Q2 2024 Minerals Technologies Inc Earnings Call

Participants

Lydia Kopylova; Head, Investor Relations; Minerals Technologies Inc

Doug Dietrich; Chairman and Chief Executive Officer; Minerals Technologies Inc

Erik Aldag; Chief Financial Officer; Minerals Technologies Inc

Brett Argirakis; President, Engineered Solutions; Minerals Technologies Inc

Daniel Moore; Analyst; CJS Securities

Douglas Dietrich

Mike Harrison; Analyst; Seaport Research Partners

Steve Ferazani; Analyst; Sidoti & Company

David Silver; Analyst; C.L. King

Presentation

Lydia Kopylova

Good morning, everyone, and welcome to our second quarter 2024 earnings conference call. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik’s prepared remarks, we’ll open it up to questions.
As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on these slides. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from these forward-looking statements. Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and in appendix of this presentation, which are posted on our website. Now I’ll turn the call over to Doug.

Doug Dietrich

Thanks, Lydia. Good morning, everyone and thanks for joining today. Okay, let's go over a quick outline for today's call. I'll begin today's presentation by reviewing some highlights from our second quarter. I also want to take a few minutes to highlight the transformation that’s been happening at MTI and how this is leading to our higher levels of performance.
Then I’ll give you an update on what we are currently seeing in our end markets and conditions for the remainder of the year. Erik will then take you through the detailed financials and provide an outlook for the third quarter.
I’ll finish up with a small advertisement for our 16th Sustainability Report, which we published earlier this week, and mention a few highlights. We will then open the meeting to questions. With that, let's get started.
We delivered another record quarter, and our portfolio of businesses continues to show its strength. This quarter was also an example of strong operational execution by our team and how we are leveraging the power of our new organization.
Let me take you through some of the specific highlights. Sales this quarter were $541 million. The consumer and specialties segment grew 3% over last year on an underlying basis driven by strong growth in both our consumer specialty and specialty additives businesses. Sales in engineered Solutions were slightly lower than last year as growth in high temperature Technologies was more than offset by lower sales in environmental and infrastructure due to the continued weakness we are seeing in the commercial construction market.
Operating Income was $85 million, a record level for the company and up 20% over last year. Margins continue to expand, reaching 15. 7% in the quarter, ahead of our interim target for this year. We saw a favorable mix of our higher margin products, captured synergies from the reorganization, and our teams continue to execute our pricing strategies, and capture input cost savings. Each business is performing well operationally, focusing on safety, variable cost control, and productivity improvements.
Earnings per share were $1. 65, a 26% increase over last year. Operating cash flow also remained strong, increasing 10% over last year. I also want to give you an update on our status with the BMI bankruptcy. As you likely saw in our press release, we agreed to establish a $30 million credit facility for BMI in order to support continued progress with the bankruptcy and mediation process. We see this as a constructive step to keep the process moving forward as expeditiously as possible to a fair and final resolution for all parties. Erik will go into more detail on this in his update in a few minutes.
So, overall, I'm pleased with the quarter, the track the company is on, and our performance so far this year. We’re delivering solid results quarter after quarter, despite facing a few market challenges. We have momentum across our businesses and across the organization and we see even higher levels of performance to demonstrate going forward.
I want to take a few minutes to review the progress we are making against our strategic objectives and use our first half results as a backdrop to highlight the strength of our business model and of the portfolio of businesses we’ve built.
Let me begin by saying that our strategy to position ourselves in higher growth and more profitable markets and to invest in new technologies is truly transforming MTI. We've built a resilient portfolio of businesses across both Consumer and Industrial sectors that provide stable growth platforms to balance instances of industrial market volatility, like we are seeing today. We have outlined that our long-term potential is supported by our leading positions in these markets and geographies, by our core technologies, and by our unique global mineral reserves.
Our first half financial performance is a good example of the type of results this transformation can drive, and I want to highlight for you some of the significant changes we’ve made in each business, the new positions we’ve created, and why we are confident we can not only sustain but strengthen our performance going forward.
Let’s start with the consumer side of the company. We’ve invested in and assembled a portfolio of consumer-based products designed to deliver stable long-term growth. It includes a leading pet litter business with a vertically integrated global footprint.
We continue to leverage the value of this footprint to expand in North America and Europe, and in Asia to satisfy demand from growing pet ownership trends. This private-label business is positioned to grow steadily and outpace the broader market rate.
We've made tremendous progress integrating the acquired parts and optimizing it into a global business platform and over the next couple of months, we will be launching a new global brand for this business to reflect this integration and provide a unified reference for our customers. We’ve expanded our consumer specialty businesses into higher margin, growing markets like animal health, personal care, and oil purification and invested in new, natural ingredient technologies that are aligned with macro consumer trends.
In specialty additives, our new recycling technologies like New Yield for the paper and packaging industry are gaining significant traction and have become the standard and leading value generator for industry customers who require sustainable solutions.
On the Industrial side of the company, we’ve positioned our high temperature Technologies business as the leader in growing foundry markets around the world and we are transforming our refractories business with new, advanced formulations and through automated equipment and data collection systems like our Minscan LSC. We’re expanding our environmental and infrastructure portfolio to help solve global challenges with technologies like FlouroSorb for PFAS remediation and drilling products for Geothermal heating and cooling systems.
These leading positions and innovative solutions generate higher value for our customers and are generating higher margins for us. Our first-half operating margin is just over 15% and we’ve generated $162 million in operating income, up 21% over last year, and EPS of $3. 15, which is up 28%.
This profitability is driven by this newer mix of products and also by our culture of operational excellence, which continues to drive efficiencies, remove waste in our processes, and helps us to leverage our growth over disciplined overhead spending. I also think it’s important to note that throughout this transformation, we’ve maintained our historically strong cash generation profile and our balanced approach to capital allocation.
This year we’ve generated $106M in cash from operations, a 34% increase over last year and are generating Free Cash flow at our target level of approximately 7% of sales. We returned $22 million to shareholders last year and expect to return approximately $75 million this year. At the same time, we’ve strengthened our balance sheet leverage to 1. 7 times EBITDA.
This financial strength, the capability of our aligned and focused organization, and our strong operating culture is a solid foundation to continue to build upon. We understood when we established our 5-year growth and financial objectives, that the journey would not take a linear path. But our results this far, demonstrate that we have put ourselves on a solid trajectory to achieving them. Now, let's review what’s happening in our end markets and the trends for the remainder of the year.
In household and personal care, we are seeing strong demand for our consumer-oriented products and continue to have a positive outlook for this product line. The summer months are the seasonally low demand point for our Pet Litter business; however, the market begins to enter its strong season late in the third quarter. For the other consumer specialty products, we expect similar demand levels into the third quarter and sales for these products to remain on their strong growth path.
In specialty additives, we expect generally stable markets conditions in paper and packaging, and in food and pharma to remain through the second half. Residential construction in the US is also relatively stable for us yet remains below the levels we saw over the past two years. In addition, we are ramping up 3 satellites in the second half of the year, which will add to volumes in 2025. And we continue to have a strong pipeline of paper and packaging opportunities, driven by demand for NewYield and for our products targeting the packaging market.
In high temperature Technologies, we see similar market conditions to the first half in all regions except for a weaker Agriculture Equipment market in the US, which will have a small impact on our second half metalcasting volumes.
We are also keeping our eye on lower steel prices levels in the US, which could impact steel production levels. We are benefiting from the Minscan installations we’ve completed over the past year and have several more scheduled in the second half. Overall, we expect another strong profit performance from this product line.
environmental and infrastructure is where we see the most challenging market conditions and is the one product line with lower sales compared to last year. We expected to see some improvement in the commercial construction market in the second quarter, but given the interest rate sensitivity of this market, our order delivery dates began to slip from the second quarter to later in the year.
Our current expectation is that any meaningful market inflection will likely be late this year or early next. Despite this, other parts of this product line like wastewater remediation solutions, and drilling products remain solid.
I’d like to note that in this product line, our Fluoro-Sorb product continues to gain traction. We completed a municipal water installation in Q2 and currently have over 100 pilot projects in various stages. We remain closely engaged with the US Environmental Protection Agency and are gaining similar recognition and engagement with agencies in Europe.
To sum up, we see a relatively positive market landscape ahead for us, albeit one with a few additional pockets of industrial market weakness. The second half demand picture for some of our industrial markets looks to be a bit less certain than it was in the first half, but it is one we feel we can navigate successfully to deliver another record year.
Now I'll turn it over to Erik to review the financial details, segment highlights, and our financial outlook for the second Quarter. Erik?

