Minerals Technologies Inc (MTX) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Minerals Technologies, Inc. 2nd quarter 2004 earnings conference call. Today's call is being recorded. With us today is the Chairman, President, and Chief Executive Officer, Mr. Paul Saueracker. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to the Minerals Technologies 2nd quarter 2004 earnings conference call. Worldwide sales for MTI of $229.3 million represented a 13% increase compared to prior year's 2nd quarter. Income from operations of $22.9 million, including over 400,000 in restructuring costs represented a 6% increase compared to the 2nd quarter of 2003, and equaled 10% of net sales. Our 2nd quarter net income of $15.1 million also up 6% translated into diluted earnings per share of 73 cents. I am pleased to report that all our product lines contributed to MTI's sales growth. TCC was up 11%, processed minerals increased 19%, and the refractory segment increased 14%. In particular, process minerals benefited from the very strong demand for building products in the U.S. during the 1st half of 2004. Refractory segment sales strongly benefited from the surge in North American steel production. For the 1st six months of 2004, global production in printing and writing paper was up an estimated 5%, and steel production was up 7.9%. We saw other signs of the improving economy. We are pleased to report that the financial health of our customer base improved in the 2nd quarter, and the paper mill and our associated satellite plant at Millenaka, Maine, which has been idle since December, 2002, restarted operations. While the company experienced strong growth in sales, several factors restrained our growth in operating income. Increased raw material costs, primarily in refractories, increased energy costs, plan of higher spending for R&D, and higher legal costs being incurred to vigorously defend our intellectual legal property on a worldwide basis limited growth in operating income to 8% prior to the restructuring charges.

Total operating income of $22.9 million after the restructuring charge increased $1.3 million, or 6% over prior year 2nd quarter. Yesterday we announced that we have revised the accounting treatment with respect to the reversal of $15 million of tax reserves in the 3rd and 4th quarters of 2003. This technical correction, which resulted in a restatement of earnings, reflects this transaction as a direct transfer to paid-in capital. This revision has no impact on the underlying business of the company, its income from operations, cash flows, assets, or liabilities. Furthermore, the original accounting treatment, as well as this correction, have not and will not impact any payments under the company's officer and manager compensation plans. Following my introduction, Ken Massimine, Senior Vice President and Managing Director of our Paper PPC business will report on the progress we have made the PCC product area. Alain Bouruet-Aubertot, Senior Vice President and Managing Director of MINTEQ will report on the refractory segment of our business, with John Sorel, our Senior Vice President of Finance and Chief Financial Officer will provide a brief financial summary and provide more detail on the accounting treatment of the one time tax reversal. Following John's presentation, I will conclude with a few remarks, and open the floor for questions. Before proceeding further, I need to remind you that on page 6 of our 2003 10-K, we list the various factors and conditions that may affect future results. Any statements that are related to future performance by me or other members of management are subject to these cautionary remarks and conditions. t's briefly review performance by product area. Total TCC net sales increased 11% in the 2nd quarter. Our programs for coating PCC continue to gain traction, requiring additional expansions of capacity.

We continue to make progress with the joint development efforts with International Paper on filler fiber composite material technology, which if successful can result in a substantial increase in filler levels. Process minerals achieved a 19% increase in revenue. Sales of processed minerals products have benefited by the continued strength in construction markets, strong housing starts, as well as success in gaining new accounts. The refractory segment, responding to a strong increase in steel production reported a 14% increase in net sales for the 2nd quarter versus prior year. For MINTEQ, when steel capacity utilization reaches or exceeds 90%, as is the case in the U.S., the demand for higher performance monolithic refractory products and systems surges with a shift toward our higher margin more durable product offering. Strong focuses an growth initiatives, operations excellence, and price surcharges were largely able to offset increased raw material pricing through the 2nd quarter. While this allowed operating income to increase by 17%, it was not sufficient to maintain a double digit operating ratio. Alain will address the raw material pricing issues in more depth in his review of the refractory segment. Our synsil program continues to move forward. We have activity in three out of the four class segments. One customer is currently using synsil on a full commercial scale at two manufacturing locations, firmly establishing the economic viability of our product in their segment. We also have one large scale trial in progress in a second segment of the glass industry, and another scheduled for the 4th quarter in that same segment. Success at either of these locations will likely result in the need for a commercial scale synsil facility. Additionally, a large scale trial in a third segment is scheduled to start prior to year-end. I will now ask Ken Massimine to provide us with 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 2nd quarter, and some expectations about the remainder of the year. Most sectors of the global paper industry are are recovering after one of the toughest economic periods in paper-making history. In the first quarter of this year, the U.S. real gross domestic product grew by an annualized 3.9%, and we expect the 2nd quarter will be about the same. Business investment has definitely picked up this year, and consumer confidence is high. The effect of this improved economic climate has finally started to trickle down to the paper industry. Preliminary 2nd quarter data show printing and writing paper demands improving. U.S. shipments of uncoated free sheet, our most important market segment, moderately increased in the 2nd quarter at 1.9%, compared to the 2nd quarter of last year. However, the limited increase in demand belies this sector's operating rates, which averaged 93% this year. The high capacity utilization rate is more related to a reduction in domestic capacity of a half a million tons over the last year. As mentioned at our last conference call, coated paper demand is responding to a pickup in business and consumer activity. Inserts, magazines, and mail order catalogs in particular. Boat coated free sheet, and coated groundwood papers have seen impressive production gains. For the 2nd quarter, U.S. shipments of coated free sheet gained almost 15% quarter-over-quarter, while coated groundwood soared almost a 9.5% growth.

