Minerals Technologies Inc (MTX) 2003 Q1 法說會逐字稿

Good day and welcome everyone to this Minerals Technology Incorporated, first quarter 2003 earnings conference call. Today's call is being recorded. With us today is the Chairman, President, and Chief Executive Officer Mr. Paul Saueracker. Please go ahead Sir.

Thank you. And good morning and welcome to the first quarter 2003 Minerals Technologies Analyst conference call. This time I can again use my favorite introductory phrase. It's a pleasure to be here with you today. Because today, given our solid first quarter performance, I have a far easier story to tell. For the first quarter of 2003, MTI recorded net sales of $201m, an increase of $22m or 13% versus the first quarter of 2002. The growth in sales was realized across all business areas. PCC was up 6%, Processed Minerals up 33% and Refractories up 16%.

These gains, which were assisted by favorable currency adjustments, were realized despite a very modest economic recovery. Data stated from the Blue Chip consensus forecast indicated that in the first quarter, both GDP and the industrial production expanded, that is a seasonally adjusted annual rate slightly below 2%.

Fortunately, none of our major customers entered bankruptcy in the first quarter, a refreshing change from the fourth quarter of 2002. In consolidating industries, bankruptcies, and closures have become all too common. However, the quarter was not without its special events. Before this cumulative impact of MTI's adopting FAS 143, or accounting for asset retirement obligations, MTI's income was $14.9m, up $1.4m or 10% compared to the first quarter of 2002, and equivalent to $0.74 per diluted share. The cumulative accounting change associated with the adoption of FAS 143 diminished our net income by $3.4m or $0.17 per diluted share. As a result, our reported net income for the first quarter was $11.5m or $0.57 per diluted share.

Following my introduction Ken Massimine, Senior Vice President and Managing Director, Paper PCC will provide more detail and report on the progress we have made in the PCC product area. Alain Bouruet, our Senior Vice President and Managing Director MINTEQ will report on the refractory segment of our business. And John Sorel, our Senior Vice President - Finance, Chief Financial Officer and Treasurer will provide a brief financial summary and more details on the impact with FAS 143. Following John's presentation, I will conclude with a few remarks and open the floor for questions.

Before proceeding further I need to remind you that on page 6 of our 2002 10-K, we've listed the various factors and conditions that may affect future results. Any forward-looking statements by me or other members of management are subject to these cautionary conditions. In my mind, the most direct and accurate measure of the ongoing status of our business is our operating income.

For the first quarter, MTR recorded operating income of $22.5m, equivalent to 11.2% of net sales. Some, 5% above the first quarter of 2002. For total PCC sales increased 6% and operating margin increased 5%. Operating margin was equivalent to 13.7% of net sales, somewhat improved compared to the 12.7% reported in full year 2002, which was affected by bad debt provisions and write off's. The largest turn around came in Refractories, where unlike in the fourth quarter of last year when sales were up and operating income was down, sales increased 16% and operating income increased 13%. Operating income was 11% of net sales, returning MINTEQ to the double-digit operating margin zone that we expect from this business.

The programs that are being successful on turning around MINTEQ's performance will be discussed in detail by Alain, but I would like to say at this point that we believe that Alain's balanced program to improve year term performance while strengthening the infrastructure to support long-term growth is working well. While I shall not dwell on the specific details affecting PCC and Refractories, which will be reviewed, by Ken and Alain, I would like to point out some highlights. Demand for paper PCC, MTI's largest product line continued to grow in the first quarter. While total production of paper in the United States declined, the most important segment for SMI, uncoated free sheet remained flat.

While PCC volume that is to say tons was up slightly 1% in North America, paper PCC volumes in Europe were up 7%, as our satellite at Alizay ramped up, and improved volumes were achieved at and at Hermalle and at other satellites. Favorable changes in product mix; currency and pricing in Europe offset similar unfavorable changes in Latin America.

With regard to International Paper, we continue to accelerate depreciation related to our satellite PCC facilities with them, so that each facility will be fully written off over the remaining term of existing contracts. Discussions with International Paper continue at very senior levels. However, as of this time, a final resolution of the differences between us has not been achieved.

As part of IP's stated strategy, it is likely that IP will enter into a contract to build a satellite PCC facility with an alternative supplier. Regardless, we remain hopeful that a workable and equitable resolution of the differences between IP and MTI can be achieved. One of the problems we have faced as a supplier to consolidating industries has been the tendency for customers to defer major capital and contract decisions until things settle down. This has affected us both in steel and paper, where decisions on the installation of new refractory systems and commitments for new satellites tended to be deferred.

On the MINTEQ side, commitments expected in December will move into January. As a result, first quarter equipment sales were up 116% compared to prior year. Fortunately, MINTEQ's backlog for new systems installations is still strong and MINTEQ's program to expand the sale with refractory systems will show strong growth over 2002. For problems associated with plants and systems, acquired from Martin Marietta, appear largely under control. Studies have indicated that further improvements can be realized and they will be implemented over the course of this year.

Our Specialty PCC sales increased only 2% for the quarter. Growth and sales for plastics and sealant applications from Brookhaven, and Lifford increased or were offset by decreases in sales within the healthcare sector. Processed Minerals showed an extremely strong quarter with a 33% increase in net sales, attributable to continued strong residential construction in the acquisition of Polar Minerals in the third quarter of 2002.

Excluding the Polar acquisition, 7% growth was achieved despite the adverse impact of severe weather in the Northeast. We continued to invest heavily in Sincil. Modifications to the Sincil facility completed in 2002 allowed us to produce a product of improved consistency and lower cost. Large-scale tests have been conducted throughout the first quarter of 2003, and at this point, we have one large semi-commercial trial underway and six large-scale trials scheduled in the remaining quarters of the year. Sincil represents a major change in the glass making process. Convincing a major producer to switch to Sincil is a very time consuming process, one that literally requires thousands of tons of Sincil for trials under the full range of operating parameters. We are now at a point where we expect to sign our first long-term commercial supply agreement during the second half of this year. I will now ask Ken Massimine to provide you with details related to the PCC portion of our business. Ken.