Erik Aldag

Thanks Doug, and good morning, everyone. I’ll begin by providing an overview of our second quarter results, followed by some details on the performance of our segments, and I’ll wrap up with our outlook for the third quarter. Following my review, I’ll turn the call back over to Doug for some highlights from our latest Sustainability Report.
Now let’s review our second quarter results, we delivered another strong quarter, with records for operating income, EBITDA, and EPS, excluding special items. Sales in the second quarter were $541 million, up 1% on an underlying basis versus last year.
Operating income increased 20% over last year to $85 million, a record for the company, and operating margin expanded 290 basis points to 15. 7%. For the first half, our operating margin was 15. 1%, well above the 14% interim margin target we set for 2024.
You can see in the operating income bridge that volume and mix increased income by $3 million, which is net of the impact from the deconsolidation of BMI last year.
The consumer and specialties segment contributed most of the favorable volume impact, while the favorable product mix came mostly from engineered Solutions, driven by higher sales of our newest automated refractory equipment within High-Temperature Technologies. Together, volume and mix contributed 80 basis points of margin improvement.
Higher selling prices drove an additional $3 million of income, contributing 40 basis points to the improvement in operating margin. The remaining $8 million of income and 170 basis points of margin growth came from an improvement in our overall cost position. We are realizing the benefits of productivity and variable conversion cost savings, a generally stable input cost environment, and the full run-rate impact of our $10 million cost savings program. We also benefited from favorable energy cost relative to our expectations heading into the quarter as our supply chain team did a nice job taking advantage of lower rates.
EBITDA was $108 million in the quarter, and EBITDA margin was 19. 9%, up 310 basis points over last year. Earnings per share was $1. 65, excluding special items, up 26% from prior year. And cash flow remained strong, with cash from operations of $50 million, 10% higher than last year.
Before we move on to our segments, let me take a minute to outline the special items in the second quarter.
We recorded special charges of $34 million, primarily related to a $30 million provision for credit loss relating to the Company's committed line of credit to BMI Oldco – which is the entity formerly known as BMI. MTI provided this line of credit to facilitate progress in BMI Oldco’s bankruptcy proceeding and ongoing mediation process. Thus far, MTI has loaned $5 million of this $30 million commitment. However, a provision for the full amount was necessary, since the funds will likely be consumed in the process and / or credited toward the ultimate creation of a 524(g) trust.
Now let’s review the segments, beginning with consumer and specialties, second-quarter sales were $284 million, 3% higher on an underlying basis. Sales in the household and personal care product line were 1% higher year-over-year.
Cat litter sales were temporarily lower this quarter to the timing of product changeovers at a few retailers in the U. S. Meanwhile, we saw higher sales in several high-margin consumer applications, such as personal care, fabric care, and animal health.
In specialty additives, sales were 4% higher on an underlying basis. We had solid volume growth in paper & packaging, driven by improved market conditions in North America and Europe, and the ramp-up of our newest satellites in Asia. In addition, we’ve seen relatively stable demand for our products serving the residential construction market.
Segment operating income was $44 million in the second quarter, 29% higher than last year, driven by higher volume, improved product mix, favorable input costs, and higher pricing… And our operations teams delivered a strong productivity performance. In short, the business is performing well. And as a result, operating margin has improved significantly, up 370 basis points from prior year, to 15. 4% of sales.
Looking ahead to the third quarter, we expect year-over-year growth for household and personal care to return to the mid-single digit range.
In specialty additives, we expect underlying sales growth to remain similar to what we saw in the second quarter. Overall, for the segment, we expect underlying sales growth versus last year in the low-to-mid-single digit range, and operating margin remaining strong, around 15%.
Now, let’s turn to the engineered Solutions segment. Second quarter sales were $257 million, 2% below last year.
In the High-Temperature Technologies product line, sales grew 1%. In North America, foundry and steel markets have been stable, with the exception of softening Ag equipment demand for some of our foundry customers. In Europe, steel markets have remained sluggish through the first half. Meanwhile, we saw continued growth in foundry volumes in Asia, driven by market penetration of our differentiated greensand bond systems and technical services.
In the Environmental & Infrastructure product line, sales were lower by 8%, driven by weakness in commercial construction and large environmental projects. When we talked to you last quarter, we expected more projects to move forward in the second quarter. However, we’ve seen a continued shift in the timing of projects for this business.
Segment operating income was $45 million, up 16% over last year, driven by higher volumes and a favorable product mix in High-Temperature Technologies, as well as disciplined pricing and cost control. Operating margin was 17. 4% of sales, up 270 basis points from prior year.
Looking ahead to the third quarter, we expect market conditions to remain similar, with sales for the segment slightly lower than last year – and that’s driven primarily by the market conditions in the Environmental & Infrastructure product line as well as softer conditions in the North American Ag equipment market.
And we expect operating margin of approximately 16% – in line with our target level for the segment, although lower than the second quarter due to a more normalized product mix.
Now let’s turn to our balance sheet and cash flow highlights, our cash flow performance has been strong. Cash from operations for the first six months of the year totaled $106 million, up 34%.
And we delivered free cash flow of $69 million, more than double the first half of last year. For the full year, we expect free cash flow in the $150 million range.
We deployed $37 million toward capex in the first half, and we expect between $90 and $100 million of capex for the full year. The rate of capital spend will increase in the second half as we invest in several new paper & packaging satellites – including those equipped with our NewYield recycling technology – and as we complete several units of our high-tech refractory equipment for delivery and installation at customer sites.
In the second quarter, we also repaid $10 million in debt and returned $23 million to shareholders through share repurchases and dividends. To date, we have repurchased $49 million of shares under our one-year, $75 million authorization. Our balance sheet remains very strong, with over $500 million of liquidity and net leverage at 1. 7 times EBITDA.
Now I’ll summarize our outlook for the third quarter, we expect a similar level of sales and a solid operating performance in the third quarter.
In consumer and specialties, we expect underlying sales growth in the low-to-mid-single digit range versus last year, driven by higher sales of cat litter and other consumer-oriented products. In engineered Solutions, we expect sales to be slightly lower than last year, similar to the second quarter trend.
In summary, for MTI, we expect sales between $535 and $545 million, continuing the same underlying sales growth trend we saw in the first two quarters. With a more normalized product mix, as well as some seasonally higher energy costs, we’re expecting operating income between $77 and $80 million, and operating margin remaining strong at close to 15%.
