentioned, integration is going well and we continue to progress according to the plan. Our shared service organization continues to deploy globally, with further expansion into supply chain functions. One of the main areas of focus continues to be on IT systems integration, which is also moving forward with the deployment of the Oracle ERP platform to the acquired business. For the next quarter, savings will continue to improve, and we expect to achieve $18 million for the fourth quarter. This will put us at an annualized rate of $72 million by the end of the year.

Now let's go through the financial results for each of the business segments, and I will start with specialty minerals. Segment sales were $157 million. And on a constant currency basis, sales grew 2% over last year, driven by the growth of PCC in China and GCC sales in performance minerals. Within the segment, paper PCC's underlying sales grew 2% and volumes improved 3%, the second consecutive quarter of growth for global PCC volumes. Growth in China was particularly strong, where our PCC sales grew 52% over last year from our 3 new satellites commissioned this year, one of which was the successful launch of our NewYield technology that converts a waste stream and functional filler for paper. We also announced our 22nd and 23rd commercial agreements for our FulFill high filler technology with one papermaker here in the US and another in Asia. We see our growth continuing in Asia next year, where we will start up 3 more satellites in China that will add an additional 215,000 tons of capacity by the end of the year.

As I mentioned earlier, sales in processed minerals were 5% higher than last year, driven by 7% growth in ground calcium carbonate. Operating income for this segment was $25 million, with an operating margin of 16%. Operating margin was near the same level as last year despite the lower sales due to good overhead expense control and a 6% productivity improvement in the segment.

Moving on to our outlook for the segment for the fourth quarter, we expect our paper PCC operating income to be slightly higher than the third quarter. Asia volumes will continue to grow as we ramp up the new satellites in China, but this will be partially offset by weaker volumes in North America, primarily due to the idling of the [Verso] paper machines, which will begin to impact our volumes in the fourth quarter. In performance minerals, the fourth quarter is the low point of demand in the year for end markets, and sales are typically 7% to 10% lower than the third quarter. Overall, we expect the fourth quarter operating income for the segment to be about $1 million lower than the third.

Now let me take you through the performance materials segment. Sales this quarter were approximately $127 million, which is 7% lower than last year. Foreign exchange had an unfavorable impact on sales of 3%. Within this segment, sales in metal casting were down 9%, being impacted by the weakness in the US agricultural sector and extended foundry outages in China due to the recent slowdown in the automotive industry.

The segment saw areas of significant growth this quarter. Fabric care sales in Asia increased 76% over last year, driven by sales in China, which were up 148% due to the introduction of new surfactant granules. Personal care was up 32%; and global pet care grew 15%, driven by strong bulk sales and the introduction of our new lightweight pet litter formulation. In basic minerals, sales were down 12%, primarily due to lower drilling fluid sales due to the continued weak oil and gas drilling activity. Operating income was $22.7 million, which was 10% higher than the third quarter of last year. Operating margins improved significantly over last year to 18% of sales from 15.3%. This performance has been driven by strong sales in household and personal care as well as a 16% productivity improvement in overhead expense reduction. You can see from the chart on the lower right side the significant improvement in operating income and margin from pre-acquisition period.

Looking at the fourth quarter, we expect segment operating income to be approximately the same as the third quarter. We see continued strong performance in the majority of the product line. Basic minerals, however, will continue to be soft due to the current weakness in the energy and steel markets.

Now let's took a look take at the results in our construction technology segment. Sales for this segment were approximately $50 million, 28% lower than last year. Within the segment, sales in environmental products were 37% lower, impacted by two main factors. First, our sales last year included a number of very large environmental remediation projects, which we did not see again this quarter.

Second, we rationalized some of our very low-margin products as we began to focus on our newest technologies in higher-margin specialty geosynthetic clay liners like Resistex. These specialty GCLs are focused on our -- on major global remediation areas such as red mud residue landfills from aluminum production and the coal ash landfill opportunities from power generation. Building materials, which also includes construction drilling products, sales declined 19% from last year, also due to a major building project in California that was included in last year's sales. Operating income was $6.1 million, representing 12.3% of sales this quarter. The decline from last year was due to the number of large projects I might just mentioned completed in the third quarter of 2014. This business has posted double-digit margins for the past five quarters. This is due to significant overhead cost reductions, low-margin product rationalizations that have occurred over the past 18 months.

