Minerals Technologies Inc (MTX) 2016 Q2 法說會逐字稿

Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Paul Donnelly. Please go ahead, sir.

Thanks, Ebony. Good morning, welcome to our second quarter 2016 earnings conference call. For today's call we will follow the usual format with Chairman and Chief Executive Officer Joe Muscari providing an overview our results, key drivers and strategies, followed by a more detailed update on our financial performance and condition from our Chief Financial Officer, Doug Dietrich. Before we begin I need to remind that you beginning on page 13 of our 2015 10-K we list the various factors and conditions that may affect our future results and I'll also point out the Safe Harbor disclaimer on slide two. Statements related to future performance by members of our management are subject to these limitations, cautionary remarks and conditions. Now I'll turn the call over to Joe Muscari. Joe?

Thanks, Paul. Good morning, everyone. We again had solid results for the second quarter, giving us an excellent first half earnings per share of $2.22, and our EPS for the quarter of $1.20 represents the best second quarter performance in the history of the company. We achieved an operating margin of 16.4% as the business, the MTI business system combined with our operational excellence initiatives and a high -- very high level of employee involvement have enabled us to achieve high productivity improvement in the quarter.

Lower material and energy prices also provided some lift to us. Safety performance also continues to be excellent for the first half of 2016. We were better than what we consider to be world class performance levels for recordable injuries and our loss workday rate was down from 2015 by more than 50%. Our minerals-based businesses were again the primary drivers of our results, posting an operating margin of over 18% for the quarter with a specialty mineral segment which includes our PCC, GCC and talc product lines, generating record Q2 operating income of $27.6 million. Our focus on the opportunities for growth in China continues to bear fruit. As overall China sales were up 5% while PCC sales were up 17%. For the half, China sales were actually up 9% over last year and as we've discussed in the past we continue to see considerable room for further growth and development of our minerals-based businesses in China. We recently also formed a China lead team for the company to ensure that we execute on all of the opportunities available to us. And this multidisciplinary team will coordinate support across all MTI operations and growth initiatives in China. Also during the quarter we took further significant action to adjust our energy services segment to current market conditions

And going forward the business will focus only on filtration and well testing. Areas where we expect to be able to grow profitably over time. Doug will provide some further details around the restructuring shortly. In addition and consistent with our previous communications around priorities for our cash, we utilized our strong operating cash flow to repay a further $50 million of our term loan during the quarter. This slide shows our quarterly earnings trend, and as you can see this quarter's EPS of $1.20 per share, represents one of our strongest results ever in spite of the significant challenges that we've been facing in energy services and the softness in the global steel industry, which has obviously affected our refractories business. Here's a simple snapshot of the breakdown of sales and operating income by business segment, which highlights the significant contribution from our two largest minerals-based segments, specialty minerals and performance materials. Together they're driving almost 75% of our productivity. As we look at our minerals businesses overall, operating margins improved again during the quarter as they contributed $61 million in operating income on slightly lower sales.

Increased sales of our higher margins, specialty GCL products such as Resistex drove a stronger result in construction technologies while lower energy costs and productivity gains led to an improved margin in performance minerals. It's also worth highlighting for the first half that our Paper PCC Asia sales were up 7% and our operating income there was up 20% while productivity was also up 7% and the minerals business achieved a 10% return on capital in the half on an annualized basis. Further, in China overall, minerals sales were up almost 12% with an 11% operating income increase. And Doug will go into the details of each of the segments shortly with you. Continuing weak market conditions in the oil field services sector globally, as well as our exit from several energy service lines drove a 25% decrease in sales for the services-based segments.

However, stronger equipment sales and our refractory segment along with improving conditions in the U.S. Steel sector enable that business to generate a strong profit margin for the quarter, helping to offset the operating loss we sustained in energy services. As I mentioned we expect that with this restructuring of energy services we've positioned the business for profitability going forward and significant growth when more favorable market conditions return. It's been a year since we held our analyst day and presented our 2020 growth initiatives and targets so I thought we'd take a few minutes to update you on our progress. While we certainly have faced some challenges recently due to the adverse conditions in oil, gas, and steel, as well as the strength of the U.S. dollar, we remain committed to achieving these targets, which we believe can take MTI to as much as $3 billion to $4 billion in revenue over the course of the next five years or so. Two of the three key financial targets that we set for 2020, operating margin and EBIDTA margin, have already been hit, and we will be striving to improve them further and achieve even higher levels by 2020. And, I should note that our 12% return on capital target remains a realistic goal for us as well. In each business we're driving forward with multiple initiatives to generate higher sales and of course higher profitability with commensurate improvement return on capital.