And we expect EPS between $1. 50 to $1. 55. Thanks Doug, and good morning, everyone. I’ll begin by providing an overview of our second quarter results, followed by some details on the performance of our segments, and I’ll wrap up with our outlook for the third quarter. Following my review, I’ll turn the call back over to Doug for some highlights from our latest Sustainability Report.
Now let’s review our second quarter results, we delivered another strong quarter, with records for operating income, EBITDA, and EPS, excluding special items.
Sales in the second quarter were $541 million, up 1% on an underlying basis versus last year. Operating income increased 20% over last year to $85 million, a record for the company, and operating margin expanded 290 basis points to 15. 7%. For the first half, our operating margin was 15. 1%, well above the 14% interim margin target we set for 2024.
You can see in the operating income bridge that volume and mix increased income by $3 million, which is net of the impact from the deconsolidation of BMI last year.
The consumer and specialties segment contributed most of the favorable volume impact…. while the favorable product mix came mostly from engineered Solutions, driven by higher sales of our newest automated refractory equipment within High-Temperature Technologies. Together, volume and mix contributed 80 basis points of margin improvement.
Higher selling prices drove an additional $3 million of income, contributing 40 basis points to the improvement in operating margin. The remaining $8 million of income and 170 basis points of margin growth came from an improvement in our overall cost position. We are realizing the benefits of productivity and variable conversion cost savings, a generally stable input cost environment, and the full run-rate impact of our $10 million cost savings program. We also benefited from favorable energy cost relative to our expectations heading into the quarter as our supply chain team did a nice job taking advantage of lower rates.
EBITDA was $108 million in the quarter, and EBITDA margin was 19. 9%, up 310 basis points over last year. Earnings per share was $1. 65, excluding special items, up 26% from prior year.
And cash flow remained strong, with cash from operations of $50 million, 10% higher than last year. Before we move on to our segments, let me take a minute to outline the special items in the second quarter.
We recorded special charges of $34 million, primarily related to a $30 million provision for credit loss relating to the Company's committed line of credit to BMI Oldco – which is the entity formerly known as BMI. MTI provided this line of credit to facilitate progress in BMI Oldco’s bankruptcy proceeding and ongoing mediation process. Thus far, MTI has loaned $5 million of this $30 million commitment. However, a provision for the full amount was necessary, since the funds will likely be consumed in the process and / or credited toward the ultimate creation of a 524(g) trust.
Now let’s review the segments, beginning with consumer and specialties, wecond-quarter sales were $284 million, 3% higher on an underlying basis.
Sales in the household and personal care product line were 1% higher year-over-year. Cat litter sales were temporarily lower this quarter to the timing of product changeovers at a few retailers in the U. S.
Meanwhile, we saw higher sales in several high-margin consumer applications, such as personal care, fabric care, and animal health.
In specialty additives, sales were 4% higher on an underlying basis. We had solid volume growth in paper & packaging, driven by improved market conditions in North America and Europe, and the ramp-up of our newest satellites in Asia. In addition, we’ve seen relatively stable demand for our products serving the residential construction market.
Segment operating income was $44 million in the second quarter, 29% higher than last year, driven by higher volume, improved product mix, favorable input costs, and higher pricing… And our operations teams delivered a strong productivity performance. In short, the business is performing well. And as a result, operating margin has improved significantly, up 370 basis points from prior year, to 15. 4% of sales.
Looking ahead to the third quarter, we expect year-over-year growth for household and personal care to return to the mid-single digit range.
In specialty additives, we expect underlying sales growth to remain similar to what we saw in the second quarter. Overall, for the segment, we expect underlying sales growth versus last year in the low-to-mid-single digit range, and operating margin remaining strong, around 15%. Now, let’s turn to the engineered Solutions segment.
Second quarter sales were $257 million, 2% below last year. In the High-Temperature Technologies product line, sales grew 1%. In North America, foundry and steel markets have been stable, with the exception of softening Ag equipment demand for some of our foundry customers. In Europe, steel markets have remained sluggish through the first half. Meanwhile, we saw continued growth in foundry volumes in Asia, driven by market penetration of our differentiated greensand bond systems and technical services.
In the Environmental & Infrastructure product line, sales were lower by 8%, driven by weakness in commercial construction and large environmental projects. When we talked to you last quarter, we expected more projects to move forward in the second quarter. However, we’ve seen a continued shift in the timing of projects for this business.
Segment operating income was $45 million, up 16% over last year, driven by higher volumes and a favorable product mix in High-Temperature Technologies, as well as disciplined pricing and cost control. Operating margin was 17. 4% of sales, up 270 basis points from prior year.
Looking ahead to the third quarter, we expect market conditions to remain similar, with sales for the segment slightly lower than last year – and that’s driven primarily by the market conditions in the Environmental & Infrastructure product line as well as softer conditions in the North American Ag equipment market.
And we expect operating margin of approximately 16% in line with our target level for the segment, although lower than the second quarter due to a more normalized product mix.
Now let’s turn to our balance sheet and cash flow highlights, our cash flow performance has been strong. Cash from operations for the first six months of the year totaled $106 million, up 34%. And we delivered free cash flow of $69 million, more than double the first half of last year.
For the full year, we expect free cash flow in the $150 million range. We deployed $37 million toward capex in the first half, and we expect between $90 and $100 million of capex for the full year.
The rate of capital spend will increase in the second half as we invest in several new paper & packaging satellites – including those equipped with our NewYield recycling technology – and as we complete several units of our high-tech refractory equipment for delivery and installation at customer sites.
In the second quarter, we also repaid $10 million in debt and returned $23 million to shareholders through share repurchases and dividends. To date, we have repurchased $49 million of shares under our one-year, $75 million authorization. Our balance sheet remains very strong, with over $500 million of liquidity and net leverage at 1. 7 times EBITDA.
Now I’ll summarize our outlook for the third quarter, we expect a similar level of sales and a solid operating performance in the third quarter. In consumer and specialties, we expect underlying sales growth in the low-to-mid-single digit range versus last year, driven by higher sales of cat litter and other consumer-oriented products.
In engineered Solutions, we expect sales to be slightly lower than last year, similar to the second quarter trend. In summary, for MTI, we expect sales between $535 and $545 million, continuing the same underlying sales growth trend we saw in the first two quarters.
With a more normalized product mix, as well as some seasonally higher energy costs, we’re expecting operating income between $77 and $80 million, and operating margin remaining strong at close to 15%. And we expect EPS between $1. 50 to $1. 55.

