Minerals Technologies Is Prepared To Navigate Current Headwinds (NYSE:MTX)

Sep 21, 2023

AndreyPopov

Minerals Technologies (NYSE:MTX) is one of those businesses that I consider any conservative investor can buy and hold for the long term as the company is highly profitable, operates in several key markets, and cash payout ratios are very low while debt is widely manageable. Furthermore, its products are essential to a wide range of industries and net sales have shown to be very stable over time.

Despite these good aspects, the company is currently facing a set of headwinds that have led to a 31% devaluation in its share price. Inflationary pressures, increased energy and freight costs, severe cold weather in the Western United States, and a rebound in COVID-19 cases in China are negatively impacting profit margins significantly. Also, weaker economic conditions in China and Europe, higher customer inventories, and a stronger-than-usual dollar are starting to slow down sales.

Despite this, I believe that the current fall in the share price represents a good opportunity for shareholders with a long-term horizon as these headwinds appear to be, in my opinion, temporary due to their direct link with the current macroeconomic context. Furthermore, the company has been successfully deleveraging its balance sheet while making strategic acquisitions, has enough cash reserves to weather short and medium-term inflationary pressures and recessionary risks, and generates enough cash from operations to continue paying down its debt pile in the long term while making further acquisitions.

Minerals Technologies is a global developer and manufacturer of a wide range of specialty mineral, mineral-based, and synthetic mineral products, and a supplier of supporting systems and services operating for a wide range of industries, including metal casting, household, personal care, paper and packaging, building, paint and coatings, glass, steel, non-ferrous metal, ceramic, polymer, food, automotive, and pharmaceutical. More recently, the company has been penetrating the pet care industry by making strategic acquisitions and will restructure its business segments into two: Consumer & Specialties and Engineered Solutions. The company was founded in 1968 and its market cap currently stands at $2 billion, employing over 4,000 workers worldwide.

Minerals Technologies logo (August 2022 Investor Presentation)

Until now, the company operated under three main business segments: Performance Materials, Specialty Minerals, and Refractories. Under the Performance Materials segment, which provided 53% of the company's total net sales in 2022, the company supplies a broad range of bentonite-based and synthetic materials for consumer-oriented and industrial markets and for non-residential construction, environmental remediation, and infrastructure projects. Under the Specialty Materials segment, which provided 31% of the company's total net sales in 2022, the company manufactures synthetic precipitated calcium carbonate and processed quicklime, and mines mineral ores for processing and selling natural mineral products, mainly limestone and talc. And under the Refractories segment, which provided 16% of the company's total net sales in 2022, the company manufactures monolithic and shaped refractory materials and specialty products, as well as providing services and selling application and measurement equipment, calcium metal, and metallurgical wire products.

In 2023, the company will restructure these three segments into two: Consumer & Specialties, which will manufacture technologically enhanced products to consumer-driven end markets and industrial goods, and Engineered Solutions, which will provide advanced process technologies and solutions that are designed to improve our customers' manufacturing processes and projects.

Using 2022 as a reference, 53% of net sales are generated by operations within the United States, whereas 23% are generated in Europe and Africa, 16% in Asia, and 7% from Canada and Latin America.

Currently, shares are trading at $59.91, which represents a 31.46% decline from all-time highs of 87.41 on June 1, 2021. This has opened the opportunity to acquire shares at a price that I consider reasonable given the company's good long-term prospects, but first of all, it is very important to look back at the latest acquisitions in order to understand the current situation of the company (characterized by a process of deleveraging) and the path it is determined to follow. Later, I will analyze the company's balance sheet, the performance of its operations, and the associated risks.

In order to understand the current situation of the company, it is very important to understand the major acquisition that took place in May 2014, when it acquired AMCOL International Corporation, a leading international producer of specialty materials and related products and services for industrial and consumer markets, for ~$1.7 billion. After this acquisition, the company entered into a new deleveraging phase, which caused stagnant net sales as paying down its big debt pile became a top priority.

