Minerals Technologies Inc (MTX) 2002 Q3 法說會逐字稿

Thank you for standing by and welcome to this Minerals Technology, Inc. third quarter 2002 earnings release conference call. Today's call is being recorded. At this time I'd like to turn the conference over to the Chairman, President and Chief Executive Officer, Paul Saueracker. Mr. Saueracker, please go ahead.

Thank you, operator. n good morning and welcome to the third quarter, 2002, Minerals Technologies analyst conference call. Minerals Technologies is again able to report growth in net sales and net income, despite volatility, turbulence and uncertainty in the economic environment. Our steady progress reconfirms the validity of our business model, but introducing new and innovative products, even in slow growth or cyclical industries, can provide for relatively steady and predictable growth in revenue and income.

MTI achieved net sales in the third quarter of 2002 of 192.1 million dollars, an increase of 10 percent verses the third quarter of 2001. It should be noted that this growth was spread across all product lines. PCC, Process Minerals, and refractories. Despite a number of factors that adversely affected our operating income in the third quarter, total net income of 14.2 million dollars was up five percent verses prior year, delivering earnings per diluted share of 70 cents.

Following my introduction, [Ken Massamine], Senior Vice President (inaudible) will provide more detail on the progress we have made in the PCC product area. Howard Crabtree, Senior Vice President, [Mintech], will report on the refractory segment of our business, and Neil Bardach, our Chief Financial Officer will provide a brief financial summary.

Following Neil's presentation, I will conclude with a few remarks, and then open the floor to questions. And so before proceeding further, I need to remind you that on page six, about 2001 10K, we list some of the factors that may affect future results. Any forward working statements by me or other members of management are subject to these cautionary conditions. As I indicated in my opening remarks, our total worldwide sales for the third quarter are up 10 percent, a performance that I am quite proud of, in light of the difficult business environment.

By product line, sales for PCC were up nine percent. Process minerals up nine percent, and refractories up 12 percent. I am also pleased that the sales growth on the specialty minerals side of the company resulted in a ten percent growth in SMI's operating income, to 16.9 million dollars, 12.8 percent of sales, verses 15.4 million, 12.7 percent of sales in the prior year.

However, despite this strong performance in SMI, a number of issues primarily in the refractory segment adversely affected operating income in the third quarter. Operating income for MTI, of 21.6 million dollars, was two percent below prior year. As a percent of sales, our operating margin for the third quarter was 11.3 percent of net sales, verses 12.6 percent in the third quarter of last year.

A number of atypical costs and expenses in the refractories business area reduced the operating margin in that segment to 7.8 percent of net sales, verses 12.3 percent in the prior year. Items that adversely affected the business included the difficulties in achieving the full benefits anticipated from the Martin Marietta refractories acquisition. In particular, these difficulties included the integration of production facilities in North America, and higher expenses associated with the conversion of electric (inaudible) to [Mintech] Systems.

Loss of volume at several highly profitable BOF shops due to shutdowns, also contributed to the reduction in operating income. Howard Crabtree will address in detail the causes of this decline. We are confident, however, that we have resolved the operational issues and the refractory segment is expected to improve operating margins by two percentage points in the fourth quarter.

Additionally, the accelerated depreciation we are taking on certain assets associated with international paper, adversely affected SMI's operating income by approximately 700,000 dollars, which translated into a reduction in earnings of about two cents per share. Control of expenses continues to be an important element in leveraging income performance. Our 10 percent increase in net sales was accompanied by a three percent increase in total expenses.

We reduced our expense ratio for the third quarter to 12.9 percent of net sales, from 13.7 percent in 2001. While I shall not dwell on the details affected PCC and refractories, which will be reviewed by (inaudible) Howard, I would like to point out some highlights. Demand for paper PCC, MTI's largest product line continued to grow in the third quarter. In North America, while production of printing and writing paper was up an estimated 2.4 percent, verses prior year third quarter, paper PCC sales were up five percent, as efficient mills utilizing PCC outperformed the market as a whole.

On a global basis, growth is coming from both stronger volumes at existing satellite plants, up seven percent, and the contribution from the ramp-up and start up of new facilities, which brought the total third quarter volume growth of satellite PCC to 10 percent. Particularly noteworthy is the increased use of PCC for ground wood paper. In addition, retrofitting of the [Hermal] plant has allowed us to accelerate the development of (inaudible) A40, a higher performing coating grade pigment, which will be initially commercialized in the European market.

At this time I feel I should mention the situation on international paper. We are continuing to supply all of IP's operating locations where satellite PCC plants have been installed. Although discussions between our two companies continue, there have been no material developments affecting our supply position during the third quarter. I continue to believe that MTI offers the best value proposition available to the paper industry, and I am hopeful that IP will reconsider its policy in light of the value we continue to offer.

Especially PCC side, our sales increased four percent, primarily as a result of increased volumes at our [Brook Haven] plant. However, this facility is still operating well below capacity levels. And the overall profitability of the product line continues to be effective by weak industry conditions, and competition from low cost GCC in the calcium supplement market.

Sales of the refractory segment were up 6.3 million or 12 percent compared to the third quarter of last year. Although sales of refractories materials and services were flat, sales of metallurgical product line were up 77 percent. And sales of our (inaudible) unit, which offers advanced measurement and instrumentation technology to the steel industry, were up 63 percent.