You can see from the chart in the lower right the significant improvement in operating income in margins post acquisition. You might also note that sales quarter to quarter in this segment are at times lumpy due to the significant size of some of the projects in which we participate. And the timing of our sales from these large projects can be difficult to forecast. Looking to the fourth quarter, we expect operating income to decrease by about $2 million from third-quarter levels. The fourth quarter is the seasonally weakest period for this segment.

Now let's turn to energy services. This business had sales of $41 million, which was 52% lower than the third quarter of last year. Our exit from coil tubing this quarter represented 20% of the decrease. Operating income for the segment was $2.6 million, $2 million higher than what we had communicated on the last call, as we began to realize the expected savings in coil tubing. And our offshore service line profits were slightly better than expected.

As I indicated on the last call, we took restructuring and impairment charges of $10.5 million in the coil tubing and other domestic onshore service lines. We expect to incur additional charges in the fourth quarter in coil tubing as we negotiate the termination of several large equipment leases. Operating margins for the quarter were just over 6% despite the significant decrease in sales and the unabsorbed fixed cost associated with winding up coil tubing services.

The chart on the lower right side will give you some perspective on the challenges faced in this segment and our performance managing through them. You can see the significant sales decline over the past several quarters correlated to the decline in oil prices, which I show as the red line. We acted quickly and removed significant cost from this business in order to preserve profitability, given the steep decline in sales. In doing so, on a year-to-date basis, we have been able to maintain our operating margins at near pre-acquisition levels.

Looking to the fourth quarter for this segment, we see a similar level of operating income to the third quarter. We expect to generate additional incremental savings from the exit of coil tubing as we remove the remaining fixed cost. However, this will be offset by lower well testing sales in the Gulf of Mexico.

Now let's go through that refractory segment. Sales for the third quarter were approximately $77 million, 14% lower than the third 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 third quarter of 2014, and both refractory and metallurgical wire sales continued to be impacted by the weak market conditions. Within this segment, refractory product sales declined 13% and metallurgical wire sales were down 18%, both driven by lower steel production in North America and Europe, especially in the UK. Operating income for the segment decreased 19% from last year to $7.9 million. Foreign exchange had a negative impact of $700,000, or 7%. Despite the considerably lower sales, the business was able to maintain margins of 10% for a 6% improvement in manufacturing productivity and overhead cost reductions in the segment.

Looking forward to the fourth quarter, we expect profits to be slightly lower than the third quarter, as US steel capacity utilization rates have declined somewhat from the third quarter to around 70% currently. Also, we will see lower volumes in the UK due to the closure of the SSI steel facility. In addition, we are not seeing the higher volume of equipment orders which we typically see in the fourth quarter.

Before I conclude, I wanted to give an update on our progress with debt repayment and deleveraging. This chart shows our debt principal payments and associated debt leverage ratio for the past five quarters and what we expect for Q4. Since the acquisition, we have steadily reduced our leverage every quarter 4.5 times EBITDA at the close of the acquisition from 2.9 times at present. We expect to continue with the current pace of debt repayments in 2016 and are targeting to be below 2.4 times that leverage for the end of next year.

Our third-quarter earnings of $1.06 per share reflect the solid performance given the challenges we face this quarter. We delivered strong cash flows, maintained our pace of debt reduction as well as captured additional synergies. We also managed the exit from the coil tubing service line and are on track to deliver the targeted savings. In addition, we generated significant productivity improvements and maintained very good overhead spending control.

I would like to give one bit of additional perspective to our earnings this quarter. As I indicated earlier, the combined negative profit impact from foreign exchange and energy services and refractories market conditions was almost $14 million, or $.28 per share, compared to last year. We will see a similar year-over-year comparison in the fourth quarter as these challenging conditions continue. We have managed to offset some of this decline with additional synergies, productivity improvements and spending control in other parts of the Company.

