Minerals Technologies Inc (MTX) 2003 Q2 法說會逐字稿

Good day, everyone. We thank you for your patience and welcome you to the Minerals Technologies Incorporated second quarter 2003 earnings conference call. Today's call is being recorded. I'd like to turn the conference over today to the Chairman, President and Chief Executive Officer, Mr. Paul Saueracker, please go ahead, sir.

Thank you operator and good morning and welcome to the Second Quarter 2003 Minerals Technologies analysts' conference call. It is a pleasure to again to be able to report growth in both sales and net income, despite a lack luster business environment and a number of issues that arose and were successfully addressed. Empty I achieved net sales in the second quarter of $202.4 million, 8% above prior year second quarter. This growth was realized across all business areas, PCC, process minerals and refractories.

As a result of the number of factors that adversely affected our operating income in the second quarter, net income increased just 2% compared to the second quarter of 2002, reaching $14.3 million. This translated into fully diluted earnings per share of 70 cents, 3 cents above the earnings recorded in the second quarter of 2002 and two cents above the most-recent consensus forecast. Following my introduction, Ken Massimine, Senior Vice-President and Managing Director of Paper PCC will provide you with an insight as to the factors underlying the performance of our latest product group, PCC. Alain Bouruet, Senior Vice-President and Managing Director of MINTEQ will report on the refractory segment of our business and John Sorel, our Senior Vice-President of Finance and Chief Financial Officer will provide a brief financial summary. Following John's presentation, I will conclude with a few remarks and open the floor to questions.

Before proceeding further, I need to remind you that on page 6 of our 2002 10K we listed various factors that may affect future results. Any forward-looking statements by me or other members of our management are subject to these cautionary conditions. By business area, sales for PCC were up 3%, process minerals were up 26%, largely driven by the acquisition of Polar Minerals in the third quarter of 2002. And refractories were up 10%. A major event in the second quarter was a successful conclusion of the protracted discussions between International Paper and Specialty Minerals. While the terms of this resolution reduced our earnings by approximately 4 cents per share in the second quarter, it resulted in multi-year extensions of satellite agreements and eight of the 10 satellites we have with IP thereby stabilizing and deepening the relationship between MTI and its largest customer.

Another factor that impacted earnings has been the continued weakness in the manufacturing sector of the U.S. economy. Two steel producers, Weirton and Steelco, both customers of MINTEQ, filed for bankruptcy in the second quarter. Although the bankruptcies did not require us to take a specific charge, when compared to last year, we increased our bad-debt accrual rate and this is reflected in the second-quarter results. Although the National Bureau of Economic Research last week declared the recession of 2001 ended in November of that year, in the manufacturing sector the recovery remains invisible. Jobs are still being lost and the latest estimates of U.S. industrial production show second-quarter 2003 to be four tenths of a percent below second quarter 2002 and shrinking from the first quarter of 2003 at a 1.6% annual rate.

While the majority of economic forecasters have called for a noticeable recovery in the second half of 2003, it still remains invisible. Our outlook for the second half reflects a continued drift in the economy rather than a distinct upturn. I am pleased that MTI, despite a number of factors that added to our cost, was able to preserve its cost to sales ratio and as a result production margin increased 8%, paralleling sales growth. However, expenses increased at a rate greater than sales as a result of higher benefit costs, primarily related to employee medical coverage, increased rates of bad-debt accrual reflecting the continued instability and financial stress in a North American manufacturing sector, particularly steel, and the increase in infrastructure expenses associated with the key MINTEQ strategies. While Ken and Alain will provide you with a more detailed analysis about PCC and refractory businesses, I would like to point out a few highlights.

PCC sales are up 3%, reaching 107 million dollars in the second quarter. Sales of PCC used in paper had a 2% growth in tonnage despite continued weakness, particularly in the U.S. uncoated pre-sheet market. The resolution of our differences with International Paper was without a doubt the highlight of the second quarter. Not only did we cement the relationship between ourselves and our largest customer, but we entered a new phase of technical co-operation with a commitment to co-develop technologies in the area of filler fiber composites that have the potential to significantly increase the mineral filler content of uncoated pre-sheet paper, our largest end-use market. We believe that PCC's penetration into the groundwood segment of the paper market will continue in 2003. And progress will also be made in the coating segment, based on PCC's ability to provide improved brightness and cost characteristics. This segment of the paper industry is forecasted to grow at 4% per year.

Our refractories business showed good growth in the second quarter with sales up 10% and operating income up 11%. MINTEQ's expenses for the quarter, however, were high due to hiring to strengthen our management capabilities, additional support for key R&D programs and to provide for additional bad-debt accruals. For this reason, our operating income ratio dropped below 10%, although we averaged 10.1% for the half. We are still troubled by weakness in our largest markets, North America and Europe, where lower pricing is resulting in continued bankruptcies in North America and production cutbacks. These temporary cutbacks aimed at alleviating overcapacity and shoring up prices will further soften production in the third quarter and could extend into the fourth. Any declines in steel production would have a negative impact on our performance.

Increased spending on new products and systems as well as putting the organization in place to be able to participate in the world's fastest growing steel market, China, while costing us money in the short term, will provide a very significant long-term payback. Our process minerals business continues to show strong growth with sales up 26%. Excluding the September 2002 acquisition of Polar Minerals, second-quarter sales growth for this segment was 4%. Process minerals products depend heavily upon construction, and have benefited from low interest rates. High levels of housing starts, and spending on residential construction, including remodeling. Our acquisition of Polar also brought us a high level of participation in plastics, which while important in construction, is also tied to multiple consumer and industrial applications which represent higher growth components of the economy.