Unfortunately, despite the sales increase, third quarter operating margin in the refractory segment decreased by 1.9 million dollars or 29 percent. This was primarily due to inventory, production, and quality issues, mainly at [Mintech's] River (inaudible) plant, totally 1.3 million dollars. And application systems start up problems and a number of electric furnace accounts obtained through the Martin Marietta acquisition, which cost an estimated 300,000 dollars in the third quarter.

These start up problems have been largely resolved. In addition, product mix changes, that is to say, lower sales of our highly profitable blast furnace and [BOF] product lines, have also adversely impacted margin. Again, Howard will discuss these factors in more detail. The processed minerals product line benefited from the strong residential construction market.

Third quarter sales were up nine percent, primarily due to the polar minerals acquisition, reaching 24.5 million dollars for the quarter. Operating income was up substantially, both ground calcium carbonate and talc performed well. Our specialty mineral segment acquired polar minerals on September 9th. This tactical acquisition of a Midwestern minerals processor with locations having direct water transportation, will provide access to low cost (inaudible) from a variety of sources, that will enable us to gain an increased share of the Midwestern market, and secure increased participation in appearance grade plastics. A market, which could not be serviced effectively from our Barracks, Montana plant.

Polar had annual sales at the time of acquisition of approximately 24 million dollars. And we expect this acquisition will strongly augment Process Mineral's performance in the fourth quarter and in 2003.

We continue to invest in this [inaudible] opportunity. Major modifications to our [sinsel] production facility located in Woodville, Ohio were recently completed. Our first large scale trial in the flat glass segment is scheduled to commence later this month, and last six to eight weeks, consuming an estimated 3,000 to 4,000 tons of [sinsel]. Though many of our earlier trials have been in lower volume segments, including fiberglass and specialty glass, this will be our first trial at a large volume facility with a highly efficient regenerative glass furnace.

As a result of extensive evaluations in our laboratory, of the customer's glass batch formula, we are highly optimistic with regards to the results of this trial. Furthermore, additional full-scale trial commitments have been secured for both this quarter and the first quarter of 2003. Although we continue to get positive test results and trial commitments, getting a major industry to make a fundamental change in it's manufacturing practices is a tortuously slow process.

I will now as [Ken Massamine] to provide us with details related to the PCC portion of our business. Ken.

Uh, thank you Paul. Uh, let me begin by providing a summary of current market conditions, followed by highlights of our business results for the third quarter, and some expectations for the remainder of the year. Overall paper shipments in the U.S. reached a low point in the third, in the late third to fourth quarter of last year, and have increased each quarter since then in response to improved business activity and the replenishment of paper inventories.

In the just completed third quarter, U.S. Printing And Writing's paper shipments have gained an estimated 2.4 percent, versus the comparable low point last year. Although Printing And Writing paper shipments are expected to decline somewhat in the current quarter, we are cautiously optimistic about next year in response to strengthening economic conditions.

Shipments, as well as demand, for uncoated presheet, our most important market segment, continue to show some improvement. Operating rates have averaged 91 percent so far this year in response to very large reductions in capacity. Producer inventories are low and near low, near levels not seen since 1997. North American coated paper demand is seasonably robust. Many mills are reporting backlogs of five and six weeks with coated ground width demand faring slightly better than coated presheet.

Both markets are playing catch up due to the economic uncertainty over the summer, the implementation of the recent postal rate increases, as well as precipitous drops in magazine ad pages, catalogue circulation, and commercial printing.

While we anticipate the current surge in coated paper demand will subside, shipments for next year are expected to increase about four percent, in line with an improving economic environment. Internationally, Western Europe and Asia continue to struggle with their own economic issues. The underlying improvement in the European paper markets appears more fragile than earlier hoped for. Their weak economies and lack of advertising continues to affect all publication grades for magazines to catalogues. However, given a moderate improvement in the economic climate, we anticipate increasing paper shipments in the fourth quarter and into next year.

Our growth so far this year has out paced the slight improvement in the global paper industry. Through nine months, MTI shipped seven percent more PCC tonnage than last year, while the global printing and writing industry grew an estimated one percent during the same period. Our growth being driven primarily by previously announced expansions and ramp ups at some of our existing satellites. Along with improving regional business, particularly in North America.

MPI's total PCC sales for paper and non-paper applications in the third quarter are up nine percent over the prior year's third quarter, from approximately 99 million dollars, to almost 108 million dollars. First nine months total PCC sales likewise gained six percent, from 296 million dollars to almost 314 million dollars. Year to date, foreign exchange continues to be a drag on sales. Overall the negative impact represents 1.4 million dollars, or .4 percent of sales growth.

On a same score basis, sales tonnage of paper PCC from existing satellites increased seven percent in the third quarter, compared to the year ago period. As outlined in previous quarterly conferences, we have embarked on a comprehensive set of strategic initiatives to take advantage of global opportunities occurring in several segments within the paper industry.

We believe these world wide initiatives represent a balanced marketing approach both geographically and across all major paper segments. In particular, our growth strategy to penetrate the paper coating market remains on track in both Europe and North America.

The recently acquired merchant PCC facility at [inaudible] Belgium, and our new [Walsom] German facility will play key roles in our coating initiatives. In North America, Mississippi Line, our new alliance partner, is preparing for commercial start up of coating grade PCCs, which will allow us to penetrate the Midwestern and southern coated paper at paper board markets.

