Minerals Technologies Inc (MTX) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the Minerals Technologies Inc. third-quarter 2003 earnings results conference call. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Paul Saueracker, Chief Executive Officer. Please go ahead, sir.

Good morning and welcome to the third quarter 2003 Minerals Technologies analyst conference call. It is a pleasure to again be able to report growth in sales and net income, despite what I'll refer to as a disconnect between the economy as a whole and the materials manufacturing segment. MTI achieved net sales in the third quarter of $198.2 million, 3 percent above prior year's third quarter. The growth in sales was realized in both PCC and Process Minerals. Continued customer bankruptcies and a decline in third-quarter steelmaking in our largest markets caused our Refractory segment sales to decrease by 1 percent.

Despite a number of factors that adversely affected our operating income in the third quarter, net income increased 71 percent to $24.2 million from $14.2 million in the third quarter of 2002. In the third quarter, because of the expiration of the statute of limitations, for (ph) a review of tax returns for earlier years, the Company was able to reverse certain tax accruals. This onetime, non-cash item, which was reflected in a reduced 2003 tax provision, increased our net income in the third quarter by $11.5 million, or 56 cents per share. As a result, diluted third-quarter earnings per common share were $1.18, up 69 percent from the 70 cents reported for the same period last year.

Following my introduction, Ken Massimine, Senior Vice President for Paper PCC, will provide you with an insight as to the factors underlying the performance of our largest product group, PCC. Alain Bouruet, Senior Vice President of MINTEQ, will report on the refractory portion of our business. And John Sorel, our Senior Vice President of Finance and Chief Financial Officer, will provide a financial summary, including some further detail on the tax adjustment. 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 10-K we list the various factors that may affect future results. Any forward-looking statements by me or other members of our management team are subject to these cautionary conditions. There is a general consensus that the U.S. economy, as measured by GDP, increased at an annualized rate in excess of 4 percent in the third quarter. What we are observing however, is a disconnect between the economy as a whole and the materials manufacturing segment. While over time, MTI continues to secure a larger portion of its business outside the United States, as of today, over 60 percent of our sales are tied to the U.S. economy.

It is important to note that manufacturing represented less than 14 percent of the U.S. economic output in 2002, and an even smaller percentage of that was attributable to basic materials. If we look back to 1988, manufacturing represented over 19 percent of GDP. As demand for finished goods rises, it takes time for that demand to back up through the supply chain and basic materials is the last segment to respond. Production of steel in the United States for the third quarter was down 14.5 percent versus prior year. Shipments of uncoated freesheet paper were down 0.4 percent versus prior year. We are hopeful that as the U.S. economy gains momentum, the manufacturing sector will pick up speed beginning in the fourth quarter and accelerate throughout 2004.

While Ken and Alain will provide you with a more detailed analysis of our PCC and refractory businesses, I would like to point out a few highlights. Total PCC sales are up 1 percent for the quarter, reaching $108.5 million. Sales of PCC used and paper were also up 1 percent. This is despite the softer market conditions in the United States for uncoated freesheet papers, SMI's largest market, and the shutdown of the Great Northern Paper Mill in Millinocket. The Millinocket Mill, which is owned by Katahdin Paper, was a large volume customer in 2002. We still (indiscernible) Katahdin Paper's decision as to the date of the restart of the paper and (indiscernible) complex where our satellite facility is located.

While demand for uncoated free sheet has been sluggish, the demand for lightweight coated grades has been improving, as evidenced by the quantity and bulk of mail-order catalogs arriving in our mailboxes. For MTI, this is a good sign rather than an annoyance. Our sales to the coated freesheet segments are up approximately 5 percent compared to last year at this time. We are constructing a large merchant coating grade PCC facility at Walsum, Germany, to service the growing European market for coated paper. Qualification trials of MTI's products are proceeding, supplied from our Hermalle Belgian facility to develop an immediate baseload for the plant when it comes onstream in September, 2004. I am also happy to announce the startup of our 54th PCC satellite at Sabah Forest Industries in Malaysia. Finally, the implementation of the agreements that we reached with International Paper in the second quarter is proceeding as planned. We are actively investing in R&D to cooperatively (ph) develop IP's filler/fiber composite technology. This technology has the potential to significantly increase the demand for PCC in uncoated freesheet paper.

Our specialty PCC product line sales were down slightly in the third quarter, again due to sluggish demand from durable goods and manufactured products. However, while sales did not grow, our efforts to reduce costs and expenses have had a payback as the operating margin of this segment began to improve in the third quarter. The refractory segment has faced an extremely difficult operating environment in the United States, as the steel industry continues to consolidate and restructure. As Alain will describe to you, MINTEQ has developed a program to grow both its sales and its operating income despite an adverse environment. Although MINTEQ sales decreased 1 percent compared to prior year, MINTEQ achieved an 8 percent increase in production margins. This reflects the success of its programs to focus on higher valued products and technologies, reduce costs and become more efficient.

An industry that is undergoing drastic change requires a drastic change on the part of its suppliers. I am in full support of the program that has Alain has developed to reposition MINTEQ to succeed in the refractories business by broadening our geographic scope to include China. That includes introducing new monolithic products to replace brick (ph) that can help the steelmakers increase productivity by eliminating costly downtime and installation labor, and the introduction of high-technology measurement and control devices for the high temperature processing areas where MINTEQ materials are currently used.

Our Processed Minerals Groups continue to show strong growth, with sales up 25 percent. Excluding the September 2002 acquisition of Polar Minerals, third quarter sales growth for this segment was 8 percent. This growth was driven by the strong performance of the residential construction and housing sector. I am happy, of course, to finally report that Minerals Technologies signed its first commercial contract with a major glass manufacturer for the use of our Synsil products. At the request of the glass manufacturer, we will not disclose its name at this time. I would also like to point out that this is the first step toward full commercialization of this potential new productline. At this time, other customer trials are being run, and the evidence supporting the use of Synsil products as an alternative raw material to the conventional glass manufacturing process is building. We are looking forward to further contracts in the near-term future. I will now ask Ken Massimine to provide us with a review of the third-quarter results for our PCC business.