Let me summarize what we are seeing for the fourth quarter. In specialty minerals, operating income will be around $1 million lower than the third quarter, as performance minerals is in its seasonally slowest period. We will also begin to be impacted by the idling of the Verso paper machines and will lower volumes in North America. In performance materials, we expect similar operating income to the third quarter, strong performances in the majority of product lines. In construction technologies, we expect operating income to be $2 million lower than the third quarter as this business enters its slowest seasonal period for the construction and environmental markets. For refractories, sequential operating income will be slightly lower the third quarter, driven by weaker market conditions. In addition, we are not seeing the typical fourth-quarter increases in equipment orders. Energy services sequential operating income will also be similar to the third quarter, as increased savings from coil tubing will be offset by lower well testing profits. In total, we expect our earnings for the fourth quarter to be between $0.95 to $1 per share, which is in line with the current range of analyst estimates.

Looking further out to next year, we expect to face continued challenging conditions in the energy services and refractories segments. We will realize the full impact of the idling of the Verso and Domtar paper machine -- machines earlier in the year in North America. We do see, however, overall growth in paper PCC in 2016, driven by 3 new satellites coming online in China in the middle to latter half of next year. In addition, we see a solid year for performance material growth -- through growth throughout Asia. In construction technologies, we expect to make significant progress with deploying our new specialty GCL products, large global environmental projects. In addition, continued strong cash flow and deleveraging in 2016 will strengthen the balance sheet to support our 2020 growth objectives.

Now let's open it up to questions.

(Operator Instructions) Ivan Martinez, KeyBanc Capital Markets.

Real quick, when you talk about in the PCC business $220 million in sales target by 2020, is that all -- how much -- if you were to break down the $220 million in sales, how much is just the straight PCC penetration versus that NewYield, FulFill and other new products added onto that? Or would that -- would those be two separate buckets?

Yes. There is two pieces to that because the NewYield is also PCC. So of the $220 million, I am going to say about $75 million to $80 million is straight PCC. You have got another about $100 million in NewYield, but NewYield comes in a couple of different forms. We have our first form and then two subsequent forms of new technologies with NewYield. And then the rest of it is also PCC into packaging. The balance would be the PCC in packaging. For packaging, that would be a coating product -- the packaging coating product.

Okay. Thanks. Then, you gave some discussion on the energy business. So it looks like you will make $15 million or so in OI this year. And then, if you were to hold this business -- how to think about it is you talked about the offset of well testing. Should you have -- should the core business be lower next year and then you will get the benefit of $8 million, so you will have -- earnings might be higher or lower, but you'll --. How do the moving parts go, I guess, is the basic question in terms of the cost savings versus what the core business is doing, at least for what you could tell at this point?

Ivan, right now, a little bit hard to forecast, as Joe mentioned in his comments. It is really driven by how the oil industry goes. We are expecting, at least in the early part of the year, it is going to be pretty similar to how it is now. We're probably looking at similar operating income next year depending on how some of the drilling activity offshore holds up. We will get the benefit of some of the savings from coil tubing, so that will help us. But I think it really depends on how the offshore and international locations hold up. We should see some improvement in operating improvement if they continue along the lines that they are now, but it is just a little bit hard to forecast at this point.

Great. And then, I guess, more near term in the fourth quarter, I think you have talked about free cash flow being sort of in the $300 million range or $200 million, $300 million range. Is it still sort of in the cards and you would anticipate a pretty strong cash flow -- another strong cash flow in the fourth quarter? Was there any anomalies last year because I think fourth quarter of last year was also very strong. Or is that how to think about the business going forward?

Yes. I think you are referring to operating cash flow. We have kind of forecasted $300 million in operating cash flow, not free cash flow.

Right. Sorry. Excuse me.

That's all right. So, yes, we are probably close to $300 million. We are at $195 million right now. Fourth quarter is typically strong for us. So we should be around that number with the free cash flow. We are expecting CapEx to come in around the $85 million to $95 million range. So we should have a strong free cash flow year.

We did have an anomaly last year, so it probably won't be as strong as last fourth quarter. We had a significant tax refund from filing after post-acquisition that we used for debt repayment. So I wouldn't use last fourth quarter as a comparison. But it typically is a strong quarter for us from a cash flow standpoint.