Our overall initiative into the ground width paper market segment continues to gain momentum in super calendered and directory applications encompassing both mill conversions and satellite expansions. In the uncoated presheet paper market, we are in the process of introducing third generation successors to the [Albacar] and [Albafill] family of PCC products.

In all these market areas, after several difficult quarters for the paper industry, commercial trial activity is either planned or under way. When completely executed, we expect the business strategies now in place will provide us with the continued long-term growth momentum on a global basis. Now, let's briefly turn our attention to specialty PCC for non-paper applications.

This product line continues to experience a very difficult market environment. Nevertheless, we are encouraged by the improved performance of our [inaudible]. Sales of our special TPCC products for plastics and sealants have increased in the third quarter over the comparable period last year, and are consistent with our marketing strategies. In conclusion, we are confident that our strategic initiatives in paper, paperboard, and specialty markets will support our long-term growth targets. We are proud of our consistent and dependable PCC financial performance, and remain optimistic that significant ongoing projects will culminate in new, important PCC business.

Now, I will turn the microphone over to Howard Crabtree who will review [Mintech's] business performance. Howard.

Thank you, Ken. [Mintech's] net sales in the third quarter, of 60 million dollars, were up 12 percent versus the prior year's third quarter. This growth was primarily the result of the acquisition of the Rhinestone Metallurgical Product business, but we also saw strong growth in the [inaudible] sales in both Europe and Latin America, and in our lathe and measurement equipment product line.

Unfortunately, this sales growth has been accompanied by a continued, unacceptable decline in operating income that must be reversed.

In the third quarter, operating ink in the 4.7 million dollars was 1.9 million dollars, or 29 percent below the 6.6 million dollars earned in the third quarter 2001. The operating income ration dropped from 12.3 percent of net sales last year, to 7.8 percent. I will attempt to explain to you what is going well, and then focus on the problems that are affecting some portions of our business, and the solutions we have developed to address those problems.

Geographically, [Mintech] showed strong improvement in sales and operating income in both Europe and Latin America. Operating income in Europe increases substantially due to a large increase in highly profitable systems revenues. Canada with essentially flat sales compared to a year ago also turned in a significant increase in operating income. Our problems were concentrated in the United States and Asia.

Steel is a global market. Integrated steel production is shifting from the United States and Europe to developing countries. In particular China, Eastern Europe and Latin America. In the United States, steel producers are importing slabs from the developing countries. Growth in domestic skill production is primarily in the electric furnace segment, which uses scrap metal. While there is some short-term improvement expected in BOS production as ISG, the success of the LTV ramps up. The long-term trend is still toward the electric furnace segment. That was the primary rationale behind our acquisition of [Martin Marietta Factories] which gave us significant position in this segment.

The segment has historically been less profitable for us than the BOF segment, but it is where growth in North America is going to occur. We have shown in Europe that we can be very profitable in this segment by applying our new technology. And we intend to use the same model in the United States.

Although the acquisition allowed us to meet our strategic objective of improving our position in the electric furnace segment, other expectations of the acquisition were not met. And this has largely lead to the problems we have had in the United States throughout 2002.

Expectation number one was that we would be able to rapidly consolidate production between [Mintech] and [Martin Marietta] plants resulting in lower overall costs. By late 2001 we had consolidated all production of preformed shapes for the steel industry in the acquired River Rouge plant. Unfortunately the plant did not have the capability to produce complex products resulting in severe quality problems.

To retain business, we had to use toll manufacturers. Plant variance and inventory problems arising from these difficulties caused an increase in product costs of around 1.3 million dollars in the quarter.

Expectation number two was that the down turn in the United States steel industry that began in late 2000 would be short lived. Unfortunately, the down turn was prolonged, and we lost significant sales because of plant closures and customer bankruptcies that we have not recovered. A significant amount of the lost sales was in our most profitable areas. The blast furnace and the BOF.

While U.S. steel production on a year to date basis finally exceeded 2001 levels in August, and was two percent ahead for the quarter, production of iron and BOS steel has not yet returned to the 2001 level which was in turn 11 percent below the 2000 level.

Expectation number three was that we would be able to introduce the new [Minscan] application equipment that had been very successfully introduced in Europe into the newly acquired electric furnace accounts and make them immediately more profitable. We severely underestimated the resources required for start up, and have to put massive amounts of time and energy into fixing the start up problems. These problems have plagued us for most of the year, and cost us about 300 thousand dollars in the third quarter.

Another factor, increasing our U.S. costs in the quarter has been the continued large number of trials and new account start up activity as we grow our business in molten metal handling. When we want, or start a new account, we take still more service personnel from their current jobs to attend the trial, and we have to cover them in their regular jobs with overtime.

Now let me turn to the things that will bring about improvement.

Steel production in the United States has finally turned around. And we expect to see a continuing improvement compared to prior year. In particular, the ramp up of ISG is improving our BOS sales. We have overcome our [Minscan] problems and these accounts are now operating at close to target levels. In fact, we have developed an improvement to the equipment that will benefit the business in the United States and should also improve the already excellent performance of our European installations.

We have reorganized the work force, added process controls and instituted new operating procedures at the River Rouge plant. Which have brought quality to an acceptable level. Where possible, we have brought tolls production back in house. The bleeding has stopped, and our inventory problems are behind us.