Our development efforts with sinsill continue. As you know we have initiated semi-commercial trials. One major trial has been very successful and expanded in scope. By the end of the year, we expect to be fully commercial in at least one account. During the second half, additional large-scale trials are scheduled in wool fiberglass, reinforcing fiberglass, and container glass. Based on the positive results to date, our development efforts are accelerating and spending has increased. I will now ask Ken Massimine to provide us with the details related to our PCC 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 second quarter, and summing up expectations about the remainder of the year. Total shipments of U.S. printing and writing papers in the second quarter of 2003 declined slightly from the comparable period a year ago, continuing the negative production bias exhibited during the last few quarters. We are hopeful that a turn around will continue in the second half as the economy begins to respond to various government, fiscal, and monetary stimuli. On the positive side, magazine ad pages and catalogues mailed continue to show strong growth over the first five months of this year, compared to the same period last year.

This translates into increased demand for coded groundwood papers, primarily light weight coded, which through the first five months of this year have advanced 14.6% versus last year's first five months. Unfortunately, imports of coded paper, particularly coded groundwood, have been strong during this period of time, thus reducing the need for domestic shipments. In fact, imports of coded groundwood paper from Europe increased significantly from April of last year. Consequently, domestic paper and mill operating rates have trended downward. U.S. operating rates are still hovering around 90% for coded groundwood in spite of reductions in capacity at UPM Kymmene and Sora Enso. Operating rates for coded free sheet currently stand at 84%, have been similarly affected by imports.

In addition to a weak U.S. demand, imports now account for 30% of the U.S. market for these papers. Demand for and shipments of uncoded free sheet, our most important market segment, have continued to languish through the second quarter. Ricey, a widely followed forecaster of paper industry trends, estimates that the U.S. uncoded free sheet market has now lost 1.5 million tons of demand, or 10% of the market, since its peak in 1999. Inventories of these papers are rising, and paper mills continue to take extended downtime. For example, three of our major customers, DomTar, International Paper, and Weyerhauser, have announced or implemented plans to curtail production. Thus, we are cautious in our outlook for North American uncoded free sheet.

We are hopeful that demand will recover somewhat during the second half of this year in response to an improving economic climate. Internationally, overall demand for printing and writing papers in western Europe is declining in similar fashion to the United States. But unlike the U.S. situation, European production of printing and writing papers remains firm, because a large percentage of that production is destined for export shipment. For the past year, European domestic consumption of printing and writing papers has shown meagre growth and, in fact, the second quarter showed negative growth versus last year. In response to world fiscal stimuli, we are hopeful that European domestic printing and writing paper demand will slowly rebound, but not until the third or fourth quarter of the year establishing a firm base for a stronger 2004.

In addition, we believe that the Asian economy should begin to modestly recover from the recent SARS-induced slowdown which should lead to improving paper demand. I am pleased with our worldwide sales growth during this difficult second quarter in spite of continued lackluster economic growth and poor paper history performance. MTI's total PCC sales for paper and non-paper applications in the second quarter are up 3% over the prior year's second quarter from approximately $103 million to $107 million, despite Great Northern's shutdown and the recent International Paper resolution. The continued weakening of the U.S. dollar was the major contributor to the sales growth. During the quarter, foreign exchange had a positive impact of over $4 million. Total PCC operating income remained stable in the second quarter due to the successful implementation of continued cost-reduction programs. On a same-store basis, global sales tonnage of paper PCC from existing satellites have increased about 2% in the second quarter compared to the like period a year ago.

If Great Northern had been operating continuously during the second quarter of this year, our overall tonnage would have grown over 3% during that time. I am pleased to note the new owners of Great Northern have restarted part of the Millinocket, Maine paper mill complex as Katahdin Paper Co. And although our PCC satellite hasn't restarted as yet, we are supplying the mill from our nearby network of satellite plants. When the complex is fully operational, sometime next year, we anticipate the restarting of our PCC satellite. Our European region posted strong sales growth over 26% for the second quarter compared to a year ago. The full ramp up at our one year old Alazaid, France satellite and favorable foreign exchange were major contributors to our healthy European performance.

Interest in coding grade PCC remains very strong with continued product trials in progress at several potential customers. Our Hermail, Belgium facility was instrumental in supplying overcarb 840 PCC to the market in advance of the completion of our Walden, Germany facility slated for mid-to late 2004. As Paul mentioned, Minerals Technologies and International Paper have been entered into a new PCC supply agreement covering contract extensions at eight of our existing 10 PCC satellites. Included as part of this agreement, MTI has licensed from International Paper, unique technology that has the potential to increase average PCC fill-la content up to 30%. Joint product development is now underway to reduce this technology to commercial practice. We fully expect this technical co-operation to extend into other application areas as well, such as coded paper and paper board. We are pleased that overall customer trial activity has picked up in both the uncoded free sheet and groundwood market segments.

We are confident that this will translate into new satellite opportunities as we move forward into the second half. Now, let us briefly turn our attention to specialty PCC for non-paper applications. Overall specialty PCC sales were down 2% quarter-over-quarter due to weakness in the automotive and commercial construction markets, which is expected to continue into the third quarter. We are cautiously hopeful that our specialty PCC sales will recover as we go into the fourth quarter. In conclusion, in spite of a difficult market environment, we were able to capitalize on recently implemented strategic initiatives in paper and specialty markets. Based on the sound business fundamentals just discussed we remain guarded but hopeful that a late business recovery, coupled with significant new projects will culminate in important PCC sales growth.

