Minerals Technologies Inc (MTX) 2004 Q1 法說會逐字稿

Good day and welcome, everyone, to the Mineral Technologies Inc. first-quarter 2004 earnings conference call. Today's call is being recorded. With us today is the President and Chief Executive Officer, Mr. Paul Saueracker. Please go ahead, sir.

Thank you and good morning, and welcome to the first quarter 2004 Mineral Technologies analyst conference call. On March 26th we announced that our first quarter would be particularly weak. We estimated that our diluted earnings per share would be in the range of 58 cents to 63 cents, including a 2 cents per share for a restructuring program announced last year.

As you know, yesterday we reported earnings per share of 61 cents for the quarter. We also indicated in March that we remain confident that we will earn between $2.90 and $3 per share for the full year. We continue to have that confidence.

Seasonally, the first quarter was often been our most difficult and this year proved to be no exception. January was worse than expected. But February and March showed some improvement across all our product lines. The paper industry, despite the good performance shown in the quarter by some papermakers, continued to experience additional machines shutdowns.

Other factors that have an impact on our performance, with the effect of our agreement with International Paper Company, which became effective in the second quarter of 2003; cyclical nature of equipment installations in refractory segment; and the increase in research and development spending -- primarily for the (indiscernible) composite technology we're working on with International Paper.

MTI achieved net sales in the first quarter of $209.5 million, which was 4 percent above last year's first quarter. The growth in sales is primarily due to the favorable impact of foreign exchange.

Our operating income declined 11 percent compared with the first quarter of 2003 from $22.5 million $20.1 million.

Following my introduction, Ken Massimine, Senior Vice President for Paper PCC will provide you with the factors underlying the performance of PCC -- our largest product group. Alain Bouruet, Senior Vice President of MINTEQ, will report on the refractory segment; and John Sorel, our Senior Vice President of Finance and Chief Financial Officer will provide a financial summary. After 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 2003 annual report Form 10-K, we have listed the 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. Let's look at current business conditions.

In the first quarter of 2004, the U.S. economy, as measured by GDP, grew at 4.2 percent and the latest purchase and managers index showed growth in the manufacturing segment sector for the 10th consecutive month.

Also, earnings reported by many -- but not all -- manufacturing Companies have improved. Economic indicators are showing a gradual improvement in the steel and paper sectors. But that has not resulted in a substantial improvement in our business.

Approximately 60 percent of our sales are domestic and are tied to the U.S. economy. However, many of our markets are growing more rapidly outside the U.S. To participate in that growth, we're positioned MTI to create a larger international presence to capture significant growth in (indiscernible) key markets.

During the quarter, we signed a joint venture agreement to construct two satellite PCC plants and paper mills in China owned by APP China. These satellites will add eight additional units of capacity, or roughly 220,000 to 260,000 tons of PCC a year. These plants will be operational in the first quarter of 2005.

We announced on Wednesday that we will build a $14 million automated refractory manufacturing facility in China. This is being done to position the Company to take advantage of the tremendous growth in the Chinese steel industry. We expect this plan to be operational by mid 2005. And we have further strengthened out infrastructure in the Asian region. While Ken an Alain will provide you with a more detailed analysis about PC and refractory businesses, I would like to point out a few highlights.

Total PCC sales were up 3 percent for the quarter reaching $112.3 million. Sales of PCC used in paper were also up 3 percent for the quarter. The majority of this increase, however, was attributable to the favorable currency impact -- especially in Europe.

Construction continues on our large merchant coating grade PCC facility at Walson (ph), Germany, to service the growing European market for coated paper. This facility is expected to be onstream this fall.

Our specialty PCC product line sales were flat for the quarter. This product line saw an improvement in sales to the adhesives and sealants market but this improvement was offset by weak market conditions in calcium supplements and food fortifications.

Our process minerals group continued to show good growth with sales up 10 percent for the quarter -- primarily on the strength of the construction and plastics markets. Refractory sales grew 3 percent in the quarter due to the favorable impact of currency. Operating margins remained in the double digits.

In March, we signed our second commercial contract for Synsil products -- our family of synthetic silicates for the glass industry. We signed this contract with the same glass manufacturer who signed the first commercial Synsil agreement in the fourth quarter of last year. This program remains on track.

We continue to evaluate the results of previous trials, produce Synsil for scheduled trials and plan for additional trials. Because of this activity, the body of evidence supporting the use of Synsil as an alternative to the conventional glass manufacturing process, is building.

As you know, in the fourth quarter of 2003, we restructured our organization to reallocate our resources globally. And to share services across the Company where it is efficient and appropriate. Furthermore, we're confident that we have the right strategies, organizational structure and programs in place to ensure continued growth.

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 first quarter, and some expectations about the remainder of the year.

The world paper market continues to be challenging and difficult. However, I am encouraged by recent evidence that suggests a meaningful turnaround in the industry may be at hand.

As recently reported, the U.S. economy grew at a 4.2 percent rate during the first quarter, on the heels of a strong third and fourth quarter reported last year. The recent data indicates that business investment is picking up and consumer spending is increasing.

The effect of this improving economic climate appears to be trickling down to the paper industry. Preliminary first quarter data shows printing and writing paper demand improving along with pricing. U.S. shipments of uncoated freesheet, our most important market segment, moderately increased in the first quarter at 2.1 percent compared to the first quarter last year.

Some of this order uptick can be explained by real increases in consumption and some due to pre orders ahead of two consecutive price increases.