In Asia, our concentration in Japan, and the loss of a major steel account there due to contract expiration caused sales to decrease by 25 percent. When coupled with increases in expenses due to trial activity in China and Japan, and costs associated with the recruitment of the new regional business head, this region reported an operating loss. However, the new business head for Asia is an experience manager, will place initial emphasis on the important China market.

While over 52 percent of the steel production in the United States is made in mini-mills, over 75 percent of China's huge production is made in BOF vessels. Historically, our most profitable refractory products have been sold to the BOS segment of the steel industry, making a compelling argument for reallocating resources toward development of the Chinese markets. [Mintech] is positioning to sell to adapt to the shifting market. Meanwhile, a new technology will also position us well for a future shift in mini-mills and ore markets.

We have carried out a restructuring and reorganization of our Japanese enterprise. We have brought focus onto new systems and products with several trials planned for the fourth quarter. We expect shortly to reverse the decline in sales and profitability.

[Mintech] has very successfully integrated the [Furtron and Weinstal] acquisitions into it's business. We did a poor job of integrating [Martin Marietta] factories. However, it will be a very good acquisition for [Mintech] providing us with expanded markets for our technology. For example, we will be launching [Scantrel] a fully automated robotic maintenance system at an electric furnace conference in the United States next month. This follows a very successful launch in Europe earlier this year. We have exciting new technologies and products. And we will make [Mintech] into a profitable growth business.

The turn around has started, and I expect operating margin for the fourth quarter to improve by two percentage points. Neil.

Thank you, Howard. Uh, you have heard of the, uh, the descriptions of conditions in our business. I, I shall now describe how that information is reflected in our consolidated results.

Consolidated net sales increased 10 percent for the quarter. Both of our segments had excellent sales growth for the quarter, albeit for different reasons. The nine percent growth in specialty minerals was driven by organic growth in paper PCC, specialty PCC, and processed minerals. With approximately one point of growth added by the acquisition of polar minerals. Conversely, the 12 percent growth in refractory segment was mainly contributed by the acquisition of [Reinschtal]. Our refractory segment growth for the quarter came primarily from our metallurgical and laser scanning device product lines. While our overall results for the quarter were satisfactory, our performance at the gross margin line is clearly disappointing.

Gross margin increased by only one percent on a ten percent increase in sales. In the specialty minerals segment, gross margins were affected by increased costs for developing the coating grade PCC market. Expenditures from which we expect long term benefits, and increased depreciation expense with satellite plants at IP mills.

In refractories, Howard described several issues that lead to gross margin deterioration. Loss of high margin DOF accounts, plant variance and inventory problems in North America due to ineffective plant consolidations. Short term problems with new [Minscan] installations, and on a more positive note but nonetheless affecting gross margins, significant trial activity in molten metal handling applications.

Marketing and administrative expenses for the quarter increased only six percent on our ten percent sales increase. Again, the results in our two segments were quite different. In specialty minerals, these expenses declined from last year's third quarter largely from the effect of last year's restructuring. And the refractory segment, marketing expenses increased due to significant product introduction activities, while increases in administrative expenses were related to organization changes in the U.S., and in Asia, and to increased bad debt reserves.

Research and development declined six percent from last year, with reductions in specialty minerals partly offset by planned increases in refractories. In total, income from operations declined two percent from the third quarter of 2002. Admittedly very disappointing given the sales increases we generated. Non operating deductions declined by a million dollars for the quarter due to reduced interest expense.

Average borrowings were lower than last year's third quarter, while average rates were relatively flat on our outstanding debt. Our effective tax rate for the quarter was 28 and a half percent. Close to last year's 28.7 percent and equal to our current projection for the full year. To summarize the quarter, sales increased ten percent generating a one percent increase in gross margin. Total expenses grew three percent, leading to a decrease in operating income of two percent.

A substantial reduction in interest expense lead to a five percent increase in net income. And [inaudible] earnings per share increased by three percent to 70 cents per share, compared to last year's 68 cents per share, and were exactly in line with the latest Wall Street consensus estimate. Compared to the weighted average number of shares we had outstanding for the third quarter of last year, our increase in shares outstanding reduced our diluted earnings by one cent in this quarter.

As to overall operating margins by product line, the operating margin in the third quarter of 2002 in our specialty minerals segment was 12.8 percent, a slight increase from last year's 12.7 percent, generating a ten percent growth in operating income. Margins in the refractory segment declined four and a half percentage points in the third quarter for the reasons Howard and I have already described.

I want to reiterate that we expect refractories operating profits will increase in the fourth quarter from this quarter's levels. But we will not reach the margins attained in the fourth quarter of last year. Overall, MTI's overall operating margins for the quarter declined by 1.3 percentage points of sales from last year. Our balance sheet remains very strong. Our debt to total capital ratio declined to 19 percent from 24 percent at the end of 2001, giving us substantial capacity to continue to invest in our growth strategies.

Cash flow from operations year to date has exceeded 80 million dollars, and we have received an additional 30 million dollars from stock option exorcises. We have invested 62 million dollars year to date in acquisitions and capital, and we have repaid 28 million dollars of short-term debt. Year to date, we have repurchased 433,500 shares for treasury at an average price of 40 dollars per share, for a total expenditure of 17.3 million dollars. Our working capital has increased 14 percent from year-end, four points higher than our sales growth.