Let me begin by providing a summary of current conditions within the paper market, followed by highlights of our business results for the third quarter and some expectations about the remainder of a year. Shipments of U.S. printing and writing papers in the third quarter of 2003 showed modest improvement over the second quarter, but were approximately 3 percent below last year's third quarter. The long-awaited turnaround in the U.S. economy appears to be having a positive effect on some portions of the paper industry. Specifically, a strong, fall catalog season has increased demand for coated ground wood papers, primarily lightweight coated or LWC. Domestic shipments of these papers are running about 21 percent ahead of last year on an annualized basis. And coated ground wood paper mills are operating at about 94 percent of capacity. Unfortunately, imports of coated ground wood paper, particularly from Europe, have been strong this year as well, thus reducing somewhat the need for domestic shipments. The level of these imports could have been much larger if it were not for the escalating euro, which has tempered ground wood's rate of import growth.

On the other hand, demand for coated freesheet papers in the third quarter has not shown much improvement. U.S. operating rates for coated freesheet paper, currently standing around 85 percent, have been similarly affected by imports. They now account for 28 percent of the U.S. market for these papers. Demand for and shipments of uncoated freesheet, our most important market segment, continue to be lethargic and unresponsive to improving North American economies. Even though in recent years the North American paper industry shuttered over 1.5 million tons of capacity, operating rates are stalled at around 91 percent, while pricing continues to slide and inventories continue to build. We anticipate U.S. shipments of uncoated freesheet paper will be slightly lower this year and complete its fourth consecutive year of declining output. As the U.S. economy slowly responds to recently enacted government fiscal and monetary stimuli, we expect a corresponding revival in paper demand.

Internationally, Western European overall consumption of printing and writing papers registered some improvement during the third quarter. At the same time, European production of printing and writing papers averaged about 4.6 percent ahead of last year quarter-over-quarter, due to a large percentage of their production destined for export shipment. We anticipate that domestic European printing and writing paper demand will continue its rebound during the balance of a year, establishing a firm base for a stronger 2004. In the Asian region, economies are starting to recover from the recent SARS-induced slowdown. We anticipate Asian printing and writing demand to return to their normal 4 percent annual growth rate in the near future.

While we await the revival of the world's paper markets, I am encouraged by the increased interest in customer PCC trial-related activity. This level of heightened activity is occurring in all regions of the world and in all segments of the paper industry, but especially in coated papers. As a consequence, direct R&D expenses have and are expected to continue to increase over the remainder of the year and into next year as well. We are optimistic about these new opportunities and feel confident that this increased trial activity will soon generate meaningful new business for MTI.

I am also pleased with our overall sales performance during this difficult third quarter, in spite of continued lackluster economic growth and poor paper industry performance. MTI's total PCC sales for paper and nonpaper applications in the third quarter are up 1 percent over the prior year's third quarter, from approximately 107.6 million to 108.5 million. The continued weakness of the U.S. dollar continues to be a major contributor to our sales growth. During the quarter, foreign exchange had a positive impact of $3.6 million. However, total PCC operating income declined 10 percent in the third quarter versus prior year due in part to the aforementioned trail-related R&D activities, the shutdown of Great Northern, now Katahdin Paper Company at Millinocket, Maine, as well as the International Paper resolution.

On a same-store basis, global sales tonnage of paper PCC from existing satellites decreased 0.2 percent in the third quarter compared to the like period a year ago, although up slightly from the second quarter. If Katahdin Paper had been operating continuously during the first three quarters of this year, our global tonnage growth would have increased by several percentage points. I am pleased to report that we are currently supplying their East Millinocket site with PCC from our regional satellite network. However, we still await the decision as to when Katahdin Paper will fully restart their entire Millinocket, Maine pulp and paper mill complex.

Our European region posted strong sales growth of 12 percent for the third quarter compared to a year ago. Favorable exchange was a contributor. It should be noted that interest remains very strong for coating-grade PCC with potential to build on current sales. In particular, this is in response to the construction of our new Walsum, Germany merchants PCC facility. Presently, the 125,000 metric ton Walsum facility is on schedule for a September 2004 startup. On the topic of startups, our 54th PCC satellite at Sabah Forest Industries in Sipitang, Malaysia began operations a few weeks ago without any problems. This one unit facility currently supplies PCC to our first customer in that country.

As announced previously, MTI has licensed from International Paper unique filler/fiber composite technology that has the potential to increase average paper filler content up to 30 percent PCC. Joint product development is now progressing to bring this filler/fiber substitution technology into commercial practice. We anticipate paper machine pilot testing during the first half of 2004. In addition to these filling opportunities, we are working with IP in other applicationed areas where our PCC products bring value. Sales to Specialty PCC, which is used primarily for non-paper applications, continues to be weak as a result of poor industry conditions and competition in the calcium supplement markets. For the fourth quarter, we expect the Specialty PCC segment to reflect some improvement based on initiatives in our main markets -- plastic, health care, sealants and adhesives.

In conclusion, in spite of a continuing difficult market environment, we were able to capitalize on recently implemented strategic initiatives. We remain cautiously optimistic that significant ongoing projects, especially in Europe and Asia, will culminate in additional new PCC business. Now, I will turn the microphone over to Alain, who will review MINTEQ's business performance.

Last July, I indicated in the second quarter conference some concern related to announced deep production cutbacks in the third quarter. That concern was justified. Consolidation and restructuring of the North American steel industry was the major factor affecting MINTEQ's performance in the third quarter. Since the beginning of a year, seven MINTEQ customers filed for bankruptcy, the latest last night. Moreover, despite widespread indications of an economic turnaround, steel production in the third quarter of 2003 was down in MINTEQ's two largest markets compared to last year. After a (indiscernible) start in 2003, North American steel production dropped precipitously in the third quarter, and for the quarter was down 14.5 percent compared to the prior year, despite the help afforded by protective tariffs and the weakening U.S. dollar.

In Europe, steel production for the third quarter was down 1.8 percent versus prior year. While July was 2.4 percent ahead of last year, September was 4.8 percent behind, creating a highly unfavorable short-term trend in Europe. For example, due to soft demand, extended plant shutdowns were taken over at (indiscernible) over and above the normal summer holiday seasonal slowdown, which together adversely affected MINTEQ's sales in the third quarter. Furthermore, this brought year-to-date steel production for 2003 in the EU, which had been ahead of prior year, back even with 2002.