Thank you Paul. Let me begin by providing a summary of current conditions within the paper market, followed by highlights of our business results for the first quarter, and some expectations about the remainder of the year. Shipments of US printing and writing papers in the first quarter of 2003 showed very little change from the comparable period a year ago. The lackluster economy, low consumer confidence, and unsettling war news kept most consumers and businesses alike watching and waiting on the sidelines.

As a result, paper consumption this year was slightly lower than originally anticipated. One measure of paper usage however continues to look encouraging. Magazine ad pages have increased 3% during the first two months of this year compared to last year. This translates into increased shipments of coated free sheet and coated ground-wood papers, which through January and February have advanced about 6% a piece compared to last year's first quarter. Operating rates have been in the low 91 to 93% range, due not only to high paper demand but also to rationalization within the paper industry. Still, operating rates are quite surprising, as imports of coated papers primarily from Europe and Asia have increased dramatically in the last few months. This attested the current strength of the coated paper market, which we expect will remain strong throughout the year.

Demand for, and shipments of uncoated free sheet, our most important market segments have remained somewhat static in the first quarter in response to a sluggish economy. The general level of business activity affects these papers more than coated papers since they are used primarily as copy, office, and computer stock. We expect the demand for these papers to recover somewhat during the second half in response to an improving economic climate.

Internationally, the Western European market for printing and writing papers has shown no evidence of rebounding. A soft economy, and concerns over the war continue to subdue paper consumption. For the last three quarters, domestic consumption of printing and writing papers have shown meager growth. However the export market for coated papers destined primarily for North America is one bright area even in the space of the strengthening euro.

With the winding down of the war, and a return of consumer confidence during the second half of this year, we expect domestic demand to rebound strongly averaging almost 3.5% growth for the year. Asian printing and writing paper demand on the other hand is growing at a greater than 4% per year rate. Now that China has taken the regional lead away from Japan. China now accounts for almost 40% of Asian paper demand. MTI has four operating PCC satellites in Asia and a fifth facility currently under construction at Sabah Forest Industries in Malaysia, our first satellite in that country. I am pleased to report that this satellite is on schedule and well along in its construction phase. We anticipate start up in the third quarter. I am also pleased with our sales growth during this difficult first quarter in spite of the third straight year of lackluster economic performance that has been financially devastating particularly to the paper industry. MTI's total PCC sales for paper and non-paper applications in the first quarter are up 6% over prior year's first quarter from approximately $103m to $109m. The continued weakening of the US dollar contributed to the sales growth.

During the quarter, foreign exchange had a positive impact with $3.4m or slightly over half the sales growth. Total PCC operating income increased 5% in the first quarter based on these improving sales along with successful cost reductions. As Paul just indicated, we continue our dialogue with International Paper and remain hopeful these discussions will result in a mutually beneficial conclusion. In the meantime, we are committed to providing International Paper, our full service, technical backup, and support for all of their PCC satellite mill locations. On a same store basis, global sales tonnage of paper PCC from existing satellites increased 2.5% in the first quarter compared to the like period a year ago. Sales of North American paper PCC shipments were in line with last year's first quarter in spite of a subpart domestic economy and paper mill shut downs, primarily Great Northern Paper resulting in the temporary closure of our satellite in Millinocket, Maine. Stronger sales at selected mills making coated and other papers offset the loss at Great Northern.

By way of contrast, if Great Northern had been operating in a normal fashion, our quarterly North American sales would show a 4% increase over last year's quarter. Of particular note, the bankruptcy court has recently approved the sale of GNP. We are hopeful that all issues will be resolved and that the closing will occur soon. However, further PCC sales from this satellite are not expected for the remainder of this year. Our European region however posted strong sales growth of greater than 30% compared to a year ago due to a continued penetration of PCC into Western European printing and writing papers. The full ramp up at our [Inaudible] Alizay, France PCC satellite and favorable foreign exchange were major contributors to a healthy European performance. In addition, PCC sales improved at our Hermalle, Belgium merchant plant and at other satellites that satisfied local market conditions.

Globally, it appears we have entered into a period of stabilization with the integration of the last round of major paper company consolidations. Cost reduction is now the paper industry's mantra. Paper manufacturers are committed to cost reduction by either implementing paper making for the first time or taking advantage of PCC's ability to maximize cost savings while preserving quality. Through this end, we have been extremely busy conducting extensive pilot and on-machine trials on behalf of companies who manufacture coated and ground-wood papers.

In addition, our R&D personnel continue to invest the case and work towards developing breakthrough technologies capable of substantially replacing wood fiber and other minerals, thereby lowering the cost of paper raw materials. We are hopeful that these types of activities will generate new satellite opportunities in the second half of this year and beyond.

Now, let's turn briefly to our Specialty PCC for non-paper applications portion of the business. I am pleased to report that our Specialty PCC segment registered improved sales during the first quarter of 2003 compared to the same period the year before, particularly at our Brookhaven, Mississippi PCC merchant plant. However, a non-recurring restructuring charge at our Lifford facility adversely affected an otherwise improving profitability within our Specialty business. Going forward throughout 2003, we expect the Specialty PCC segment to continue with growth trend in sales and profitability based on our initiatives not only in the plastic and healthcare markets but also in sealants and adhesives.

In conclusion we put into practice this quarter our strategic initiatives in paper and specialty markets. Based on these sound business fundamentals, we remain optimistic that significant ongoing projects will culminate in an important new PCC business. Now we'll turn the microphone over to Alain, who will review MINTEQ's business performance. Alain.

Thank you Ken. For the first quarter of 2003, MINTEQ was about to report increases in net sales and operating income of 16% and 13% respectively. Operating income reached 11% of net sales vs. 7.8% in the fourth quarter of 2002 testifying to the effectiveness of MINTEQ's response to the challenge [Inaudible] laid out for us in the last conference call. We turned MINTEQ to a double digit operating margin in 2003. MINTEQ recorded net sales of $63.7m, 16% of both prior year first quarter and 8% above the sales achieved in the last quarter of 2002.