This welcome news is the result of an increase in real demand for coated paper, coupled with lower inputs of these papers due to the weaker dollar and some hedge buying ahead of announced price increases. Internationally, Western European production of printing and writing papers advanced 6.6% in the 2nd quarter on top of a similar jump in the 1st quarter. The improvements in production are due to real increases in domestic demand, since exports are relatively stable. European coated paper production looks to remain strong for the next several years, and bodes well for our new merchant coating PCC facility, which is planned to start up this October in Walsam, Germany. The entire Asian Pacific region, including Japan, has seen a rapid escalation in economic growth since last year. Over the next five years, we anticipate the economy of the Asian region will grow by an average of 4.5% per year, versus 2.2% for North America. MTI currently has five operating PCC satellites in the Asian region, and two under construction. I am pleased to report that our year-to-date sales performance shows quarter-to-quarter sequential growth. MTI's total PCC sales for paper and nonpaper applications increased 5.5% over the 1st quarter, and 11.5% over the prior year's 2nd quarter from approximately $107 million to $119 million, due primarily to strong volume growth in all regions. The continued weakness of the U.S. dollar contributed moderately to our sales growth. Total PCC operating income ratio in the 2nd quarter declined slightly compared to last year.

This was due in part to higher than anticipated maintenance costs in North America, and planned increases in R&D spending primarily associated with filler fiber composite materials and trial related activities. Global sales tonnage of paper PCC on a same-store basis increased almost 6% in the 2nd quarter, compared to the year-ago period. As Paul mentioned, I am also pleased to report that our satellite in Millenakas, Maine restarted in the 2nd quarter. For the full year, given our continued in a improving economy, we anticipate further gains in our overall volumes. Increased paper demand significantly improved our European regional sales and operating income during the 2nd quarter. Construction of our new merchant coating grade PCC facility in Walsam, Germany is nearing completion, and we still anticipate an October startup. Our regional coating market development activity is progressing according to plan. I am pleased to report that in Europe, in addition to Walsom, we are increasing coating capacity at another location. This important expansion will not only meet continued coating PCC demand in both coated wood-free and coated mechanical papers, but it will also help enhance our regional capability to satisfy future market development activities. And in the Americas, significant trial activity has picked up in North America as well as in Latin America, where papermakers see overcarb PCC as the pigment of choice to achieve required optical properties on a cost performance basis. We remain hopeful that these promising trials will lead to new opportunities for PCC satellite installations.

I am likewise pleased to report that our joint research efforts with International Paper have made significant strides during the 2nd quarter in scaling up technology for new filler fiber composite material. This composite material will allow the replacement of up to 30% wood fiber and depending upon the paper mill has the potential to double current PCC consumption. Ongoing trials have been favorable, and further verification studies are expected over the balance of the year. Overall, our progress to date is an affirmation of our key paper strategic initiatives. I fully anticipate these programs will generate a framework for continued sales growth and a platform for future business opportunities. Now let's briefly turn our attention to specialty PCC for nonpaper applications. Sales of our specialty PCC segment grew at a double digit rate in the 2nd quarter versus the same period a year ago. This improvement resulted primarily from increased sales to the construction and consumer markets. All three of our specialty PCC plants showed good sales growth. For the remainder of this year, we expect the specialty PCC segment to continue its sales penetration following our strategic initiatives. In conclusion, we are very pleased with our sales progress during the 1st half. We are starting to see the results of programs initiated last year that will act as positive catalyst for improved sales and profitability as we continue to move the business forward. Now I will turn the microphone over to Alain who will review MINTEQ's business performance. Alain?