Great. And you are generating a lot of cash. Again, your debt ratio is pretty -- down pretty quickly. And I guess you put out a release and you talked about this $150 million buyback a couple of times in this past release and the presentation. So you had $150 million buyback, but you really didn't use it all that much, the last one you had. So is the strategy going to change at all or in terms of how you are going to look at buybacks going forward? Or is this just letting people know that you have this out there and it'll probably be useful roughly the same as it was last time?

Yes. Ivan, the strategy hasn't changed. We have always taken a balanced approach pre-acquisition -- and now we'll be, this is post-acquisition -- to how we use the cash. We do have some current restrictions, and I will let Doug give you a little more detail on that we have got to get ourselves below about 2.5 from a ratio standpoint.

But from a going-forward standpoint, we are going to continue to -- as we look at opportunities that we have, first priorities will be around reducing the debt. However, also, we will look at opportunistic type of things that make sense for the Company, where we do have the capacity to buy companies. And to the extent those don't materialize within nearer-term horizons, then the potential for buybacks is there. But it is not -- we are pretty much focused right now, as I mentioned in my remarks, to reduce debt and support the strong organic growth we have and the requirements for capital there. Doug, do you want to add a little bit to that, please?

Yes. The restrictions, Ivan, I think we have spoken about them before, is below 3 times. Some of these restrictions lighten up from our credit agreement and they go away completely below 2.5 times. So, then we are able to buy back some stock now. We will give it a fully -- execute on share repurchase program will be below 2.5 times.

So, as Joe mentioned, we are going to focus on reducing debt as the primary focus and opportunistically look to distribute capital when it makes sense to share repurchase.

To that end, why are you targeting a lower debt repayment in the fourth quarter if it is your strongest cash flow quarter? And from where your balance sheet, looks like you are fairly flush with liquidity. So why wouldn't you increase the debt paydown? Or is there something preventing that?

First off, the cash on the balance sheet, we use most of it -- our US cash to service our debt and right now repatriating a lot of funds. So some of that balance sheet cash that you are seeing is offshore. We do bring it home, but we look for opportunities where we don't have the tax impact -- significant tax impact to do so. So we are funding it with US cash. It could be a little bit higher than that, Ivan. I'm just giving you the $40 million right now is what we are pretty certain to target.

Great. Nice quarter. Thanks a lot.

Daniel Moore, CJ Securities.

Wanted to focus on little on construction technologies. And maybe you can break it out between environmental products and building materials, just talk about the pipeline of opportunities. Maybe both for Q4, but as we look out into the beginning of fiscal 2016.

A question around just the robustness of the pipeline or what (multiple speakers)?

Precisely. What bidding activity, your expectations for growth, be it in Q4 or into early next year.

Yes. Sure. The challenge with Q4 and Q1 is it really is the seasonal low period. So you're going to see the Q2, Q3, the seasonally highest periods. So right now, construction activity winds up. And, certainly, breaking ground on some environmental remediation landfill products projects doesn't happen too much in these quarters.

However, the pipeline, as I mentioned, is pretty robust. We are pursuing a number of different projects around the world, really targeting, as I mentioned in my comments, the higher-margin technically differentiated products like Resistex and Core Flex and building materials. Resistex is an environmental product. And those are focused on major construction areas and major landfills -- so, very tough environments like red mud from aluminum production and coal ash from power generation. And you know the regulations that have just come out on coal ash are going to create some opportunities for us. We are just now completing a coal ash landfill with Duke power. That was one of the projects that was in Q3 and straddled over into Q4, as I mentioned last month. And so we think that is going to be a big area of focus for us going forward, and the pipeline of that is pretty robust, though it takes a long time to secure some of these big projects. That is why it is difficult to forecast when they are coming in.

And, Dan, one of the things we look at is the rate of new opportunities that construction technologies develops in the environmental products area. And actually, the trend line for that has been on an uptick for the last, I'd say, six to eight weeks. So these typically -- when we look at the incoming opportunities, you are typically looking at things that are six to 12 months out. But, right now, we are seeing some positive movement there. I am going to let Patrick Carpenter give us a little more around that, if you would, Patrick, please.