Now I will turn the microphone over to Alain, who will review MINTEQ's business performance. Alain.

Thank you, Ken. These [INAUDIBLE] which must be categorized as a highly [INAUDIBLE] and somewhat unsteady recovery of the steel industry, MINTEQ's second-quarter net sales were up 10% versus prior year, and operating income was up 11% showing a successful leveraging of the P & L. While I would like to stop here, both customer [INAUDIBLE] and the balance of positive and negative factors underlying this performance do require some further explanation. The second quarter MINTEQ net sales of 65 million, a new second-quarter record for MINTEQ, increased approximately 6 million dollar, compared to our 2002 second-quarter sales. Our sales of products, that is to say materials, were up 9% and equipment sales were up 29%.

While strong equipment sales speak well with regard to the success of MINTEQ's approach of selling systems of much equipment and materials, that optimize product performance, it should be noted that equipment sales tend to be volatile and fluctuate to a high degree quarter to-quarter. However, sales of the product applied through the equipment cumulative at time. Each new piece of equipment requires an ongoing supply of product, providing a non-volatile revenue stream that builds over time. Operating income of $6 million was up 11% versus prior year, and represented 9.3% of net sales. This was the result of a balance of two factors: First, our cost of sales ratio showed strong improvement yielding a 18% increase in production margin.

Second, MINTEQ made the decision to invest heavily in the [INAUDIBLE] future business, with R&D up 23%, and total expenses up 21%, partially offsetting the gain in correction margin but still resulting in an 11% increase in operating income. It should be further noted that our increased expenses reflected an increased provision for bad debt, which covered the second quarter bankruptcies of Weirton Steel in the U.S. and Steelco in Canada. As evidenced by this recent bankruptcies, it is clear that the steel industry, while much improved over last year, is still not in any condition that can be called stable or robust. particularly in North America. So all of our key U.S. customers continue to operate on the Chapter 11 protection. This is despite the fact that global steel demand is up substantially. Steel industry problems appear to be more related to price than sub-demand, also decrease of too much production is of some concern.

AK Steel , one of our largest U.S. customers, reported a substantial second-quarter loss versus a profit last year, based on, open quote, declining prices coupled with increased cost for purchase raw materials. Closed quote. AK and several other major steel makers have recently cut back production and not chased after ultra low-priced business being targeted by imports. Figures for the first six months of 2003 indicate that world steel production for the first half of 2003 increased 8.2% over the first half of 2002. By region, North American steel production for the half was up 3%. The European union was up only 1.9%, Latin America, up 8.4% and Asia, up 12.6%. Steel production in Asia continues to be a reflection of China, now the world's largest producer, where steel production increased an astounding 21% for the first half. Without the impact of China, Asia increased at the moment as 5.2% in the first half.

Of some concern has been the trend in steel production. In North America, steel production in June was down 1.7% versus May, and down 3% versus June 2002. Output in the European Union was down 5.7% compared to May, and was down 1.9% versus June 2002. While modest growth in global steel production is anticipated in the second half, the long-term trend to [INAUDIBLE] increased global share of steel production is shifting to developing countries, in particular China, will affect the growth in North America and Europe. Recently, there has been a movement to cut back production to stabilize prices in both Europe and America. This would impact steel in the second half, particularly in the market regions where MINTEQ is strongest.

By region, MINTEQ second-quarter net sales were up 7% in the Americas, 23% in Europe, and down 4% in Asia. Thus, in North America and Europe, where MINTEQ system approach has been widely introduced, sales have exceeded market growth in steel. In Europe, it should be noted that while we had strong volume increases in the basic oxygen furnace and electric furnace segments, new equipment sales were down and again versus prior year was primarily driven by favorable currency impacts. Net sales in Asia continued to be a disappointment, down 4% versus prior year. This was primarily due to the loss of a customer in Japan, whose requirements we supplied in the first half of 2002 under a long-term supply agreement that expired in July of last year. The continuous strong growth in China steel production, reaffirms our decision to commit additional resources for developing the market for MINTEQ refractory systems in China.

While production of steel in China remain high throughout the first half, the SARS epidemic restricted travel and did a [INAUDIBLE] of MINTEQ systems. We expect Trice to accelerate and get back on track with significant increases in commercial sales by the fourth quarter. As the Chinese steel industry increasingly participates in the free market economy, return on Capital will become more of a driver. In this context, we believe the ability of MINTEQ Systems to increase forward and return on investment, will provide MINTEQ with the opportunity for substantial growth. By product line in the second quarter, MINTEQ's refractory sales grew 7%, metallurgical product sales grew 19%, non-ferrous products grew 4% and equipment sales grew 29%. As I indicated earlier, MINTEQ's production margin increased 18% on a 10% sales increase.

Contributing to this improvement were favorable manufacturing variances of half a million dollar and favorable product mix shift, particularly in the United States. As LTB and Acme, we started at BOF operations MINTEQ was able to substantially increase its sales of high-performance products to the BOF segment, the most demanding of refractory applications. Fortunately, the cost of our key refractory raw materials that are purchased from China in dollars, has not been adversely affected by currency fluctuations. While there has been increases in the price of these raw materials, currency has not been a factor. If China lets the R&B freely float against the dollar, there would be an exposure. However, such a condition does not appear likely at this time.