Operating income reached $7m, up 13% compared to prior year first quarter and 53% over the fourth quarter of 2002. While I would like to take full credit for our strong sales performance, favorable currency exchange rates particularly a stronger euro provided about 50% of the sales growth. In addition, increased demand from the steel industry provided an essential ingredient for success. However unlike the third and fourth quarters of 2002 when sales went up 12% and 9% respectively but operating income went down, in the first quarter of 2003, MINTEQ was able to translate its 16% growth in sales into a 13% increase in operating income, despite investing in an improved management structure.

I do not wish to dwell on the outside environment, however with 95% of MINTEQ's sales growing into the steel industry to place MINTEQ's performance in the proper context, it is necessary to provide a brief summary of recent developments in that industry.

Fortunately, the global steel industry now appears to be entering a recovery phase. Compared to the beginning of 2002, steel production for the first three months of 2003 was up 6.5% in the United States and down 3.5% in Canada. Mexico, which we consider part of Latin America showed a 29.6% increase in steel production versus prior year. The EU where the economy appears to be recovering more slowly than in the US, showed a 3.3% increase in steel production through March. Global steel production for the first three months of 2003 was at an estimated 8.8%, driven by explosive growth in China. Steel production in China, which accounted for 20% of global steel production in 2002, was up 18.1% for March 2003.

I had mentioned in the last analyst conference call that early holiday shutdowns affected fourth quarter steel production and spending for equipment by the steel industry, particularly in North America and Europe. EU's steel production in January was 7.5% above that in December. February was 3.3% below January, but still showed an advance versus prior year.

In the United States, a similar pattern prevailed. January was stronger than December and February was weaker than January. Again, steel production in the US was up 6.5% versus the first three months of 2002, a key factor underlying MINTEQ's improved sales performance. However, the key question remains as to the strength of steel demand for the rest of the year, which may impact US refractory consumption moving forward.

Over the next three years, growth in steel production is expected to be concentrated in developing regions such as China. This is being addressed by MINTEQ through a revised strategy focusing increased resources on these regions. While steel demand has been up in the first quarter from last year, MINTEQ's growth in the first quarter net sales exceeded growth in steel production in every geographic area, except Asia. Since in North America we're up 9%, Latin American sales were up 49%, Europe up 32%, and Asia up 4%. MINTEQ was so benefited from currency adjustments as a result of the international scope of its business. European sales in particular were favorably impacted and currency added $4.8m to MINTEQ's 2003 first quarter sales.

In our last conference call, we indicated how the number of equipment installations slowed down in the fourth quarter as a result of extensive holiday shutdowns and capital spending constraints within the steel industry. It should be noted that MINTEQ's sales of equipment were up 116% versus prior year first quarter, reflecting in part some of that carryover. Unlike sales of refractory materials, which tend to follow steel production with each ton of steel produced consuming a few pounds of refractory, equipment sales do not bear upon each other and tend to fluctuate over time. Each sale is a separate transaction and while equipment sales are expected to show strong growth in 2003 compared to 2002, quarter-to-quarter fluctuations can be expected.

Sales in Latin America were particularly strong at 49% as a result of large increases in steel production and the resulting use of MINTEQ's premium products to secure maximum output and furnace availability. Compared to 2002, there is significantly more BOF steel-making capacity available in the United States as a result of the reopening of LTV, Acme Steel, and Geneva Steel. The reopening of these integrated shops has had a favorable product mix in fact on MINTEQ's US operations.

In terms of production margin, MINTEQ was able to hold its own. Globally, sales were up 16% and production margin was up 16%. However, as a result of some of the new management initiatives, expenses for MINTEQ increased to 16.8% of net sales, up from 16.4% in the prior year first quarter. This restrained the growth in operating income to 13%. That notwithstanding, we were still able to break through with double-digit volume and deliver operating income equal to 11% of net sales in the first quarter. As I outlined in the previous conference, the number of organizational challenges had to be implemented to assure improved manufacturing controls and timely implementation of cost improvement projects. These have caused a short-term increase in the ratio of expenses to sales.

Spending for R&D in the first quarter increased 25% over prior year. Marketing expenses also increased as the infrastructure was put in place to develop the Asian market, particularly China. China is a market where MINTEQ has not secured significant sales in the past and has embarked upon a program to increase its participation in what has evolved into the world's largest steel market. We expect this effort to continue over the remainder of the year before increased revenue translates into a more significant contribution to MINTEQ's operating income. Overall, recent strong sales and income performance gained confidence that MINTEQ can be successful by offering the steel industry system solution for refractory maintenance that include instrumentation, products, and installation equipment in an integrated and expense dollar value package.

In terms of operations, it should be noted that MINTEQ's overall manufacturing variances were favorable in the first quarter, indicating that much progress has been made on some of the past programs; in particular, those associated with our River Rouge facility. We're working on further improvements in our manufacturing system with a goal of reducing our total cost of goods sold ratio. Strong performance in terms of equipment sales is related to the sale of new mini scans, circuit units and Lacam laser scanning systems. MINTEQ plans to strongly promote these systems through the rest of this year, including a fully automated electric furnace maintenance system called Scantrol.

One Scantrol unit, which combines laser scanning, robotic technology, and advanced product formulas in one optimized system, was sold in the first quarter. MINTEQ continues to invest in new refractory application systems that operate faster and more accurately. In order to operate successfully, the equipment product system must be optimized, requiring constant upgrades in product formulation. A new line of monolithic Refractories customized for the steel ladle and electric arc furnace applications was the focus of extensive developmental and trial activity that started near the first quarter.

In conclusion, assuming the steel industry continues to recover globally, MINTEQ will be successful in delivering a double-digit operating margin in 2003. This will be accomplished despite having to invest strongly in strengthening our management structure, particularly in developing markets and continuing to invest in research and development in order to support long term growth. John.