The North American steel industry presented an exceptionally difficult operating environment. Not only was steel production down an astonishing 4.2 million tons versus prior year's third quarter, but capacity utilization was down to 77 percent versus 90 percent in the third quarter of 2002. When capacity utilization is low, increased equipment availability resulting from the use of MINTEQ's premium products, does not offer a stronger return and customers tend to temporarily settle for lower performance products. Up until last night, MINTEQ has had six North American customers file for bankruptcy this year. This included (indiscernible) Steel, Wilton Steel, (indiscernible) Steel in Canada, WCI, and REP, formerly known as Republic Steel, and recently Georgetown Steel, which came out of Chapter 11 less than two years ago, and just last week refiled again under Chapter 11, and was supposed to shut down. In addition, (indiscernible) Steel filed for Chapter 11 last night. In short, the economy upturn indicated by GDP is not yet finding its way into the domestic steel sector.

In contrast, lower steel production was up an estimated 3.5 percent in the third quarter, equal to some 12 million metric tons. Of this increase, 10.5 million tons were produced in China. While China remains a strong importer of steel, its impact on the U.S. steel market has been significant. China's exports of steel containing manufactured goods continue to surge at that the expense of North America and European durable goods producers. This reduces the raw material required by these durable goods manufacturers, thus indirectly hammering both U.S. and European steel producers.

I would add that finally, in October, a slight uptick in steel production has been noted in North America. Steel customer orderbooks appear to be filling and while not yet a trend, there is some basis for optimism in the fourth quarter. Given the fact that steel production was down in MINTEQ's two largest geographic markets, it is not surprising that MINTEQ's third quarter worldwide sales of $59.1 million were down 1 percent versus the prior year. Globally, MINTEQ's sales of products -- that is to say materials -- were down 3 percent, while equipment sales, the developing part of our business, was up 30 percent for the quarter. The (indiscernible) factor as (indiscernible) with equipment sales is that increased product sales normally follow. However, despite a strong sales increase for value-added systems, it should be noted that North American equipment sales, while up 51 percent, were dampened by the fact that (indiscernible) customer orders were not installed pending resolution of liquidity issues.

Despite a 1 percent decrease in net sales, MINTEQ's production margin increased 8 percent. This was the result of generally improved operations and higher value products and systems. However, expenses increased 14 percent compared to last year's third quarter as a result of MINTEQ's commitment to address two fundamental long-term issues, the geographic shift in steel production and while there are opportunities in monolithic products to gain share, the overall demand for refractory materials in North America and Europe remain static. Our group is addressing these fundamental issues through a three-pronged program. First, follow the geographic movement of the steel industry and establish the requisite supply capability where steel production is increasing. Today, that means China, where almost 60 percent of the world increase in steel production over the last five years has occurred.

Second, increase the scope and develop value of our business by expanding the classic definition of refractories as materials to include measurement equipment, robotics, services and comfort systems for high-temperature environments. Third, continue to offer technologically enhanced monolithic refractory performance through improved products and installation systems. This will allow us to continue to gain position from monolithic refractories in North America and Europe at the expense of brick, molten steel and non-steel application. In order to realize these objectives, MINTEQ is investing in R&D, marketing and administrative infrastructure, resulting in an increase in expenses which extended into the third quarter. The total expenses reached 19.1 percent of net sales.

Major factors underlying the increase in expenses over and above the conscious decision to invest in R&D and global infrastructure include an increased provision for bad debt write-offs and increased employee health care costs. As a result of the expense increase, operating income of $4.5 million was down 4 percent, or $169,000 versus prior year's third quarter. The operating income ratio for MINTEQ averaged 7.7 percent for the third quarter and 9.3 percent year-to-date. By region, MINTEQ's third quarter net sales were down 3 percent in North America, flat in Europe, down 27 percent in Latin America, and up 23 percent in Asia. The gain And Asia was driven by new equipment sales as MINTEQ continues to broaden the geographic penetration of its (indiscernible) business. The increased sales and the financial strength of Asian steel producers (indiscernible) record reporting earnings by Posko (ph) and Bao Steel has opened the market for MINTEQ's system approach. At the same time, progress continues to (indiscernible) in place the marketing and manufacturing infrastructure required to commercialize our products in China. Aggressive product trial programs are underway at major accounts, which will translate into increased sales in the fourth quarter and into 2004.

Late in the third quarter, MINTEQ acquired a refractory (indiscernible) facility in Bhotan (ph) in Ghana. This Bhotan facility, which had previously successfully (indiscernible) certain complex shapes for our full-service refractory program that could not be manufactured at our (indiscernible) facility, is now fully incorporated into our system.

Our spending on R&D continues at a high level. MINTEQ has developed a line of (indiscernible) products that are as durable as brick and can be installed in a fraction of the time. These products are targeted to replace brick in (indiscernible), electric furnaces and (indiscernible) represent a major avenue of growth for MINTEQ in static North American refractory markets. Outside of steel, efforts are continuing to increase our presence in non- (indiscernible) applications. (indiscernible) with our new non-wetting (ph) (indiscernible) products for aluminum not metal contact are currently underway and results today are encouraging. A significant effort is underway to reduce the cost of our refractory raw materials by working with suppliers to qualify less expensive alternatives in order to offset inflationary increases. While MINTEQ imports the majority of its refractory raw materials, the decline in the U.S. dollar has not adversely affected our purchases. This is because both magnesia and bauxite are sold by China into export markets on a dollar-denominated basis. Despite President Bush urging for free floating R&B, it is doubtful this will have any short-term adverse impact on our purchases.

In conclusion, despite an increasing production margin as a percent of sales, our operating margin dropped 7.7 percent of net sales. A modest uptick in the steel industry should result in a strong improvement in MINTEQ's operating margin in the fourth quarter versus prior year, and provide a basis for our retail into double-digit profit margins in 2004, as we continue to implement our strategies for growth and redeployment.

You have just heard the descriptions of the business environment and the highlights of the operating conditions and key programs of the Company during the third quarter. I shall now review with you how that information is reflected in the Company's consolidated financial results.