With regard to the 21% increase in expenses, as I remarked in the previous conference, a number of organizational changes had to be implemented in order to assure improved manufacturing [INAUDIBLE] and timely implementation of cost improvement projects. As evidenced by the increased production margin, this program is meeting with success. In addition, the need to expand our participation in China, has prompted the strategy decision to incur additional expenses in order to rapidly build our organization in that region. Spending for R&D in the second quarter was up 23%, as a result of hiring additional research specialists and accelerating development work on our new hot shot quick product, OPTISHOT SP of G..

This product will allow steel makers to make structural repairs in ladles and furnaces while hot. Second, a new line of improved not-wetting hot metal contact products was developed to help stimulate sales in our non-ferrous products. 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. Product performance was still [INAUDIBLE] and electronic furnace applications were developed in the second quarter and successfully tried. In conclusion, while MINTEQ achieved an operating margin of 9.3% of net sales in the second quarter, we averaged 10.1% for the first half.

Assuming the steel industry continues with a modest recovery overall, MINTEQ will be successful in delivering on its commitment to increase the operating margin and contribution to earnings in 2003, as compared to 2002. However, we do have some concern related to steel production cutbacks and their duration in the third quarter in both Europe and North America, but at this time we expect an increased demand for our new systems and modest uptick in the economy in the fourth quarter. John.

Thank you, Alain. You have just heard the descriptions of the business environment and the highlights of the operating position, the key programs of the company during the second quarter. I shall now review with you how that information's reflected in the company's consolidated results for the quarter. Net sales were $202.4 million, an increase of 15.6 million, or 8% compared to prior year. Foreign exchange had a $9 million or nearly 5 percentage point favorable affect on sales for the quarter driven primarily by the continued weakness of the U.S. dollar against the euro. As you have just heard, both of our business segments continued to achieve sales growth during the quarter, despite the underlying weaknesses in the primary markets, paper and steel.

Sales in the Specialty Minerals segment were 137.4 million, and 8% growth. Approximately 4 points of that growth was generated by the Polar Minerals acquisition, completed in September 2002, and about 4 points of growth was from currency. Sales of PCC increased 3% to 106.6 million. Sales growth in the PCC product line were tempered by the continued idling of the Millinocket PCC facility, continued weakness in the non-paper PCC market, particularly automotive and industrial construction, and the resolution of the IP agreement. However, despite weakness in the worldwide paper industry, overall PCC product line volume increased 2%. Sales in the process minerals product line were 30.8 million, up 26%, primarily the effect of the Polar acquisition and were up 4% excluding that acquisition as high demand continued for our products in residential construction-related industries.

The refractory segment sales increased 10%, to 65 million as compared with 59.1 million in the prior year. Approximately 7% of the growth was due to the favorable impact of foreign exchange. The remaining growth is primarily due to higher refractory and metallurgical wire sales in North America and increased equipment installations during this quarter. With the relatively strong sales results for the quarter, performance and gross margin line also improved. Overall MPI's gross margin increased by $4 million or 8%, growing at the same rate as sales. In the Specialty Minerals segment, gross margin increased 4% as overall growth was impacted somewhat by the shutdown of the Millinocket satellite, continuing development costs at the Hermall, Belgium facility and the effect of the IP resolution. Although volumes have increased, synsil trial costs were slightly below prior year, reflection of increased pricing and improved operations. In refractory segment gross margins grew 18%, on a 10% sales growth, reflecting the benefit of an improved mix in the equipment sales.

Total marketing administrative expenses for the quarter increased 13%, versus the 8% sales increase. As planned, the refractory segment increased marketing expenses to support our business development efforts worldwide and we implemented an aggressive program to replace our global ERP systems. In addition we incurred higher medical expenses and increased our bad-debt provision during the quarter. The company's research and development expenses for the quarter were 12% above last year, due to increased product development activities in both segments, and include the purchase of technology rights from International Paper. As a result, MTI's income from operations reached 21.6 million, 10.7% of sales and grew 3% over the second quarter of 2002. The Specialty Minerals segment's operating income was level with prior year, generating an operating margin of 11.3% of sales.

Excluding the impact of the IP resolution, the operating ratio would have been 12.2%, the same ratio as the prior year. Refractory segment generated an operating margin of 9.3% of sales, slightly below the expected double-digit performance. Non-operating reductions increased by 0.7 million for the quarter, primarily due to higher interest -- net interest cost and foreign-exchange losses. For the first six months, the overall effective tax rate was 27.9%, just slightly below last year's rate. The net reduction year to year is primarily a result of a reassessment to the geographic mix of earnings. As a result, net income was 14.3 million, and diluted earnings per share for the quarter were 70 cents, or 4% above the same period in 2002. These results include the effect of the company's agreement with International Paper Company, which reduced earnings by about 4 cents per share for the quarter.

To summarize, the income statement for the quarter, sales increased 8% generating an 8% increase in gross margin, total expenses grew 13%, leading to an increase in operating income over the second quarter of 2002 of 3%, an increase in non-operating deductions mostly offset by a lower tax rate, led to a 2% growth in net income. Diluted earnings per share increased 4% to 70 cents, compared to last year's 67 cents per share. Our balance sheet remains very strong, our debt to total capital ratio remained at 17%, giving us substantial capacity to continue to support and invest in our growth strategies. Cash generated from operations through June was about 45 million dollar. To date, we've invested about 30 million in capital additions, we have also repurchased 124,500 shares for treasury at an average price of 37.88 per share for a total expenditure of about 4.7 million. Depreciation and amortization expenses totaled approximately 35 million for the first half. Now I will turn the mic back over to Paul for his closing remarks and for questions.