For the remainder of 2004, I view the outlook with increasing optimism. Shipments of uncoated freesheet papers are expected to increase about 2.5 percent this year in response to an improving level of business activity, since they are used primarily as copy, office and computer stock.

Also during the first quarter, most categories of coated papers were showing improving demand, particularly coated groundling. Coating coated papers in general should soon be responding to a pickup in advertising pages, inserts and mail-order catalogs -- especially as advertising activity strengthens this year in response to the upcoming elections.

Internationally, Western European production of printing and writing papers was rather subdued in the first quarter. In contrast to the United States, Western European production of uncoated freesheet was lackluster on a first quarter to first quarter comparison.

On the other hand, coated freesheet production seems to be responding to increasing demand at home as well as for export.

The Asian Pacific region, excluding Japan, has emerged as the fastest growing regional economic block. China is the engine of this growth and its total paper production now rivals that of Japan. Over the next five years, we anticipate China's paper demand will grow by an average 6 percent per year versus 1.9 percent from North America.

MTI currently has five operating satellite PCC plants in Asia, including one in China.

As Paul just discussed, we have expanded our joint venture agreement with APP China to construct two new satellite PCC plants at two of APP's paper mills in China. These satellite plants, with capacities of a four units of PCC each, will be operational in the first quarter of 2005. The new satellite at the Dagang, China our second satellite at this mill, will provide PCC for filling and coating applications and wood-free papers.

The satellite at Suzhou, China will provide PCC for uncoated freesheet and coated base stock, along with other paper grades.

When these new satellites are installed we will have three PCC satellites in China, and a total of seven satellite operating in the Asian region. The new facilities will serve to reinforce our commitment to China's expanding paper industry, and to establish MTI as the pre-eminent supplier of PCC in the Asian region.

MTI's total PCC sales for paper and non-paper applications in the first quarter increased 3 percent over the prior year's first quarter from approximately $109 million to $112 million. The weakness of the U.S. dollar was the major contributor to our sales growth.

Total PCC operating income declined in the first quarter. This was due in part to increase R&D expanding and trail-related activities, as well as paper machine shutdowns and the contract resolution at International Paper. Our moderate sales growth during the first quarter was disappointing.

Global sales tonnages of paper PCC from existing satellites increased slightly in the first quarter compared to the year ago period. However, if last year's disruption had not taken place, our overall all volumes would have been up at least 2 percent over the prior year's first-quarter.

For the full year, given an improving economy, we anticipate our overall volumes should reach the mid single digit range.

Although the European paper market remained weak, we were able to increase our European sales volumes and benefit from foreign currency translations. Construction of our new merchant coating grade PCC facility in Walson, Germany is currently well underway with expected startup this fall. I am pleased that coating market development activity is progressing according to plan. We have also continued to work closely with International Paper, and I am satisfied with the current progress of our joint research program on filler fiber composite material. We're hopeful that machine trials will occur in the second half of this year, which should help validate the commercial efficacy of this exciting technology.

Overall, our key paper PCC strategic initiatives remain on track. I fully anticipate that these programs will generate a solid foundation for new business opportunities and a platform for continued sales growth.

Now, let's briefly turn our attention to specialty PCC for non-paper applications.

Sales for our specialty PCC segment were essentially even within the first quarter of 2004, compared to the same period the year before. This resulted primarily from increased orders for PCC to the adhesives and sealants markets, offset by decreased sales to the health-care industry.

For the remainder of this year, we expect the specialty PCC segment to improve its sales growth, based on our initiatives not only in the adhesives and sealants markets, but in plastics and health-care as well.

In conclusion, we firmly believe that our strategic programs will act as positive catalysts for improved sales and profitability for the remainder of this year and beyond.

MTI is proud of its market positions, leading-edge products and strong array of customers.

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

Thank you, Ken. MINTEQ had a (indiscernible) first quarter despite a number of challenges.

Net sales of $65.8 million enabled to business to achieve its double-digit operating margin goal, delivering operating income before restructuring charges equivalent to 10.3 percent of net sales.

From a macroperspective, the U.S. economy appears to have been booming in the first quarter with GDP up 4.2 percent, and industrial production up at an estimated 6.6 percent annual rate. This improved economic conditions were underscored by the strong reported increases in North American steel industry profitability.

For example, comparing first quarter 2004 to first quarter 2003, new (indiscernible) net income was reported up six-fold. U.S. steel also reported improved income from operations of $151 million versus a $34 million loss last year. In both cases, this was driven by rapidly rising prices of finished steel products. Yet, crude steel production in MINTEQ's primary markets has not kept pace with growth in the economy is a whole. Since well over 90 percent of MINTEQ sales are made in steel industry, I will touch briefly on global trends in steel production.

Surprisingly, according to statistics released by the International Iron and Steel Institute, first quarter steel production in North America -- MINTEQ's largest market -- was down 0.5 percent compared to prior year first quarter. United States steel production was up a modest 1.2 percent, which was offset by sharp reported declines in Canadian and Mexican steel production.

In Canada, we were impacted by the first quarter bankruptcy of Stelco and a six-week shutdown of Slaters steel.

First quarter steel production in Europe, E.U. 15, was up 2.1 percent. But in the largest market within Europe, Germany, first quarter steel production was up only 0.9 percent.

For the E.U. 15, March steel production was particularly weak, being 1.8 percent below March of 2003.

With all these low single digits figures, the 8.7 percent figure reported for world growth in first quarter steel production appears incongruous until one includes China. Which included for approximately 25 percent of global steel production and whose first quarter output was reported to be up an astounding 26 percent. This represents a first quarter 2003 to first quarter 2004 increase of 12.9 million tons, or two-thirds of the total world's increase in steel production.