Thank you, Ken. It was pointed out to me that the individual business remarks section of these calls tends to be too long, and would benefit from being shortened. In the case of MINTEQ, the refractory segment of MTI's business, I am able to tell our story in a short amount of time surpass the 2nd quarter numbers speak loudly for themselves. Global steel production from 2nd quarter of 2004 was up 7%. MINTEQ sales for the 2nd quarter were up 14%, while [indescernable] and restructuring costs was up 17%. While the essence of our performance is reflected in the numbers, I would like to take the opportunity to briefly elaborate on several factors affecting our business, notable accomplishments, and the conditions in our principle market, the steel industry. Global steel production for the 1st half was reported to be up 7.9%, an astonishing volume increase for an industry that is producing at a billion ton per year rate. Focusing on the 2nd quarter, North American steel production was up 6.3%, compared to the 2nd quarter of 2003, which contrasted sharply to the 0.5% dec line that was reported by the International Iran Steel Institutes for the 1st quarter of 2004. The EU15 showed an accelerating recovery increasing 4.4% in the 2nd quarter, compared to 2.1% in the 1st quarter. In contrast, Asia slowed to a 9.2% rate of increase in quarter two from a blistering 14.4% increase in the 1st quarter. The slowing growth rate in Asia was caused by a moderation in the rate of increase in steel production in China from 26.4% in the 1st quarter to 15.7% reported for the 2nd quarter. Despite government mandated slowdown in the [indescernable] steel production facilities, the outlook for continued double digit growth in China steel production through 2005 remains strong. In so far as much of the new steel capacity added over the past two years is still in the rampup stage.

MINTEQ's global sales were up by 14%. By region, MINTEQ sales were up 22% in North America, 5% in Europe, and 17% in Asia. Sales in our smallest market, Latin America, were down. North America was particularly strong as U.S. steel making capacity utilization was at 90% through July 24th, versus last year when capacity utilization was 83.2%. The sale of systems, that is to say the combination of product and equipment, continues to be a key element of our success. As the steel industry consolidates and becomes more efficient, steel producers need to rely on high equipment utilization rates, which makes the use of MINTEQ systems increasingly attractive. During the 2nd quarter, MINTEQ's product sales were up 13%, and equipment sales were up 28%. It is noteworthy that our nonferrous product sales which consist primarily of refractories sold to nonsteel applications were up 33%, as MINTEQ was able to successfully adapt certain of its systems used for steel applications to nonferrous applications. Our outlook is for continued strong growth in this segment. MINTEQ was able to deliver strong sales growth in the 2nd quarter. However, the pricing of certain key raw materials increased MINTEQ's total cost of sales to 73.5%, up slightly from 73.2% a year earlier. The primary cost of this increase has been in the escalation in the delivered cost of magnesium, a key component of refractory products supplied to the steel industry that we source primarily from China. A combination of strong demand in China as a result of increased steel production, a temporary tripling of freight rates on belt commodities shipped from China, and increased fuel cost and export license fees were the primary contributors to the magnesia cost increase. Through the 1st half, the impact of magnesia cost increases was moderated by the material in inventory and implementation of subcharters. However, implementation lines of these subcharters, and some subsequent FOB China cost increases are preventing a full recovery at this time. The freight situation has eased somewhat with [indescernable tax dropping 40%.

However, the delivered price on magnesia exported from China is still extremely high due to increasing export license fees. MINTEQ is in the process of developing additional sources of magnesia as part of a long-term strategy to lessen our dependence on China. Operating income prior to restructuring charges increased 17% versus prior year. During the 1st half, we consolidated the River Rouge production at our older, more efficient facility. MINTEQ's operating margin in 2nd quarter of $7 million was equivalent to 9.5% of sales, and for the 1st half was 9.9% of net sales. A major contributor to this result was North America, due to both a strong steel demand and the benefit of our new product development force. Overall the effect of increased raw material prices on MINTEQ's operating income was moderated by the application of a surcharge to offset these cost increases. In this context, it should be noted that the street recovery of costs through price of charges implies an increase of sales, which reduces our operating margin ratio. MINTEQ's 17% increase in operating income was the result of leveraging the 13% increase in production margin against 10% in total expenses. Total expenses for MINTEQ were 17% of sales versus 17.6% in the 2nd quarter of last year. It is expected the expenses will continue to decrease as a percentage of sales as our growth programs gain traction. The [indescernable] increased spending has occurred is R&D. Where we have initiated a number of highly promising projects.