Net sales for the quarter were $198.2 million, an increase of 6.1 million, or 3 percent, compared to prior year. Foreign exchange had a $6 million, or nearly 3 percentage point, favorable effect on sales in the quarter, driven primarily by the continued weakness of the U.S. dollar. As you have just heard, our Specialty Mineral segment continued to achieve sales growth during the quarter despite a difficult business climate, while the Refractory segment fell 1 percent due to the underlying weakness in the steel industry. Sales of the Specialty Mineral segment were 139.1 million, a $7 million increase, or 5 percent growth. Approximately 3 points of the growth was generated by the Polar Minerals acquisition, completed in September of 2002, and about 3 points of growth was from currency.

Sales of PCC increased 1 percent to 108.5 million. Sales growth in the PCC productline were tempered by the continued shutdown of the Millinocket PCC facility, the implementation of the International Paper agreement, the continued weakness in the non-paper PCC market. Overall, PCC product line volume decreased by nearly 2 percent, primarily due to weakness in the worldwide paper industry. However, year-to-date PCC volume remains up 1 percent versus prior year.

Sales in the Processed Mineral productline were 30.6 million, up 25 percent, mainly due to the Polar acquisition. Excluding that acquisition, they were up nearly 8 percent as demand continued for our products in residential construction-related industries. Refractory segment sales decreased 1 percent to 59.1 million as compared with 60 million in the prior year. Approximately 2.5 million of MINTEQ's sales growth was due to the favorable impact of foreign exchange. The decrease of 6 percent in business activity was due primarily to temporary customer shutdowns, especially during August and September in both Europe and North America and to overall weak demand in both markets. Performance at the gross margin line improved 2 percent, slightly less than the sales growth.

In the Specialty Mineral segment, gross margin was even with last year, as results were impacted by the continued shutdown of the Millinocket satellite, continuing development costs for the paper coating program, and the effect of the implementation of International Paper agreement. Although product volume have increased, Synsil's trial costs were slightly below prior year, a reflection of higher customer contribution and improved operations. In the Refractories segment, gross margins grew 8 percent, despite a 1 percent decrease in sales, reflecting the benefit of improved operations and improved mix in the equipment sales. MTI's total marketing and administrative expenses for the quarter increased 12 percent on a 3 percent sales increase. As planned, Refractories segment increased marketing expenses to support business development efforts worldwide. In addition, we incurred higher employee benefit costs, particularly pension and medical expenses, higher IT costs associated with the implementation of the new ERP system, and increased bad debt provisions during the quarter.

The Company's research and development expenses for the quarter were 15 percent above last year, due to increased product development activities, primarily in Specialty Minerals, and an increase in the activity in Synsil product development. MTI's income from operations reached $19.5 million, 9.9 percent of sales, but declined 10 percent over the third quarter of 2002. The Specialty Mineral segment's operating income was 11 percent below prior year, generating an operating margin of 10.8 percent of sales. Our margins have been affected short-term by the IP agreement and the Millinocket shutdown. The Refractories segment generated an operating margin of 4.5 million, 7.7 percent of sales, similar to last year's 7.8 percent performance, but below the targeted double-digit performance. Nonoperating deductions of 1.1 million for the quarter were even with prior year.

As Paul mentioned, during the quarter there was a dramatic change in our estimated effective tax rate for 2003. For the first six months, the overall effective tax rate was 27.9 percent, slightly below last year's rate. As a result of the expiration during the third quarter of the statute of limitations for the Company's U.S. tax returns for earlier years, we were able to reverse certain tax accruals. As a result, the estimated year-to-date rate for 2003 was decreased to 8.8 percent and had the effect of increasing net income for the quarter by $11.5 million and creating a net tax benefit for the quarter. This had the effect of increasing earnings by 56 cents per share. As a result of this onetime event, net income was 24.3 million and diluted earnings per share for the quarter were $1.18, or 78 percent above the same period in 2002. The Company's agreement with International Paper Company reduced earnings by about 4 cents per share for the quarter. As the year-to-date adjustment reflects our forecast for the full year, you may also expect the fourth quarter effective tax rate to be approximately 8.8 percent. In addition, since this was a onetime event, you can expect to return to an effective rate in the 30 percent range for 2004.

To summarize the income statement for the quarter, sales increased 3 percent, generating a 2 percent increase in gross margin; total expenses grew 13 percent, leading to a decrease in operating income of 10 percent for the second quarter of 2002. The year-to-date adjustment to a lower tax rate led to a 71 percent growth in net income, diluted earnings per share increased by 69 percent to $1.18, compared to last year's 77 per share. Our balance sheet remains very strong, our debt to capital ratio remained at 17 percent, giving us substantial capacity to continue to support and invest in our growth strategies. Cash generated from operations through September was about $62 million. To date, we have invested about 41 million in capital additions and we also repurchased 124,500 shares for treasury at an average price of 37.88 per share, for a total expenditure of $4.7 million. Depreciation and amortization expense totaled approximately $51 million for the first three quarters, and receivables and inventories, although above year-end 2002 levels, are essentially even with last year's third quarter. Now I will turn the mic back to Paul for his closing remarks and for questions.

It is evident that we are operating in a difficult manufacturing environment. But as we look ahead, I believe we have the appropriate programs in place that will provide a modest improvement in our financial performance in the fourth quarter and continued improvement in 2004. Operator, we are ready for the first question.

(OPERATOR INSTRUCTIONS) Alan Cohen, First Analysis.

One, congratulations for hanging in there in a tough environment. I have a series of questions, if I may, in each area. Just stop me when you have had enough. In the Synsil area, can you comment on the nature of the glass customer -- is this a boutique small guy or a more commodity? How might this unfold? Is that customer buying material out of your semi-pilot plant or is now the contract in place and nothing happens until you build a dedicated plant?

Obviously, it is a contract that we have with this customer; we are supplying them routinely. The only comment I would make is that it is very much a glass company name that you would recognize, but I am really not at liberty to say more than that. But we are shipping routinely to them; it is a commercial enterprise at his time.

Well then, can you comment, is it for, if you will, a specialty glass application?

I would prefer not to do that, Alan, again, at the request of the customer. It is being shipped, by the way, as you can imagine from our Woodville customer sampling facility in Ohio, so it is a routine customer, and the contract goes for an extended period of time.

Now that you're selling stuff out of that plant, do you have enough (indiscernible) to be -- ?

The answer is yes. That is one of the things that certainly that development team is looking at very carefully, is that we have a full commercial customer here, and we are very pleased with that, as you can well imagine, that we still have sufficient capacity there, free boards, so to say, to continue to run extensive trials with other customers and we have other trials on the way.