Doug Dietrich

Thank you, Erik. Before we go to questions, I want to finish up by highlighting our latest sustainability report, the 16th that we have published. For the past decade and a half, we’ve outlined in these reports how safety, environmental stewardship, financial strength, employee engagement, customer satisfaction, community relations and shareholder engagement have always been part of our values, cornerstones for how we run the company and key facets our strategy. This year’s report is a broad one that reflects all the company has done and continues to do in each area.
A few highlights in this year's report, you will see that we continue to make significant progress toward achieving our 2025 environmental goals – In fact, to date, we have already significantly exceeded 10 of our 12 targets.
We have initiated a Science-based Targets initiative that we will use to frame our new long-term environmental goal and we have published the first draft of our Scope 3 emissions.
Please take some time to read through the report as it highlights our culture and the passion our employees have for our company. It is a true testament to our teams' actions to help MTI make a positive impact in each part of the world in which we operate. Thanks for your attention today, now let’s open it up to questions.

Question and Answer Session

Operator

Daniel Moore, CJS Securities.

Daniel Moore

Thank you. Good morning, Doug. Good morning, Eric. Hopefully you can hear me there. Maybe start with consumer in a lot of consumer, more discretionary businesses had a tougher time in Q2. Your consumer businesses well, that's a really well feeling any sort of pension all on those businesses, just from maybe a tougher environment. That's one.
And two in the pet care side, maybe just a little bit more detail regarding the product changeover. When do you expect volumes to return? And ultimately could that we see a greater revenue opportunity?

Douglas Dietrich

Yeah, thanks, Dan. Actually, we saw strong, continued strong demand across the consumer oriented products in household and personal care. And a lot of these products are not there more consumer discretionary nondiscretionary, their cat litter there you know, pharmaceutical driven, they are into beverages, things that folks are buying regardless of not your typical consumer spending downturn type item. So we saw some strong demand the changeover again, out of the DJ, give you some more color part of that business and the pet care business.
It happens regularly. We've called this one out this time. Just to give you some comparisons year over year, but nothing abnormal. Did you want to go to more color on what that was about and kind of how it places some of the strength of what we're doing impact?

Erik Aldag

Sure, thanks for the question, Dan. I'd suggest So what Doug said, basically what shifts that we're seeing in the consumer market are favorable to us or continues to be private label, especially in the cat litter, is growing at a higher rate than the rest of the market. We're able to take advantage of that, but we also have got great positions with our branded customers.
As far as this changeover goes, it's part of our strategy to work with our partners in their private label strategies and that will on occasion just as we reset and reintroduce new products and upgrades, those products will see this from time to time. But in general, things are going according our strategy have a good looking second half a fast approaching.
And just to give you some broader to mention that some of the things that we'll do during these upgrades can be as simple as that and I know ergonomics shift on packaging or just a change in packaging type or maybe a change in fragrance, but then it also gets more complex, the change to the look and flow of the product to promote greater hygiene at the home.
So so it's a couple of different changes going on with those some of our good retailers. But overall, it's helping further grow this category and also improve our margins as we upgrade the product.