Thank you Alain. As you have just heard, excuse me, you have just heard the descriptions of the business environment and the general operating conditions within the company during the first quarter. I shall now review with you how that information is reflected in the company's consolidated results for the quarter.

Net sales for the first quarter were $201.5m, an increase of $22m or 13% compared to the prior first year, excuse me, prior year first quarter. Foreign exchange had an $8m or nearly 5% point favorable effect on sales in the quarter, driven primarily by the weakening of the US dollar against the euro. As you've just heard, both of our business segments recorded excellent sales growth for the quarter. An 11% growth in the Specialty Minerals segment was achieved. Approximately five points of that growth was generated by the Polar Minerals acquisition completed in September 2002 and about three points of growth was from currency. The remainder was volume growth in both the PCC and Process Minerals product lines. A 16% sales growth in refractory segment was realized. Higher product volumes in the US and Latin America combined with increased application equipment sales represented about 50% of the growth and remainder was the result of the stronger European currency.

Complementing the relatively strong sales results for the quarter, performance at the gross margin line also improved. Overall, MTI gross margin increased by $4m or 9%. In the Specialty Minerals segment, gross margin increased, but overall growth was tempered somewhat by the shutdown of our satellite PCC plant in December 2002 at the Great Northern Paper Company in Millinocket, Maine, increased development cost at Hermalle, Belgium paper PCC facility and increased cost to provide Sincil trial material. In addition, $0.7m of one-time restructuring costs were incurred at Lifford, UK Specialty PCC operation. As noted in the income statement during the first quarter of 2002, we also incurred a one-time charge of about $0.8m in the Specialty Minerals segment; in that case, for impairment of a PCC plant.

In Refractorires, gross margins grew 16% the same level as the sales growth. MTI's marketing and administrative expenses for the quarter increased 15% versus the 13% sales increase. The plant increase and marketing administration occurred primarily in the refractory segment to support our business development efforts in Asia and Europe and to further strengthen the company's bad debt reserves. The company's research and development expenses for the quarter were 7% above last year, and represent a 4% increase over the previous quarter due to increased product development activities primarily in the refractory segment. As a result MTI's income from operations reached $22.5m, the highest level achieved since the third quarter of 2000, and grew 5% over the first quarter of 2002. As you would expect, currency had a net favorable impact on operating income for the company.

The Specialty Mineral segment's operating income increased 2% overall, and generated an operating margin ratio of 11.3%. Refractory segment generated an operating margin ratio of 11% of sales, the first double-digit performance since the first quarter of last year. Non-operating deductions declined by $0.9m primarily due to reduced interest expense.

For the quarter, the overall effective tax rate was 28.5% slowly below last year's first quarter rate. The net reduction year to year is primarily the result of the change in the geographic mix of earnings and an increased depletion benefit. Income before the cumulative effect of an accounting change grew 10% to $14.9m, $0.74 per diluted share, our best performance since the second quarter of 2000.

Effective January 1, 2003, the company adopted SFAS number 143, accounting for asset retirement obligations. This resulted in the recording of a non-cash, after-tax charge to earnings of $3.4m or $0.17 a share for the cumulative effect of this accounting change which relates to future retirement obligations associated with the company's mining properties since the final removal of our 50 plus PCC satellite facilities as stipulated in our satellite PCC contracts.

The ongoing cost impact of FAS 143 was $0.2m for the quarter and that rate will continue into the future. As a result net income was $11.5m in diluted earnings per share for the quarter were $0.57 to 14% lower than the same period in 2002.

To summarize the income statement for the quarter sales increased 13% generating a 9% increase in gross margin. Total expenses grew 13%, leading to an increase in operating income over the first quarter of 2002 of 5%. A reduction in non-operating expenses and a lower tax rate led to a 10% growth in income before the cumulative effect of the FAS 143 accounting change. Diluted earnings per share increased by 12%, to $0.74 before the accounting change compared to last year's $0.66 per share.

Our balance sheet remains very strong. Our debt to total capital ratio remained at 17% giving a substantial capacity to continue to support and invest in our growth strategy. Cash flow generated from operations for the quarter was about $15m. We invested $8m this quarter in capital addition. We also repurchased 124,500 shares for treasury, at an average price of $37.88 per share, for a total expenditure of $4.7m. Depreciation and amortization expense totaled approximately $17m for the quarter. Now I will return the mike back over to Paul for his closing remarks and for questions.

Thank you Ken, Alain, and John. As you can see, MTI was able to deliver a solid performance in the first quarter of 2003. The economic recovery that we have all been waiting for has been very modest. Steel, one of MTI's most important customer industries has shown recovery in the beginning months of 2003. Paper on the other hand has shown little evidence of recovery in the United States or Europe. Hopefully, now that a swift resolution of the Iraq war appears at hand, business and consumer confidence should return and in the improvement of both the European and American economies is expected during the second half.

MTI has incorporated a modest economic recovery into its outlook for 2003. We see PCC continuing to show steady progress. We are gratified by the turnaround evident in the Refractories portion of our business and in the growth that has been achieved in the Processed Minerals segment. We also look forward to Sincil, moving out of the development phase and into a commercial phase. All told, I believe that excluding the cumulative effect of FAS 143; an estimate of MTI's earnings in 2003 in a range of $2.90 to $3 per diluted share would be reasonable. Operator, we are ready for the first question.

Thank you. If you do have a question today, please press the star key, followed by the digit one on your touch tone phone. Again that is star one for questions, also if you are using a speaker phone please make sure your mute function is turned off to allow your signals to reach us. We'll go first to Alan Cowen, of First Analyst.

Thank you on a good quarter, and again amazing results, in MINTEQ getting double-digit margins. Wanted to talk about two areas. One more positive a little bit amplification on Sincil if you will and what you are seeing to the extent you can, and what your current cost level is running there because of the increased trials, and on the other side could you amplify a little further on IP and your belief that they will soon, if I understand you right, sign a contract with the competitor for satellite brand?