Progress continues on the [indescernable] improved products with our new [indescernable] products, we [indescernable] twice the durability of competitive materials. These products brought on the range for refractory materials supplied via our mainscan and scan roll systems. As our market ships geographically, there is ongoing challenge to move with the market, and MINTEQ has adapted a number of strategies to ensure the process of matching opportunities and resources is carried out effectively. In this regard, I am pleased to report that progress continues on a China refractories plant despite a more selective approach by the Chinese government to the permitting of capital projects. In this context, in order to move our program forward, we have relocated this project to the Suzhou Industrial Park, only 40 miles away from the original site that was selected in the city of Kunshan. The Suzhou sight is also located in the center of an area comprising a very large number of steel mills. Moreover, it is located on deeper water that is more accommodating to the movement of bulk industrial materials.

This program is on schedule, and these products are to become operational in the 3rd quarter of 2005. While we have the full benefit of our restructuring program in the 2nd half, we will continue to be burdened by higher raw material costs. We believe our material sourcing programs and continuing exports to more fully recover these additional costs through price increases and surcharges will allow us over time to offset these increases. However, I indicated in our last conference call the 3rd quarter, which traditionally has shown seasonal weaknesses, would present a challenge in terms of maintaining operating margin ratio. Overall, the 2nd quarter results confirm that we are making good progress on our growth and operational incentive programs, and despite steel challenging conditions we expect that 2004 we will present another year of continuing improved performance from MINTEQ. John?

Thank you, Alain. You have just heard the descriptions of the business environment and the highlights to the operating conditions in key development programs of the company during the 2nd quarter. I shall now review with you how that information is reflected in the company's consolidated results for the quarter, and I'll also discuss the recently announced restatement of the 2003 results. Net sales for the quarter were 229.3 million, an increase of $26.9 million, or 13% compared to prior year. Foreign exchange had a $5.7 million, or 3 percentage point favorable effect on sales in the quarter. Excluding currency, our marketing programs delivered double digit growth in both of our business segments during the quarter as our markets recover and our new products gain wider acceptance. Sale in the specialty minerals segment were 155.1 million, a 13% growth. Only about 2 points of that growth is generated by currency. Sales of PCC increased 11% to 118.6 million from 106.6 million last year, as unit volumes of PCC used for filling and coating paper increased 7% in the 2nd quarter. Sales growth was achieved in all regions, but most significantly in Europe, where sales grew 18%. Sales in the process minerals product line increased 19% to 36.6 million from 30.8 million. Growth was achieved at all plants and in all product lines and was the results of continued strong market conditions and increased penetration in the building products and plastics industry. Refractory segment sales increased 14% to 74.2 million, as compared with 65 million in the prior year. Less than 4 percentage points of that growth was due to favorable impact of foreign exchange. MTI's cost of goods sold was 76.3% of sales compared with 75.3% of sales in the prior year. Cost of goods sold grew 15%, which had an unfavorable leveraging effect on sales resulting in a 9% increase in gross margins. Production margins were pressured by the anticipated higher raw materials costs in refractories and process minerals, and by higher maintenance costs in the paper PCC product line, primarily in North America.

Total marketing and administrator expenses for the quarter increased 8% compared to the 13% sales increase. These expenses include the planned increased marketing expenses to support our business development efforts worldwide, in addition to higher corporate expenses to achieve Sarbanes-Oxley compliance, and to protect our intellectual property. The company's research and development expenses for the quarter were 13% above last year, due to increased product development activities in both segments, but particularly in the filler fiber composite material projects. The company recorded restructuring charges of 400,000 during the quarter, relating to work force reductions and the continued -- just a continuation of the program announced last year. Combining the above, MTI's income from operations were 22.9 million, 10% of sales in total, and 10.2% excluding restructuring, a growth of 6% over the 2nd quarter of 2003. The specialty minerals segments operating income grew 4% overall, generating an operating margin of 10.4% of sales, excluding restructuring, growth is 5% and margin was 10.5% of sales. Refractive segments operating margin grew 12%, and was 9.1% of sales, and again excluding restructuring, operate margin was 9.5% of sales and a 17% growth. Nonoperating deductions decreased by .7 million for the quarter, primarily due to lower net interest costs and foreign exchange gains. For the 1st six months the overall effective tax rate was 29.7% about 1.8 points above last year's rate. Net increase year-to-year is primarily the result of a change in geographic mix. As a result, net income was 15.1 million, and diluted earning per share for the quarter were 73 cents, which includes a restructuring charge of 1 cent per share.