Daniel Moore

Okay. Maybe switching gears to refractories. You've been the high-temperature tech part of the business?
Yes, I think we've installed about a dozen or so automated systems over the last two years. And there is, I think 60 or so electric arc furnaces. What are your expectations for growth going forward on? Has the low hanging fruit been picked here or there really steady?
I'd say slope of upgrades are still ahead of us?

Douglas Dietrich

Yeah, I'll take that and then I'll pass it over to Brett. I know there's a long road ahead of us here. There's we're just this is electric arc furnace application. I think we've installed 15 of them over the past two years. We have another five, I think, to install this year. There's more than that to the United States. And I think we're now just introducing it in Europe. But Brett, you want to give us some kind of how this is playing out and as you're already doing it?

Brett Argirakis

Sure. Thanks, Doug. Look, as we've talked about before, the market has shifted from a view after integrated steel more towards the non-integrated steel or electric arc furnaces. We've installed this new equipment of course, for safety reasons for more efficient refractory applications for our customers. And it utilizes a combination of our laser technology, our cameras to so that we can move people off of the shop floor. They can see inside that first and see what they're buying our product to.
And then the robotic system and PLC control that applies the product to the right spots of the furnace to make it very efficient. As Doug mentioned, we have signed 15 agreements, including the refractory supply on probably around $150 million over over that period through 2025.
And we're working really hard to further penetrate the US market, but we're also now we have a nice footprint, a nice pipeline in Europe and also in Japan. So we have three more agreements signed for 2025. As Doug mentioned, we have five or six board installed this year. So actually, it's nine total units in 2024, and we're developing that pipeline for Europe and Japan.
So we feel good about expanding because the European market is also moving in the same direction. They're moving from the integrated to the nonintegrated. And so we want to be there to help them, and we're well aligned to meet there.

Erik Aldag

And then as you know, these are set up as Brett mentioned, kind of 5-year contracts that provide not only the equipment either as a capital sale or lease, of course, in the refractory through. And we've changed our refractory formulations for electric arc, the electric arc market, and that's what I referred to, some higher tech formulations, this equipment and some of the data gathering that we're working on.
It brings more intelligence to that process. So it's kind of a different business than it was four, five years ago in terms of just per ton gunning. Now it's it's a different model that we're going out, and I think we still have some room to expand that globally.

Daniel Moore

Excellent. And maybe switching gears one more, and I'll jump back in queue. But just how should we think about the $30 million commitment to the BMI, is that for legal expense or of course, a good portion of that likely go to fund the eventual settlement and in our business any way reflect kind of expectations around timing of when we might finally go through it?

Brett Argirakis

Yeah, it's going to fund the process largely that those are legal expenses to continue to fund the process that we're in mediation right now. Look, I think, you know, it's a supportive and constructive steps to keep the process going on. It's a very structured process, as you can imagine, through bankruptcy.
And I can't give you right now a data as to how it will play out or when it will play out. But but I can say that being in mediation is still a good process, right? So we'd feel like the $30 million should fund this through largely toward the end of the year and we think that's a good runway to keep that process going.
So constructive steps we wanted to keep it going. And like Eric said, either it will be consumed or it will probably be contributed into the fund remediation solved itself sooner. But for either way, that's why we took the charge you account for this look very helpful.

Daniel Moore

(technical dicciculty)

Operator

Mike Harrison, Seaport Research Partners.

Mike Harrison

Hi, good morning. Just another clarification of the $30 million is that something that you could be to at some point, I think you kind of classify that as a credit line that implies that it might be repaid at some point.

Brett Argirakis

Our expectation right now, which is why we took the full charge for the $30 million is that it will either be consumed over the next several months to fund the process going forward or if that mediation and for some reason, it will be a contribution into the trust. So either way, I think it's going to be accounted for as fully consumed one way or the other at the end of the process into the bankruptcy like better.
Okay. Understood. On the engineered solutions business, just the guidance that you're providing for q three and the 16% operating margin level, which is a lot lower than what you just reported here in Q2. You referenced that the mix is going to be normalizing. Can you give a little bit more color as to what was unusual about the mix in Q2 that would have such a dramatic impact sequentially on the margin performance?

Erik Aldag

Yeah, Mike, this is Eric. So it was the several equipment sales that we mentioned. That was the main contributor of that. But the more favorable mix in the second quarter relative to what we're expecting in the third and part of that's driven by I mean, Doug alluded to the fact that some of these are outright sales and some of these releases.
So the ones in the second quarter happens to be outright sales and that gave a boost to that margins in the second quarter. We have, I think, five to go off or five planned equipment sales through the rest of the year, but most of those are structured as leases. So a little bit different of an impact on margin and I will say they're all including our refractory product.
So they do provide a nice long-term recurring revenue stream for us in that way. And but mostly, I would say it was the high margin equipment sales in the second quarter and then a little bit of energy as well.
In terms of Q2 to Q3, we're seeing a little bit higher energy costs but those are the main and main margin differences.

Mike Harrison

All right. And then I had a couple of questions on the pet care business. This product changeover timing, is that pull volume forward into Q1 or is it going to push volume out into Q3? Or am I confused on the whole mechanism and I shouldn't be thinking about it as a different timing of volume hitting your P&L.

Brett Argirakis

So we certainly don't want to make a bigger deal. It is done, so we had probably a few customers change over this quarter and the dynamics are different with each one that you're changing box plants or pails technology, et cetera. And in this case, it was with a larger customer that DJ, I think mentioned we're moving to a different technology.
So we forecast that would happen. Sometimes the timing of them and the duration of them are different. So it really wasn't anything out of the norm, and we didn't pull anything into fill up the stocks. And I will say though, that after the changeover occurs, and that's why I think Eric is mentioning pet pet care volumes growing two things really happened in the back half of the year, one that changeover one of one or two of this changeover should be complete.
Plus we start to hit the high season for pet litter as the colder months are usually higher pulls. There's usually promotions that are going on late in the fall. And so I think those once the chain, a couple of changeovers have moved through and we'll likely have another one in the fall. But either way that with the higher season seasonal volumes and pull through Mike, it's nothing out of the out of the ordinary. That was just to highlight comparison last.

Mike Harrison

Got it. And then there was also a comment a target in your remarks that you guys were launching a new global brand. Can you share some more details there yet?