The four-point differential is due to the addition of working capital from polar minerals with only three weeks of sales included in our results. Depreciation and amortization totaled approximately 51 million dollars. For the full year 2002 we expect spending for capital expenditures and acquisitions to approximate 75 million dollars, while depreciation and amortization should be approximately 70 million dollars. Let me turn the mic back over to Paul for his closing remarks, and for questions.

Thank you, Ken, Howard, and Neil. As you can see, MTI continues to achieve growth in a highly uncertain and volatile economic environment. While production of paper and steel lagged in the first half of the year, production in these segments is now increasing, albeit at a slow rate. We believe that a number of the challenges that affected our results in the third quarter are behind us, and we remain cautiously optimistic with regard to the rest of the year, and expect continued improvements in our departments.

Although the outlook for the world wide economy remains uncertain, we believe that earnings in the range of two dollars and seventy six, to two dollars and eighty one cents per diluted share for 2002 is reasonable. Operator, we are now ready for the first question.

Operator; Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key followed by the digit one. We do ask that you un-mute your phone if you are signaling for a question. Again, that is star one for a question. Our first question will come from John Roberts with Buckingham Research.

Uh, good morning guys. The, um, shift in the, uh, minerals, uh, excuse me, the [Mintech] business sounds like you won't ever get back to your peak margins in that business. I want to check that assumption and ask what a reasonable intermediate term improvement would be beyond the two percentage points for the fourth quarter.

Well that's an excellent question John, and, uh, as we look at the business, as you know, we peaked in 1999, early 2000, uh, in terms of the operating income ratios for the refractory side of the company, the [Mintech] side of the business. And that was in the range of 14 and a half to 15 percent. Uh, we see as Howard mentioned, and I mentioned, a, a couple pin improvement in the fourth quarter. We see as we go into the middle part of next year, additional improvement upon that. And we think that as we get to the latter part of next year, we should be probably in the 12 to 13 percent range as we look at, uh, operating ratios for this company. Uh, and for that segment of the business, rather.

Uh, I think in the environment that we're in with the consolidations taking place in the steel industry, it would be difficult to get back to the 14 and a half to 15 percent range. But I'll ask Howard to, to address that, also. Howard?

Yeah, um, I think the question here is really whether we want to build an infrastructure for growth or not. And, um, you know, I believe we want to grow this business. We are going to have to invest in, certainly in Asia to do that. And I think to, uh, to have a growth business you'll probably, you know, the, the range that Paul is talking about, uh, is, is a good range to expect to be in.

Um, secondly related to that, in China I thought they did fairly regular annual maintenance shut downs and so forth. So I'm wondering whether or not your technologies have as much applicability given the different operating practices you might have there. My guess is having more up time is not as big an issue for them.

It, it has not been traditionally, but it is changing. And, uh, as, as the business changes in China, as the steel mills become much more, um, more like their western counterparts in their approach, uh, they're more and more interested in technology. And, um, uh, I, I'm convinced that we will be able to sell, uh, some of our new technology in our systems into, into that market. We've already, uh, our new regional head has already looked at, uh, uh, the possibilities there. And, uh, he also is convinced that we're going to be able to do that.

But I think, uh, you know, one of the things that we're going to have to do is, is make sure that we have, uh, an immediate established presence there that's capable of, of taking advantage of that market.

And then just lastly, um, it looked like you purchased about 12 million worth of stock during the quarter, so you, you stepped up the activity, uh, as the quarter went on. I, is my perception at least, was your intention to use the entire 30 million that's come in from options, um, to repurchase stock to sort of maintain a balance there?

Uh, John, uh, we have authorization from the board, as you know, to purchase up to 25 million dollars per year. Uh, we purchased as, uh, Neil indicated in his comments, a little over 17 million in, uh, share repurchase so far this year. And we've done that, as you know, on an opportunistic basis. Uh, we certainly, uh, look at, uh, potentially using the remaining portion of authorization as we go forward. But again, it would only be done on an opportunistic basis.

Thank you.

Our next question will come from [Bob Reches] with Bear Stearns.

Yeah, hi. I got a couple, uh, one clarification, and then just one, uh, and a couple other questions. First clarification, did you say that margins were, you didn't expect margins to get back to, uh, prior levels? And if you did say that, uh, I just want, you know, clarification. And then I wanted to know why you, you believe that?

Yeah, what we had indicated that as we, uh, work through the issues that we have experienced, and we expect improvement in the fourth quarter of a couple pins, that we expect additional improvement as we go into the middle and latter part of 2003. But we also, uh, believe that as we invest as Howard properly indicated, to continue to make this a growth business, that we see the margins returning into, obviously the 12, low teens, 13, maybe 13 and a half in that range, uh, operating income into those low tees there.

Uh, but to get back to that, to have 15 percent operating income level, I think is certainly one that would be, uh, would be challenging. Uh, and that's from [Mintech] by the way. You know, we're talking about the refractory business here. Uh, and that's really the, you know, the issue we've look at. As you look at the SMI side of the business, we continue to have very attractive margins on the SMI, SMI side of the business. But the [Mintech] side is the one where we had the significant short fall on the third quarter.

But we see that easily, uh, moving forward as we go through the middle part of 2003.

Okay, uh, I wasn't clear on that. The second thing is, uh, you mentioned something about the [Ipaper], uh, and you know, relationship. It sounds to me like it's just continuing, you guys are continuing to talk, and there's nothing one-way or the other. Is that correct?