To summarize the income statement for the quarter, sales increased 13%, generating a 9% increase in gross margin, total expenses grew 9%, leading to an increase in operating income over the 2nd quarter of 2003 of 8% before, and 6% after restructuring charges. A decrease in nonoperating deductions on a higher tax rate led to a 6% growth in net income. Diluted earnings per share increased 4% to 73 cents compared to last year's 70 cents per share. Turning to the balance sheet, our debt-to-capital ratio was at 15% giving a substantial capacity to continue to support investment and growth strategy. Cash generated from operations through June was about $45 million. To date we have invested about 40 million in capital additions we have also repurchased 168,800 shares for treasury and at an average price of 54.87 per share for a total expenditure of 9.3 million. Depreciation and amortization expense totaled approximately 35 million during the 1st half. The company also announced that it has revised the accounting treatment with respect to the reversal of certain of its tax reserves during the 2nd half of 2003. As a result of this revision, the company will restate its financial statements for the fiscal quarter ended September 28th, 2003, and for the 4th quarter in fiscal year ended December 31st, 2003. As previously disclosed, during the 3rd and 4th quarters of 2003, following the expiration of applicable statutes of limitations, the company reversed certain tax reserves resulting in a reduction to the income tax provision of approximately $15 million, or 73 cents per share. The 56 cents per share in the 3rd quarter, and 17 cents per share in the 4th quarter.

Although the company consulted with its independent auditors who concurred with the accounting treatment of this transaction at that time, it has now been determined that the reversal of the tax reserve should have been treated as an equity transaction transaction, and reflected as additional paid in capital of 15 million in the 3rd quarter of 2003. Accordingly, we'll be restating the 3rd quarter, 4th, and full year 2003 financial results to reflect a direct increase of 15 million to additional paid in capital as opposed to reduction in the tax provisions. This restatement is due entirely to [indescernable] correction, it has no impact on the underlying business of the company, its income from operations, its cash flows, or assets and liabilities. 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 can see, MTI was able to deliver solid performance in the 2nd quarter of 2004. The economic recovery is gaining momentum, and is finally being reflected and increased demand for materials in the manufacturing sector. This is an election year, and continued economic strength is expected, which should sustain the strong performance of our business. Our PCC business continues to show steady progress both in the paper and specialty sides. Strong demand for paper, coupled with expanded consumer applications for specialty PCC will continue to keep demand for PCC products high. The refractory segment will face a challenging 3rd quarter as raw material costs continue to escalate. However, these costs are being addressed by specific strategies being developed by the unit for additional sources of supply. Our process minerals group should continue to benefit from expected strong construction activity. All told, I continue to believe that the estimate of MTI's 2004 earnings in the range of $2.90, and $3 per diluted share remains reasonable. Operator, we are now ready for the first question.

Thank you, sir. At this time, ladies and gentlemen, if you would like to ask a question, please press the star key, followed by the digit 1 on you're touch-tone telephone. If you are using a speakerphone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment. Once again, if you would likes to ask a question at this time, please press star, 1. We'll take today's first question from Michael Judd with Greenwich Consulting.

Good morning.

Good morning, Mike.

I believe that you mentioned during the last conference call that there might be an opportunity to run a paper machine trial on the filler fiber composites. It sounds like you've been doing some testing, but have you actually been doing sort of larger scale testing yet? And if you haven't gotten to that point yet, do you still anticipate doing that in the 2nd half of the year?

Okay. Mike, a very good memory there in terms of our conference call, but, yes, we have actually moved filler fiber technology to and on full-scale paper machine. It was just a very limited trial, but it was actually run on a full-scale paper machine. So we are moving that technology forward. Obviously we have, as Ken indicated, a substantial amount of effort required in there, but obviously, we are very encouraged with the progress we have been making on a joint basis.

And going forward, can you kind of help us understand, you know, assuming it is successful, when could we, you know, begin to see, you know, the volumes of that application pick up, and, you know, what are some of the logistical issues that have to be reconciled?

Well, as you can imagine, this is a development technology. We are pleased with the progress we are making. We have run, as I said, a limited full paper machine trial. We will continue to run additional trials during the 2nd half of 2004, and as we continue to refine that technology, we'll continue to run those trials. Obviously, we're hoping as we go into 2005 that we'll see continued progress, and obviously start moving to larger scale trials, and hopefully move it forward into commercial usage at least on an initial phase of one of IP's locations.

Thank you.

We'll take our next question from Ray Cramer with First Analysis.

Hi, first I guess I'll start on the paper side. If I heard correctly, the Millenaka, it was roughly 2% volume contributor year-over-year?

I wouldn't get into that type of a specific numbers there, Ray, in terms of the contribution to the total improvement in our volume, but, yes, we've seen very nice volume increases cross the board. I think as Ken indicated on a same store basis, we saw a 6% improvement in volume in the 2nd quarter on a same-store basis, so we're very pleased with the rebound in the paper industry, and more importantly the continuing use of precipitative calcium carbonate.

When did the Millenaka mill start up again, at what point in the quarter?

Ken -- I'll ask Ken specifically what month that was. I believe it was in late April. But I'll ask Ken to respond to that. Ken?

It was late April.