Well Alan, of course we are pleased that we had a very strong performance in the first quarter of this year, and obviously a tremendous effort by all of the senior managers and all of the people within MTI. In regards to Sincil, we do have a large ongoing right now semi-commercial trial underway within the glass industry that has been going on now for a number of weeks over a month, and we'll continue for obviously several more months as they look at all the various operating parameters that they want to test. Obviously we are very encouraged by it. They have actually put Sincil on all the furnaces within that complex, and we are very optimistic that that will continue and should move into the first commercial account. We do have other large trials scheduled as we move to the second and third quarter, and we remain optimistic that we will as we get into the second half of the year sign our first commercial account for Sincil. So, again we are pleased with the progress that we're making there in the development efforts for this product.

In terms of International Paper, obviously we do continue to speak with them at the very senior levels, obviously Ken Massimine, the Senior VP who has spoken here this morning is the lead person in those discussions. We still are hopeful that we will be able to reach a successful resolution of the issues between the two companies and move forward on a long-term basis. What we expect, and obviously as a part of IP's strategy, they have indicated that their goal was obviously to try to find an alternative supplier for PCC. And we expect that they will probably do that, find an alternative supplier, and there have been hints in some cases through the investment community that that is something that may occur shortly. So, that's the only reason why I included that in my comments. There is that sense that that may take place and I just want to make sure that people are aware of it, and it fits very much into the strategy that IP has told us, that they are looking try to find an alternative supplier. We still, like I say, we still are hopeful that we'll be able to reach some initial agreeable resolution between the two companies.

If I understand you right at this point, there was a certain element of fair disclosure, but did you have no further explicit communication from IP. You have no knowledge that anybody has applied for construction permits or try to line up raw materials at a given site?

That we're not aware of. No. Not aware of the idea of construction permits or lining up alternative sources of line supply in that thing. No. No, we're not.

If you will certainly a fresh opportunity to look at how you relate to customers where you'll be [the guide-Inaudible] on-site manufacturing or pretty much dedicated regional plant with what's unfolded with IP. Is that going to lead to any changes in your approach as you sit down to talk about long-term relationships in Sincil?

In terms of Sincil, we expect obviously that we will have multi-year agreements for the supply of that product to provide both assurance to the potential customer of the supply of Sincil and obviously the assurance that we as a potential supplier who would have to invest capital resources to provide that product to them. The assurance of the security of that we would make. So we would expect that to be under multi-year agreements in terms of that type of an arrangement with a glass company to supply them. I think they would want that assurance of supply also.

I mean one obvious change is in the nearly years, you might simply target a higher return than you did with IP, so that you recaptured more your cost when you had a unique position. What are your thoughts?

We are obviously, as we've spoken in previous conferences, there is a value equation that we see for Sincil obviously reduced energy, greater throughput and improved quality reduce the mission. So there is a value equation at the glass company. We'll review during these extended trials what we call now that one that we are in a very semi commercial trial where they are back looking at those parameters reducing energy for example increasing throughput, increasing yield, reduce improving quality, reducing aero missions, those are the parameters that they are going to. Obviously, if they didn't think there was a significant value of Sincil they would not be running these almost commercial trials at this point across all of the premises at that glass complex. So, they see value in the use of Sincil.

We think there is value there and obviously we've been in discussions with them in terms of our perception of what the value Sincil should bring to that complex and we need to come to a basis of moving forward where the value that we see and the value that we need to make the substantial capital investment to buy suitable returns for MTI and at the same time provides an economic benefit to the glass customer. We think that's going to be attractive by the way, we think it's going to be attractive both to MTI and to the glass customer.

I'll look forward to further discussion after you put your first set of contracts in place. Thank you very much.

Thank you Alan.

We'll go next to Jeff Zekauskas of J.P. Morgan.

Hi, good morning.

Good morning Jeff.

A couple of questions. In terms of the contract that IP may or may not sign in the PCC area with another company. Is your hunch that it would displace plant of yours that was one you did in size or two or three or four? How do you think about that?

I don't really know Jeff. To be honest with you, it would really speculation on my part to really get in to that.

Right. I am just asking you the speculate?

Well I prefer not to. [Laughter] I prefer not to speculate on just knowing what their strategy is, and ninth time obviously that we've been in discussions with them that this is something that would not be a surprise to me. That's something like this would occur but yet regardless of that we still think as we continue to discuss this with them that hopefully will reach some resolution to move forward.

Second question is may be I am mistaken it by my memory but I felt it there were two large trials that you are conducting in Sincil and in your description, it sounded like there was only one, I believe one was the glass manufacturer and one was a fiber glass manufacturer?

That's correct. We in fact have, I am calling one a semi commercial trial; the other one is a trial.

I see and that trial is one of 106 ?

Yes. That is correct.

And I know your experiences new in this but you know how long would it take these six trials to end or you know I'm sure would be stagger. Can you give us an idea of what your expectations are?

You know, we obviously will sequence those through because we expect and are hopeful that the semi commercial trial will just continue and they're using large volumes of Sincil as we speak right now. We ship it to them by railcar and they continue to take that material, that's continuing and we expect and hope that that will just continue into a full commercial contract.

We have another trial underway, that's a trial, so it's not a semi commercial trial just a trial to verify the benefit to Sincil. We have other trials also scheduled as we go into the latter part of this quarter and into the third quarter of 2003 for additional trials. Some of those are repeat trials as you know and as we've spoken the customer who will want a trial will obviously stop and evaluate the data and then come back and run a second longer trial for example again to verify the benefits of Sincil on the various operating parameters. So, we expect that to continue as we go through 2003. We also have to take into account, as you know that we only have approximately 50,000 tons of capacity of the customer sampling facility. So, we obviously have that constraint on us until we make a decision to move forward with our first true commercial Sincil facility.

Have you made any progress in terms of whether it would be a merchant facility or a dedicated facility?

I believe and again this is just my thought right now. Jeff as I look it. I think the first facility would be a merchant facility. It would be a large merchant facility that would supply a number of different customers that would be my expectation right now.

I guess, just lastly, in the Refractories area, I mean, maybe that auto production is down, oh, I don't know, 10% in the second quarter. Is that something that, I mean, given your projections for steel demand in the second quarter. Do you see your Refractories margins going back below back 10%?