To some degree you're right there. We have continued to dialogue with International Paper. We continue to have, uh, a very good working relationship with them at our satellite plants in terms of supplying them with TCC. So from an operational perspective, it's a very good relationship.

We have yet to, in these dialogues, uh, find the key to resolve the issues that we've discussed previously. So, though that dialogue continues, and it's a very cordial dialogue, uh, we have not found a key to unlock the, and resolve the issues.

Is there, I, I just think with that, is there any concern on your part that, uh, there's dialogue, or let's say, the, the one plant that's down, I mean my major concern is that you lose other facilities, obviously, uh, in IP land. Or have, in the dialogue do you, uh, get into all the other, uh, plants that you have with I Paper in terms of what's going on? Because the one, obviously, is the tip of the iceberg, which has us all a little bit concerned.

Right, that, that is correct, uh, that's the one up at Ticonderoga, New York which we have indicated. And yes, the dialogue does, or have a wide ranging, uh, parameter to it as you would expect. Uh, but as we've indicated previously that eve if they follow through on their strategy, uh, the biggest impact to this company would not be until 2007.

Okay, but futures are a concern to all of us.

Absolutely. They are to us, also, by the way.

I, I hope so. Thank you.

And our next question will come from Jeff Sakakis with, uh, J.P. Morgan.

Hi, good morning. Um, can you talk about the difference in the rates of volume growth in PCC for uncoated free sheet versus PCC for coated paper?

Uh, if you look at it, uh, on a percentage basis, if you look at it on a percentage basis, obviously the, uh, growth of PCC for example in, as a [inaudible] and ground wood paper is growing very rapidly at this point. Uh, because that is the segment of the market, as you know, that is accelerating because of market driven quality requirements in that portion of the market.

LWC, Super Calendar Paper directory those, those segments. So that is moving very quickly. Uh, and that would be higher than the, say, a traditional uncoated free sheet [inaudible] portion, where the market may be growing at one or two percent as Ken indicated in his comments. Obviously our growth is, uh, you know, a couple times higher than that, two or three times higher than that, uh, in terms of that segment of the paper industry. But I'd ask, uh, Ken to make a, some additional comments in that area that he would like to share with you.

I think, Jeff, just overall, uh, you know, when you look at the business on a year to day basis, uh, comparing, you know, third quarter to third quarter on a year to day basis, uh, essentially all, all our segments have shown growth as I had indicated, seven percent. Uh, and all of, all segments, whether it be coating, ground wood paper, or a more traditional filling, uncoated presheets, have expanded. Uh, so in essence the business continues to grow, and as Paul indicated, ground would clearly uh, the one segment that stood out, or has stood out.

No, I was aware of the different rates of growth. What I was wondering was, how fast ground wood grew, or how fast [inaudible].

Well obviously the, the presheet, as I indicated d grew by, I don't want, here in the middle, single digits, for example, would be a range for uncoated presheet. Of course that market has grown, so you'd be in the middle, middle single digits. Obviously ground wood grew several times that in terms of percentage increase.

Did, did ground wood grow more than ten percent?

Well, several times, middle single digits would be. Yes.

Um, yes, if I could just have one follow up. Um, you, you talked about [Albacarb] and [Albafill], and now you have a newer generation product?

Yes, that is correct. Megafill.

Megafill. And, um, and what's the, I, I kind of get that one of the differences between Megafill and the other two products is the level at which the filler can be loaded?

That is correct. You're absolutely right there, Jeff. That's, uh, as we move from one generation of product to another, generally it permits the paper maker to, I'll use the term more easily, I don't want to say it's easy, but more easily, to continue to work to achieve higher filler levels in the sheet of paper.

So what's the difference in filler levels for a use, for the user of Megafill versus the other two products?

Uh, that depends on the individual paper maker. But in many cases where people are looking at the higher ash levels, uh, a lot of times, uh, Megafill for example has been used in our international operations, uh, where they generally carry a higher ash level, up in the 20 percent range. Many of those mills, in fact, use Megafill, uh, as opposed to the [Albacore, Albafill] type products used more traditionally here in North America.

One of the things that I think I've shared over the years that is a disappointment to us as a U.S. based company, is that many of our newer technologies, just as [inaudible] coating, are introduced more in the international arena, and adapted for use in the international arena before they are brought back and adapted for use into the United States. We see some of that, also, as Howard has indicated in the refractory side. The new robotic automation equipment that we're introducing into the steel industry is introduced first, and accepted first, in Europe for example, and then only brought back into the United States. And we see the same thing on the paper side.

And that, by the way as a, uh, U.S. citizen, the U.S. company is a disappointment to me, uh, when I look at that. But that, in fact, is the case. So more Megafill is used in the international side of our business than here in the North American side.

Okay, thank you very much.

As a reminder, star one for a question or follow up. And we'll next go to [Robert Kathowski] with [Sedodi And Company].

Good morning guys. Uh, I was just curious of the, the ten year increase in, uh, the PCC side. Just curious how many are, uh, new satellite facilities versus ramp up of additional, or existing facilities?

Uh, as we look at the, the growth in the PCC business, uh, in terms of the percent increase, obviously for existing satellites we have a smaller percent increase in PCC. Uh, and, uh, obviously a larger increase in both the new satellites and the ramp ups. And again, a very substantial differential if you would just look at that on a percentage basis.