The size and growth in China is still production was the basis for MTI's decision announced earlier this week to invest approximately $14 million in the construction of a 100,000 ton per year monolithic refractory plant in Kunshan, China, approximately 50 kilometers outside of Shanghai. (indiscernible) in a center of a cluster of 15 steel mills.

We schedule the out (ph) plant, which is to become operational in mid 2005, (indiscernible) MINTEQ to introduce a full line of high-performance monolithic refractory systems, in a market has yet to convert from a dominant reliance on brick to a more balanced and cost-effective mix of brick and monolithics.

In terms of regional sales performance, MINTEQ Asia sales were up 18 percent, followed by sales in North America which were up 7 percent. Our European sales were flat, including the effect of a strong Euro which increased first quarter revenues by $3.2 million.

However, looking at Europe, equipment sales were down 38 percent. The decline in equipment sales needs to be interpreted in the context of history. Fourth quarter 2002 equipment sales were very low as a result of adverse conditions in the European steel industry and extended holiday shutdowns. Equipment sales scheduled for that quarter were deferred into the first quarter of 2003 resulting in a doubling up of sales and an artificially high base for comparison.

We expect full year European equipment sales to be somewhat above the 2003 level.

In terms of MINTEQ's major product lines for the first quarter, global refractory sales were up 7 percent, metallurgical product sales were up 9 percent, and equipment sales were down 24 percent due mainly -- as I said earlier -- to the timing of this last ticket sales items.

During the first quarter, MINTEQ tried two new electric furnace refractory products aimed at banks and slag lines. We achieved sharply improved application rates and improved durability compared to current maintenance practices. This forms the basis for optimism for further growth in the electric furnace market. We have scheduled a global rollout of these products for the remainder of the year. This underscores MINTEQ's strength, which is still is to stay ahead of the competition by continuously improving the value equation for our customers to improve product and equipment performance.

Our biggest area of progress has been in shock treatable refractory products. These products, which replace structural brick, can be applied hot and offer durability similar to brick in a number of electric furnace and molten metal handing applications. It should be noted that in North America, where the program is most advanced, our first quarter molten metal handling sales were up 18 percent compared to prior year first quarter -- primarily as a result of new shock treatment system sales.

Our primary source in Asia has been China for several years. However, shortages of fuel in China used to dead-burn magnesite into magnesium, an increase in import license fees, and rapid escalation in shipping costs for (indiscernible) materials from China have caused are delivered cost of magnesium to escalate rapidly. We are in the process of asking our customers to share in this (indiscernible) magnesium surcharge.

In North America, the first surcharge was announced on January 26th, effective March 1st, and has been largely accepted by our steel industry customers.

An increase surcharge will be announced in the second quarter as costs for our delivered raw materials continues to escalate.

However, additional surcharges and price increases will have to be implemented in the second half in order to cover the additional cost of magnesium now in transit. Moreover, additional pricing initiatives will be implemented in the second quarter in Europe and Asia. The same time, we are actively seeking alternate sources of supply to minimize this impact.

For the first quarter of 2004, our total expenses were up 9 percent compared to the first quarter 2003, as marketing and administrative resources were increased in order to implement MINTEQ's international growth strategy.

We are definitely starting to see some results -- particularly in Asia, where sales activity was strong.

Our expense ratio will continue to improve underscoring MINTEQ's strategy to move with the market and efficiently deploy its resources into higher growth areas.

As part of the restructuring program initiated at the end of last year, we closed the River Rouge plant at the end of the first quarter. While accelerated depreciation at the River Rouge plant was an added cost reflected in our cost of sales, we expect to obtain the full benefit of the restructuring in the second half.

Meanwhile, operating income for the first quarter was reduced from 10.3 percent to 10.0 percent after all restructuring charges still, meeting our double-digit operating income goal.

The rationalization of world magnesium prices, or, our ability to successfully pass on magnesium cost increases by a timely implementation of surcharges is critical to attaining our goals. This is going to be particularly critical in the third quarter, which traditionally has shown seasonal weakness. But, all-in-all, we believe that MINTEQ's 2004 net sales and operating income will increase from last year, based on the continued positive outlook for the steel industry, and the successful rollout of our new electric furnace and (indiscernible) products. John?

Thank you, Alain. We have just heard the description of the business environment and the highlights of the Company's operations and key development programs for the first quarter. I would now like to review with you how that information is reflected in the Company's consolidated financial results for the quarter.

Net sales for the first quarter were $209.5 million, an increase of $8 million or 4 percent compared to prior year. Foreign exchange had a $10 million or approximately 5 percentage point favorable effect on sales in the quarter driven primarily by the weakness of the U.S. dollar against the euro.

As you have just heard, neither of our business segments achieved significant volume growth in the quarter. Specialty Minerals segment sales growth was 4 percent -- essentially all related to foreign exchange.

Paper industry conditions began to improve late in the quarter, but did not offset the effect of the paper machine outages that carried over from year-end. Overall, paper PCC volumes were only slightly ahead of last year, and sales performance versus last year was further impacted by the agreement with International Paper reached in the second quarter of last year.

Process minerals product line sales were $31.4 million up 2.9 million or 10 percent due to continue strong demand in the residential construction and plastics industries.

Refractory segment sales grew 3 percent overall. Increased demand in the U.S. and favorable currency were partially offset by lower volumes in Europe and a reduced number of equipment installations in the current year.