With the resolution of past, if you will, tax practices, it sounds like you were appropriately aggressive in dealing with the IRS and perhaps conservative in what you reported. Will you be -- as a result of what has unfolded, will you be changing your expected tax rate for next year?

I think -- I will just take that question quickly and then I will turn it over to John. But I think obviously we have a very prudent tax policy for this Company, and this is certainly one of the results of that prudent tax policy. And as John indicated, we're expecting a tax rate around 30 percent for 2004. But John, if you would want to comment further on that?

I think that was a good summary, Paul. As it relates to transactions that go back a number of years, the expiration of the statute is something we could adjust for now, but going forward you should be thinking of the rate in the range of the recent past, somewhere in that 30 percent range.

Then is the beefed-up expenses in MINTEQ relative to what they might have been a year ago, is something like in the neighborhood of approaching half a million to one million a quarter reasonable number?

First I will say obviously we have increased the expenses on the MINTEQ side to support the programs that Alain has put in place, but then I will ask Alain to speak specifically to some of the actions that he has done.

Yes, the expenses, as I talked about, we have a strategy in place to improve our product offering and system offering to continue very hard and very strongly on the R&D development. At the same time, we are redeploying ourself in markets and areas where we have an exposure that is not in line with the growth of this industry. So the increase of expenses that you mentioned is about in line with what we have and which is in line (indiscernible) supporting this effort, yes.

Can you bring us up to date on your sales progression in China?

We certainly have improved our sales, I would say slightly at this time, in China. Obviously, as you know, we have a satellite PCC plant operating there in China, and obviously we have the MINTEQ development efforts in China, so we have two --

I asked a MINTEQ question.

I know that. I realize it is a MINTEQ question, but I am just answering it in terms of our effort in China. Because obviously there is both a paper effort there and a MINTEQ effort there. So we have the one satellite plant there, as you know, and certainly trying to further develop the MINTEQ. But let me have Alain answer that portion of it directly.

As I mentioned in the second quarter review, we expect to see some sales increase in the fourth quarter this year. That is what I renewed also this quarter, and well into 2004. As you know, to develop new sales, you have to go through an extended period of trials. And this program that we had underway at the beginning of the year was delayed by the SARS events because we couldn't access the steel mills of our customers. So this program was delayed, but we are back on track with this delay. We expect to see some growth of the sales in the fourth quarter and 2004. But I would qualify that as the beginning of a program, I mean nothing dramatic but it is going to be a long-term strategy for us and we're making progress in terms of the timeline and programs we have in place.

Thank you very much, appreciate it.

Michael Judd, Greenwich Consultants.

Congratulations on your first Synsil contract. I have a question relating to Synsil. Obviously you're selling it to this customer, can you give us a sense of -- I'm trying to get a sense of when it is going to become profitable. In other words, do you need to essentially sell out the entire testing facility to get to decent gross margins or can you just shed some light on the profitability perspective? Maybe it is not even probable right now but at some point it will be probable. What are some of the things that need to happen in order for it to become profitable?

Certainly, Mike, this continues as I indicated, this is really just a first step in that commercialization process. Presuming that obviously we continue to be successful with the trials and certainly our expectation is that they will continue to be successful. But we are shipping now from a customer sampling facility so it is not a commercial scale facility at this point. So the facility and the business at that point would not be what you would call a profitable business because it is really a sampling facility that we are providing the quantity of Synsil from. As you know that customer sampling facility as I have indicated previously, has a capacity of about 50,000 tons per year. To really make Synsil a commercial success and having a good contribution to MTI we would need to build what I would call a commercial, a commercial Synsil facility. Obviously that is a decision that this company has still yet to take depending on how our development efforts proceed. Again we are very pleased with this first step here with this contract that we have. We believe it will lead to additional business and contracts as we continue working not only with this company but with other trials that we have underway. But yet we will need to build a full commercial Synsil facility to make this program a good contributor to the financial results of MTI.

As a follow-up I believe that you have also mentioned during the last conference call that you had a number of other glass manufacturers sampling Synsil. Has there been any change in terms of the numbers of the samples I guess?

No, that continues. We are running in fact, one very large trial right now in addition to the commercial business that we have and other obviously trials are scheduled. So that this list sort of say, and potential opportunities that we have is continuing.

Just to beat this to death here, at what point would you feel that you would need to build a commercial facility? It certainly sounds like if you got another contract signed you would be in a position maybe to start thinking about that and obviously there is a leadtime of 8 to 12 months to build a plant probably.

You are correct there. You're looking at probably about a year to build a plant from the time we want to do that between the permitting and the construction of it. But hopefully we would be in a position by the middle part of next year to make that decision just to give a time reference there, to say, yes, we're comfortable now that we should move forward. That if we are there by middle or latter part of 2004 we would be pleased to do that.

Thank you very much.

Bob Brices (ph) at Bear Stearns.

Just a couple other type of questions. One, did I hear correctly? It sounds to me like on the macro sense from your customers, both steel and paper, that you are encouraged by business, you view. So the question I have for you, A, is that correct? And B, is business getting better than you would have thought it would have been, about as you predicted, or softer?

I would say overall it is probably as we predicted. As you remember, during the second quarter conference call in July, that we indicated that the so-called recovery was invisible to MTI. Alain specifically mention that he was very concerned about shutdowns in Europe, for example, and some in North America. In fact, that did come to pass. As Alain indicated, he is seeing some improvement in steel in the October time frame, so we expect some improvement in the fourth quarter. And why I think that overall the performance of MTI will improve in the fourth quarter and then continue to improve in 2004, and that is predicated on, again, there is a lag time, but we hope to see some improvement as Alain is seeing now in steel in the fourth quarter, that also Ken, for example, will see that in the paper side, that we will see some improvement in the fourth quarter and that will continue into 2004. But what occurred during the third quarter was pretty much as we thought it would and what we spoke about during the second quarter conference call.

Let me ask you this. The third quarter is kind of past, so what's your outlook now -- it sounds to me like your outlook is better or am I wrong?

Yes, we expect -- no, the outlook is better in the sense that we expect some modest improvement in the fourth quarter.

Is that better than you would have thought -- that is my question.