Okay, so, uh, generally speaking it's going to be the new satellite growth?

Uh, overall, yes. But we still have very good, uh, growth in the existing business. For example, I think, uh, Ken shared with you that on, in the third quarter, our existing satellite PCC volumes increased by seven percent. And we think that again reflects what we're able to bring to the paper producers. That even though the production of paper, even at existing facilities, only went up as a, as Ken indicated, by one, one or two percent. Our volume growth at existing satellites went up seven percent.

So we continue to out perform the market in terms of our ability to leverage their growth in production to a much higher production, growth and production for this company.

Okay, I was just wondering of the, the kind of geographic breakdown of this growth. Either, is it primarily in the U.S., or, uh, Western Europe:

Uh, well we have a much larger base in North America as you know, and we have very good growth in North America. Uh, but percentage wise, the growth would be higher in Europe and in Asia. If you just did it on a percentage basis. But in terms of absolute numbers, uh, because of the very large infrastructure we have in North America, uh, that is a very good, very large portion of the increase.

Okay, thank you guys.

And we do have a follow up from [Jeff Sakakis] with J.P. Morgan.

Uh, I guess I have a couple of things. Um, in the last conference call, Paul, if I remembered your comments correctly, you said that you expected to size a large [sensil] contract in the first quarter of 2003. And I was wondering, how much confidence you had in that statement? Or what's the probability that you would attach to it?

We are still, uh, as we look at that, Jeff, and that's a very good question. Uh, we're seeing, for example, we're starting later this month a very large trial with a high-class producer, our first very large trial with that producer. And we have been told, just so you're aware of it, that, uh, if the trial is very successful, they will just stay on [sensil]. They will commercialize it at that point.

So the opportunity there is, and again, the trial has to be successful. So I'm not trying to, uh, you know, jump to a very positive conclusion here. But how the trial has been arranged is that is if it is successful, uh, they have indicated and we have committed that we will just continue to supply them on a commercial basis.

Okay, so like that, so say you got the contract, um, sort of, would you be able, in your opinion, to profitably manufacture for one single customer? Or would you really need multiple customers in order to profitably manufacture?

Oh of course, Jeff. We would need more than one customer to make a profitable business for [sensil]. Uh, but where we're looking at it, and as I indicated, we have, uh, additional trial commitments for both the fourth quarter and the first quarter of 2003. Uh, we're starting to see an acceleration now in the trial activity. Uh, the interest, uh, by multiple customers in the different segments that we're looking at. Uh, we have another customer that will go commercial, uh, in January in the specialty side.

So we have a number of positive things here that are moving forward. But the key as you all know is a large, not just one large customer, but, you know, several large customers that truly make this a commercial business. But we think we're at the cusp of being able to do that.

Okay, I guess just, uh, a last question. Just to flip back to refractories. You know, and these are just round numbers. Um, in the old days, or I think that what you've done is you've added maybe 20 million in sales or so on an annualized basis. Um, I'm sorry, you've added, um, you've added much more than that in terms, but the operating margins that you're going to return to, are operating margin levels that you had before you acquired any refractory businesses at all recently.

So is, is the take away from that, that the quality of the business has fallen in spite of your various acquisition efforts? And that all things being equal, what you attempt to do in the acquisition is to sort of bolster falling returns? And so all things being equal, it's not something that you would want to aggressively pursue in the future anymore in the refractories area.

Well I don't think so, because if you look at the acquisition of [Martin Marietta] refractories, the new position that's very well in the electric furnace area. We recognize the, you know, the, most of the new technology we have is applicable to that segment. And if we are saying that the model for the future business is what we're doing in Europe, then in Europe right now we are at around 14 percent operating input. And, and that's the kind of business that I think we'd like to aim for in the future. I think the, uh, the acquisition of the [Rinestall] business, we, we acquired, um, a business there that added something close to five million dollars of sales to our business this quarter.

Um, but that was a pretty high cost of sales. We knew that when we took it on, that the reason we took it on was to give us, again, the opportunity to be able to, uh, convert those customers to, um, higher valued products. And, and that we will do over time. But it's going to take some time to do that. So I, you know I, I think they were made for strategic reasons rather than just for, uh, um, taking on board sales, if you like. Because that's the way the business is going.

We, you know, we, we need to, to change as the industry changes, and to, uh, position ourselves for growth in the future.

And I think that's the key part here, Jeff. Because as you, and you know this company very well, is that as we, in fact, were increasing operating income, which was absolutely essential for this company to do. And as we improve that from the two to three percent level when we did the IPO, to where we reached a, uh, the maximum type of operating income in the ends of, of the latter part of 1999, the early part of 2000, before we ran in, obviously, to the very troubled times in the steel industry. Uh, that we in fact shrank sales during that time. Uh, we, in fact, reduced sales by over 20 million dollars as we were trying to build that operating income. What we're trying to do now is, and I think Howard is doing it very well, is to balance, uh, an opportunity to grow the company. Uh, to grow the company and to grow the refractory portion of the business to a much larger portion of the business. And yet, uh, realize that as we invest in that growth, uh, throughout the business, and build the infrastructure for that growth, that in fact we may not get back to a 14 and a half or a 15 percent operating income. That it may be one or two pins below that as we continue to balance growing this business, the refractory business, uh, building infrastructure for it, and continuing to introduce and develop new technologies.