Thank you, Ken. And John. As you can see Empty I has been able to deliver growth in sales and income despite a difficult market environment affecting our two largest customer industries, paper and steel. The economic recovery so far remains invisible. MTI has based it's outlook for the remainder of 2003 on a continued drift scenario with a minor upswing beginning only in the fourth quarter. As you also heard from Ken and Alain, we anticipate a number of customer slowdowns in both paper and steel in the third quarter. As a result, I believe third-quarter performance may be below what I would like to see. And that earnings for full-year 2003 may be reduced by 5 to 10 cents per diluted share. Operator, we are ready for the first question.

Thank you, gentlemen, the question-and-answer session will be conducted electronically. If you'd like to ask a question, please press the star key followed by the digit 1 on your telephone. If you are using a speaker phone, make sure to turn off your mute function in order to allow your signal to reach our equipment. Again, that's star 1 to ask a question. Our first question comes from Alan Cohen with First Analysis?

One, congratulations yet again in doing a great job in a tough environment.

Thank you, Alan.

A couple of clarification questions. If I look at your statement about the 4 cents impact of all the IP agreements, would it be fair to divvy that up with perhaps 3 cents on the contract renegotiations and 1 cent for the license fee?

Allan, that would be one way of looking at that in terms of the resolution with International Paper and how it impacted the -- our earnings in terms of the adverse impact of four cents per share.

And is there going -- other than an ongoing royalty when you sell anything, are there any other pieces of the license fee that are yet to be paid?

Uh, not -- no. No, there are not. Obviously we will have continuing costs going forward from the resolution, as you would -- a continuing impact, I should say.

That -- that's for sure?

Right. As we go forward. And I would expect that impact would be in that three to four cents per share per quarter as we go into the third and fourth quarters in 2003.

And then, Alain, I think your premise that some day people in China will pay attention to an above-zero cost of capital is perhaps realistic, but perhaps not in our lifetime with the way they're going. If you look at some of the drivers there of putting people to work where they don't pay them much and some, at least in the decision process, no cost to capital, what does that do to your selling proposition under those dynamics?

Well, the value equation we have today is still for reduced expenses, and that's not only labor cost as you recognized are low in China but also material cost. But also the major driver in China right now is the throughput, and the production capacity is very tight because the demand is very strong. And our products and systems allow the steel maker to increase the output by reducing downtime. So this is a very strong factor in our value proposition. So we expect to be successful based on these parameters.

Okay. And then, John, is it fair with all the additional trials that the R&D cost should go up sequentially? The synsil trials?

Yes. Well, they've been running -- the net cost is really not much different than last year. And with the increased trials, because there is some additional pricing going on, it has not had a noticeable impact.

Okay. Thank you very much.

Next with Sidoti and Company, Robert Kosowsky.

Hello gentlemen, congratulations on a good quarter and a tough environment as well?

Thank you, Robert.

I was just curious what your operating margin refractory segment would have been without these unexpected bad-debt expenses?

That would be -- it's tough to say, obviously we had additional bad-debt accruals that we made.

Yeah?

We did not have to take a special provision for the bankruptcies at Weirton and Selvell, and we've obviously increased , as I indicated, the accrual rate, Robert, for that. That would have certainly some small impact on that ratio that we have.

But it would only be a few tenths of a basis points, in my mind.

Okay.

Excuse me, a few tenths of a per cent.

Okay. A few tenths of a per cent. And just getting back to the China topic. What percentage of your sales in the refractory segment are in China right now and what are some of your goals for maybe a year out, 2 years out and just kind of give a little bit more color on the margins of that region, too?

Obviously our sales right now are very limited but I'll ask Alain to address that further.

Our sales are very limited right now. I think I mentioned that we are doing extensive trials. We were doing these trials, in fact, prior to the outbreak of the SARS epidemic. And all activity was frozen. So we are resuming this activity and we have a very important program between now and the end of the year for these trials. I cannot give you a specific number of sales we will have next year, but today the sales we have are marginal. We are still working on a business plan, but we anticipate to see some commercial sales in the fourth quarter.

Okay. Thank you very much, guys.

Thank you, Robert.

Next we have Jeff Zekauskas with JP Morgan

Good morning?

Good morning, Jeff.

I guess I'll just start off with some questions of clarification. You said that earnings may come in light by five to ten cents, versus what?

We have, Jeff, as you know, have been providing some guidance. When we announced the resolution with International Paper we indicated that that would have an impact for the year, some pluses and minuses, but in the range of about 10 cents.

Right?

And we're saying now that the concern that I have, Jeff, as I look at what Alain indicated with the slowdown in steel production that he's seeing both in Europe and here in North America and what Ken mentioned in terms of whether it's a DomTar or an International Paper or Weyerhauser taking downtime, extended downtime at certain mills.

Right?

That we're concerned that we're going to see a further decline, obviously, in our earnings. And I'm just trying to share that. I think the difficulty I see is going to be primarily in the third quarter with hopeful improvement as we go into the fourth quarter. But that impact could be in the range of five cents or seven cents, eight cents, something like that, ten cents in the third quarter, maybe a little bit in the fourth quarter. But the concern we see is the slowdown, the fact that steel companies are slowing down production, that several of the paper companies have announced slowdown and machine shutdowns and that's our concern that we have.