Thank you, Joe. Yes, Dan. We see it in major construction around the world. Still a lot of market growth for the below-grade waterproofing where we specialize in major infrastructure waterproofing and internal waterproofing. Also, we have seen an actual uptick in the amount of remediation work, riverbed remediation, and the use of our specialized clay we call [algano] clay. So we track these opportunities as they increase. And we are branching away from being typically a Northern Hemisphere Company in developing markets in places in Southern Hemisphere so we can smooth out that quarter-to-quarter revenue. But, overall, as Joe said, we are seeing a much more increase in opportunity creation, and it gives us a good projection going forward.

Very helpful. Then, switching gears a little bit, any additional color you might be able to provide at this stage regarding potential impact of the decision by Verso and Domtar to reduce production overcapacity?

Sure. The Downpar announcement was made a lot earlier this year, I believe, but it is really a conversion of a paper machine to fluff pulp. So that is going to impact some of our volumes. And I think that conversion is going to start in the first quarter, so that is why I mentioned that.

From Verso, though, those are two mills, Jay and Wickliffe idling machines. That is going to start in the fourth quarter. The full impact will probably be probably about 50,000 tons will be the full impact if they remain idle in the first quarter. They have asked us to keep our PCC satellite there and intact. They are looking to sell that mill. We have had that happen before in France with the [Enriel] facility that was sold, and that actually ended up coming back in France.

So we are keeping our satellite there, but right now we are anticipating that that volume will come out in the fourth quarter and a full impact in the first.

Okay. Very helpful. And then, just lastly, in terms of -- obviously, the decision to exit coil tubing, you had a change in leadership just announced recently in energy services. Any additional color around strategic move there, whether we are at -- any other pieces of the business that you are considering exiting, or are you sort of at a run rate of where you want to be post that exit of coil tubing?

Thanks for the question. It gives me an opportunity to talk a little bit about Andy Jones, who -- he is actually here on the call as well with us. But Andy comes to us with a very strong background in the energy services arena. He had 20-plus years at Schlumberger. Very deep and broad in the international scene for oil and gas. And as we look out, as you look out, at deep well drilling and activity today and where the opportunities are for us, that is a key strength of Andy, although he's been around so many places in his career. But Andy does give us a good strength from an international standpoint, and that is something that we will be adding in terms of the emphasis we are putting on the business, which is the filtration business with well testing being a forerunner or lead-in to filtration business. And, as we have said earlier, we are basically reshaping the business to concentrate on the filtration business. And that also is an area that Andy is strong in.

Mike Johnson left. Mike is an entrepreneur. He helped develop the business, and Mike wanted to go off and do something else from an entrepreneurial standpoint. So we wish Mike well, and we are delighted to have -- that we had Andy inside the Company and could provoke him into the position. And happy to have him here.

Okay. Excellent. And, lastly, Joe, M&A, since you sort of mentioned it proactively, obviously you're still focused on paying down debt. But what does the environment look like if the balance sheet were closer to 2 times leverage there? Are there opportunities that you are seeing today? And what type of multiples are you seeing out there?

Well, the environment is good in terms of activity going on right now and some of the areas that we have rekindled and that we are looking at. But if we just look around us in terms of what is happening, it is quite active today.

Multiples, it ranges depending on the end-market segment that the companies are in that we are looking at. Rather than give you a number, I can just tell you that it is kind of different. They have come off a little bit from where they were. And I think in part that is due to just the general economic outlook around the world with the impact that the China slowing is having on things. So we are seeing a little bit of a downward pressure from a multiple standpoint as we look out.

(multiple speakers) you want to add anything to that? John Hastings, our M&A head.

No, I would echo the same. Again, we have a portfolio that we continue to look at, small and large, geographically dispersed, and certainly focused on technology and innovation where we can drive our minerals to market strategy. But as far as multiples are concerned, I think Joe hit it. We see them coming off of some of the highest that we have seen in recent times, and we will keep you posted as opportunities develop.

Okay. Thanks for the color.

Dan, one quick clarification. That Verso 50,000 tons I gave you, that is an annualized number. That's annualized. Okay? That's not the fourth quarter -- that's not the first quarter (inaudible).

Right. Understood. Okay, thank you again.

Jeff Zekauskas, JPMorgan.