MTS's cost of goods sold increased 5 percent, and performance of the gross margin line was even with the prior year. In the Specialty Minerals segment, gross margin decreased primarily as a result of the IP agreement, and by temporary outages at several paper mills -- particularly during the early part of quarter.

In refractories, gross margins grew 4 percent, slightly above the growth level of sales.

MTS's marketing and administrative expenses for the quarter increased 5 percent versus the 4 percent sales increase. The planned increase in marketing administration expenses occurred primarily in the refractory segment to support our business development effort in Asia and Europe.

The Company's research and development expenses for the quarter were 12 percent above last year and represent a 6 percent increase over the previous quarter due to increased product development activities primarily in the PCC business to accelerate key programs -- including the filler fiber composite material project.

The Company reported restructuring charges of 0.6 million relating to workforce reductions during the quarter in line with the program announced late last year. Last year, similar amount of severance cost was included in cost of sales.

As a result of the increased expense levels, MTI's income from operations were $20.1 million, representing a decrease of 11 percent from the first quarter of 2003.

In total, the operating ratio was 9.6 percent for the quarter, and 9.9 percent excluding restructuring.

The Specialty Minerals segment's operating income decreased 13 percent overall, and generated an operating margin of 9.4 percent of sales. The decrease is primarily the result of the International Paper agreement and increased R&D spending, partially offset by foreign exchange.

Refractory segment maintained an operating margin of 10 percent sales, although total operating income decreased by 6 percent due to the increased worldwide infrastructure cost and market development expenses, as well as restructuring charges.

Nonoperating deductions increased by 0.5 million versus last year, primarily due to the impact of foreign exchange on dollar index assets.

For the quarter, our overall effective tax was 29.7 percent, 1.2 points above last year's first quarter rate. The net increase year-to-year was primarily the result of a change in the geographic mix of our earnings.

Income before the cumulative effect of the FAS 143 accounting change adopted last year, decreased 16 percent to 12.6 million or 61 cents per diluted share. That accounting change was associated with asset retirement obligations, and resulted in the recording of a non-cash after-tax charge to earnings of $3.4 million or 17 cents a share last year.

This year's net income of 12.6 million diluted earnings -- $12.6 million -- diluted earnings per share of 61 cents are 7 percent above the same period 2003, including the cumulative effect of the accounting change.

To summarize the income statement for the quarter, sales increased 4 percent with gross margin remaining level with the prior year. Total expenses grew 7 percent, leading to a decreased operating income of 8 percent before restructuring charges, and decrease 11 percent after restructuring charges compared to the first quarter of 2003. An increase in nonoperating expenses and our slightly higher tax rate led to a 16 percent increase decrease in income before the cumulative effect of the FAS 143 accounting change. Diluted earnings per share decreased by 18 percent to 61 cents per share before the accounting change, compared to last year's 74 cents per share.

Our balance sheet, of course, remains very strong -- our debt to capital ratios approximately 16 percent giving a substantial capacity to continue to support an investment (indiscernible) growth strategies.

Cash flow generated from operations for the quarter was about $19 million. We invested 18 million this quarter in capitalization (ph). We also repurchased 82,400 shares for treasury at an average price of 54.46 per share for a total expenditure of 4.5 million.

Depreciation and amortization expenses totaled approximately 17 million for the quarter.

Now, I will turn the mike back over to Paul, for his closing remarks and for questions.

Thank you Ken, Alain and John. As you have heard, MTI faced a difficult first quarter, especially at the outset. Looking forward, we're positioned in the Company to execute our growth strategies. And we're expanding our presence internationally to take advantage of the regional growth opportunities that are available in both paper and steel.

Based on these considerations, as I stated earlier, we believe that earnings in the range of $2.90 to $3 per to the share for 2004 is reasonable.

Operator, we're now ready for the first question.

(Operator Instructions). Michael Judd, Mike Greenwich Consultants.

Question about, I guess, IP had announced their earnings about a week ago last Friday. And they indicated their volumes were up by 8 percent sequentially in uncoated freesheet. I realize that they are one of your largest customers, but it's not a huge part of your overall mix.

Can you just comment -- because you mentioned that your PCC volumes are only up slightly. That seems to be a little different than what we're hearing at least from one of your major customers? And then I have follow on question.

Mike, yes, as Ken indicated in his remarks, we have seen some improvement in our PCC sales. But some of that improvement as Ken indicated, was offset by shutdowns. So that the net effect was only a slight increase in our overall PCC volumes.

But, yes, we have seen some improvement in our sales to the uncoated freesheet segment. Our overall growth obviously is not at the range that IP has indicated. But if I was looking at it, I would presume that some growth that we see in terms of uncoated freesheet is probably some inventory drawdowns as customers have bought in anticipation of two price increases that have been announced. But, yes, we have seen some of that increase but not at the high rate that International Paper has indicated.

And I apologize, I didn't have a chance to write the number down that you gave us in terms of what your outlook was for PCC and paper volumes for the rest of year?

We're seeing PCC volumes probably in the mid single digits is what Ken had indicated in his comments.

Does that assume any more paper shutdowns -- paper machine shutdowns? Or perhaps some coming back or anything that would be unusual?

No. Nothing unusual. We're hoping that the mill (indiscernible) facility that you are aware had shutdown will start up, hopefully, in the next several months.

Thank you very much.

John Roberts, Buckingham research.

I just wanted to check that math. So if we assume same-store sales essentially are flat for the next couple of quarters, and you get the Millinocket's free start, we go up to somewhere between a 4 and 7 percent unit growth in the PCC business?