Well, I'm going to answer quickly and then I'll turn over to Alain. Now we think that we have moved this business backing to the double digit operating income range. We think we're comfortable that we can maintain that in that range and continue. Alain is doing both to improve the new term operations and at the same time set this stage to seize the growth opportunities that Alain is looking at in the strategic plan. So, I think we should be okay but I am going to ask Alain to comment on that also on. Alain.

Yes, as Paul mentioned we've made significant progress in terms of efficiency and also what we expect some time during the year is to introduce new products and systems, so that we contribute to improving our margins. Regarding the demand in steel, there was specifically an increase during the first quarter almost everywhere in the world including in the US, however, it is true that for the rest of the year there is a question especially in the US regarding the steel demand and we've taken that into account in our forecasting that we will be still at double digit operating margin for the rest of the year.

Okay. Thank you very much.

Thank you Jeff.

Our next question is from John Roberts, Buckingham Research. Mr. Roberts, your line is open. Hearing no response, we'll move on to Valerie Davidson of Lazard Asset Management.

Could you please tell how many PCC units you have at the Ticonderoga River plant?

Yes Valerie. We have approximately a total of two units at the Ticonderoga plant.

Okay. And I think there is another IP contract that expiring this year, is that correct?

Yes. We have an IP contract in Europe that will be expiring this year.

Okay and how many units is that?

That's probably about one to one and a half units.

Okay. The guidance for 2003, when does that assume that an alternate PCC supplier would go into Ticonderoga?

Well, we have no sense of that by the way Valerie whether there is or not right now, we continue to supply all the IP locations on a routine basis.

Okay.

We continue to supply them routinely with PCC. It's done on a very business like basis we supply them the technical service. It's a really just a normal business relationship that we have with IP and that continues in terms of what we are doing.

Your guidance then assumes that it would be business as usual for the remainder of the year at Ticonderoga ?

Yes, that's correct.

Okay. If they do indeed find an alternate PCC supplier I would have to assume that they would have an onsite PCC suppliers similar to the arrangement that you have with them now. Is there any feel for how long it would take to get that started?

You know, that's all, starting to speculate now Valerie in terms of what we are doing. We would think that certainly they would want to move forward at some point if that was their decision with someone to at some point construct a satellite PCC facility but really that's just a speculate at this time as to what they would do.

Okay. Because, I mean, I just want to confirm that you did say on the call that you would expect them to find an alternate supplier?

Yes. They have publicly stated, IP has publicly stated that their strategy is to try find an alternative source of PCC and we have heard and actually have heard through the investment community that at a recent conference that there was a comment made to that extent. At a recent conference that IP spoke at and I'm -- basically what I'm saying is we've heard it, we're aware of it, it is backed, I guess, really that we're aware of it. And it doesn't surprise us based on the strategy that they've indicated to us.

Okay.

That doesn't mean it's necessarily at Ticonderoga by the way.

The thing is that the other plans -- you have existing contracts, existing long term contracts with them and they wouldn't be able to prematurely terminate those contracts, would they?

I wouldn't expect so and there has been no indication why IP that they would even consider doing that.

Okay.

Like I say, it has been a very good business relationship between the two parties. We are honoring our contracts. They obviously are using the precipitated calcium carbonate and we're providing the service and requirements associated with those contracts, and they pay the bills. So -- so we continue to work well together. So -- it's not an issue from that perspective.

Okay. Other than IP, like excluding that, how many PCC units are you adding then in 2003 and 2004?

As you know Valerie, we don't talk about that on a quarterly basis. What we do, as you know in January of each year, we indicate the number of units that we have added through new facilities and expansions of existing facilities. We do know as, Ken mentioned in his discussion that we have under construction the facility at Sabah Forest Industries in Malaysia and that will be operational in the third quarter of this year. That actually is a one-unit facility. But that one will be operational in the third quarter. But in terms of the other expansions etc. that we're doing, we just summarize those in January of each year for the preceding year.

Okay, thank you.

Once again, that is star one if you do have a question. Next is Rob Risis of Bear Stearns.

Yeah hi. I'd like to follow up on some of the questions. In 2003-2004, excluding IP, how many PCC contracts are coming up besides Ticonderoga and the one in Europe.

It's less than a handful.

Okay, in this year and next year?

Yes.

Okay, and how about just the following year? When you say less than a handful? I assume that's five or less. Is that a handful?

Yes.

Okay, and then the following year?

Probably, just a -- I would imagine a couple more so to say, but I would have to look at that information and [Rick Coni-Inaudible] I could certainly look into that.

The next question -- I mean has IP told you anything or are you just speculating based on what you've heard at a conference that IP said, I mean, has there been any formal....

No, we're basically just basing information on, information we've heard through a conference.

Okay. The other thing I heard -- I spoke -- I'd like you to just clear up one other issue that I have. When I spoke to PPG and I asked them about Sincil, they said it was too expensive and I know -- and they weren't going to use it. I'm just curious. Had other people said it's not too expensive? Just curious where that stands.

Bob, what all of them have told us is that Sincil was a very expensive product. So we accept that going in, because as you know, we're charging in terms of three to four times the cost of the raw materials that we're placing. So all of them have commented to us that Sincil is very expensive.

Why we're running the trials and why we're into the semi-commercial phase now, is that people have found out, guess what? At that price, Sincil provides a value and a benefit to the glassmaker, which is what our belief is. So we think that we'll reach a commercial opportunities here that's beneficial both to us and to the glass company.

Okay and one last question. Getting back to the I Paper issue, is -- do you -- I mean, no one else would come up and say the same types of things. Are you -- what percentage of new mills that are new mini mills that are coming out, what percentage are you winning in the sense of the, you know, you have one large percentage, are you still or there are just too few that are coming out that you can't make a whatever?