Late April. Okay. And then, if I look at, you know, I'm just looking at North American growth, it was on the order of 2% in uncoated free sheet, but same store sales growth was 6%. Can you sort of comment on what factors are, you know, triple the market rate there, and then maybe also in Europe, you had fantastic growth. Was that in coatings, in filler, in bulk? Can you kind of give some more color there?

We can provide a little bit of update. Obviously we saw some improvement obviously in North America, as I think you remember when we did the 1st quarter conference call, we had indicated that although the paper industry improved in the 1st quarter, a lot that improvement was drawdown in inventories. Those inventories are being replenished. They are lower than what they were, which is also a good sign for the paper industry, but obviously we're seeing improvements in machine runability, improvements in the capacity utilization in the paper industry, as Ken indicated, so we're seeing the demand improvement for our PCC in North America. Obviously we've seen a greater improvement in the European side, so that's actually a double digit improvement in the European side, but we're just seeing a very good run rate for many of our paper mills that we serve there. We're seeing increased demand for our coating grade PCC as Ken indicated. We need to expand our capacity there in Europe to meet that increasing demand. So we've seen some very good progress there with the programs both in uncoated free sheet , ground wood and coating. So that's moving along very nicely.

Okay. Great. And on the specialty PCC side, if I heard right, it sound likes you're maybe getting traction in a calcium supplement or something like that? Can you add any color there? It sounds like -- is this like a new product line, if you will, or a new area?

Well, Ray, it's not so much in the traditional calcium supplement. What we're seeing here because of precipitated calcium carbonate has a certain taste and feel to it, I don't want to say taste, it's probably the wrong word, but a certain feel in the mouth, for example, that we're seeing the use of PCC, our USB PCC more into say food fortification applications used in some of the new beverages that are being developed for the marketplace, and the PCC product fitting very well. It suspends for easily, stays in suspension. There are a number of benefits that the manufacturer achieves by using precipitated calcium carbonate, and our team in that area has very specifically focused on these applications, and we're starting to see now that be traction taking place for the specialty side.

All right. Great. And then one other question and I'll get back in queue. This is more of a technical financial one. It looks like the decrease in other income, you know, is responsible for about half of the year-over-year EPS increase. Can you give a little more color on what happened there specifically in the quarter, and then maybe what that should trend for the rest of the the year?

Ray, we certainly would, and I'll ask John to address that specifically. John?

Yeah, I'm not sure I understood the -- just repeat the part about the decrease in which part?

In other expenses.

Uh-huh.

John, operating expenses. If I look at that year-over-year --

Yeah, yeah.

It was about a 2 cent decrease.

Right. Well, you know, our interest income is down a bit, and we have some more capitalized interest as a result of our -- the capital projects we have under way.

So should I look for it to be more at the Q2 levels in the back half of the year than the Q1 levels?

Yeah, I would say that's appropriate.

Okay. Thanks, guys, I'll get back in queue.

Thank you, Ray.

We'll take our next question from Jeff Zekauskas with J.P. Morgan.

Hi, good morning.

Good morning, Jeff.

During the quarter, your share count increased year-over-year from 20.3 to 20.8, it's up about 2%, and, you know, given that your -- you're basically on leverage now, and you think your technologies are doing well in synsil and the coated paper area, I'm sort of puzzled why your share repurchase isn't more aggressive.

Well, it depends on how you look at that, Jeff. Obviously as John indicated, during the 1st half, we repurchased a total of about 9.3 million dollars worth of the stock, 168,000 shares. We have a program that John has developed for repurchase, and we certainly buy our shares on an opportunistic basis. As John indicated, the average price of those shares during that period was about $54.87. We do it on a opportunistic basis. As you know the board has approved a share repurchase program of $75 million over a three-year period, and we're on track to continue to repurchase shares and do it at a price that we think is reasonable.

As I said, given the free cash flow of the company and the lack of leverage, it just puzzles me.

Well, you know, we obviously, as we've spoken before, Jeff, we see a lot of strategies moving forward. You know, we're expecting that with expectations that synsil will be successful, the coating strategy that Ken has talked about, the plant that Alain is building in China, that we see a lot of opportunities to use the cash and more importantly the financial resources of this company, and the share repurchase is just one portion of that plan.

So I imagine that's a step up in capital need spend is imminent?

We certainly can't talk about the imminency of that, but certainly we think that there will be capital requirements for this company going forward, certainly.

So before when you were talking about synsil about how if one of the trials goes well, you would need manufacturing capacity. When will that trial end, and is that a goal for this year, that is the announcement of an expansion of synsil capacity?