No, it is about where -- no, it's a good question, Bob. We expected to see some improvement in the fourth quarter. We knew the third quarter was going to be difficult, and we expected some improvement in the fourth quarter. We are seeing some of that in steel now, as Alain indicated. We are seeing some of that improvement. Not as much on the paper side. But yet overall, we think it will lead to improved performance for MTI in the fourth quarter.

Okay, cool. Thanks very much.

Rosemarie Morbelli at Ingalls & Snyder.

Could you give us a feel for how much Synsil is going out the door at the moment with this one contract? Is it 10 percent, is it 20 percent of your pilot plant capacity?

The only thing I would be willing to say here, Rosemarie, is that this contract is in excess of 10,000 tons a year.

Okay.

I will just give you that reference and I won't say any more, but it is in excess of 10,000 tons per year.

So it means that you really have room for quite a few of those contracts of this size before you actually decide that it is time to build a new commercial plant?

It depends on obviously the next success that we have in the development effort, Rosemarie. In other words, there could be a potential customer that has a demand that is substantially more than 10,000 tons per year, for example. But we are watching it very carefully, because obviously the goal from this facility is to develop the market. That is why we call it a customer sampling facility. So the team is very cautious in terms of their commitments and how they are staging trials and making sure that they can do this in a very orderly fashion, with the goal that, as we go forward, it will lead to a need on the part of this Company to make the commitment for a full commercial Synsil facility.

And this customer, I'm assuming, is using glass for different applications. So is this order only for one kind of application and that same customer could actually come up in a month or two and say, all right, now we are done with the trials in this other area and we want another -- let's pick 10,000 metric tons for that particular product? In other words, all of your 50,000 tons could actually end up with the same customer for different applications.

That is certainly very speculative, Rosemarie. But yes, this customer has multiple facilities and hopefully over time we will be supplying Synsil to possibly several of those facilities.

Okay. Then if we look at the fourth quarter and -- at the third quarter, I'm sorry, and we eliminate the benefit from the tax transaction, then you earned about 52 cents a share.

Actually it was 62 cents in the third quarter.

Yes, sorry -- I can't count. I made the mistake of counting this in English and it just never works.

(multiple speakers) a problem not doing that in English.

So that was 62 cents. And when we look at the fourth quarter, if you were to tack on normalized type of tax rate, should we tack on the 30 percent you are expecting for '04 or would it be more like the 27, 28 percent we had for the first part of this year?

Obviously, I am going to just touch base briefly and then ask John to further review it. But obviously, we will have a benefit of a lower tax rate in the fourth quarter as a result of what has occurred here. I will ask John to further enlighten on that.

That is the principal. You should expect the effective rate for the fourth quarter to be in the range of 8.8 percent, the same as it is on a year-to-date basis.

But this is non-recurring, so I was trying to look at the fourth quarter's results with a normalized type of tax rate, which is what we're going to compare it (indiscernible) next year against.

Then if you're going to compare it, use the 29.7 we were using prior to this.

Okay, thanks. Yes? Are you disagreeing?

I believe I said 27.9.

One second, because I think John reversed some numbers there.

I did. Wait a second.

It is 27.9 and not 29.7.

Exactly. There you go, Rosemarie. I just wanted to clarify that.

I'm having the same trouble counting in English, Rosemarie.

Well I know Alain must. Actually, one last question. How comfortable are you that you can make progress on the refractory business as quickly as you think, considering that it is a very kind of slow-moving type of industry? In other words, it took 10 years for the paper industry to get into PCC. What do you think is going to happen on the refractory for the use of your new systems and products?

I would say it is an ongoing initiative that we have to introduce new products and systems. And what we are seeing also in new markets -- which are not quite new for us, like China, because we have a joint venture there for 10 years -- is that we need to go through trials of products that improve performance as compared to existing technologies. So the comparison of -- we are not going through brand new technologies; we are going through a breakthrough improved technologies, so the reference is easier for the customer to (indiscernible).

I would say we are making progress in our plans. What you have to be aware of also is that in the third quarter, (indiscernible) saw a seasonally weak demand because of the shutdowns during the summer holidays, especially in Europe, and it appears also the demand was not very strong. So when you have the combination of all these factors in terms of the seasonality of the demand, the strength of the economic recovery, (indiscernible) our market penetration efforts, which is an ongoing effort. I don't know if it answers your question there.

If I were to summarize, it is going to happen a lot faster than the PCC change -- the change in the paper industry.

I would expect so.

Okay, thanks.

John Roberts, Buckingham Research.

When you say North American refractory sales were up 51 percent, but a lot of that wasn't installed because it was sold to a financially distressed steel company, were those cash sales? I just want to make sure -- are you booking bad debt reserves in booking revenues?

First, that was equipment sales that we were referring to specifically there. But let's let Alain respond to that.

First of all, the 51 percent referred to the sales of equipment in North America. Then you touched upon -- I mentioned also two sets of equipment that we couldn't -- on top of that -- that we couldn't materialize because of liquidity problems with customers. What it touches upon is the difficult financial situation of some of our customers, which are not only (indiscernible) on our bad debt reserves and accruals and the exposure we have there, but also on the fact that the demand is impacted. So despite very good results in selling new equipment and systems, the financial situation of some of the customers even affected this good progress.

So those were sales not booked for the distressed customers?

That is correct, they were not.

Are the margins relatively low on equipment and all the profits essentially come from the follow-on refractory sales?

No, we have profitable sales on all product lines.

Lastly, you talked about the strategy in China regarding paper in MINTEQ. In the investor day, I remember you were talking about the Specialty Minerals business, your Ohio plants, get a special ore from China and that that was something that might allow you to take the Specialty Minerals business back to China as well. Is that anything active?

In terms of the Specialty PCC segment, clearly we keep exploring opportunities in that part of the world as well. And I would say we are in discussion with people, but at this point, nothing is what I would call in place that we can talk about, other than we are just in active negotiations and discussions.

Thank you.

(OPERATOR INSTRUCTIONS) Jeff Zekauskas at J.P. Morgan.

Are you selling the Synsil at a flat price or is there a sliding scale for volume purchases?

I'm not going to get into that detail, Jeff, other than to say it is being sold at a full commercial price, which is obviously the key thing for us, that we have demonstrated the value equation for Synsil, and that is obviously what we have been trying to do during the trials that we have been running. We have, obviously, for this customer here, demonstrated to him that the use of Synsil very much had a very significant value to him and we are selling that product to him at a full commercial price.