But despite the deleveraging phase, the company made more acquisitions since the acquisition of AMCOL, although these have been minor in comparison. In May 2018, the company acquired Sivomatic Holding B.V., a leading supplier of premium pet litter products in Europe with manufacturing facilities in the Netherlands, Austria, and Turkey. The acquired company's history dates back to 1924 and generated revenues of €73 million in 2017. After three years, in July 2021, the company acquired Normerica, a Canadian leading supplier of premium pet care products for both branded and private labels in North America established in 1992. The acquired company generated revenues of $140 million in 2020 and positioned Minerals Technologies as the largest private-label cat litter manufacturer in North America. More recently, in April 2022, it acquired Concept Pet for $28 million in order to expand the company's presence in the European pet care industry.

As we can see, the management is determined to enter the pet-care products industry, which is expected to grow at a CAGR of 5.1% from 2022 to 2030. Therefore, these acquisitions have the objective of not only increasing sales but also their growth.

Net sales increased by 69.42% in 2014 as a consequence of the AMCOL International acquisition and, since then, have remained somewhat stable as the company has constantly used its excess cash to pay down debt and finance share buybacks along the way. Also, net sales of new products developed over the past five years increased by 42% to over $300 million, which shows the company has great R&D capacity.

Recently, the coronavirus pandemic crisis caused a net sales decline of 10.95% in 2020 due to slower business activity in several end markets, but they recovered in 2021 as they increased by 16.52% compared to 2020.

Minerals Technologies net sales (10-K filings)

2022 was also a good year as net sales increased again by 14.38% to $2.13 billion as the company launched 63 new products, and that's despite a $100 million foreign exchange headwind due to a stronger-than-usual dollar. During the past quarter, net sales increased by 6.44% year over year but declined by 6.33% quarter over quarter, which shows that the upward trend could be ending due to weakness in construction and steel end markets, and slowing economic conditions in China and Europe. Also, customer inventories were higher than a year ago, which has provided them with more timing capacity. In this sense, some orders that were expected for the past quarter have been postponed to 2023.

Rising net sales and declining share prices have caused a recent decline in the P/S ratio to 0.924. This means the company generates net sales of $1.08 for each dollar held in shares by investors, annually.

This ratio is 31.62% lower than the average of 1.352 of the past decade, and 59.62% lower than the peak of 2.288 in 2014, which means investors are placing less value on the company's net sales. This is due not only to the apparent slowdown in demand amidst growing fears of a global recession but also to a deterioration in margins as a result of current inflationary pressures.

The company has enjoyed gross profit margins of over 25% during the past few years, and EBITDA margins of over 15%. Higher raw material, freight, and energy costs caused a margin contraction in 2019 and the company implemented a restructuring and cost-savings program also due to supply chain disruptions in the Western United States and slowing demand in the U.S. Metalcasting market, as well as generally weaker demand in China and Europe. These efforts included workforce reductions and cost savings, as well as new product development and acquisitions.

Margins slightly increased in the 2020-2021 period but started to decline during the second half of 2021 due to inflationary pressures and higher freight and energy costs. The company raised the prices of its products in the Specialty Minerals segment from 3% to 10% in January 2021 in order to offset rising costs caused by these inflationary pressures, but margins have continued to fall in 2022 as they weren't enough to offset rising costs due to continuous high inflation rates. In this sense, the trailing twelve months' gross profit margin currently stands at 21.88%, and the EBITDA margin at 13.87%.

Furthermore, the company reported gross profit margins of 19.25% during the fourth quarter of 2022, and EBITDA margins of 12.41%, which shows inflationary pressures are depressing margins even more as of recently due to lagging contractual price adjustments and higher mining and production costs due to the severe weather in the United States. In this regard, margins will likely remain depressed as long as inflationary pressures remain, but the good news is that the company's operations are widely sustainable as the cash payout ratio remains at very low levels.

It is very important to take into account that passing the increase in costs to customers takes time and that the macroeconomic context is still characterized by very high inflation rates at a global scale. During the last quarter's earnings call conference, CEO Doug Dietrich stated that further price adjustments are still taking place. But nevertheless, margins are expected to remain lower than usual in the coming quarters despite current efforts to adjust product prices.

The company's long-term debt reached $1.5 billion in 2014 as a consequence of the AMCOL International acquisition and has steadily declined since then. Nevertheless, the recent acquisitions of Normerica and Concept Pet, as well as share buybacks have caused a slight increase to $1.06 billion.

Furthermore, the company currently holds $247 million in cash and equivalents and has increased its inventories by around $100 million since 2021 to $348 million, which will give the company ample room to keep deleveraging the balance sheet in the short to medium term.