Well, we certainly hope that as we get to the end of 2004, that the trials that we have under way, obviously in the one segment, we have commercial customers now. We are running, as I indicated, an ongoing large scale trial right now that under way in another segment, and that will be followed up by a different customer in the same segment that will run a very large trial beginning in the 4th quarter. Either one of those, if those customers obviously see the economic value of synsil, are large enough that we would have to build a commercial plant to supply them long term.

And so it's --

We're hoping that as we move forward with the one trial or the other trial, as we get to the end of this year, or the early part part of '05, we'll have that decision.

And just, then, a last question. In looking at your results, it seems that your PCC operating income was probably flat to down year-over-year, but nicely up on a sequential basis. Is that correct? And what are the factors behind those two movements?

Okay. Your -- you are correct in your assessment, Jeff, as you look at that, and I'll just ask John to address that a little bit farther. John?

You're pretty correct in your assessment there, Jeff. One thing you want to keep in mind is the 1st quarter in PCC was, in fact, still affected by VIP condition. It didn't anniversary until the 2nd quarter of this year, so it was -- -- it looked a little worse actually and affected SMI in that way in the 1st quarter than it really was. But with the sales growth we have, you have seen a rebound, so sequentially they are doing better, although the operating income rate didn't grow at the same rate as sales, and you'll see that in total SMI results as Ken pointed out in his discussion. There were some cost pressures on the maintenance side, but the trend is certainly favorable, and it is complementary to that sales growth.

So in part the reason why you sort of reiterated your guidance is that you just expect some of those costs to go away in the 2nd half?

That is correct, as you look at it sequentially. Right.

Okay. Thank you very much.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, 1 on your touch-tone telephone. We'll go next to John Roberts with Buckingham Research.

Good morning. The process minerals business had a nice jump here. It has been in the high 20s to 31 million in sales for over a year on a quarterly basis, is 36 to 37 the new base level, and can we go up meaningfully from there over the next few quarters?

Thank you, John. Yes, the process minerals business very much has taken a step up over the last few quarters in terms of its business activity. Obviously we have done a number of things is there in that business with one, the improvement in the economy, the improvement in housing starts for example, has worked out well, and we have also have gained new business, so that group of individuals in that area has certainly moved that business very, very well, and we're very pleased with the performance that they have. There is some seasonality that business, as you know, that in terms of construction, the 2nd and 3rd quarters generally are the strongest, and then it just tapers off slightly in the 4th quarter, and certainly into January-February time frame, but, no, there is a higher level of operations in that business now, that higher level should be sustained as we go into the 3rd quarter, and then seasonally we would see a little drop in that level just because of seasonal considerations in that business, but overall they have made very substantial progress.

Thank you.

And as a final remainder, ladies and gentlemen, that is star, 1 for questions. We'll go next to Michael Judd with Greenwich Consulting.

You probably discussed this before, but just as a reminder, the new Chinese capacity that's coming up next year, what was the sort of the volume contribution on a year-over-year basis?

Certainly, Mike, as you know, we there be starting two satellite plants in China in the 1st quarter of 2005. We've indicated that they have a total capacity -- they have a total requirement of about 8 units of capacity between those two facilities. They include both filling material and coating material, so if you just look at that 8 units of capacity, and use the 25 to 35,000 tons per unit, you can see that that's a very significant increase in our capacity and production of PCC in 2005.

Thank you.

We'll take our next question from Jeff Zekauskas with J.P. Morgan.

I guess just a few more. You discussed a coatings and expansion of PCC coatings capacity in Europe. Is that at Hermal, or is that at a different place?

Certainly, Jeff, obviously we don't get into the specifics as you know when we're adding capacity. We do give a total in January of each year, but, yes, not only are we bringing the very large merchant plant onstream in October of this year, as Ken indicated, but we do have the requirement and need to increase the capacity of one of our other satellite plants.

And that's Hermal?

I just said a satellite plant.

Well, is the meaning of the capacity expansion that there are more inquiries for coatings grade PCC?

Both more inquiries, and higher demand from our existing customers, it's a combination of both. That program is moving forward very nicely. Ken and his team have really established the Obercrob 840 as the premium coating PCC pigment in the marketplace.

Secondly, can you quantify the margin squeeze, that is in millions of dollars, from the magnesia price inflation? Both for the 2nd quarter and your expectations for the 3rd?

We don't get into those specific numbers, Jeff as you would imagine, but obviously you're aware of the increase in magnesia costs, and obviously Alain has increased prices and looked at other products substitutions as he looks at addressing that issue. We are -- obviously have had some impact in the 2nd quarter, we expect additional impact in the 3rd quarter, but I'll ask Alain to also provide his view on that, Alain?