And, clearly, as you can see from this chart, our minerals businesses will be the main engine for achieving our sales targets along with acquisitions. In Paper PCC the opportunities for new satellites in China remain strong, in spite of China's slower growth and our new yield and fulfill innovations continue to gain traction. We're especially bullish about new yield prospects in China where it's increasingly being recognized as an attractive solution for paper makers that need an answer to their process waste disposal issues. Packaging opportunities in China also remain a key focus for us going forward. We expect performance minerals and performance materials to continue to participate in favorable trends affecting automotive, construction, consumer products, and agriculture. These include urbanization, economic growth, and our customers' increasing focus on yield and quality in their production processes as well as supply chains

Greenfield expansions are also in the cards for us. Performance materials continues to penetrate China through its substitution strategy as conversions of foundry customers to our premixed green sand bonds continues and household and personal care products have been particularly strong this year with increased demand and some new and growing customers. Similarly, our construction technologies business is very well positioned with its ability to supply its innovative geosynthetic clean liners from multiple production facilities around the world. Products such as Resistex are becoming more widely recognized as the most cost effective solution to environmental remediation challenges faced by governments, electric utilities and aluminum companies.

Recent orders from several major aluminum and power companies such as Alcoa and Duke Energy are an indication of this growing preference. Obviously our service businesses, particularly energy services, have developed a deep hole since we originally set these targets. Nevertheless, and nonetheless we continue to strive to make up some of this ground as quickly as possible. Energy services of course is a much smaller and more focused business at this point, but we do feel it has plenty of upside going forward as its reputation for innovative order filtration solutions has been firmly established in basins around the world. The last slide of this table indicates our continuing focus on acquisitions as an important facet of our growth strategy, and I'll comment further on this in a couple of slides. Now let me just spend a few minutes on our recent business development activities in China. Earlier in the quarter we announced the selection of our partnership with Sun Paper and Tsinghua University as one of EcoPartnership forms during the annual U.S. China strategic and economic dialogue.

The EcoPartnership program is jointly sponsored by China's national development and reform commission. It's better known as the NDRC, and the U.S. State Department and it brings together experts and innovators from U.S. and Chinese cities, companies, universities, and NGOs to work together, exchange best practices, and find solutions to challenges related to environmental protection, clean energy, and climate change. And our partnership, MTI and Sun Paper are going to work together with Tsinghua University to pilot our new yield technology, innovate ways to localize this technology to China, evaluate the results of the technology deployment as well as recommend policy and regulatory action and then move to assessing the steps necessary to drive change throughout the Chinese pulp and paper industry. And Tsinghua is, by the way is one of China's leading universities.

We're already seeing more interest in new yield and MTI broadly as a consequence of partnering with two of China's leading institutions and the involvement here of the NDRC, which arguably is China's most important agency overseeing its economic development and providing the framework and initiatives for the country's five-year plan. Concurrent with the EcoPartnership announcement we were also able to participate in the U.S. China climate leaders summit, where a number of our other products that address environmental challenges were introduced to a much wider audience. Again, this was all under the auspices of the NDRC and we're now experiencing strong interest in our offerings from regional officials and company management teams who are looking for environmental solutions that have basically passed muster with China's national government.

Let's now just flip back for a moment to the subject of acquisitions and acquisitions, as you know, are a significant part of our growth strategy, and we're currently actively engaged on a number of fronts. Our focus continues to be on minerals-based companies, where we can leverage our expertise in crystal engineering, on particle technology and polymers. And the end markets that we're focused on are environmental, consumer products, agriculture, and construction, all within the context of our existing minerals businesses, as well as in other minerals. As you know, we have a very strong capability to identify, evaluate and integrate companies, and we plan to leverage this capability as we go forward.

So in summary, let me just say we've had a solid first half in spite of some significant challenge, and I'm confident that we'll continue to perform well going forward. And it should also be mentioned here that we of course we're keeping an eye on the situation in Turkey as well as the potential repercussions of Brexit but so far these events have not affected our operations or otherwise had any impact on us. With that let me turn it over to Doug.

Hey, thanks, Joe. Good morning, everyone. Now let's go into our second quarter results and I'll cover performance in each of our five segments, review the structuring and special charges in the quarter, update on debt repayment and leverage targets and then I'll give you an outlook for the third quarter. As Joe mentioned this is a strong quarter for us with earnings per share from continuing operations of $1.20, excluding special items, compared to $1.18 last year. Reported earnings this quarter were $0.60 per share, including the special charges associated with additional restructuring of energy services, which I'll provide more details on in a moment. Total sales for the quarter were $427 million, $36 million lower than last year.