First of all, John, we're not saying that same-store sales are flat. We're seeing some growth in the same-store sales and we expect that to improve as we go out through 2004.

But some of that, as you look at the first quarter -- some of that growth as Ken indicated was offset by shutdowns that occurred subsequent to the first quarter of 2003.

And then, maybe, I will ask the question in a different way then. Because every quarter you announce one or two new satellite contracts -- like the China contract this past quarter. So, if you had same-store sales flat, let's say, in the next two, three quarters. What would be growth in PCC simply from bringing on schedule the stuff that you have been announcing quarter after quarter over the past year?

Remember now, the only new satellite that we brought on in 2003 was Sabah Forest Industries. And that was a one unit satellite that we brought on stream in Malaysia.

The only new what we have coming up right now is the Walsom facility -- that will be the end of this year. That will be, as Ken indicated in his comments, that will be coming on stream in the fall.

So the growth we see will in fact be the growth that some of the paper Companies have indicated. The growth that they see in demand for uncoated freesheet and other grades of paper where we supply PCC. And as Ken indicated, that growth, we expect, will enable us to grow our volumes in those mid single digits that you mentioned.

And the next one after Walsom will be the China plans?

Yes, that's correct. As Ken indicated those should be operational in the first quarter of 2005. And, obviously, that is a total of eight units of capacity. So those are a sizable addition to the network that we have.

Second question is the talc that you import from China -- I thought was primarily for the catalytic converters ceramic substrate?

No, that's not correct. The talc that we import from China goes to what we call our river plants. Those are the two plants as you know that we acquired from Poland Minerals in September of 2002.

Those are used in such applications as plastics, for example, and certain health care applications. So that's the major application for the talc that we import from China. Obviously, as you well know, we have a very large domestic facility in Barretts (ph), Montana, where obviously we there mine our own talc. And that in fact is the source of talc for catalytic converters.

Can you remind us then again why the stuff is coming from China if it's not so special that it cannot be easily replaced?

It's not that it can easily be replaced, but its application sensitive. In other words, talc bodies -- talc ore bodies all have very specific properties associated with them. And some are more applicable to certain applications than other ore bodies. So the talc that we're importing from China, again, which goes into our two river plants there, is used in those applications.

Okay. Thank you.

Alan Cohen, First Analysis.

A couple of questions if I might. One, are you still seeing some creep in the percentage of PCC used by your existing customers per ton of paper?

We're seeing slight improvements there -- slight improvements, Alan. As you know, one of the things we're looking at us to bring out new technologies -- new technologies that will significantly increase the amount of filler in a sheet of paper.

So, yes, we see just small, small increments of creep. But that is not where we will drive the business. We want to drive the business through some of the newer technologies -- such as the filler fiber composite technology that we're working on.

And then, you're putting up a 100,000 ton plant in China. Can you give us some feel of how much existing business you have in China of the monolith? So when that plant starts up what kind of operating rate might have?

I will just give a little introduction to (indiscernible) then I will ask Alain to address that further.

Obviously, as you know, we certainly have a presence in Japan. We have a presence in Korea. We have a presence in terms of selling in other parts of Asia. And we are in fact selling material in China now. We're moving our refractory products into China and certainly we have seen that as a very substantial growth opportunity. Obviously the $14 million investment. So we will be working on that effort through 2004 to 2005 to develop that base. But with that brief introduction, I will ask Alain to provide some additional insights. Alain?

Well, we have a presence in China for some time, which is growing. But I would say, from a small base, what we're doing today are (indiscernible) and qualifications of products that we import from our other operations in Asia.

Obviously, the confirmation and the announcement of this plant are going to boost the programs that we have. And, also, this capacity is large. We expect a fast ramp up over the first few years of the capacity of the actual -- the start up of the plant. But, it is clear that the plant has been designed to accommodate large volumes that we expect to have in the future.

And, Alain, I sense that you may want to comment also that the geographic location where you have -- where we're citing the plant, is attractive for the higher quality refractories that we produce.

Yeah, the plant is located near Shanghai. And this is also the place where the steel is, especially the high grade steel, is manufactured in China. The plant is located right in the center of a cluster of 15 steel mills. Some of them very large and been part of a large sophisticated Chinese groups.

We have been doing business with those groups -- with those Companies for some time now. So, the announcement is a confirmation of our strategies, and we anticipate, also, that the relationships are going to be strengthened and our programs are going to be accelerated.

Thanks.

Here with a couple of just quick (technical difficulty) questions if I may? Your 29 (technical difficulty) dollar guidance (multiple speakers)

I'm sorry, whoever is speaking, you're breaking up. So it's hard to hear the question.

Ray Cramer here -- also just a couple quick accounting-type questions. Guidance of 2.90 to $3 -- does that include the 2 cent restructuring charge?

Yes it does.

Okay. And then could you quantify at all the magnesium and talc price increases that you're seeing?

As we look, certainly, at the import of the raw materials from China, primarily magnesium that is the largest volume of the two materials, magnesium and talc, the magnesium, obviously, is the largest component of that. But we're seeing increases that are easily -- and I will ask Alain to comment on this -- are easily in the 40 to 50 percent range in total. In total increases -- and I will ask Alain to certainly comment on that. Alain?

Yes, we have seen -- when we talk about delivered cost, accumulating all the impacts of a tighter supply in China -- higher energy costs, production cost, license fees and shipping costs -- we have seen increases higher than 50 percent in delivered cost.