What I don't understand is, was your original expectation for the year $2.80 or $2.90 or $3?

Originally we were in the $2.90 or $3 if you remember. That's where we started as we were originally looking at the end of the first quarter, we said we were going to be in the 2.90 to $3.00 range and then we indicated with the resolution of the international paper opportunity, that that would have reduced it by about 10 cents. And we're saying now that we see, as we look at difficulties in both steel and paper, especially in the third quarter, that it may be another, say between five and 10 cents.

Okay. So it's 2.70 to 2.80 if I understand what you just said?

That's correct.

I couldn't tell from your comments on synsil whether you were ahead of schedule or behind schedule or on schedule?

Jeff, we're pretty much on schedule right now with what we're doing. We have a couple large trials underway as we speak. We expect with what we see right now and the results that we're seeing with -- especially one of the trials, that that will go into a commercial mode by the end of the year, and we're very pleased with that. And in addition to what we have ongoing right now, we're looking at additional trials already scheduled in wool fiberglass reinforcing fiberglass and container glass.

Is the one trial that was at semi-commercial scale, is it now decided that you're going to commercial production?

No, no.

Or still not decided?

Still not decided. But we're expecting that will go into that mode as we go over the next few months.

Okay. Like, my recollection is that that was supposed to be a third-quarter event, is that correct?

We originally were hoping it would be a third-quarter event but we're probably within 30 days of that.

Okay.

So we're --

30 days at the end of the third quarter or 30 days as of today?

30 days -- I was looking at a third-quarter event I probably would say it maybe into the October time frame. So we're within a very close window here.

Very close window?

Right. So we're very pleased with the progress that we're making here.

Okay. The last question, I'll get in the queue. In terms of the increasing filler levels in PCC with IP, is there any general time frame for that?

There's not a general time frame per se, Jeff. But, obviously, they are anxious to do it and, as Ken indicated, that is moving forward very nicely, both ourselves and IP have put teams of individuals into this program from a research and technology perspective with the directions both from myself for our people and from senior management and at IP that we need to move this as rapidly as possible.

Okay. Thanks very much.

There are two names remaining in our queue. Once again if you would like to ask a question, please press the star key followed by the digit one. Moving on now to Rosemary Marelli with Ingalls & Snyder.

Good morning and congratulations again?

Thank you Rosemary

Since the agreement with IP, have you seen any signs from all the paper companies that they are going to start exerting pressure on MTX in order to get PCC at lower prices as well?

No, we have not. Obviously, people are aware of the agreement that we have with International Paper. Certainly recognize that they are one of the largest paper companies in the world. But we certainly have outstanding relationships with the other companies that we work with. We have worked very closely with them in terms of moving new technologies forward, extending contracts, that those negotiations and discussions have moved forward very nicely as we are looking to introduce new technologies, whether it's in groundwood or coding for example, those are all being received very well. So still those strategies continue to move forward as we anticipate them to.

And even through the grapevine you don't hear that some are beginning to make noise?

I have not, but I'll ask Ken to directly address that, Ken.

No, Rosemary, we have not. So, in essence what we did with international Paper, of course is what we did with that particular company, but in essence we continue to move forward on all front s with our other customers.

Okay. And on the refractory side, the margins did not reach the 10% level, consider in the second quarter as expected, considering what is happening in the industry and your comments about slowdown and so on, do you see it achieving it in the third quarter just because of the cost-cutting and the changes you have said?

Obviously, we're expecting, from the refractory side, the MINTEQ side, obviously improvements in our operations as Alain very properly and very nicely discussed in his prepared comments, and we see those improvements with the changes he's making there. Obviously, it will be a challenging environment because of the slowdown in steel production that we see. So it's going to be a balance of the improvement that Alain is making with his management team and certainly the market conditions that we're encountering at that time. But I'll ask Alain to also answer that. Alain.

I think, as it was communicated before, there will be, we expect, an improvement from last year's performance. The goal that we set at the beginning of the year of double-digit operating margin will largely depend on the evolution of the demand. And we indeed have some concern about the third quarter.

Okay. And do you expect to also more bad debt to be needed, I mean additional accruals? What do you see in terms of your customers? Do you think that some additional ones are on the verge of filing?

As we look at that, Rosemary, yes, we will continue the accrual, the higher accrual for bad-debt expenses just to be as cautious as we can. Obviously, we were able to deal with the Weirton and Stelco bankruptcies without any special provisions, but certainly we will, as we go into the third quarter, continue with the higher accrual rate for bad-debt expense. Again, just the way we operate this company as conservatively as we can.

And you mentioned, if I understood it properly, that in terms of coded groundwood, you have more competition from Europe. And is that competition coming -- well, in addition to the expense -- to coming at the expense of tonnage, is it also at lower prices and therefore you are seeing margin shrinking here?

We're not seeing -- let me just try to -- could you -- I'm having difficulty responding to your question, to really understand in terms of specifically the groundwood segment, Rosemary.

Well, I seem to, I was writing very rapidly, so my memory may not be correct, but it seemed as though there is an increased pressure from exports or imports into the U.S. from Europe on the application of PCC for groundwood?

Okay. The imports -- okay. Now I understand what you're saying.

And I may not have understood it right to begin with?