Douglas Dietrich

Yeah, we from let's see how many brand we have four brands in this company right now.
So if you know how the business has been put together. Started has a $70 million business operating under a really not even a brand under the American colloid ACC branding part of the Amcal acquisition we bought in 2018, a company in Europe called Sivomatic. We purchased in 2021, another company called North America.
And then in 2022 or '23 if my memory serves me, we bought and a third company in so likely called concept. So we have four different companies and we've now integrated them into one global company that we use and we're expanding now into Asia.
So we've invested in infrastructure. We've invested in automation. We've invested in to make sure that these are the lowest cost plants. They're all vertically integrated. We're starting to use those reserves globally to support customers, large customers that operate globally.
And so now that that integration is done, we think it's time to have that business, which is $400 million and our target to grow to over $500 million in the next two, three years. It is on Identive and one that our customers can refer to whether they're in Asia, Europe, North America anywhere. And so we're kind of excited about that. We're working on it and so stay tuned.
I just wanted to give it another brief advertisement on that brand name coming out, that should be coming out in the next couple of months.

Operator

Mike Harrison, Seaport Research Partners.

Mike Harrison

Hi, good morning. Just another clarification of the $30 million. Is that something that you could be to at some point, I think you kind of classify that as a credit line that implies that it might be repaid at some point? Is that the expectation?

Doug Dietrich

Our expectation right now, which is why we took the full charge for the $30 million is that it will either be consumed over the next several months to fund the process going forward or if that mediation and for some reason, it will be a contribution into the trust. So either way, I think it's going to be accounted for as fully consumed one way or the other at the end of the process into the bankruptcy like better.

Mike Harrison

Okay. Understood. On the engineered solutions business, just the guidance that you're providing for Q3 and the 16% operating margin level, which is a lot lower than what you just reported here in Q2. You referenced that the mix is going to be normalizing. Can you give a little bit more color as to what was unusual about the mix in Q2 that would have such a dramatic impact sequentially on the margin performance?

Erik Aldag

Yeah, Mike, this is Eric on. So it was the several equipment sales that we mentioned. That was the main contributor of that. But the more favorable mix in the second quarter relative to what we're expecting in the third. And part of that's driven by I mean, Doug alluded to the fact that some of these are outright sales and some of these releases. So the ones in the second quarter happens to be outright sales and that gave a boost to that margin in the second quarter.
We have, I think, five to go off or five planned equipment sales through the rest of the year, but most of those are structured as leases. So a little bit different of an impact on margin and I will say they're all including our refractory product. So they do provide a nice long-term recurring revenue stream for us in that way. And but mostly, I would say it was the high margin equipment sales in the second quarter and then a little bit of energy as well. In terms of Q2 to Q3, we're seeing a little bit higher energy costs but those are the main margin differences.

Mike Harrison

All right. And then I had a couple of questions on the pet care business. This product changeover timing, is that pull volume forward into Q1 or is it going to push volume out into Q3? Or am I confused on the whole mechanism, and I shouldn't be thinking about it as a different timing of volume hitting your P&L?

Doug Dietrich

So we certainly don't want to make a bigger deal. It is done. So we had probably a few customers change over this quarter and the dynamics are different with each one. You're changing box plants or pails technology, et cetera. And in this case, it was with a larger customer that DJ, I think mentioned we're moving to a different technology.
So we forecast that would happen. Sometimes the timing of them and the duration of them are different. So it really wasn't anything out of the norm, and we didn't pull anything into fill up the stocks. And I will say though, that after the changeover occurs, and that's why I think Eric is mentioning pet care volumes growing two things really happened in the back half of the year, one that changeover one of one or two of this changeover should be complete. Plus we start to hit the high season for pet litter as the colder months are usually higher pulls.
There's usually promotions that are going on late in the fall. And so I think those once the chain -- a couple of changeovers have moved through, and we'll likely have another one in the fall. But either way that with the higher season seasonal volumes and pull through Mike, it's nothing out of the out of the ordinary. That was just to highlight comparison last.

Mike Harrison

Got it. And then there was also a comment a target in your remarks that you guys were launching a new global brand. Can you share some more details there yet?

Doug Dietrich

We from let's see how many brand we have four brands in this company right now. So if you know how the business has been put together. Started has a $70 million business operating under a really not even a brand under the American colloid ACC branding, part of the Amcal acquisition.
We bought in 2018, a company in Europe called Sivomatic. We purchased in 2021, another company called America. And then in 2022 or three if my memory serves me, we bought and a third company in so likely called Concept Pet. So we have four different companies and we've now integrated them into one global company that we use and we're expanding now into Asia.
So we've invested in infrastructure. We've invested in automation. We've invested ito make sure that these are the lowest cost plants. They're all vertically integrated. We're starting to use those reserves globally to support customers, large customers that operate globally.
And so now that that integration is done, we think it's time to have that business, which is $400 million and our target to grow to over $500 million in the next two, three years. It is on Identive and one that our customers can refer to whether they're in Asia, Europe, North America anywhere. And so we're kind of excited about that. We're working on it and so stay tuned. I just wanted to give it another brief advertisement on that brand name coming out, that should be coming out in the next couple of all right.

Mike Harrison

Very good. Thanks very much.

Operator

Kyle May, Sidoti.

Steve Ferazani

Steve Ferazani on for Kyle. I appreciate the detail on the call this morning has not wanted to ask a little bit more on the what actually more of the strength in margin in the quarter? And obviously, you pointed out the product sales on the refractory side when I look at your bridge, looks like mix was a smaller piece, a lot of it came on the cost side.
Can you highlight a little bit more of those efforts and to get that kind of margin improvement in the relatively flat market is impressive. Is there more to go on the cost side?