Obviously, this extra cost is evolving overtime. We -- it seems that there is a softening for orders that we may have for the end of the year. But, there is clearly a spike right now. And if there is a softening, it's requires to be confirmed. But, the increasing cost is significant.

Thanks, guys.

Jeff Zekauskas, J.P. Morgan.

I guess, first, on the filler fiber technology, if it turns out you have a relatively successful machine trial late in '04, how quickly could you introduce that technology into the market?

As we look at that trial that we're looking at, Jeff -- and obviously that is work that we're doing on a cooperative basis with International Paper -- you (indiscernible) know that they are certainly, obviously, trying to accelerate this technology as quickly as possible -- because of the financial benefit that it has to them.

That program is moving along very well. And both ourselves and International Paper are pleased with that progress.

We're hoping that as we run that trial with International Paper in the second half of 2004, that it will continue to move forward. As you know, and as you would expect that -- in a cooperative development effort with International Paper, that technology will be rolled out first with International Paper as part of our agreement with them. And that hopefully will be moving out as we go into the latter part of '05 and into '06. As we move in among the various facilities that they would have.

And, sort of what is your assessment as to the probability of success of the trial? Is it 50-50 or 30-70 or 7030? How do you see it?

Right now, the work that we're doing -- and again, this is a cooperative effort between both International Paper and ourselves -- is that we're looking at results that are very positive -- I will just say the results again -- this is just work that's done on a pilot scale. Very positive in terms of what we're seeing. And why both we and certainly International Paper look at moving it from the pilot scale into the paper mill trial. But the work is that encouraging.

Okay. So essentially you're saying its higher than 50 percent?

Well, I'm not going to say higher or low, but it's encouraging. If we and they are moving it forward, obviously, what we're seeing is encouraging.

Okay. The second question is -- you had success in selling more PCC contractual arrangements to the Chinese market. But not really a lot of success anywhere else. Why is that?

Well, I think you're just drawing a conclusion that I don't think is correct. Obviously, yes, the last facility that we started up was in Malaysia. And now we're starting up and just announced two new ones in China. But, in fact, we're moving forward and we have programs underway with other satellite opportunities in many other global areas. So, it's just is a matter of which one comes to fruition first.

So, in other words, what you're saying is that your announcements so far this year are unrepresentatively low?

Right. Well, unrepresentatively low, but remembered now, there have been disruptions in both the North American market with shutdowns and other consolidations that have taken place. And there have been some other shutdowns and consolidations in the European market. So they have been factors that have influenced our ability to bring some of these activities to conclusion.

But, if you look at Europe, we have the Walsom projects that is a major investment by this Company moving forward that will be onstream in the fall of this year. And the market development activity for that plant is moving along very well. I'm very pleased with the progress that Ken Massimine and his team are making.

So, that is coming along with -- which we think will lead to, obviously, a significant opportunity for this Company in the coating grade PCC market.

So, and rough terms, Paul, if you're bringing on eight units in China and that's 240,000 tons, and 125,000 tons in Walsom or Balsom, whatever it is -- that's 365,000 tons. And more or less, that's 10 percent demand growth? And then there all of these unannounced PCC facilities that you're going to, I guess, talk about in the future. And the paper market is recovering. So, 2005 should be a pretty good year for you?

We're certainly hoping it will be. Your thought process is right on track.

Okay, thanks very much.

Rosemarie Morbelli, Ingalls & Snyder.

Could you give us a feel for how much business you are currently doing in China in either the exported (indiscernible) either in dollar or in pounds? Whichever one you preferred?

We don't get into that detail Rosemarie, we look, obviously, that we have a satellite plant operating at Dagang right now. And that is a several unit satellite plant -- four units of capacity. We obviously, as Alain indicated, that we have a refractory business in China. So we obviously have a presence both of the paper side and on the refractory side in China.

Obviously, we're making very large commitments for additional business in that country. So, it will continue to grow for us. But we don't at this point breakout specific sales levels.

I guess what I was looking for is on the refractory side -- since you are exporting into China from Europe, or from the U.S. -- and if you could give us a feel for where it is coming from? Are you planning to start up that new plant in shutting down capacity or do you think that the U.S. and European markets can absorb whatever they will not be exporting any longer?

Okay, I just have to understand your question, Rosemarie. One, obviously yes -- we are exporting some refractory products to China -- from other locations as Alain indicated. But the programs that we have underway in the refractory business in molten metal handling and other applications that Alain indicated, certainly will continue to require the utilization of those facilities.

So, we don't see the need, at this point, at this moment, for example, to make any adjustments per say in that manufacturing network that we see. But again, I will ask Alain to address that a little bit further. But we see a growing business for our refractory segment.

I would say that the plant is primarily focused on the Chinese market. Having said that, we anticipate to have a low-cost positions from these -- from this particular plant. Because also the main raw materials are coming from China. So it will be an opportunity for us, as well, to optimize our production activity within our network of plants. So that's an additional benefit that we will see down the road.

So, I am translating this into -- even though the -- you still have opportunities in the European and the U.S. market, if you actually measured them some capacity here in order to provide the products from the more (multiple speakers)

No. I think you're making a leap there that is not called for, Rosemarie. In other words, I think what is Alain is indicating that as we continue to increase our presence in Asia, for example, in Asia, that this will give us a low-cost manufacturing facility in Asia that will enable us to, obviously, seize opportunities that will develop with the more advanced refractories we're going to be producing. But again, I will ask Alain to certainly comment on that.