Okay. No, no. There, in fact, as Ken indicated, as you look at paper production, although there's been some slowdown in paper production here in North America, paper production has continued at as high a rate in some cases in Europe. And part of that reason is the export of paper from Europe into other countries, whether that's the United States, for example, or Latin America or wherever that may go to. We still are moving forward with our groundwood program in terms of converting people to the use of PCC in groundwood. Obviously, the big change that has occurred in this market area for us has been the succession of operations in our Millinocket satellite plant due to the bankruptcy of great Northern Paper at that point. So certainly as I look at it from a year-over-year perspective, that has a negative impact on our total production of PCC for that segment here in North America. But overall, the movement and the trend towards the use of PCC in groundwood paper continues to move forward.

And you don't find that the exports from Europe, if they are coming into North America, are coming in at a lower price and therefore eliminating some of your abilities to get a good margin on that new products even though it is still growing?

No. And from that question now I see where your question is the answer is no. In fact, some of our customers are actually, because of the shutdown of the Great Northern Paper facility and the grade of paper that they were producing, that we're selling more PCC to some of the other accounts to compensate for that in the marketplace.

Okay. Thank you.

Did you have anything further, Miss Morelli?

No I am fine, thanks.

Thank you. Moving on we have some followup questions, the first coming from Alan Cohen.

Yes. In looking at the what I believe is the patent you licensed from IP, it essentially describes precipitating PCC onto fuzzy pulp, if you will?

Okay.

If I've got that part right, is that normal pulp, or does that need to go through some special pretreatment before it can be utilized with that technology?

There are in fact a number of different ways of preparing pulp for use as a filler fiber composite material, and that's certainly some of the technology development that will be done between the two companies.

Is that materially higher cost than preparing the pulp to go directly into the paper machine?

I don't -- obviously that's an excellent question, Alan, and that's one of the things that will be evaluated during the research and technology development program. We don't believe it is at this time, but obviously it is another step in the process. So there could be some additional cost that I would expect to be associated with it, but not one that would prove the process to be one that would be uneconomical.

Thank you very much.

Jeff Zekauskas also has a follow-up question.

A couple of questions. Given the lead times in developing adequate test data with synsil, would it be the case that in the three other trials that you've talked about, if you were successful you would sign contracts in '05, or would it be in '04 or in '03?

Jeff, a very good question. What we have done in synsil, and I think this is why, obviously, as I indicated, we believe the program is accelerating, why it's moved to semi-commercial phase, hopefully it will move into the commercial phase as we discussed a few minutes ago. We have learned during these trials and have accumulated a significant amount of information, a body of intellectual property of how you would run a furnace, for example, how you take advantage of the performance of synsil in that glass batch. And a lot of it is counterintuitive. You know, obviously you put synsil in, you're saving energy. You can improve the productivity. And we're learning now and obviously teaching at the same time the way that you would, to the glass maker, the way that you would properly use synsil and get the most benefit from it. So as we have learned through the trial program in part of the reason that we've been learning is that the data is available to us, it's done on a very co-operative basis, and the information, obviously, we're gathering just as the potential customer's gathering. We're able to learn and more completely describe the benefits of using synsil, but more importantly also what the furnace conditions need to be to obtain the ultimate benefit from the use of the synsil product. So I think that as we have learned that over the last six months, 12 months, especially since we've accelerated the trial program with the customer sampling facility, that we hopefully will move the program quickly once we get into that commercial stage.

Okay. Well, I don't -- so, are you saying that you can sign more than one contract this year, next year, or in '05? I don't -- I still don't understand?

Okay. I would expect -- if I can say. The goal that we have is to sign a contract here over the next few months in North America.

Right?

And that we would in 2004 have the opportunity to sign additional contracts.

Okay. In '04?

'04, sure.

Second for John Sorrel. What's the expected tax rate for this year and next year?

At this point, we're looking at the tax rate we're running now at about -- just under 28.

If I -- just under 28 for the remainder of the year?

That's correct.

Okay. Can you talk about the magnitude of the curtailment of production in paper that you expect for the third quarter?

As we look at it, Jeff, obviously the curtailment is done on individual mill basis.

Right?

It's done obviously to control the inventories for that customer or that producer at that location. It's difficult for us to specifically quantify the amount of that curtailment in terms of tons of PCC produced because it depends on, one, how long the customer will curtail the operation of his machine, whether it's a two-week curtailment or whether we'll continue for three or four weeks, for example,.

Hmm?

That we don't have specific information on. So from that perspective it's hard for us to judge it. Other than we're hearing from multiple customers at this point, that inventories have built up in the uncoated pre-sheet area, for example, and that curtailments are being taken to bring those inventories down. Obviously, if the economy improves in the third quarter, that will be a short period. If the economy does not improve and the demand for that paper does not increase, then that curtailment may be a little bit longer. Maybe not as great a curtailment, but still some curtailment.

Again, as a last question, if you had to do it all over again, would you not have bought the various refractories business that you've bought over time?

Would we have not? No. I think the acquisitions that we have made on the refractory side, for example, whether it's Ferotron, for example, Martin Marrietta, are in fact moving our strategies forward just as Alain has indicated. The critical thing obviously is with the Ferotron, our systems approach, the MINSCANs, the Scantrol, are in fact being installed at steel mills worldwide and that is a critical element as Alain indicated for our future growth of this company. The Martin marrietta acquisition obviously gave us an excellent position in the electric furnace segment and that segment now is in fact adopting the use of the automated application equipment, the MINSCANs. But I'll ask Alain to also address that, Alain.