Well, I think it's tough to make that judgment. I think we continue to be a successful in PCC. I'm very pleased obviously with the first quarter, Bob, when you look at it, because as Ken indicated, you know, obviously the Millinocket mill was shut down. Obviously during this period of time, a couple of other satellites that were operating in the first quarter of last year, two of them decide [Inaudible] by the way at area in Lock Haven were operating in the first quarter of last year that are now shut down. And yet we continue to grow our volume of PCC. So we still have very effective strategies from moving PCC forward. We're building the one at Saba Forest Industries and we're actively pursuing other opportunities as Ken indicated.

Okay. I thank you for your answers and take care.

Thank you Bob.

Again, star one for questions. We'll go next to Robert Kazowski of Sidoti & Company

Hi guys, congratulations on a good quarter.

Thank you Bob.

Going back to the IP -- the IP issue, I'm just curious what the chances are that this now -- whoever this customer is could take over your total position within International Paper. We're just looking at a couple of mills here and there over the next ten years.

Well, obviously we think we continue to have a, you know, a solid business relation at the present time with IP. These contracts as you know extend out through and the latest one to around 2010 and we've indicated that really the major impact would not be until probably 2007. If in fact, we didn't do anything or invent new technologies that will be of great interest to IP. So I think you're still looking at a very long time frame here. Even if they make a determination to move in a different direction, before we would see that impact.

Okay. And I guess on the PCC growth side, I was kind of curious about the waiving of impairment versus customer something increased from a level versus more sales of coating.

We will see obviously, really success and growth taking place in a number of those business areas, Bob. Obviously we're moving forward very nicely in the filling area for ground-wood filling for example. As Ken indicated, we're seeing more coating grade PCC being sold for example out of Hermalle. So that's moving up. So we see both in uncoated free sheet, we're seeing more sales out of existing satellite plants. So we're seeing really, a continued growth for -- across pretty much the entire business line. But I'd ask Ken to provide some additional information there. Ken.

I'll say that we've had excellent growth as you had indicated Paul for almost all product lines. Quite in essence, a lot of the two has been associated with really people taking advantage of using more filler, you know, in the sheet as well as some of the -- our filler product that even we've had. So in essence, I would say it's a combination of ramp-ups like Alizay and also people who are decreasing their filler usage.

Okay. Could you maybe speak to what your average fill level is now versus maybe couple of years ago? Do you have those numbers handy?

We're right now -- we're in a range of about 15.5 to 16% is where we are at the present time. If you go back a few years, it probably was less than 15, probably between 14 and 15.

Okay. Thank you.

Thank you Bob.

We'll go next to Jeff Zekauskas, JP Morgan.

Okay, well, I just haven't gotten enough with this International Paper issue.

Okay Jeff. [laughter]

Well, see, you've looked around and there's no permitting and IP apparently has said something about having an alternative supplier. So logically, in the essence that they might displace you with a ground calcium carbonate supplier. Is that feasible in the United States?

That probably is not if you look at it Jeff. I would not expect that because the optical performance of the cost benefit associated with the optical performance and the bulking characteristics of PCC versus GCC really dictate that where you're using PCC, you would continue to use PCC, because the GCC would immediately reduce the bulking characteristics within that sheet and you would lose some of the optical performance that you obtain with PCC. So it would be unlikely that they would use GCC in place of PCC. So I would not expect that.

Well then, just to clarify further, just judging from your own history, how long does it take from the time when you first get a permit to bring PCC plants on the stream?

It takes probably 18 months or so, 12 to 18 months to do something like that.

18 or 12?

Well, probably the quickest we've ever done with is about 12 months, but a more typical time would be about eight months – well you know...18 months.

Okay, thanks very much.

Next is Nick Recue of Banc One.

Hi. Just a second. Could you tell me how the acid is going -- your acid product?

The AT PCC mix?

I am not that familiar with these products.

Okay. That's doing very well. As we've been indicating, this is the use of PCC in ground-wood paper. This would be a super calendared and directory - LWC for example. That business is growing very rapidly for us. It is one of the very nice growth markets that is moving forward. The reason for that is, it is becoming market driven. The quality of that sheet of paper especially in North America is improving and as it improves, those people who are presently not using PCC need to use PCC. So, we have trials underway. That is one of the significant opportunities we see for additional sales of PCC and additional satellite PCC facilities. So, that is moving very nicely, Nick.

Now that is going into coated, more than often say, directory?

It's going - it is across the grades there. Some is being used in newsprint for example. It is being used in super calendar SCA grades for example, that's being used in directory paper and LWC. So, all of that benefits from the use of PCC. It gives them a brighter more opaque sheet and in fact, it allows them to also to replace some of the wood fiber. So, again you get the benefits of using PCC and for us, the nice opportunity is that it is becoming market driven that the quality requirements are now moving people to use PCC.

What kind of market share do you think you got in that versus say uncoated free sheet?

In terms of the use of - in terms of total pigment use in the -- what we would call the ground-wood sector, it's still relatively small. In terms of the use of PCC in a ground-wood sector, as you would imagine is probably pretty high.

Are you displacing TI-02 or is this just a conquest sales?

This is more just an improvement in quality. In this case, you're replacing mainly Cayland (ph) clay is what you're replacing, because they're trying to make a brighter more opaque sheets is what they're trying to do. So you're not replacing, you know, TI-02. The other advantage it provides in this area is that the paper maker is able to reduce his bleaching costs, because the other way, he can get brightness when one is using clay is to bleach the fiber to a higher brightness. By using PCC, he can also reduce some of those bleaching costs. So it's a very attractive proposition for him, what he is -- he is meeting the new requirements in the marketplace and by using PCC, he can reduce his manufacturing costs.

Now, your price versus Cayland is roughly the same or are you less expensive than Cayland?

It depends on the individual mill. I was going to say it depends where they're located, the distance, transportation, other factors that are in that equation.

Those kind of dependings would lead me to suspect that it's roughly the same price, on a production basis.

I would have to ask Ken Massimine to answer that question really, Nick, because I don't' know enough of those details. Ken, do you have some information there?