(technical difficulty) for Jeff. I have a question regarding the PCC operations. So you said your PCC volumes were up 3% year over year. And if I look at total PCC sales, though, they were down 6%. And presumably, currency -- like it seems hardly that currency was a 9% headwind. So I was wondering whether there was a price mix shift.

No. There's some of the -- the total PCC includes both paper PCC and specialty PCC, [Solka]. My comments were referring to paper PCC volumes. Specialty PCC had some declines, and those were particularly -- specifically in Europe for the most part.

Okay. And in terms of the gross margin performance -- so like the -- there was very good growth margin performance in the first half of the year, and then things are now more flattish to down. Is that a -- similarly, is that a price issue? Is that the volume issue? A currency issue? I was wondering whether you can shed more light on that.

Any particular segment or just in the Company in total?

Just for the Company as a whole.

Yes. I think there is some foreign-exchange impact that you are seeing year over year in some of those numbers, especially in refractories. We have -- we do buy our magnesium oxide in dollars around the world. So that has been one of the -- on the gross margin line. Energy services as well, as you have seen the decline through energy services, we have had a lot of fixed operating costs in this quarter in coil tubing. We have had to remove both overhead and get the operating costs up. So there has been some uncovered, both overhead and operating, expenses in this quarter. So those are probably two of the main factors.

Okay. And lastly, what was your headcount at the end of the third quarter?

It was roughly around 4,100.

Do you expect that to be lower by the end of next year?

Well, as we have touched on before, we are continuing to deploy the Oracle ERP system. And as we go through the year towards the end of 2016, there will be further reductions, and not major. But we also have -- offsetting that, we are adding new satellites to the Company. So we are bringing new people on. We have added staff -- staffing technical personnel, managerial personnel -- to Asia. So when you net that out, we could be at the same place or very possibly higher.

Rosemarie Baldelli, Gabelli and Company.

Congratulations on the great quarter and 23 years on the 23rd.

Thank you, Rosemarie.

There is one area in terms of paper PCC that you have not touched upon, and it is in India. Is the development in India flowing? Are they done with -- is paper no longer growing there? Are they no longer increasing the PCC content in their paper? Can you give us a feel for what is going on in that region?

Yes. Actually, India is still on a very good track, Rosemarie. We continue to do well there. We're actually -- there are some additional satellite opportunities for us that we are pursuing. FulFill -- further deployment there is still something that we have going. So I would say, no, the India paper business is strong, continuing to track on a very good growth rate. I am going to ask Rand to share a little more perspective around that. Rand?

Yes. I think the two highlights for India through our paper PCC business is the expanding technology of FulFill. Our team has grown there in India. It is becoming very competent, both technically and from an operations standpoint. And FulFill technology is expanding there. We also have a couple satellites that are in our pipeline, and we are pretty optimistic about those.

The other thing I would add, Rosemarie, is that India, today, for us, has a very well-developed management team, strong leadership. And we have set up a lead team that really coordinate and provides critical mass leadership for all the businesses that are in India. Today, we have -- besides PCC, we have our refractories business there, our wire businesses there; performance materials is there, construction technologies is there. we are looking to have performance minerals there. So India, for us, is it really a -- we are very -- right in the middle of our radar screen, as is China, for the future growth opportunities. And most of those areas are tracking very well for us right now.

Okay. Thanks. And in terms of the M&A, you have touched upon it. But from small to large, would you mind defining the optimum size of a bolt-on that you might be looking at, let's say, by 2017?

Wow, that is hard to predict. I will share with you, we are looking at companies in size from -- some are as small as $20 million. Let's say, $20 million to $50 million. Others are in excess of $700 million, and the potential is even greater than that. But I would say we are dealing within that range, and it is hard to predict today exactly the sizes of the companies that we will be buying in that timeframe. But it is quite a broad array of different sizes and also different types of businesses relative to some of the end markets. But what will be common -- what is common about the target portfolio today, it is all minerals-based with a strong technology differentiating factor in terms of how the companies do business.

So it is something we work. As you know from having followed us for some time, these things don't happen overnight. It is something that we will continue to work over time, which is what we have rekindled over the summer as we are coming to the end phases of our integration of the forward AMCOL. John Hastings, who has led the integration, has moved to increasing, let's say, what he does on a day-to-day basis with a higher percentage of the acquisition work. So that is sort of -- that kind of gives you a picture of what is happening right now.