Yes. I think one of the positive factors that we had in the second quarter was the improvement in the production margin. That was the result of the improved mix of our products and also the contribution of the products and the positions we inherited from these acquisitions.

Well, what I mean is that your sales were 70 million higher now than they were in the late 1990s and your operating profits lower? I mean, were the acquisitions in the end defensive acquisitions, or is there leverage to come as you're able to more successfully sell your product line?

Right. The word, not defensive, Jeff, as you look at it, we are in a position here as we have -- taking the company, and as you look at the programs that we've implemented over the last couple years, the operations excellence, for example, the best practices, the flexible operations that we have in some of our plants now where, because of the information computer technology we put in, we can operate plants unattended for periods of time. We are in fact positioning this company as we move forward to leverage it very quickly with an improvement in the economy, in the industries as we serve. So as we see improvement in production, whether it's in PCC or in the refractory side of the business, we will leverage the operations of our facilities because of the improvements that we have made in our manufacturing operations. So we are looking to have a company that not only has outstanding growth opportunities with the strategies that we're moving forward, whether it's Sinsol, for example, whether it's the coding strategy, groundwood, other strategies that are moving forward, the systems approach in MINTEQ, that as we continue to do that and the economy improves as we go out, whether it's in the fourth quarter of 2003 or into 2004, that we in fact will leverage this company and have a significant improvement in performance.

Okay. Thank you very much.

We'll take a question now from Greg Makowski with Lord Abbott .

Yes, thank you. With regard to the Polar acquisition in the plastics market. Can you talk about the integration there and what your expectations are and how it''s going?

Certainly Greg. Obviously, we made that acquisition in September of last year. It's been certainly one of the drivers of growth for our processing minerals business. And one of the things that we very much needed to do was to establish a presence in the mid-west, especially for plastics, adhesives and sealants and those end-use applications that go into the automotive and the appliance industries. We were obviously from a regional perspective not able to effectively penetrate and compete in those market opportunities. As you know, the Palmer industry is still an industry that's growing at 5 to 6% a year at a higher rate than the other industries that we serve. The Polar acquisition and the ability to use the products that we have and the technologies that we have, for example, whether it's in talc or ground calcium carbonate gave us the position, especially from a geographic perspective and a logistics perspective to more effectively compete in those markets and for those customers, both in the automotive and in the appliance industries. So we're very pleased with that. Obviously, just as I spoke a few minutes ago about the opportunities we take to look at best practices, to look at operations excellence, flexible operations, those are the things certainly that we will do with the Polar facilities as we move into the second half of 2003 and into 2004. But certainly will be a strong contributor to this company.

And with regard to your discussion of the imported coated groundwood papers coming into the United States and having an impact on our market here, yet you also mentioned that Europe, the European markets are negative year-over-year. Is that -- it sounds like there's overproduction there but it's still down year-over-year, is that what you're saying?

There's still -- yes. There's still good production there in Europe. And they've been able to maintain their production rate, even though it's down slightly because of exports.

I see. And do you benefit from that in Europe at all?

To some degree, we do. Unfortunately we don't have the presence in Europe that we have in North America. So in North America we have a greater presence. But certainly with those customers that we have in Europe, it's beneficial to us.

And, finally, did you mention how many shares you bought back in the quarter and how much you spent?

Yes, we did. We bought back about 125, -

More than a half?

Okay. I'm sorry. John Sorel is correcting me. John, I'll let you

What I said in the prepared text, were the 124,000 shares we bought in the half, we bought none in the second quarter.

So there were no buyback in the second quarter?

That's correct.

We have another follow-up question from Robert Kosowsky.

Hi guys. Just looking out a couple years. When do see your Specialty Minerals operating margin creeping back up to where it was in the late 1990s or so?

I wish I had a crystal ball like you do.

Like a year -- I mean, obviously the IP situation's having a detrimental effect right now?

IP certainly, as we look at, say the third and fourth quarters and probably going to the early part of 2004 could easily have a detrimental effect, but overall we continued to believe with the actions that we're taking, Robert, in terms of whether it's from a manufacturing perspective, whether it's a cost containment perspective and more importantly the implementation of our strategies for growth that we will rebuild those operating income ratios going forward. We're certainly very comfortable doing that.

Okay. And just one other question about Sinsol. When would you expect to construct a larger synsil manufacturing facility and also how much do you think it would it cost and what capacity would be there?

Obviously that's something that we are looking at internally as we see the program unfolding and hopefully moving to a very successful phase with multiple contracts. We have, obviously, as you know, and we've indicated, about 50,000 tons of capacity in our customer sampling facility in Woodville, Ohio. But as we see the success coming, we would certainly, as we look at 2004, hopefully have a plant constructed in 2004, if the program proves to be as successful as we think it should be.

Okay. Thank you.

And gentlemen we have no further questions in our queue. Mr.Saueracker, I'll turn the conference back over to you for any additional or closing remarks.

Well thank you, operator and thank you everyone for participating in our second-quarter analyst conference call. Obviously we were pleased that we were able to continue to grow the business and operating at over $200 million per quarter rate for the second quarter in a row. Obviously it's a difficult business environment that we continue to operate in, but certainly we think we have a great company with outstanding opportunities going forward. So, again, thank you for your participation and have a good day.

That does conclude today's conference call. Thank you again for your participation.