Doug Dietrich

Thanks, Steve, and thanks for the question. So yeah, margins were strong and we are ahead of our targets for the year. We highlighted that we'd be at 14% kind of for the year this year and our target was 15 for next year. And I think we're probably probably be right around a year early on that time. But what's behind is a couple of things is, yes, you saw that it's partially cost. And I think as we've seen that inflation stabilized over the past year, you know, we've done a great job in terms of stabilizing that cost base.
But I think that was a true reflection of what the company from a cost base really is in terms of profitability. We my comments for this is a little bit different. We've invested in kind of higher margin markets. We've invested in technologies that are addressing more challenging on issues, providing those solutions, which generate higher margins for us with the value we provide and so that mix story and that volume. So volume is coming from physicians. We're putting ourselves in a growing market that's adding. We're leveraging that volume and that price over a disciplined constant.
You know, the mix is coming from, as we mentioned this quarter. We've got some high-tech equipment, but it's also coming from some of the consumer and the specialties is coming from Animal Health. It's coming from the personal care products going from bleaching or these are higher margin products that we've invested in over the past few years.
The pet litter business is becoming as we've integrated invested in cost reduction, a higher margin business as well, which is now steadily grown. So I think what you're seeing is the cost base.
Yes, we are generating some benefits from cost, but it's more stable cost base from where it was last year. And what you're seeing now is this mix and the volume really being leveraged and putting ourselves in a higher margin product into that. That leads me to tell you, yes, there is more to go.
So as these products as these products. These higher-margin products continue to grow. They're growing at a faster pace. They will accrue to our margins and we're going to be disciplined about that overhead spending, as you know, us and leverage all those new sales over that fixed cost base.

Steve Ferazani

Excellent. Thanks for that. On the free cash flow target of $150 million, sounds like you have more CapEx to go in the second half. So two-piece question, where's the CapEx going in second half and any risk to that $150 million target?

Erik Aldag

Thanks, Steve, this is Eric. I think we feel pretty good about that cash flow target. The cash from ops target, the companies generating strong levels of cash flow and working capital is in good shape. The efficiencies are in good shape.
In terms of the ramp-up in CapEx spend I ever heard referenced a couple of the areas, but it's basically we've got and for paper and packaging, satellites are being constructed and ramping up in the fourth quarter and into the first quarter of next year.
And we've got [Minsk] and those are the refractory equipment with that completion of several of those units in the second half of the year. And then I would say it's a handful of smaller kind of debottlenecking and automation projects that we're also working on, but we do expect it to ramp the CapEx. So ramp up from the first half into the second half.

Steve Ferazani

Thanks.

Operator

David Silver, C. L. King

David Silver

Yes, thank you. Good morning, Dave, and maybe just to start it. Hey, thank you. Maybe just to start. I'd like to clarify or get a little clarification on the most recent question about free cash flow for the year. But the $150 million target, as you're looking at it right now, is that inclusive of the CAD30 million line of credit for BMI or you know it or is that exclusive of that?
In other words, that's kind of a new element since the beginning of the year. Is it going to be one 55 even after allocating the $30 million, which I think you indicated was likely to be consumed by the rest by the end of this year next year.

Erik Aldag

Just as a matter of geography on the cash flow statement, that's going to go into cash from investing the $30 million it alone, it's going to be very good. It's a little cash outflow.

Doug Dietrich

Okay. Thank you for that clarification. On sticking with Eric, you know, just parsing some of the language in the press release and some of the things here today. And I think you made a comment on price cost, you know, from a company-wide perspective, but there is an element of price, you know, in your performance this quarter, year over year, let's say, and there's also an element of cost reduction.
And so, you know, historically, we've been a little bit trying to catch up on price in an inflationary environment and you've done a good job about that. But is there an element in the results this quarter where actually you were increasing prices at the same time you were reducing costs, like, let's say, for selected product lines or where the cost reductions you know elsewhere. Maybe at the SG&A level, but just to comment on price cost and how that played into your results this quarter?

Erik Aldag

So I mean, I'll just break it down in terms of the costs, some favorability that we saw, it was split roughly. So we showed $8 million of favorability over last year in the bridge split roughly evenly between energy raw materials and then productivity kind of variable conversion cost, fixed cost savings.
Pricing, we price on value. So the pricing opportunities that we have, we're pricing the products based on the value that we're providing to customers.
But just to take a step back, I guess when we laid out our margin improvement targets, the 15% target, we assumed 150 basis points was coming from price costs, 100 basis points was coming from fixed cost leverage and 50 basis points that's coming from growth in high-margin products. The improved mix of the portfolio.
And so I think in terms of what you're seeing in our margins so far, a lot of the margin improvement you've seen has come from the price costs and come from the improved mix benefits. That's just to say there's still there's still a lot of room to go on the fixed cost leverage piece as we move forward on the piece, and that's about leveraging our efficient fixed cost base with incremental volume as we grow.

Doug Dietrich

And David, I think that to also answer part of your question is yes, it's both. While we're seeing costs normalize or even capturing some cost declines, we're able to continue to to price with strength. And so as you saw, we had some favorable costs and I think net prices of $3 million.
So there are pockets of where in our base products, we are increasing price because we're producing more value and the mix is coming from products that are higher priced, but they're also higher value, higher margin and the cost pieces there just mentioned.
So I think we're putting that chart up there. It's first chart to show you that where the margins coming from is exactly where we told you would come from a year and a half ago in our targets and it's coming in that kind of ratio as well. And as we mentioned, we think there's more to go as these higher-margin products continue to grow.

David Silver

Okay. Very good. Thanks for the color there. And I did want to ask you a little bit more, if I could about floaters. Earlier this year, the EPA did that on content limits and time lines, which I consider very important milestones. And in your prepared remarks, you did touch on activity levels, but I am kind of curious about what has happened or is there an inflection point interactions and activity since the EPA has finalized the limits of the setup timeline.
In other words, is a certain subset of your potential end market. Moving more quickly to tried to take advantage of it improved pattern of improved technologies or it has the level of engagement? In other words, is there an inflection point since the finalization of the EPA rules? Or is it more just a steady increase just related to overall interactions. So any inflection points in on the customer side, customer engagement side since the finalization of the EPA rules?

Doug Dietrich

Sure. Let me I'm going to pass over to Brett. I guess, David, we've seen we've seen certainly seen a higher level of interest and activity from the color you're looking for the inflection points to when does this thing become not really huge. I think we're on the we're on that path. That path is going to take some time. But yes, we have seen some increased interest increased activity. Let me take you through some of that cold tumor.