Sure. And if I look at -- however, if I look at your positions before you bought AMCOL, you were on a net cash situation type of balance sheet. By the time you start looking at something else, you will be at about, let's call it, 2.4 times net leverage. So how much higher -- and you went up to end up 4-and-change. How much higher can you get in terms of net debt -- net leverage with the $700 million type of revenue type of acquisition?

Right. When we bought AMCOL, if I remember right, we were about 4.4, 4.5 leverage ratio. So, again, depending on the acquisition, the risk, the ability to create quickly, immediately, what we can do with it after acquisition in terms of synergies, those are all factors that go into what we we're willing to take on. But I am going to ask Doug to just share some of his perspectives on this as well.

Well, I think, Rosemarie, we have certainly demonstrated that we can go to 4.5 times and manage that down very quickly. Going down to 2.5 to 2 times that leverage opens up a significant amount of borrowing, just on our existing $400 million-ish EBITDA. So it really depends on the target and the cash flows of the combined entities and the amount of EBITDA from a target and what we can do with it. What we can do with it and how it fits into the strategy and opportunities.

So I think at 2.5 times, 2 times, we could probably afford a pretty sizable acquisition. That is not necessarily what is on our -- completely on our target unless we have some smaller ones that we could do with just pure cash right now. And we could do a very small leverage, so that fit our strategy. So I think it really depends on the target.

That is very helpful. Thank you. And if I may ask one last question, could you talk about the competition on your environmental type of operations? Is it -- I mean, companies offering similar type of lining, or is it something totally different?

I'm going to -- there are companies with similar linings. We are out now with, as we have mentioned -- we do have some higher-performing liner products that came out of product development that do differentiate from the competition today. Typical companies in this arena, Patrick, would be -- what? -- companies like WR Grace, [Primco] in terms of building materials type companies. Maybe, Patrick, you can give us a little more perspective around this.

Yes. When we look at our traditional waterproofing business, we have got a couple out there. As Joe had mentioned, WR Grace. There are companies that we compete with in Europe (inaudible). When you look at the traditional GCL business, there are a couple here in this space; GSC is one. And then throughout Europe, we have got a pretty good competitor in Norway (inaudible) technique.

The majority of these companies concentrate on multiple lining systems and don't necessarily specialize in the bentonite-based geosynthetic clay liner. And that is the advantage of our technology is to meet that challenge and demand.

But, overall, we seem to have a larger portfolio in the marketplaces of waterproofing and specialty containment that may only be singular when we look at our competition.

Okay. Thank you. And just quickly, is CapEx were about -- if I heard you properly, Doug, $89 million to $95 million for 2015? What are your expectations for 2016?

It is probably going to be about the same level. Really driven by -- you know, we have built 3 satellites. It is really driven by paper PCC growth, at least this year, in China. We have 3 satellites coming on next year in China of similar size. So it should be around the same level, Rosemarie.

Okay. Thank you very much. Good luck.

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Joe, I wasn't clear, but it sounds like people want you to do some M&A. Is that fair?

You think so?

On a more serious note or more question that I had, could you just talk maybe about whether you're -- given the multiples that come off a little bit, does that change or accelerate -- or maybe I should use the word increase the intensity of which you look at transactions?

I think what allows -- a couple of things are allowing us -- or enabling us to increase the -- let's say, the intensity of how we are looking at. One is the fact that we were able to integrate and achieve our synergies faster than we originally targeted, number one. Two, that we have been able to pay our debt down quite aggressively to better position ourselves going forward. And when you put those together in terms of the Company's ability to actually buy something, let's say, of reasonable size and also do a good job in the integration relative to what is involved in the -- given the magnitude of the acquisition we just did, there were many people involved in this. Took a tremendous amount of coordination.