But in addition to high cash and inventory reserves, the reduction in long-term debt has released some resources as the company's total interest expenses have declined from over $60 million per year in 2015 to $44 million currently.

In this sense, high cash and equivalents and inventories and declining interest expenses make the company's debt load largely manageable (and reducible), especially considering that the company uses a small portion of the cash generated from its operations to cover the dividend and interest expenses.

The company pays a fixed quarterly dividend of $0.05 per share since the acquisition of AMCOL International in 2014, and this has remained unchanged ever since. The dividend stagnation is explained by the fact that the management is trying to reduce interest expenses by reducing long-term debt in order to reduce the cash payout ratio, which should give room for significant dividend raises in the long term (or further acquisitions).

This makes the dividend yield as low as 0.33% at current share prices. Although it is true that the said yield is very low, this is because the amount of cash used to pay dividends is very low in order to achieve very low cash payout ratios as the deleveraging phase is still going on. To calculate the cash payout ratio, in the table below I have calculated what percentage of the cash from operations has been allocated each year to the payment of the dividend and interest expenses. In this way, we will be able to see the company's ability to cover both expenses through actual operations.

As we can see in the table above, the cash payout ratio has historically been very low due to a very low dividend payment and very manageable interest expenses, as well as high cash from operations. It can also be seen how this ratio has decreased over the years thanks to the reduction in interest expenses, which enabled cash payout ratios below 20% in 2020 and 2021.

Despite this, inflationary pressures during 2022 have caused a significant reduction in cash from operations, which has brought the cash payout ratio to almost 50%, making the dividend much less appealing. Nevertheless, it is important to note that although cash from operations was low at $105.7 million in 2022 (compared to $232.4 million in 2021), inventories increased by $51.1 million and accounts receivable by $36.2 million during the year while accounts payable declined by $2.3 million.

As for the past quarter, cash from operations was $42.1 million (vs. $69.3 million during the same quarter of 2021) and inventories increased by $4.2 million, but accounts receivable declined by $26.6 million while accounts payable only declined by $16.2 million, which shows the impact of current margin contraction in the company's cash generation capacity.

In addition, we have to add capital expenditures that have historically danced between the $60 million and $85 million range.

Therefore, new product launches might have to be financed through debt in the short to medium term, or these could be reduced in order to preserve as much cash as possible amidst current headwinds.

The company had been performing share buybacks of $75 million every year since 2018 in order to expand the position of the shareholders over time by reducing the total number of shares outstanding. The latest one took place in October 2021 when it announced a one-year share buyback of $75 million after a prior one-year share buyback of the same amount. But in 2022, no new share buyback plan was pronounced.

This is understandable given the much tighter cash from operations due to lower profit margins. In this sense, new share buybacks should not be expected until the macroeconomic context is more favorable for the company, that is, until demand in Europe and China recovers and inflationary pressures are significantly reduced.

While it is true that Minerals Technologies is poised to withstand inflationary pressures for a long time and a potential recession thanks to its historically high profit margins and high cash and inventory reserves, there are certain risks that I would like to highlight.

Certainly, Minerals Technologies' balance sheet is quite robust thanks to a debt pile that has been significantly reduced in recent years, historically high profit margins, a very low cash payout ratio, and high cash and equivalents and inventories. Despite the recent drop in profit margins as a result of inflationary pressures, severe weather conditions in the United States, and weaker demand in China and Europe, the company has the resources to endure the current situation for a long time, especially considering that cash from operations remains positive despite current headwinds.

Given the direct link of the deterioration in margins with the current macroeconomic environment, I consider these headwinds to be temporary in nature. Nevertheless, I believe that a wise approach for investors interested in Minerals Technologies is to start averaging down from current share prices because if current headwinds persist for longer than expected (or even intensify) or recessionary risks materialize, the share price could continue to fall significantly, opening the door to the opportunity to acquire more shares at lower prices than current ones.

What I would like to emphasize is that the investors' profile that I consider most suitable for Minerals Technologies are long-term dividend-focused investors as the company has a long track record of success and operates in several key industries, and in my opinion, the dividend has very high upside potential in the long-term due to the (very) small amount of cash that the company currently devotes to its payment given the management's goal of paying down the company's current debt pile.

This article was written by

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