Brett Argirakis

David, thanks for the question. And David, as you know that this regulation, it is a five year process. So that takes us out to 2029. But absolutely, we are generating an increased level of inquiries. We've had over -- I think we've mentioned last quarter, we've had over 100 pilot programs running. We are seeing acceleration with local state and federal agencies. In fact, we've been invited by the USEPA. And we're currently negotiating with them on a collective research and development agreement and hope to finalize that shortly. And we're actively working with the EPA on five utility pilots that are being supported under the bipartisan infrastructure law and EPA technical support.
There's a there's utilities that are participating in this program, which will evaluate future cost removal from various medias, of course, gas ion exchange and our floors in addition, we have four active full-scale drinking water systems running in four additional full-scale drinking water systems that are pending this year. Internationally, we've also seen an uptick in active piloting of Flurizan work in various European countries to remove these loss from drinking water.
And so based on our actual performance and highly piloting feedback, we're really confident in the full reserve and we expect this to to continue to move forward the inflection point, not not sure when that will happen. We're seeing it in a slower process to prove out the product and then over time we should we should see revenue start to correct.

David Silver

And then just a brief follow up on that, Brett, but you did touch on international interest in your prepared remarks or in Doug's prepared remarks, is it your expectation that the content limits will be as stringent as the U. S. more stringent was stringent? What is your sense to how Europe might proceed relative to how pay for Europe or other geographies, how they might proceed relative to what what the US EPA has done?

Brett Argirakis

Yes, sure. Sure, David. I know I'm not sure where it will end up, but I suspect it will be fairly similar to the US. We're seeing it in some some responses in various countries. But as far as the awareness of taxes, my guess at this point is similar.

Doug Dietrich

Yes, the US EPA guidelines are kind of the lowest detectable limits in our parts per trillion. So we'd expect that to be probably similar around the world. But nonetheless, our floors are bought and sold and is capable of removing the cost of those left. And so and regardless of what the and the guidelines are or the regulation is we've got a great product to be able to take it down to no detectable. It was technical.

David Silver

Okay, fine. Thank you for that. And the last question I have for for DJ. , and it would be maybe to just pick apart the specialty additives performance just a little bit. So we've had a I think this is the last quarter of kind of apples to oranges with the BMI revenues included in the prior year, et cetera. But if I strip it out, there's still kind of you know, two consecutive quarters of maybe mid single digit revenue growth, and I'm kind of scratching my head. And I'm wondering, is that growth is that volume related from either start-ups or ramp-ups of new satellites? Is it pass through of higher cost or is it actually passed through lower costs and the volume growth is higher, but just how would you I'm thinking of the relationship between now revenue growth on an underlying basis and profitability from PCC in the current environment or satellites in the current environment? Thanks.

Brett Argirakis

Yes, so thanks for the question, David, on just a minor and setting of the baseline BMI eyes, there's another quarter where BMI was was in our results. So fourth quarter is when it was removed. But such as real meat behind your question, I would say that there's two things driving that. The first is the paper and packaging satellites that have come online. So this year, we brought on one in China that was on top of a couple of others that came in last year.
And then as Doug had mentioned in his prepared remarks, we've got another three that are in construction. And so all of those are contributing to this. There is also one of the items that's also under construction that we announced earlier is a conversion to new yield wall that would not show you anymore volume or revenue per se would show an increase in margin as we convert to these more value-added products so that that's also helping in those regard.
And I'd give that as an example, there are several other examples that would contribute to that. The other our GM performance that we've got, David is our West Coast operation has had terrific box. And so there's it's it's mostly through the construction industry, but it's also just in general, a great performance by that plant and our on some product modifications that we've made that meet the market needs. So that's also contributing to the volume growth as well.
So one more quarter for the comparisons of BMI, steady growth coming from the paper and packaging satellites. Lucerne Valley continues to perform quite well and the pipeline for the paper business is extremely strong. So I'm hoping that they'll be saying the same sorts of things as we talk in the quarters to come.
I would say the pipeline, Scott, a couple of dozen opportunities in a mix of packaging and paper probably 30 plus% of those opportunities of packaging. Quite a few of them are new yield opportunities and so on. So long term looks pretty strong.

David Silver

That's great color. Thanks very much.

Operator

Mike Harrison, Seaport Research Partners.
And then just just one more quick one for me. Kind of following up on David's question on the Paper PCC business. I'm just curious, do you have some contractual pricing mechanisms within that business and there were several quarters if we go back to a couple of years ago where costs were going up a lot faster than pricing. Your margins were being negatively impacted by that at this point, have you recaptured those higher costs and you've got margins back at a normal level? Or are you at a point right now where costs are actually moving lower while prices are stable or still moving higher such that you're getting some unusual strength in the margin performance of that paper PCC business?

Erik Aldag

Yes, Mike, this is Eric. I would say we're back to kind of normal path through cadence. And in fact, and are pricing with European energy rates coming down. Our people, our PCT. are for paper and packaging pricing. It came down a bit in the quarter, down $9 million range. So absent that, our overall pricing would have been a little higher, but it's now more of a normal kind of cadence for the price pass-through mechanisms from that business.

Doug Dietrich

Yes, a couple of dynamics, Mike, that some have happened. You know, historically, I would just reiterate here that these prices and some of our older contracts are set on an annual basis or semiannual basis as they've renewed over the past several years, we've changed that to a tighter alignment with those costs, whether it's a quarter and sometimes a month or so. We saw some of that delay on the way up, and we had some of that lag on the way down. But as Eric mentioned, we're largely through that. I think now there's maybe some regional ups and downs that are happening. But that's a normal cadence right now. And I think you're seeing what's really reflecting the normal margins of this business. That said we have some new products coming out like New York, we got some packaging and those can tend to generate higher margin. So we have some upside there in the future.
All right. Very helpful. Thanks very much. Thanks.

Operator

At this time we do not have any further questions. I would like to turn the call back to Mr. Peters for any closing remarks.

Doug Dietrich

Everyone. Thank you very much for joining the call today. We apologize for any technical issues that cause for some of you. At some point, what we will do is make sure that there's a very clear replay for you posted on our website and make sure that the transcript of reflects that clarity. Thank you very much for joining today, and we'll talk to you again at three.