So it is now being ready as we -- as I mentioned, moving to -- towards the end of that integration phase that also enabled us to actually bring more companies in. So that, by itself. And given that there were more opportunities brought to us by the acquisition of AMCOL has opened up more. The bentonite arena or related to bentonite from a minerals standpoint, in terms of end markets, like the consumer market, which, as you recall, is an area -- although you may not have been involved with us or others on the call know that we were focused on improving -- increasing our profile in the consumer products arena. And so that area still has opportunities from an acquisition standpoint. That is why I use the term companies with specific end markets that they are participating in. And that also plays a part into how fast we move on some things as opportunities are developed on a going-forward basis. Does that help?

Yes. No, it does. Just as a follow-on to that, you have given the sort of six quarters or five quarters since AMCOL. And then you -- as you take a step back, one of the tenets, at least on our constructive view, on what you did was the potential commercialization of some new opportunities. So could you give us maybe an update from your standpoint the new product pipeline or internal development of product and then the commercial ramp in the near term?

Yes. I would say, in general, this is still somewhat relatively early. But if we think about the combined Company rate of product development -- and is that clearly through the direction and -- of the technology lead team, I would say that the total pipeline of the Company is moving at a faster rate. If we are talking about the opportunities that have been developed because the two companies have been put together, I would say that also now is an area where we have a number of project areas that are advancing. I am going to let John Hastings walk us through that. John?

A couple of things to point out. As Joe highlighted, and we have talked before, we have had the innovation retreats. And these have been designed to bring our technical and our commercial teams together, focused on specific opportunities where we see the combined technologies could actually provide some value in the marketplace. And we have had seven of them now.

We have had some introductions of products. The first one, we highlighted previously, was in the adhesives and sealants. We had a product called [Halifort] that has been introduced in Europe. We are on pace to sell about $1 million -- $1 million to $1.5 million this year. We have also introduced some new products in pet care. So not only with the lightweight litter that Gary highlighted earlier, but we have also introduced some products that are blends of bentonite and also calcium carbonate. And we are on pace to sell about $10 million to $15 million with an impact of probably about $1 million to $2 million bottom line.

So, again, we continue to expand the portfolio of opportunities. We have -- just in the past few years, we have highlighted -- we have commercialized more than 80 products with an impact greater than $300 million potential revenue. We have got another 90-plus products in the pipeline in various stages of our stage (inaudible) development program. So, a couple of different thoughts for you there regarding the portfolio. It's very robust. And we think as we continue to accelerate the commercialization, we will have more impact going forward.

That's very helpful. My final question, if I may, I noticed on the performance material slide that -- well, at least in the report that operating income slid from Q2 to Q3. From what I recall, that business -- that is probably an abnormality. And if you look back into 2013, certainly the case and certainly in 2014, can you maybe articulate what that -- I know it is only $3 million sequential decline, but from a business standpoint, maybe what is -- remind us again, why isn't in that analysis?

I don't think you are missing anything significant. I think, really, the difference between Q2 and Q3 were two things. One, as I mentioned, the agricultural sector in the US has been pretty weak. We have also seen some of the oil and gas -- foundry products going to oil and gas. And I think particularly in the transportation and rail has also been -- had some impact. And then, we had, in August, really, over the third quarter in China was lower, but that was really due to a really slow August, and then sales came back in September. But there were a lot of outages in China. So I think we kind of saw that coming. So I indicated on the last call that operating income would be a little bit lower in the third, and those of the main factors that contributed. But it is not -- again, we still see a pretty healthy business here in North America. And we have mentioned our comments on China going forward.

Gary, do you want to add anything to that?

Just, Al, that even in North America the metal casting business use saw that -- if you look at it sequentially, and what you are maybe referring to in the past, I think we had probably a bit more of a July slowdown than what we normally see from the automotive-related foundries as well, which then picked up more toward the end of the quarter.

But the bigger point there, like Doug mentioned, China definitely has seen some headwinds, and that has also improved as the quarter has gone along and not detracted at all from our strategy there. But at the end of it all, we have a bit of a lower sales in the third quarter than we had in the past. And, as well, the other markets in the basic minerals, drilling products particularly, also a bit of slowdown there as well.

Thanks for the color.

I am showing no further questions at this time. I would now like to turn the call back over to Rick Honey for any further closing remarks.

This concludes today's call. Thank you for your interest in Minerals Technologies, and have a good day. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now all disconnect. Have a great day.