Let me try it another way. On an incremental pound of Synsil that you sell, does your margin go up, down or stay the same?

On this case here, since we are selling from a sampling facility, that is not really applicable in my mind. Obviously, the more you sell the better off we are, so that is a general rule. But really, until we get into a full commercial scale manufacturing facility, it is not that critical for us at this point.

My recollection was that you were already supplying these guys with roughly 10,000 metric tons a year. In the old days, you used to call that semi-commercial scale. So is it now that they are just paying for whatever it was that they were testing?

To some degree you're right, yes. This is one where we have indicated to you that we were running a trial and we were hoping that trial would proceed to commercial business. And what we have done now is obviously moved up to full commercial price with an agreement for them to purchase over a period of time.

So as it were, it is not that their volume take will be any larger, but they are actually paying?

That is correct -- under a written agreement. In other words, we have a contract with them for an extended period of time. We continue to supply them Synsil at a commercial price.

All things being equal, if they are satisfied with the Synsil product, would their purchases increase materially over time or are they just -- even though they are a large customer, they are relatively small and so they are done -- ?

The answer is, no. They have multiple facilities and we would expect them to increase the use of Synsil over time.

One of your research scientists in one of his papers said that your facility in Ohio could be scaled up to 210,000 metric tons. Is that true?

The facility that we are using right now is a customer sampling facility. The next step would be a greenfield facility.

At that site?

It doesn't have to be. No, it doesn't have to be. The process have makes it a minimal to build a greenfield facility, either as a regional plant or even as a satellite facility.

Well you'd need permitting, though, right?

Yes, you do.

Do you have permits at some other site?

No, we don't, but the process lends itself to what we think would be a routine permitting exercise. It would not be difficult.

A final question. Are the margins in PCC higher or lower than the margins in the non-PC Specialty Minerals business?

I understand the question. We always just look at these PCC in total. We look at PCC as a total productline. There is a paper component, which is the largest segment as you know, and then we have what we call our specialty component of the productline.

What I mean is --

(multiple speakers) we just look at it as a total PCC productline.

What I mean is that the area where you have Polar Minerals and just entirely the non-PCC minerals -- where you have ground calcium carbonate and talc and all that stuff. That is, when you look at that entity, are the margins for that entity higher or lower than the margins for the PCC entity?

I'm just going to say they are similar.

Similar?

Similar. What we call our process minerals versus our precipitated calcium carbonate business.

Since I'm on a roll, John Sorel said that tax rate for next year would be about 30 percent. Does about 30 percent mean 27, which is where your tax rate has been, or does about 30 percent mean it is something that starts with a 3?

That is a good question, Jeff. I'm going to let John handle that one.

Above 30 percent means it could be a little above or a little below 30 percent. I would expect -- .

I didn't hear you.

I would expect it to be somewhere around 30 percent -- not 27 or 28, but in that 28 to 30 range.

28 to 30, okay. All right, thanks very much.

(OPERATOR INSTRUCTIONS) Jay Harris at Goldsmith & Harris.

I missed some of the call, so if I am repeating -- getting to an area you have already covered, I apologize. How many different grades of Synsil do you anticipate the customer base would require?

Right now, we are basically working with two grades of Synsil. They have a slightly different chemistry to them. And we obviously are trialing those two different grades. We call them Synsil D and Synsil W. They have a slightly different chemistry associated with them. And we think that over time there will be some customers that prefer the Synsil D and some customers that will prefer the Synsil W. Both of those are easily manufactured in the process that we have, and we do not see that as any type of hindrance to moving forward, if the program is successful, with full commercial production.

Have your conversations with prospective customers thus far indicated whether you will have to fine-tune or tweak grades for specific customers, and therefore, if you are going to end up with 15 customers or 15 different glass manufacturing productlines, 15 different grades as you progress?

At this time, no. We think that the two basic products should satisfy the vast majority of the potential customer base.

As you look at your estimates of where you would like to sell these grades, what would be the revenue capacity of your semi-works facility?

We don't really want to get into that because a couple of things. One, we want to keep that semi-works facility as a trial facility. In other words, we don't want to commercially utilize that entire capacity because then it would prohibit us from trying to use that capacity for development efforts at other potential customers. We will obviously and the team there will strike a balance between what they would like to contractually sell under long-term agreements at different glassmakers and then what they want to reserve for customer trials going forward.

Can you share with us what the value range is of these grade material? In other words, at the upper end, where would you hope to have priced these materials?

Jay, we have indicated before that we're looking to sell these products for 3 to for times the cost of the raw material it is replacing. And those raw materials in the glass industry can be anywhere from -- on average, from 30 to 45, $50 a ton. And we're looking obviously for a very significant premium to the cost of those raw materials. Obviously, that is a value equation that you have to very clearly demonstrate to the glass manufacturer before they're willing to commit to use it on a fully commercial basis.

Thank you.

Robert Kosowsky at Sidoti and Company.

I noticed your cash balance has been growing kind of nicely over the past year. What do you guys plan on doing with the cash? And how much would this full-scale production facility cost for Synsil and how would you guys look to pay for that?

Certainly, our cash has continued to increase, and obviously we look as a Company at what is the most effective way to use the cash. Obviously, we like to invest in growth opportunities for this Company, one of them being Synsil. Certainly, we haven't gotten into discussions in terms of the capital requirements for Synsil, but certainly we have the financial resources to fund not only the Synsil opportunity for this Company but also other opportunities that Alain and the MINTEQ side or Ken, for example, for precipitated calcium carbonate would see going forward.

Obviously, other things we have looked at are repurchasing shares and other uses -- a dividend, for example. Those are some of the things that we would look at. But John, you may have other thoughts that you would like to share?

Those are the major ones. Of course, our first priority is to support the business initiatives. We certainly have a lot of dry powder for that, both in terms of cash and the unlevered balance sheet. As Paul mentioned, we recognize there are a number of avenues open to us. We have -- currently have an authorization for share repurchase and we will keep all of those options open to us to manage that cash as best we can.

Okay, thank you. And I was also curious if you have any -- the refractory segment has kind of been a drag on business over the past year. Do you have any goals that you would like to publicly state on what you want for 2004, maybe 2005, or maybe just in particular to the Chinese expansion program?