So it's a sort of balancing, uh, type of, uh, equation that we're looking at this point.

Okay, thank you very much.

As a reminder, star one for a question. We'll next go to [Rosemarie Morbelli] with [Engel Snyder].

Good morning all. I apologize for the construction noise above my head, on and off. Uh, just to, uh, to stay with, uh [Mintech] and the, the new margin levels you are talking about, is that mostly because, uh, of the growth for which you have to invest? I understand, but, uh, does the fact that you have lost business with the large mills, and are going to be more working more with mini-mills, and therefore changing the mix of your business. Is that, uh, also a large part of this margin drop?

It is, it is a portion of it, Rosemarie, and as you look at that, I think we've shared, uh, you know, with you that the BOF and the blast furnace products, uh, and the applications of those products was in fact a, a very profitable portion of the product line. But as we go forward we see, especially in North America, a shift, a very dramatic shift in the production of steel away from those integrated steel shops to the electric furnace and the use of scrap. So that's a change that we see.

We are looking to, obviously, recapture the values that want through the, through the, bring forward the use of the robotic applications systems, if I can say that. Uh, and bring those systems forward where we not only have value for the system, the lease of that system, the operation of that system, and then the introduction of higher valued refractory products through that system into the EAF portion of the business.

So we're looking at taking, uh, a portion of the steel industry business, which has not been the most profitable, and upgrading that profitability for this company through the introduction of those technologies. And mainly that's the reason, as you know, we acquired [inaudible], was to in fact be the leader in types of robotic, uh, application systems. And that's coming along very nicely as Howard indicated.

We introduced the [Scantrol] system in May in the European electric furnace conference. And we have sold several of those systems now. Uh, and we will be bringing those systems to North America with the furnace, the conference that Howard indicated, that we'll be presenting that technology here in North America to. But those are the kind of systems that we need to introduce, again to further penetrate the electric furnace segment, and recapture the operating margins that we want, which obviously are in those low teens, uh, type levels as the target that we've established.

Okay, and still on the steel industry, have you seen additional changes in payment [inaudible] from other customers? And do you expect additional bankruptcies.

Well that's a good question. Uh, we are wrestling with customers, uh, all the time, in terms of making sure that we get paid for, uh, the product that we ship to them. Some of them are on very tight terms, and we watch that very carefully. I'll ask Neil to comment on that. But, uh, as we look at that, we make provisions for additional bankruptcies. We think there are still other steel companies in jeopardy. Uh, and that may, uh, be something that we have to face. I think we have adequate provisions for that. Uh, but I'll ask Neil to, uh, elaborate on that a little bit further.

Well I would echo what Paul has said. In fact, Rosemarie, we have seen a, uh, speed up of collections from a couple of those, uh, dangerous customers because we've, we've, uh, caused those, uh, changes in collection pattern. We're not seeing a deterioration in, uh, payment, uh, schedules from steel customers.

And, uh, and sure we're worried about more bankruptcies. But, uh, I don't think there's any question that our balance sheet has, uh, that we've taken that into account in our balance sheet. And although we wouldn't welcome it, we can weather it.

Okay, and then regarding the PCC and, uh, and your comments, Paul, about the growth of seven percent, uh, in ten store satellite, uh, is that kind of growth sustainable? I mean, if my memory serves me right, and unfortunately I'm sure it does, we are comparing it with '01 when we dealt with Nine Eleven, and everything kind of stopped. So if you eliminate the impact from the terrorist attack, what kind of a normalized type of growth are we looking at in, uh, [inaudible].

Well we would expect, Rosemarie, to uh, continue to have a growth that would be two or three times what the growth of the underlying conduction of paper would be. Uh, in other words, if the paper goes up a couple percent, we would expect to be two or three times higher than that in the use of PCC in that segment. And we think those types of, uh, ratios, uh, are appropriate as we go forward.

Okay, thanks. Well, they stopped banging just as we talked.

Okay, thanks Rosemarie.

And we do have a follow up from [Robert Kathowski] with [Sedodi and Company].

Hello. Um, just getting back to the additional bankruptcies, potentially in the steel industry. I was just curious how many of those, uh, potential candidates would be integrated steel mills versus some of the more, uh, lower margin mini-mills.

Uh, that would be a good crystal ball. But I'm going to ask Howard to, uh...

I think our good friends, Bethlehem Steel is probably the biggest candidate. Um, and we, we've been working very hard to manage our receivable with Bethlehem. Um, but obviously the integrated mills are the ones that, uh, that suffer the most, uh, difficulty, because when we, uh, the legacy [inaudible]. We, we've just had, in fact, one, uh, bankruptcy, in, uh the U.K. that we had to deal with. Uh, which was fairly small, uh, receivable. But, um, you know I, I would say the integrated, uh, shops are definitely the ones that are the most susceptible.

Okay, thank you very much.

At this time there are no further questions. I'd like to turn the call back to Paul Saueracker for closing remarks.

Well thank you very much everyone, for participating on the conference call. Uh, we think that as we look at the business we're able to continue to grow Minerals Technologies. As far as the top line, we've had a very good performance on the specialty mineral side. Some difficulties on the [Mintech] side, which we think at this point are largely behind us. And we see continued growth has to go into the fourth quarter in 2003. So thank you very much for your interest in Minerals Technologies, and good day.