It's exactly that. Particularly in Asia, which represents about, overall, 50 percent of the refractories market, including the steel industry -- and of that, 50 percent in China. Meaning that 50 percent, 25 percent of the world capacity is in other Asia outside of China. And we see this plant also as opening up new opportunities in Asia, in account with the markets where we have no or limited presence. But again, it will be an additional opportunity to the market development activity that we are targeting for China.

Okay. That is very helpful. I have another also another couple of questions. The IP (indiscernible) project -- how long -- for how long can you sell only to IP before offering that particular product to other paper mills?

Rosemarie, we have not defined that. But, obviously, in any type of development program, there is a period of exclusivity for international paper. And that is what you would expect. But we have not, certainly, gone into the details with that agreement with IP. It is confidential, obviously.

All right. And then lastly, on the Synsil, are there any signs that a new glass manufacturer will move and start ordering a commercial contract?

The answer is -- we're certainly working towards that goal -- very much so. As I indicated, that, we have been doing trials with all the glass segments and in fact we're in a process of producing material for large trials coming up in various segments of the glass industry. So, yes, there are other segments that we think, and are hopeful, will move to a commercial status.

Are there also segments of the glass industry within the same glass manufacturer or with other Companies?

These are with other Companies of the segment -- right. So we're looking at more than one segment of the glass industry.

Okay. Thanks.

Robert Kosowsky, Sidoti & Company.

I was just curious how much total refractory capacity you guys have right now? How many tons?

I don't think we have provided that information. We talk about refractory in terms of sales. We give the estimate and the information in terms of sales, Robert, but we don't talk about it in specific tons. And part of that, obviously, is the nature of the products that we produce. We're not in the commodity segments of the refractory industry. We're in the specialty segment, and have certainly a different value equation than many other producers. But with that brief introduction, I will ask Alain to shed any additional comments there.

Normally we operate with an excess capacity in our plants. The major driver is not to maximize utilization but, to maximize the logistics. So to be close to the market, with a low-delivered cost position, is the driver.

But obviously, as Paul said, the major driver for us is the added value that we provide to the customer in the application.

So, we can still serve our markets with a larger radius, as long as we are targeting the right applications. But, in the case of China, clearly it is an advantage to be in China. And to be close to the customers.

Okay. And so (indiscernible) those plants over there -- what kind of impact is it going to have on your costs? I know you said distribution costs. (indiscernible) over the past few months or so.

In terms of our cost structure, initially, obviously, the plant in China will not have a big impact on that. The impact of magnesium costs has been mainly, obviously, in North America and Europe, Robert. And there, as Alain indicated, he is implementing a series of price increases and price adjustments -- magnesium surcharges, in this case, to recapture the additional costs for the additional acquisition price for the magnesium -- which as Alain indicated was a number of factors that have increased price for that key raw material for us.

But, how much cheaper is magnesium, say, if you bought it in China versus if you import it over to the U.S.?

At this point, obviously, it would be cheaper, because you the ocean freight and some of the other costs that have gone up substantially in some of the various export licenses and tariff costs that you would have.

But as Alain also indicated that we think that has peaked and will start going down towards the end of year already, in terms of a cycle here that we're looking at.

So, it will be less expensive for us to acquire these raw materials in China itself. I will ask Alain if there's anymore information he would like to provide?

Well, I would say that the cost of magnesium is high -- very high today. Also including in China. Obviously you don't have the shipping costs and the export license fee. But, the cost of magnesium is also very high in China and Asia -- in all markets.

Okay. In this is a question of the paper side. Can you guys give us an idea of how much your volumes were, say, down in January than up in March -- up in February and March?

That is a difficult one to look at, obviously. We had a weak start as we indicated. The January accounting period was a weak one for us. And then, we rebounded in February and March and ended up where Ken indicated -- Ken Massimine in his prepared comments -- we ended up just up slightly in terms of total volumes.

So, the volume was actually down in January. And then, came back up in February and March and we ended up with a higher level for the quarter than we did have for the first quarter of 2003.

Okay. Thank you.

(Operator Instructions). Michael Judd, Greenwich Consultants.

Yes, my question is around the filler fiber composites. It's very encouraging that you have a larger scale trial planned and it looks like your supplying material from your pilot plant. As I recall with Synsil there was an issue around the -- at least initially -- your first attempt at a larger scale type of facility -- a larger -- not commercial, but testing type facility -- it wasn't economic. What's your sense in terms of whether you'll be able to scale this up -- and would the economics be attractive?

(indiscernible) you look at this, is this something that you had to prove to IP before you even began doing the trials? Or it's just something that has already been worked out? If you could just provide some additional info, I would appreciate it. Thank you.

Sure. Let me just comments there, Mike. Good questions. And you're right -- we did have difficulties, as you know, when we tried to scale up the Synsil process. And we had to, obviously, make major modification, as you know, to that process to where we now have a fully commercial Synsil process.

In the filler fiber segment that we're working on right now, obviously it is being done on a cooperative bases. So, both ourselves and International Paper are sharing information between the two Companies, between the two technology groups, to develop what we think is a -- on a cooperative basis -- a process -- a process, a product in a process that will be, obviously, a commercial type process and product that will be beneficial for what we're trying to accomplish.

We believe that that is moving along very favorably. We think IP has the same thoughts -- that it is moving along very favorably. The cost of that -- we think that we're in a position to move forward and truly determine the efficiency of the process and the value -- the value contribution that will make to the sheet of paper. So from that perspective, I think we're very comfortable as we move forward.