This is primarily due to $29 million of lower energy service segment sales and negative foreign exchange which accounted for an additional $6.5 million of the decline. Sales increased last year over several product lines, global fabric care products increased 25%, Pet care grew 7% and environmental products increased 20% and GCC sales grew 6%. In addition, sales for our combined businesses in China grew 5% this quarter over last year, driven by a 7% increase in our minerals businesses. For the first half our sales in China grew 9% over last year, with a 12% increase in our minerals businesses.

Our progress in China was also highlighted this quarter by the EcoPartnership we formed which Joe just outlined for you. Operating income excluding special items was $70 million compared to $72 million in the prior year. On a constant currency basis, our minerals businesses improved by $2 million, but were offset by a decline of $3 million in our two services businesses, and further by a $1.4 million negative impact from foreign exchange. Company operating margins improved 5% to 16.4% of sales, despite the continues weakness in energy services. Our minerals businesses had a strong quarter with operating income of $61 million, representing 18.3% of sales.

Specialty minerals had record operating income for the quarter, construction technologies profits more than doubled from the first quarter with operating margins of over 17% and performance materials operating margins were close to 19% of sales. Productivity was a highlight this quarter. With each of our segments improving over last year. And we continue to control expenses, directing our spending to areas that lead to increased sales and growth. Cash flow for the first half was $102 million and free cash flow increased to $71 million from $66 million in the first half of last year. We made debt principal payments to for the first quarter totaling $90 million for the first half which is right on the target we laid out at the beginning of the year.

Before we move on let me outline the special charges we recorded in the quarter and bridge our earnings of $1.20 per share to our reported earnings of $0.60 per share. Given the weakness in the oil field services market, and our expectation that it will remain like this for some time, we initiated a comprehensive assessment of the energy services business structure and each of its remaining service lines. The goal of this assessment was the following; First, to develop a structure for the business that could be profitable in the current market conditions. Second, to focus it on the differentiated and competitively advantaged services globally and, third, position it for increased profitability when the energy markets recover.

To achieve these objectives, we decided to exit our remaining domestic on shore service lines including nitrogen, pipeline and well testing and focus the business on offshore filtration and offshore well testing services globally, which are our more profitable and competitively differentiated service lines. We also significant streamlined the overhead structure and operating footprint to lower costs.

To give you some perspective on how these changes affect the revenue profile of the business, going forward over 90% of the sales for the business will be generated from offshore service activities, compared to 50% when we acquired the business in 2014. Similarly, 40% of sales will be generated internationally compared to 20% two years ago. As a result of these changes, the company incurred pretax restructuring charges including impairment of assets, lease termination and other exit costs of $28.8 million. We expect to realize $11.5 million in annualized savings in connection with this program. Now let's go through the minerals businesses and I'll start with the specialty minerals segment. Segment sales were $151 million and decreased 3% on a constant currency basis from last year. PCC volumes have grown each of the past four quarters, however this quarter volumes were down 3% due to the final ramp down of several paper machines in the U.S., Verso, Domtar Ashdown and Madison paper in Maine.

As we outlined on the last call we see the growth tend trend of our PCC volumes continuing over the next several years though there may be a down quarter here and there along the way depending on the timing of new plant start-ups combined with possible future paper machine closures. For the first half of the year, however, global PCC volumes are up 3% over last year. Supporting this growth our PCC sales in China grew 17% over last year, driven by higher volumes of coding PCC and new yield at our two Sun Paper facilities. Also in July we commissioned another 100,000-ton PCC filler plant with Sun Paper. This new satellite will be ramping up over the remainder of the year and contribute to the continued growth of our PCC volumes. Further out we're constructing two new satellites in China that will add an additional 100,000 tons of capacity in the first half of 2017, helping to maintain our growth trajectory. One of these new satellites will produce coding PCC for packaging applications. We also continue to make progress with our E325 high filler technology and announced our 25th and 26th commercial agreements in the quarter with paper makers in China and South America. Our process minerals business had a very strong quarter with sales 3% higher than last year driven by a 6% growth in ground calcium carbonates primarily due to strong market conditions in the northeast.

Operating income for the segment was $27.6 million, a record quarter for the segment, and grew 2% over last year. Operating margins were 18.3%, 100 basis points higher than last year, bolstered by a 6% improvement in productivity combined with lower energy costs. Looking forward to the third quarter, we expect operating income for the segment to be around a million dollars lower in the second quarter. Paper PCC operating income will be similar to the second quarter with higher volumes from the new Sun Paper satellite, partially offset by the associated start-up costs for the facility. Performance minerals we expect operating income to be slightly lower than the second quarter. The third quarter is still a seasonally strong period for this business, however sales typically begin to slow in September. Now let me take you through the performance materials segment. So this quarter we're $129 million, 3% higher than last year on a constant currency basis. Sales in metal casting were lower by 5% due to lower U.S. Greensand Bond sales to the heavy equipment casting market and a lower clay export sales from the U.S.

In the household and personal care product line global fabric care sales rose 25% over last year driven by higher sales in China and Thailand, which were up 42% and 30% respectively. Sales of pet care products were 7% higher than last year with strong growth in Asia and higher volumes in the U.S. due to in-store promotional sales programs by a number of our customers. Basic mineral sales increased 5% over last year due to higher bulk shipments of chromite in South Africa. Operating income for the segment was $24 million and represented 18.7% of sales compared with 19.8% last year.

The decrease in operating margin was due to product mix and lower high margin export sales. Let me draw your attention for a moment to the chart at the bottom right-hand side of the slide, where you can see the significant improvement in profitability in this segment. For perspective, average margins for the business in the pre acquisition time frame shown in the yellow shaded region were around 11% of sales. Today, operating margins average around 19% with EBIDTA margins of 25%. Moving to the third quarter, we expect segment operating income to be approximately the same as the second quarter with a similar performance from each of the segments' product lines. Now let's take a look at the results in the construction technologies segment

Sales for this segment were approximately $54 million, 5% higher than last year on a constant currency basis and 33% higher than the first quarter which illustrates the significant seasonal nature of this business. Environmental product sales were up by 20%, driven primarily by $4 million of incremental Resistex shipments to both coal ash and red mud applications in the quarter. Building materials and drilling product sales were down 9% due primarily to few large construction waterproofing projects in the western region of the U.S. compared to last year.

Operating income is up 12% over last year to $9.3 million and more than doubled from the first quarter. Operating margins were very strong at 17.3% of sales this quarter compared with 15.9% last year. The improvement was due to increased sales of higher margin Resistex products and the productivity gains of almost 8% over last year. Looking to the third quarter, we expect segment operating income to remain strong and be at similar level to the second quarter with continued momentum of Resistex sales and some improvements in building product sales.

Now let's turn to our services businesses and I'll start with the energy services segment. This business had second quarter sales of $20 million, which was 59% lower than last year and 22% lower than the first quarter. The decrease was primarily due to the shutdown of our U.S. on-shore service lines in the second quarter, combined with the shutdown of coal tubing of last year, in August of last year. We incurred an operating loss for the segment of $700,000 excluding special items and are operating at break-even levels for the first half of the year. As I mentioned earlier the business is now properly sized to be profitable at current sales levels and market conditions. It has strong positions in offshore filtration and well testing globally which will provide a base for future growth and sales and profits as the oil and gas markets recover.

As we move to the third quarter, we expect operating profit levels to be $1 million to $2 million higher than the second quarter as we realize the full savings from the restructuring program. Now let's go through the refractory segment. Sales for the second quarter were $74 million, 3% lower than last year on a constant currency basis. Our North American refractories business has improved over the last two quarters with sales in the second quarter up over 4% than last year driven by stability in the North America steel market. However, our combined Europe, Middle East and India refractories businesses have been weaker with sales 14% lower than last year driven by a 6% reduction in crude steel production in the EU27. Metallurgical wire sales were 11% lower than last year again, driven primarily by lower sales in Europe. Equipment sales were unusually high for a second quarter, with a number of fixed installed lasers being commissioned in the quarter, boosting profits over what we had expected in the last call. One of these lasers was a torpedo scanner using our latest high temperature laser technology. Operating income for the segment increased 23% to $10.3 million, compared to $8.4 million last year. This was due to a 65% improvement in profits in North America, along with the higher equipment sales I just mentioned.

Conversely segment profits in Europe were 40% lower than last year and despite the weakness in Europe segment operating margins were strong this quarter at 13.9% of sales compared with 11% last year. Looking to the third quarter, we expect profits to be down about $2 million to $3 million from second quarter levels. We anticipate continued weakness in Europe, Middle East and India steel markets and will not see the same high level of equipment sales repeat next quarter. However, we do expect increased equipment sales again in the fourth quarter as a number of additional installations are scheduled to be completed by year end. Now let me give you a quick update on our progress with debt repayment. This chart shows our debt principal payments and associated net leverage ratio for the past eight quarters

Over this period we've made a total of $380 million in debt principal payments and have reduced our net leverage from 4.5 times EBIDTA to 2.7 times currently. We expect to continue this pace of debt repayment this year and are still projecting to be below 2.5 times net leverage by the end of the year. Also it's worth mentioning that during the second quarter Standard & Poor's global ratings upgraded the company's corporate credit rating from BB from BB minus. Our second quarter earnings of $1.20 per share reflect a solid performance for the company. We improved our earnings over last year and maintain strong cash generation, despite the lower profits from energy services. Let me summarize what we're currently seeing for the third quarter. We expect total company sales to be similar to the second quarter and approximately 5% lower than last year driven by the lower sales in energy services and refractories. In specialty minerals we expect the third quarter operating income to be around a million dollars lower than the second quarter.

We will see improved PCC volumes from the new Sun Paper PCC facilities, however profits in performance minerals will begin to seasonally slow in September. In performance materials, we expect third quarter operating income to be approximately the same as the second quarter, with a similar performance in each of the product lines. In construction technologies, we expect segment operating income to remain strong and to also be at similar levels to the second quarter. For energy services we expect operating profits to be $1 million to $2 million higher than the second quarter as we realize the full savings from the restructuring program. And, finally, for refractories we expect profits to be down about $2 million to $3 million due to lower equipment sales and the weakness in Europe, Middle East and India refractories markets. In total, we expect our earnings for the third quarter to be in line with current consensus estimates and reflect earnings growth of about 5% to 10% over last year.

Now let's open it up for questions.

Thank you. (Operator instructions) and we'll move to our first caller from Silke Kueck with JPMorgan. Please go ahead.

Good morning.

High, Silke.

I was wondering whether you can quantify the raw material and energy savings for the company as a whole and how it may have affected the performance materials business specifically.

So most of our energy savings are in the performance minerals business, would be in the specialty minerals segment. So far this year we've probably had about -- for the first half about $3 million to $4 million of energy savings. This year raw materials savings are primarily in the refractories business. We have had some lime savings but as you know those get passed through in pricing. Our magnesium oxide savings have been around $4 million, $5 million this year but some of that gets passed through to customers. In this market condition sometimes pricing gets reflected with that lower magnesium oxide costs.

That's helpful. Secondly, will the energy business, you know, run at a profit level of, like, you know, $11 million to $12 million next year when the savings are realized?

Yeah, I'd say as -- you know, as was indicated we're expecting in the coming quarter to be, you know, $1 million to $1.5 million to $2 million higher, but the trajectory we have for that business is, yes, to be in the $1 million to $2 million a quarter range as we go forward with a targeting of a 10% operating income, which would -- you know, we would foresee $100 million plus next year, which would get us in that $10 million to $12 million range.

And if I can ask one or two -- second question. Is the growth in the fabric care and the pet care markets, is that due to end market demand or is it due to your own product initiatives and share gains?

I'm going to ask Gary who is here with us to answer that. Gary.

Hi, Silke. In pet care it would be more the line of share gain, domestic, as well, as majority. A bit of also the continued launch of the light weight cat litter business line. And in fabric care, which is principally in Asia that has been more technology adoption an involved with certain key accounts in the region.

If I can add, Silke, as relates to the light weight cat litter, it's important to keep in mind since our last all that China has probably added 2 million to 3 million cats to its cat population so that certainly must be spurring some of the growth, right, Gary?

Yes. Certainly we're getting ahead that in the market, yes.

And my last question, this is -- I was wondering how lumpy environmental products is in general and, you know, and would sort of like the longer term targets are. I remember the business maybe running not at $90 million or in excess of $90 million in sales. Is that something that's achievable and how long (inaudible).

I guess the lumpy nature of the business, Silke, is driven by some of the larger products. And it's true, as it was this quarter in building products as well. Some of the projects are small construction or small landfill type projects, and then some of them can be very large. I think in the early 2015 had a large project, red mud project with ALCOA in Saudi Arabia, I don't know if you remember that was on the tail end of that project but that was almost a $20 million some odd project. You know, if you have a $5 million project one quarter and that project doesn't show up exactly in the next, you can have some lumpy kind of comparison sales year over year, and that's both environmental and building. As far as growth, there's a tremendous amount of growth for us in this business. You know, construction technologies, our 2020 targets were to grow that business about $150 million and that's through innovation, geographic expansion and also new products like Resistex here in the United States and abroad. So China, as Joe mentioned, with the EcoPartnership and what's happening with this current five-year plan opens up a lot of environmental opportunities for us to grow that business in China. Does that help?

Yes. Thanks very much. I'll get back in the queue.

And we'll move next to Rosmarie Morbelli with Gabelli & Company.

Thank you. Good morning, everyone. And congratulations.

Thank you, Rosemarie.

I was wondering if you had any surprises during the quarter, and then, linked to that, to the results to that question, Q3 is usually strong seasonally and a lot stronger than the second quarter. And based on what Doug gave us, it looks as though it will be more or less flat sequentially, if I did all of the puts and takes correctly. So could you compare -- could you get -- help us understand, you know, what was more positive than you anticipated in Q2 and what could be slightly lower, not due to what you are doing but due to the different markets in the third quarter.

Yeah, let me start. One of the surprises I think that -- first surprise in our refractories business. I think we had a number of lasers that we had been working on that were kind of in the pipeline for deployment and installation, those went off very well and we received notification from customers that they accepted them all in the quarter and that was a positive surprise for us and I noted that. So I think that was one of the surprises in the quarter. But from your question, in terms of kind of Q3 being stronger than Q2, generally they're very similar. I would say certainly Q2 and Q3 are stronger than the first and the fourth but they're usually pretty similar. The two business that's really drive that, performance minerals, as it comes out of the winter. Q2 is usually it's strongest month -- or strongest quarter, Q3 a little bit weaker, and construction technologies. I showed the seasonality of that business but we see Q2 and Q3 being about the same. Not always -- the third quarter is not always stronger. It's similar in many cases and depending on some of the projects we have in CT.

Okay. Thanks. That is helpful. And I was wondering if you could give us an update on the replacement with, already mixed Greensand in China, which I believe is really the source of growth for that particular business.

Gary, why don't you answer Rosemarie, please. Gary is going to give you some more color, some color around, that Rosemarie.

Thanks.

Hi, Rosemarie. Yeah, the business again in China, especially now with more the moderation than in the general economy, is our strategy of the substitution through a higher value added products is much more of our emphasis so that growth is really based upon existing customers, existing markets, and migrating those customers to a higher value products, as Joe mentioned, the pre blended and formulated products that we supply to those markets, which we have in the U.S. forever. So that's really the source of our particular growth and the strategy that we have going toward our 2020 objectives.

So have you made progress in the past six months, for example, in terms of substituting your product lines to whatever they do currently?

Yes. Because really what it is taking what is sort of a basic level of product and moving it then, as I said, to the more formulated product and we've had several accounts that -- where we've migrated now to this newer, let's call it, more advanced technology. And it represents a more significant portion of our sales, probably closer to a quarter of our sales in China, metal casting now are the more formulated products, and indeed at the higher level than where we were a year ago at this time.

And that's what translates into a higher margin, correct?

Margin as well as driving sales because the price point of the formulated product will be higher than the basic level product. So that's the general approach to the strategy.

Thanks. And on the paper side, are you expecting more -- have there been any announcements for more machines shut down in the U.S. and in Europe? And then if you could touch on the acceptance of new yield also in the U.S., Europe, and Latin America. Based on your comments it sounds as though China is mostly the one adopting it or looking at it more seriously.

Yeah. The -- as of right now, there are no additional or new announcements that we're -- that have been made with regard to any shutdowns. It appears the North American market has stabilized somewhat with the higher import tariffs that have been imposed on the various paper makers from around the world who were accused of dumping and resulted in the higher tariff rates. The utilization rate is good in North American paper. It's over 90% right now, which is a nice level. And with regard to new yield, new yield actually was designed for the China market. It was designed to solve Chinese paper makers' problems that revolved around ethylene's that were being discharged from their paper making process and they primarily were land filling the product. The government changed some regulations that forced them to discontinue the land filling at some point in time and burn it.

So they had to make capital investment. We translated that three, four years ago into an opportunity for a new product that resulted in New Yield. It came out of basically spending time with Chinese paper customers, better understanding the major problems that they had. And that's one of the product solutions that came out of that earlier work that was done there. So the primary demand that we have for new yield will be China for some point in time. Right now we must have 10 to 12 potential customers that have an interest in that product. One of the things that's also helped us to do is -- with that product, it -- what I touched on during my remarks, it's building our reputation as an innovator in China, an innovator in environmental products.

So we've -- that's been a key part of our government marketing, and this EcoPartnership is actually designed to have the Chinese government, if we're successful -- and we expect to be successful -- actually promote this product within the Chinese paper companies, right? And that's what in large part government marketing in China is all about. So New Yield is -- has become a bit of a springboard for us that lets us also surface and promote products such as ENERSOL our Resistex products, our -- some of our building materials products, and so that one innovation has actually sprung many tentacles that came about through simply better understanding what some of the Chinese customer issues were. I'm going to ask Rand if you'd like to add any color to that from a New Yield standpoint?

Yeah I will add, I think you mentioned that we have 10-12 very active targets with our current New Yield product. But we're also in development of a second New Yield product to address a different type of a waste stream that is going open up for us an even equal sized opportunity to the existing New Yield product. So that's just another ongoing growth of a product line, actually, that's been developed for China.

And that second product line is still targeting the paper mills -- I mean, the paper -- the paper production in China so that is the question. And then can you export that into India, which I am assuming they are having similar environmental issues.

Yeah the answer to both of those is yes. It is -- it is the same paper market that we're supporting with that, and there are opportunities around the world, including in India, for New Yield and we actually have some targets around the world.

And, lastly, if I may, the fact that the tariff rate has increased on the paper side, it is helping the U.S. paper makers, is that going to be high enough that it will affect the growth of the paper makers in China exporting into the U.S.?

I think it contributes somewhat, as -- actually the way we see it begin to manifest itself is that the higher cost, smaller producers are having a lot more trouble competing as China has had to focus more on the domestic market. We haven't seen it affecting any of the major Chinese paper mills that we deal with in terms of timing of some of their projects yet. You know, as we've talked about in the past, that could happen. We just haven't seen it yet. And China has moved paper from the U.S. to other parts of the world so you have those two things going on right now.

Thank you very much.

(Operator instructions). We'll move next to Daniel Moore with CJS Securities. Please go ahead.

Thank you and good morning.

Good morning, Dan.

Touch on refractories, thanks for the color. You mentioned, Doug, Q4 could see some pickup in equipment sales. Do you see Q4 as being potentially as good as Q2 or more likely somewhere in between?

Well, typically, Dan, Q4 is when we sell most of our lasers in the year. Usually we take in orders and they're all commissioned. That is historically been the pattern. A little bit different this second quarter as we've been working actually with our customers to kind of even this out, commission more and get them more level loaded throughout the year and I think this is an example of the business unit's ability to get these things closed out sooner. We do have a number of them in the pipeline for completion. I think it could yield a similar type level of quarter for us, but that really is going depend on how the refractory markets go as well. We had some real strengths here in the North America refractory markets. Pricing for steel here, as you know, really high. You know, hopefully that continues to be stable. And stays at that point. That's a good health for the steel makers. That helps us. So we'll be watching that. As I mentioned in my comments, Europe, India, and the Middle East have been very weak. Now, there's been some tariffs put into Europe recently. We'll see how that plays out. That could help production, but we'll be looking. So I think long way of answering, yes, it could be that type of quarter in the fourth but it really is going depend on our refractory markets, how they play out the rest of the year.

Got it. Very helpful. Just switching gears to metal casting has been solid, revenue tweaked down a little bit in the quarter. Maybe just talk about the outlook for Q3 and the remainder of the year there.

Yeah, two things there. One was the agricultural market, the heavy equipment casting market, still down. It's not projected to -- at least for the remainder of this year to increase. I think the large kind of John Deere type machinery. The other piece of that was our export sales. We do export Wyoming clay out of the United States. We had a little bit lower shipments of that clay around the world. We think right now probably a little bit more due to kind some of inventory corrections and less from demand. So do I think that the outlook for the rest of the year pretty solid, except for that agriculture market in the U.S.

You're not seeing any shift to lower quality clay? Just more of an inventory issue, as far as you can tell?

No. It's -- we're not seeing a shift to different type of clay. It's just been more, I think, at least for the first two quarters, a big shipment of -- in the latter part of last year and they've just been working through that. I think that will correct itself -- it's corrected itself and gone forward. We'll have better export shipments.

Lastly, the smaller pieces but GCC continues to grow. Maybe your outlook there in the near term as well as talc.

Both of them we have a positive outlook, talc and GCC tied to the construction markets, talc also in automotive but we've seen strong markets in the northeast for our GCC business this past quarter. We see that continuing through the third. And our talc sales as well. We've had a pretty strong year thus far in talc so we see that continuing through the year.

Okay. And the last one and I'll leave this, but in terms of capital allocation, obviously, as you talked about, Joe, M&A remains a priority to getting to those 2020 goals, but as the balance sheet continues to improve, if you can't find other opportunities, you know, over the next 6 months to 12 months, are you comfortable sort of building cash and continuing to pay down debt or consider other alternative uses?

Well, Dan, we've actually demonstrated in the past but, you know, the approach we'll take is, you know, first priority, as we reinforce is to pay the debt down and then, going forward, we are looking very aggressively for good opportunities from an acquisition standpoint, and, to your question of should we not, let's say, find the things that we think make sense for the company, what else would we do? We've always taken a balanced approach when we're in that position, and we're going to continue to do that. But I'd say our priorities are debt repayment and acquisitions right now but even, within that context it's supporting the green fields that are part of the -- a key part of the growth strategy with new satellites, which is what's happening in China right now. So obviously that's going be a priority for us, to capital fund those. And, you know, there are some things we are looking at for some of the other businesses that are primarily green field that could use some of that capital as well. Those are things in the hopper that we're not in a position to talk about right now for competitive reasons but that we're looking at very closely.

Very helpful. Thanks for the color.

And our final question will come from Ivan Marcuse with KeyBanc Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my question. Real quick, looking at your PCC business and you went over your 2020 goals and still looking at 400 million, 500 million of growth, if you take the lower end of that it's still sort of doubling the business. Sales really haven't been growing in this business, they've actually been declining for the past three years. When will we start to see an acceleration of growth to hit -- that you're going to need to hit to hit the growth targets by 2020?

Yeah, so, Ivan, we've got a number of facets in that $400 million to $500 million. Part of that is being geographic growth in China, India, other regions, but also a lot of innovation growth. We've got a number of products Rand mentioned, number of new yield products coming through. We've got our first satellite in packaging starting up in the first half of next year about that's another avenue for us to pursue. We've got a number of targets for coded packaging in Asia. So I think what you're seeing, yes, we're still in the -- we said that this filler growth is going to be -- the growth is going to be lumpy. We still see that positive trajectory going. Again, average grown over the past four quarters is 3% in volume. The first half was still 3% even though we had a down second quarter. I think as you see the Sun Paper facility coming on this year, two more next year, the targets of new yield starting to take hold through some of the things we're working on with our EcoPartnership, and we have yet to really move into in a strong way that packaging business and this first one will help us do so. So I think, you know, it's the first year. I understand your question, but I think you'll see some of that growth starting to come through as we get further on in our 5-7 year plan.

And, Ivan, the thing I would, you know, re-emphasize relative to the point that Doug made is that this is not linear and that as we look out, as we look at our position today versus a year ago, we've advanced our positions. Those haven't totally manifest itself in the top line yet, but the fundamental things that you need to do to generate or get new satellites, whether they're new yield or base filler satellites or packaging, it's about the opportunities that are being farmed in the company, so to speak. All of those are very much tracking the way we envisioned that they needed to track to hit that kind of a target.

Okay. So I guess -- I understand what you're saying, but at one point the sales are gonna start to inflect, right, and we'll start to see some pretty consistent year-over-year holding currency, where it is today, which is a tough assumption. But when you -- is this a 2017 that we start to see sales inflect or is it more 2018, 2019, it's going to be back end loaded?

Yeah for instance we have satellites coming on. We have new projects coming on in 2017 so you will see an uptick. And as we announce more satellites, right, or more FulFill contracts in China, then you'll see those come on. But they're not going to necessarily be linear. You'll have, just as we had a quarter where we dipped a little bit, the following quarter we should start to see it come up again because these are projects with 10 month to 12 month lead times, right? So from the time we get a contract it takes you 12 months, and they're not coming in, you know, one contract per month. They tend to come in, as the last set, we had three within, I think, a two-month period. So these all tend to come in that way, which lends itself to the lumpiness that Doug talked about. But to your point, yes, at some point in time you'll see the revenues should start to override the lumpy nature of things in North America and Europe, detracting from those total sales. That's really what you're dealing with. You've got three different pieces that go into making up that curve.

Ivan, if I can, let me give you one more perspective, and that is, I know we're -- it seems vague that we're being when this timing will be, but there's one thing for sure. We have the market opportunity to grow to that size. Right? The amount of penetration remaining in paper in China from where we are today could double the volumes of our PCC. Add to that packaging PCC in the new yields and the market opportunity is absolutely there. The timing of it right now as we move forward, it's not gonna be linear but that market opportunity exists for the business.

Okay. Thanks for that detail. The next question is in terms of the energy business, what's left of it, I understand it's all offshore, what would sales and profitability of, what the go-forward business, what would it have looked like, you know, a couple of years ago?

Let me give you a perspective. So --

I'm trying to figure out what sort of the earnings power would be of what's remaining, essentially.

Okay. I'm going to answer a different way. We've removed about $45 million of fixed cost from this business since the time we acquired it. So that gives you an idea of our -- how the business has changed. We've -- going forward, the restructuring that we undertook was to really model and I think Joe mentioned this earlier, was to model this business to be able to generate 10% operating income in the current market environment and that current market environment is of sales around -- around, current sales around $100 million. The remaining capacity in that business -- so that's 10% of current market environments. The capacity in this business, in terms of what we have, in terms of capital installed -- is to grow it -- is to double the business. We have the current capital and capacity to double the business to $200 million which we think then could take the profit levels of the company much higher. I can't right now say back to where they were in 2014 because we've trimmed in terms of number of service lines, but significant profit growth potential in the business as the energy markets recover.

Okay. Then a couple of quickies. CapEx, what are you looking at for the year? And then interest expense and tax rate? Thanks.

CapEx for the year, $80 million to $85 million as we're currently seeing it. Tax rate, 24.5% to 25%, in that range, similar to past quarters. Interest expense is around -- $14 million to $14.5 million. That's interest per quarter, I'm sorry, that's per quarter and that's interest and the deferred finance charge. That's all-in. Gross interest expense.

Okay, great. Thank you.

And that does conclude today's question and answer session. I'd like to turn the conference back over to today's presenters for additional or closing remarks.

Thanks for joining us. That's all the time we have today. We look forward to speaking to you next quarter.

Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.