Yeah, Nick, to give you a little bit more insight, I think a lot of it - just reiterate one point that Paul made with respect to transportation. It really comes into play. For example, if you take a look at the Northwest, clearly clay is expensive when you compare it versus having you know, a local PCC source -- sourcing point.

In essence, in the Northeast for example, their transportation cost is not as dramatic and so therefore, the cost structure is in terms of cost of the mill is probably similar. But in essence, one of the -- the real cost driver is the ability to reduce -- not only get the clay out, but in essence, you get the bleaching costs down. And that's a significant factor for the mills that want to increase the brightness that the PCC gives them, they can decrease their bleaching costs.

So is the PCC a little bit more expensive than Cayland on a per-pound basis or per-ton basis? But the all-in costs of the mill...

I don't, let's say, have the exact numbers that you're looking for in terms of, you know, whether it's, you know, a certain percentage more or less in terms of the cost comparison. But I think basically, there was a point to drive home here is just the total cost of value that you're bringing to somebody, cost performance and the value that you're bringing to the mil. In essence, that's pretty much the way you look at the value equation to the total in terms of taking a systems approach. So in essence, in some cases, the clay could be a little bit more or a little less when we take a look at the cost would be, other pigments, the bleaching cost, the ability to reduce fiber and then you start to take -- look back into account in terms of the total value equation, but it's definitely adjust the scales towards the use of PCC.

Now, is this being handled on a merchant basis as opposed to onsite?

Both.

Both, okay. But the benefit ratio is lower than it would be for PCC going into uncoated free sheet.

No, I mean each particular, I'll call it mill -- has its own, I'll call it personal value equation. But in terms of taking a look at ground-wood, I'll call opportunities or applications versus uncoated free sheet. Both of those market segments have an value equation and very clearly, we're able to demonstrate in both of those segments that PCC definitely has a value equation that favors the ability of the paper maker to enhance his quality and also reduce his cost.

And what kind of a loading are getting for the 15 to 16%?

And really again, it depends on the grade. If you per se, in some cases, it's going to be very low, for example like in directory, but you now see it -- it could be for example much higher.

Higher than 15?

Oh yes, and necessarily yes.

Oh, great. Well, thank you very much.

You're welcome.

Thank you Nick.

We'll go next to Steve Wilson, Rashingtan.

Yeah I wanted to review the cash flow. First, I just wanted to make sure, was it 15 or 50?

15 and if you look -- that compares to last first quarter about 17, if you look at a full year, you usually run something over $100m seasonally the first quarter is a little lower.

Right. And just looking at it, I saw your receivables were up a lot. Can you just talk about that?

I can. Again, if you look at receivables last -- first quarter of last year, they were up a lot also. It's a bit of seasonal trend we have had where you see it; at the end of the each year, these things, the balance seem to come down and the total number of days outstanding in the first quarter we take a jump. So, you have two things going on in the sales growth that we have. You have the sales growth and mix. And you have the seasonal jump that we experience every first quarter in receivable. So it is a fairly significant jump, but not an unusual trend at all.

Okay. And then just vis-a-vis Brookhaven with the slight improvement there, how close are we to breaking even at that facility or how much more growth that we need before we can call at a profitable operation?

Yes Steve. We are pleased that we are making progress there. Obviously the sales continue to grow. We're hoping to be breakeven, probably by the second half of this year at the Brookhaven facility.

And you said, we're still seeing deterioration on the healthcare side of that. And I just wanted to make sure, that includes sort of all the food applications that you have traditionally done, you call that healthcare or not?

We do not look at healthcare for the PCC as the traditional applications that we had -- this could be in calcium fortification for example, it to be an antacids, those types of applications. The major loss has really been in the calcium fortification and ore supplement area as where the -- we'd lost most of that business. Again this is to low-lead GCC where we see that -- we have an advantage is where you have the feel or the taste in the mouth and this would be in liquid applications.

But yet, we are still obviously seeing some erosion in the healthcare side from the low-lead GCC, you know, obviously we are seeing some opportunities developing in some other areas, but as you look at Brookhaven, it's really the use of PCC there or the Specialty PCC in the plastics and sealants applications. Our [ultra fine fixacom-Inaudible] , those are the products that are really leading to the improved volume at the Brookhaven plant.

And the last question is obviously the huge spike in the equipment revenues in the Refractory business. Could we just put that in context in terms of you know how much that comprises of the total refractory business. I know it's small but I am just wondering how small and what kind of pace that can continue to grow?

Okay, well, two things. One, you're right it is small and the other thing is that we expect that to grow at a very nice pace as Alaine indicated, but I'll ask Alaine to address that question directly. Alaine?

The equipment -- the sales of equipment is less than 10% of the total sales, but the contribution as part of the system with the products is also a good contribution. So, it has an impact on the approaching income.

And you'd be only be accounting outright sales. In some cases, wouldn't you actually lease the equipment or just provide equipment and be paid through product usage?

We do both. When we sell the equipment we record the sale, and when we release we have the lease payments in our P&L.

But so lease payments wouldn't be a part of equipment revenue or what?

It is. Yes both sale and lease.

Okay. So when you are talking equipment it would be both?

Yes it is.

Yes.

Okay. Thanks a lot.

At this time there are no further questions. Mr. Saueracker, I will turn the call back over to you.

Okay. Thank you operator. We are obviously - we are very pleased as a company for the solid performance as we start 2003 with our first quarter. I do want to just take a second; again we spent a lot of time on IP.

Obviously I wanted to provide information regarding what we have heard through the investment community and I know that couple of people have spoken to Rick Coni about what they have heard in terms of comments that were made. But again, we would like to reiterate that we are all hopeful and that we will work out a resolution with IP as we go forward. So that certainly is our hope and our belief that we should be able to do that. But we also believe that we will have a very good year with MTI and that a earnings estimate in the range of $2.90 to $3 per diluted share, certainly reasonable for this company as we go forward. So I want to thank you all for your interest in MTI and we look forward to a terrific 2003. Thank you.

And this does conclude today's conference. Thank you for your participation. You may disconnect at this time.