I think what Alain has indicated in his comments, Robert, is that certainly we want to very much bring the (indiscernible) refractory business back up into the double-digit operating income, while concurrently expanding into China and moving the other strategies that Alain has developed for that business. But Alain, I certainly would ask you to share other thoughts.

No, that is the plan that I explained. It should be said also that our results here today are also an improvement over last year. So we are still progressing in our improvement, in our improvement plan. But obviously, these plans and especially the redeployment in new geographies and markets is going to take some time. But at the same time we are working with some improvement of our operations in our existing markets. We just had a difficult quarter in terms of the demand, but the plans are in place and we are optimistic on the fact that we will continue performance improvement.

Thank you and congratulations on the Synsil contract.

Jeff Zekauskas at J.P. Morgan.

One of the themes of Minerals Tech over time has been to get value for Synsil. And you have always spoken of the price at which you would see it as multiples of price of silica. So, without asking you what your price is, is the price of Synsil comparable -- is it higher or lower than the price of the PCC? Did you get what you thought you would get, that is multiples of the price of sand or did you not get it?

No, we did get that in terms of the multiple of the price of sand -- yes, we did. One of the things that -- when you look at a technology that you are introducing into the marketplace and you have such a dramatic differential between the raw materials that they are currently using and the raw material that you're trying to replace it with, it is that there is, as you can imagine, a tremendous skepticism that you can deliver the benefits that you claim to be able to deliver, whether it is reduced energy, reduced emissions, for example, increased throughput, increased yield, better quality -- there is, as you can imagine, a tremendous skepticism out there that in fact you can do that. The proof has been and the time element here obviously is to run these trials where they themselves can verify that the value that you believe is there well above the increase in the cost of the raw material is truly achievable by that glass manufacturer.

We have always taken a position, as you know, that it is there from all of the trials that we have done. And all of the trials, as we have indicated previously, have verified those technical benefits. It was really the need to verify the value equation; the technical benefits were very easily achieved, so that was not an issue. But then based on the price (indiscernible) we said that this product was capable of commanding because of the value that it brings, that is a much more difficult sell. The technical issue was very easy to demonstrate, but then the value equation becomes more difficult because of the significant increase in price that we are asking for. And we believe that this first commercial account demonstrates that that value is there, that they have seen it, they have signed a contract for several years that goes out, and we are moving forward. We think it is, again, the first step -- and I want to be very cautious with that -- it is the first step of commercialization process, and there can always be some bumps in the road as we go forward.

But we think we are moving it forward. This customer has a number of other facilities that we think over time will most likely use Synsil also. Obviously, we are running trials now, in some cases very large trials, with other potential customers. But they haven't obviously signed a contract at this point. So it's, like I said, the first step in this station (ph) process.

Do is the price of Synsil comparable to that of PCC?

You know, obviously, the only comment I will make you are in triple digits, and I'm just going to leave it at that.

You mean triple digits with Synsil?

Yes.

Last question, for John Sorel. I think the SG&A was up 15 percent in the quarter. How many more quarters of this are we going to experience? When do we start to get it to flatten out, or are we stuck because of insurance and employee costs and all of this other stuff?

That is exactly what you are seeing in there, is the impact year-over-year of some of those increases in benefit costs, as well as this year we had the acceleration of the ERP implementation, which will probably go on for another year. In terms of the R&D component of that, of course, that varies from quarter to quarter depending on the activity in each of the business areas, particularly with the pilot type trials that they often run.

Thank you very much. Those are very helpful answers.

Michael Judd at Greenwich Consultants.

I believe that one of the things that you were trying to achieve with these contracts was to have perhaps some less cyclicality in terms of the margins. Are they at all similar to your PCC satellite or is this contracts -- or do you hope to achieve the same type of stability as you have with your PCC satellite contracts in the sense that, let's say, if volume goes down, price goes up? Could you talk about that? And secondly, your net debt to total capital is only about 10 percent now, and I am just wondering, the dividend is very low here. What are the thoughts about at least increasing the dividend as a certain percentage each year, even from a low base? Thank you.

Obviously, I'm not going to get into discussions of the terms of the contract that we have here for Synsil. This is only just the first small contract that we have, and really, it is like I say the first step in terms of what we're trying to do. I don't want to get into the details of that contract, but obviously, we are as a Company, very pleased to have it because it validates the value equation that we have been trying to validate and we think it will lead to -- hopefully lead to additional contracts, not only with this company but with other companies too, as they recognize that this is now a commercial product that other people obviously are using routinely. But that is the one thing that we hope.

Obviously, the ratio in terms of debt is low. Dividends is one of the things certainly that the Board reviews periodically in terms of what that policy should be. If the Board obviously makes a decision on that, we certainly will communicate that to the street if the Board makes a decision to modify what we are doing in terms of dividends. But it is just one of these -- as I said earlier, one of the avenues that we see, whether it's share repurchase, a change in the dividend policy, or hopefully more that we're supporting the growth strategies for this Company. John, would you like to share other thoughts there?

I don't think I could anything to that, Paul. I think that sums it up quite nicely.

May I take another at this contract thing? I understand that you have your existing contract and you don't want do talk about that. But in terms of potentially other contracts as it relates to Synsil in the future, are you mindful of the fact that the glass industry can be quite cyclical also? And how are you looking at that in terms of thinking about contracts? What are you doing to deal with that issue?

Certainly we recognize that not only the glass industry, but as we well know from the manufacturing sector, that the entire sector is cyclical. So it is one of the things that obviously we review, one of the things that we discuss with potential customers. But I think again, it is just premature to get into those discussions. We certainly are pleased where we are, and certainly hope that this continues to accelerate going forward.

Thank you.

Gentlemen, we have no other questions. I will turn the call back to you for additional or closing remarks.

Certainly thank you for all of the participants on the conference call. We are certainly pleased with the underlying performance of Minerals Technologies, and it is really a difficult manufacturing environment. I think, as you heard from Ken and from Alain, that we have very specific strategies to continue to move this Company forward. We expect some improvement in the fourth quarter and we expect continued improvement into 2004. So again, I want to thank you for your interest and participation in this conference call. Have a good day.

Ladies and gentlemen, this does conclude our conference and you may disconnect at this time.