We talked about the process being increasing over the last several months. We have we have been able to monitor it because of the level of inventory we have, and the price of charges, and increases that we've implemented, but as you know, also, there is time lag between the return, the result of these price increases to fully cover these increases, so as we move into the 3rd quarter, we are going to have the full impact of the magnesia costs without having in the full recovery through our price increases. So over time, we expect to have this gap being covered, but clearly we have the impact right now.

I guess maybe just to focus it a little bit more. That is, is the order of magnitude in the 3rd quarter a $4 million squeeze, or a $2 million squeeze? Just ballpark it. Is it something that we have to materially worry about, or we don't?

I don't think, Jeff, one way of looking at it, obviously, it's had some impact on our operating income ratio from impact in the 2nd quarter, for example, and as we indicated, it's a little bit below double digits in the 9 percent range. We expect obviously to have pressures on that the 3rd quarter. But yet when we look at the total year for both MINTEQ and SMI, we're still comfortable with the guidance of $2.90 to $3 per share.

Okay. Lastly, R&D expense really stepped up in part for -- I suppose for the filler fiber composite. Was that the largest component of the R&D expense, and should we sort of model that sort of level of spending in the 2nd half?

The answer is yes. The largest increase in the R&D spending that we had in both the 1st quarter and the 2nd quarter, and to year-to-date, is in fact the filler fiber composite material development efforts, but we've also run some other trials. There's other trial activity. As you can imagine as we're continuing to move coating technology forward, the ground wood technology forward, there are other trials that we're running, but the single largest expense would be the filler fiber. We would expect that high level of R&D spending to continue into the 2nd half. We're very -- we're seeing the results of it, we define ourselves as a research and technology based growth company. We see the opportunities here not only on the SMI side, but as Alain indicated, the higher R&D expenditures on the MINTEQ side with the programs he is working on, but we see some very favorable trends here from our research and technology efforts that will be very beneficial to this company.

I guess just as a last question. Usually at the end of your fiscal year, you announce, you know, sort of a grand total of capacity expansions

Yes, we do, in January.

Right. In January. Are you optimistic about that number in that the paper industry has certainly picked up, and paper prices have gone up, and you offer a low cost alternative.

We're very optimistic. Yes, we are. We think that as we go to January, when you look at what we're doing with China, and obviously the announcements we have there, other things that we're doing, that, yes, we'll have additional units of capacity that we'll be adding into the system in 2004, that we'll talk about in obviously January of 2005.

Okay. Thank you very much.

We'll take our next question from Ray Cramer with First Analysis.

Hi. If just wanted to touch a little on what you're seeing sequentially in the paper market. I've seen caustic prices are coming up, Hercules for example reported seeing some nice sequential strengthening. I look at uncoated freesheet shipments though, looks like in the year-over-year increase was a little bit less in the 2nd than the 1st quarter. Can you comment at all on maybe your tonnage sequentially or any paper industry stats sequentially, and what your expectations are, if you can, for Q3, or what you've seen so far in July?

We're seeing continued strong results in July. Our sales in the beginning of the 3rd quarter continue to be strong across all business areas, and so we're very pleased with that. We expect that the uncoated freesheet market will continue to show growth sequentially as we move forward. We're not going to see huge growth, though, Ray. You know, we're talking just a couple of percents here in the uncoated freesheet market, where obviously in the coated market has shown more growth, but we still see very favorable trends here, and so we're very optimistic that the PCC business will remain strong as we go through the rest of 2004.

Do you know what your tonnage increase was sequentially?

We obviously keep track of tons, but we don't talk about that specific type of information. We indicated as you know that on a same-store basis, we're up 6% in the 2nd quarter. So on a same-store basis, we're up 6%, so we're very pleased with that.

That's a year-over-year figure, correct?

Yes.

All right. Thanks very much.

Sequentially though, Ray, obviously, as you know, our 1st quarter was soft, if you remember, in the paper side. We didn't see much improvement in volume in paper in the 1st quarter, but very nice improvement in volume in the 2nd quarter.

Okay. Thank you.

And that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. Saueracker for any additional or closing comments.

Thank you, operator, and thank you for the participants on the conference call. Obviously we were very pleased with the performance here for the 2nd quarter, and the earnings per share of 73 cents after a 1 cent charge for restructuring. I'm also pleased obviously that the minerals technologies and all segments is showing very strong growth. As you know, PCC was up 11%, process minerals 19%, and refractories 14%, so we see strong growth. Our marketing strategies are taking -- gaining traction and moving forward, and we continue to be optimistic about MTI as we go forward for the 2nd half of 2004. So again, thank you for your interest our company and your participation on the conference call, and certainly everyone have a terrific day. Thank you.

Once again, this does conclude today's conference. We thank you for your participation. You may now disconnect.