Will you own the process, or --?

Well, it's a joint process -- it's a joint development that we have underway, combining the technologies of both Companies.

Will you own the equipment?

Those are things that we will certainly will discuss with International Paper as we move forward. But, obviously, we're the ones that have the manufacturing technology. But those types of details are certainly confidential between the two Companies.

Thank you.

Todd Peters (ph), American Century.

Real quick -- your capital spending plans for this year -- have those been moved upward?

The capital spending is -- generally we're in the range of somewhere between 70 to $80 million in capital spending. We think that as we go through 2004 -- I will ask John here -- John Sorel, to comment -- but we think we should be in that 70 plus million range in terms of capital spending. But John, I will ask you to comment on that.

The projects we've just announced, we've been targeting in that range -- now we're looking a little bit more towards the higher end of around 80 million.

As John indicated, with the projects we've announced, that we should be probably in the approaching the 80 million range for 2004.

Okay, it's more or less equal with depreciation and amortization?

Yet, it's certainly in the range. We are running at a rate of 70 million right now in G&A.

Okay. Thank you.

(Operator Instructions). Jeff Zekauskas, J.P. Morgan.

Can you remind me how many trials you're doing for Synsil right now?

We are certainly, as we look at the Synsil development program, at this point right now, we don't have any trials running at the moment that I'm speaking. So we don't have any trials. We have just completed some trials -- we're evaluating the data. And, as I indicated, we're in the process of developing, producing -- producing some large quantities of Synsil to go to the next round of trials. And we we're hoping that some of the next round of trials will lead to further commercial agreements.

So, how many trials did you have going, that just ended?

Over the last several months, we've had several trials going.

Right. If I remember right, you used to say it was 6. Is that right?

No. We never have given numbers. We've always just indicated several.

And, so the reason that they concluded was -- how long does it take to assess the data? And how -- if there is a next set of trials, how are the different from the set you just had?

There's quite a difference here, Jeff, in terms of what you're doing when you're running a trial with a glass Company. As you run a trial, obviously, it takes time first to introduce the product into the batch. You run a series of trials into different conditions. And then, you remove the Synsil from the batch. Obviously, this takes time to do that.

Then, we and the potential customer -- or in this case, the person we're running the trial with -- obviously then sits down and evaluates the data that was collected during that trial.

That is not an insignificant time element. Because, one, you need to schedule in the glass plant when you run the trial. That sometimes may take a few months to get a trial scheduled. Then after you run the trial, you need to evaluate the data. Then depending on the results of that data, you need to then reschedule a trial and that again may take a few months to do that. That is the process we go through.

So is it the case that any purchase decisions can come from the trials that you have already just completed?

Okay. We think that -- no. What we're saying here is that we have and we are producing materials for some large trials, that as we run these large trials now, because we've already run trials, that we're hoping that some of these trials will lead to commercial sales.

Okay. Now, I believe on the last conference call I asked you -- I said -- would you be disappointed if you didn't sell at least -- I don't know -- on the order of -- if you didn't have contractual commitments of at least 50,000 tons of Synsil by the end of '04, would you still be disappointed if you didn't (multiple speakers)?

Yeah, personally -- personally, by the way, I would be. I think the program is moving forward. We have two contract right now that we produce for on a routine basis. For those two customers that we have. And as we get to the end of 2004, yeah, I would still again myself personally, be disappointed if we didn't have commitments to move this project forward.

Do you have enough capacity right now to supply trial material plus the commitments you've got already?

Well, obviously we do. Because we are supplying two customers on a commercial basis, and we're building material for some large trials.

But, that, obviously, is one of the constraints that we're working through. Is that, as you know, our customer sampling facility only has about 50,000 tons per year of capacity.

Right. I guess just as a last question, you described the fiber filler technology in such positive terms -- would you still describe the Synsil in same terms or is the data weaker or stronger?

Absolutely not. As I think I indicated in my comments, Jeff, that as we looked at the data that we're getting from these trials, continues to build that body of evidence that Synsil is a very attractive alternative to the conventional glassmaking process. So we're very comfortable that we are building that body of evidence.

Okay thank you very much.

(Operator Instructions). Rosemarie Morbelli.

Just as a follow-up, Paul, when you say that you're now producing commercially for two customers, it is really two manufacturing plants of the same customer. Am I correct?

That's correct, Rosemarie.

And how many more -- first of all, are those for two different glass applications? And then how many more facilities does that customer have that you could get the product into?

Well, it is the same glass application. So, the two facilities that we are supplying are for the same glass application. They have several more of these plants in the United States that, obviously, they would over time very much have told us, they would like to convert to the use Synsil.

In some cases, those plants are not attractive from a shipping perspective from Woodville. So that is something that we have to look at as we go forward. Geographic constraints, for example.

But, yes, they very much are sold on Synsil. They also have, in this case, as you know, with most glass Companies, they also have other segments of the glass industry that we also hopefully will be moving forward with also.

So, they are not doing trials -- that particular customer for their other kind of glass?

I don't want to get into that at this point.

All right. Thank you.

There are no further questions at this time. I would like to turn the call back over to senior management for any additional closing comments.

Well, thank you, everyone, for participating in the conference call. Certainly, we were pleased with our results for the first quarter.

It was certainly very much a difficult quarter for this Company. We started out very weak in January and then improved during February and March.

We see the business continuing to improve throughout 2004. And as we indicated, we expect to be in the range of 2.90 to $3 for the full year. So, again, thank you very much for your support and confidence in Minerals Technologies. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect.