Minerals Technologies Inc (MTX) 2004 Q3 法說會逐字稿

Good day and welcome, everyone, to this Minerals Technologies Incorporated third quarter 2004 earnings conference call. Today's call is being recorded. With us is the President and Chief Executive Officer, Mr. Paul Saueracker. Pleasing go ahead, sir.

Thank you, operator. Good morning, and welcome to the Minerals Technologies third quarter 2004 analyst conference call. I am very pleased to report that we had a strong third quarter. MTI's worldwide sales of $236.4 million for the quarter were 19 percent above prior year third quarter while operating income at $24.4 million was 25 percent higher than it was the same period last year. This resulted in net income of $16.2 million, which was up 27 percent compared to the third quarter of 2003. Our strong earnings performance translated into earnings per diluted share of 78 cents.

We definitely benefited from the strong growth in the global economy. Worldwide steel production for the third quarter was up more than 9 percent. North American steel product where the market tends to be volatile was up over 14 percent. Our processed minerals products benefit from the strong construction market. New housing starts hit a 2 million annual rate in September, and nonresidential fixed investment expanded at a 12 percent annual rate in the third quarter. On the paper side, although uncoated freesheet shipments in North America, our primary market, only increased slightly, coated paper shipments showed strong growth during the quarter. All product lines contributed to MTI's sales growth, and all grew in excess of the growth reported for our principle markets paper, steel and construction. PCC up was 14 percent, processed minerals increased 19 percent, and the refractory segment increased by 29 percent. The strong growth in sales led to an even stronger growth in operating income despite rapid increases in fuel, utilities, and certain key, energy intensive raw materials.

Following my introduction, Ken Massimine, Senior Vice President and Managing Director of our Paper PCC Business, will provide more detail and report on the progress we have made in the PCC product area. Alain Bouruet-Aubertot, Senior Vice President and Managing Director of MINTEQ, will report on the refractory segment of our business; and John Sorel, our Senior Vice President of Finance and Chief Financial Officer, will provide a brief financial summary. After John's presentation, I will conclude with a few remarks and will open the floor for questions. Before proceeding further, I need to remind you that in our 10-K we listed factors and conditions that may affect future results. Any statements related to future performance by me, or other members of management are subject to these cautionary remarks or conditions.

While Ken will provide you with a detailed description of our PCC business performance, and Alain will do the same for the refractories business, I would like to mention a few highlights. Net sales of PCC were up 14 percent in the third quarter, 9 percent year to date. A continued ramp-up of our filler PCC sales at the Millinocket mill in Maine and our Sabah Forest Industries in Malaysia contributed to the strong performance in the third quarter. You may find that your mailboxes have recently been stuffed with catalogs. Apart from the momentary inconvenience and the need to recycle them, that is a very good sign for our shareholders, because many catalogs now incorporate paper containing PCC to improve print quality. Furthermore, demand for paper PCC continues to grow and we are investing to meet this need.

I would like to outline some of the steps we are taking. On October 4, I officiated at the dedication of our 125,000 ton per year coating grade PCC facility located in Walsum, Germany. This facility is now in the commissioning and start-up phase. We also have significant expansions in progress at several of our existing PCC satellite plants, and construction is underway at our two previously announced new PCC satellite plants, located at Dagang and Suzhou in China, with other 225,000 tons of combined annual capacity. The refractory segment increased sales by 29 percent in response to improved conditions in the steel industry, despite significant increase in raw material costs. By focusing on its value-added products and technologies and tight cost control, MINTEQ was able to leverage the strong increase in sales to a 55 percent increase in operating income. This increase was a major contributor to the Company's 25 percent increase in operating income.

I am happy to report that there were no significant restructuring charges or bankruptcies in the third quarter. While the refractory segment did not achieve its target of a 10 percent operating income ratio as a result of raw material cost increases, Alain will discuss the programs that have been initiated to overcome the issues facing the refractory segment in order to achieve a double digit operating margin in the future. I would like to briefly touch upon the performance of our processed minerals segment, where sales were up 19 percent. As you would expect, with this sales growth, our operations excellent program, and good cost control operating income for processed minerals increased significantly. We are also adding to our raymon [ph] mill capacity at our largest limestone processing facility in Lucerne Valley, California. The expansion is needed in order to meet the ever increasing demand for our construction-related products in southern California.

Our Synsil program continues to move forward. As we have previously discussed, two glass manufacturing locations owned by the same glass maker are utilizing Synsil commercially. We have also recently added a new specialty glass account. Furthermore a large scale Synsil trial continues, but equally important the product is now delivered at full commercial price. The benefits provided by Synsil clearly provide a favorable value equation for the glass maker. We are hopeful that the successful completion of this trial will result in the construction of a full-sized commercial Synsil facility capable of producing approximately 200,000 tons per year. Overall, the outlook for Synsil continues to be encouraging and we would expect to announce a decision on construction of the new plant prior to the middle of next year. I will now ask Ken Massimine to provide us with details related to the 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 third quarter and some expectations about the remainder of the year. The global paper industry appears to be on the road to recovery after 3-plus years of recession. In the first half of this year, U.S. total printing and writing paper shipments improved by 6.8 percent over the first half of last year. We now anticipate that shipments for the second half of this year will grow by slightly more than 4 percent. Because of the strong first half numbers, U.S. paper shipments this year are expected to show decent growth over last year. Still, over 3 years since 2001, total printing and writing paper shipments have grown an average of less than 1 percent per year. For the quarter just passed, U.S. shipments of uncoated freesheet, our most important market segment, showed very modest improvement. Estimated shipments were only 0.2 percent ahead of last year's third quarter. Sluggish business demand, persistent inroads from electronic communications, and slowing economic confidence continue to temper growth of this paper segment.

Operating rates are above 90 percent, but this rate has more to do with reductions in paper grade capacity than increases in consumption. Demand for coated papers remains strong during the third quarter. Coated freesheet shipments advanced almost 8 percent quarter over quarter, while coated groundwood grew by almost 5 percent. Early indications suggest the tight market for both of these grades will extend into next year. Internationally, western European production of printing and writing papers advanced almost 6 percent in the third quarter, on top of a similar jump in the second quarter. The improvements in production are partially due to real increases in domestic demand, as well as rising exports especially of coated papers. European coated paper production is expected to remain strong going into next year.

The entire Asian pacific region, propelled by China's strong economic growth, will see domestic production of printing and writing papers growing 4 percent this year and almost 5 percent next year. In China alone a tally of new capacity expansions announced for the 2005 to 2007 period shows almost 1.7 million tons of coated freesheet and 200,000 tons of light weight coated papers coming online. MTI has 5 operating PCC satellites in the Asian region and 2 are under construction in China with start-ups slated for early next year. I am pleased to report that our year to date sales performance reflects continued quarter to quarter sequential growth. MTI's total PCC revenue for paper and nonpaper applications increased 4 percent over the second quarter, after a 6 percent sequential increase from the first quarter. Sales growth over the prior year's third quarter was 14 percent, from approximately $109 million to $124 million due primarily to strong volume growth in all regions. This volume growth plus the weakness of the U.S. dollar were the primary drivers affecting our sales increase. However, with significant increases in energy and raw materials forecasted for the remainder of this year, and the start-up costs associated with the major coating facility in Walsum, our fourth quarter performance is expected to be somewhat tempered versus the third quarter.

Total PCC operating income grew at a low double digit rate in the third quarter compared to last year. Rising research and development expenses for trial related activities were higher than planned, but should pay off in the future when we see new business from these activities. Global sales tonnage of paper PCC on a same store basis increased almost 9 percent in the third quarter, compared to the year ago period. The restarting of the Millinocket satellite, as well as the start up of the Sabah Forest satellite in Malaysia helped contribute to our excellent growth over the prior year. Growing industry demand and successful penetration of the coated paper market improved our European regional revenue and operating income significantly during the third quarter, and as Paul mentioned, our Walsum, Germany merchant PCC plant is now in the commissioning phase. Earlier this month we were pleased and proud that many dignitaries, paper industry associates and friends participated in the dedication ceremonies of this initial 125,000 ton facility. We fully anticipate that the Walsum plant will enlarge and strengthen our overall coating related presence in Europe.

In addition to Walsum, I am pleased to announce recently approved capacity expansions at several global PCC satellites. As you know, in January we will provide you with a tally of total added capacity in 2004. I am also happy to report that construction is well underway at our previously announced new PCC satellites at Dagang and Suzhou in China, each representing four units of PCC capacity. Fabrication is on schedule, and both plants will be completed by the end of the first quarter 2005. All of these important expansions are not only evidence of growing regional paper demand, but also of the host mills commitment that MTI PCC is the product of choice for meeting their mineral requirements. Moreover, our filler-fiber composite research work to date continues to look promising. This composite material will allow the replacement of up to 30 percent wood fiber and depending on the paper mill, has the potential to double current PCC consumption. Additional trial activity is planned for the fourth quarter.

Now, let's briefly turn our attention to specialty PCC for nonpaper applications. Sales of our specialty PCC segment registered good growth this quarter, compared to the same period a year ago and results primarily from increased sales into plastics-related applications in construction and automotive markets. In conclusion we are pleased with our sales progress during the third quarter. Our focused business programs initiated the end of last year have generated a solid framework for current and future advances in sales and net profits. Now I will turn the microphone over to Alain who will review MINTEQ's business performance. Alain?

Thank you, Ken. Again, I am in the privileged position of being aboard to relate MINTEQ's performance in a short, direct, and straight forward manner. MINTEQ delivered a very strong third quarter. MINTEQ's sales for the third quarter were up 29 percent versus last year when our increasing total expenses was limited to 7 percent leveraging operating income to $7 million, a 55 percent increase compared to prior year third quarter. There has been a dramatic change in our business environment from serving what appeared to be a dying business, to serving what has become a dynamic and highly profitable growth industry. Who would have thought two years ago that such a description would ever fit the steel industry? Based on IISI fears global steel production was up 9.2 percent in third quarter of 2004 compared to third quarter of 2003. For the first 9 months of 2004, production was reported to be up 8.3 percent, an astonishing volume increase for an industry that produces nearly a billion tons per year. Revenues were up even more as the steel industry took advantage of strong demand to vigorously increase prices. As a result, company after company from U.S. steel and new car in the U.S. to Bow steel in China all reported recorded profits from third quarter, despite surging energy and raw material costs. In North America for the third quarter, steel production was up 14.2 percent. At the same time the EU 25 [indiscernible] 8.25 increase in steel production up sharply from the 4.4 percent increase reported in the second quarter.

Within Europe the strongest growth [indiscernible] is occurring in the eastern European countries such as Poland. Notwithstanding the growth in global steel production continues to be led by China. China year to date in 2004 accounted for 192 million metric tons or 25 percent of the world steel production. The unprecedented increase in Chinese steel making capacity added between 2002 and 2003 is still ramping up. As a result year to date China steel production has increased by 21 percent. To place this increase in perspective, the growth in China steel production this year is approximately equal to the entire steel output of Germany. We are locating resources to where steel production is growing is an important part of our long-term growth plan. In our first quarter conference call we announced the construction of 100,000 ton per year monolithics refractory plant in China. This project, located in the Suzhou industrial park near Shanghai remains on schedule and is projected to become operational by the end of the third quarter of 2005.

In the third quarter MINTEQ's total sales of $76.4 million increased by 29 percent or $17.3 million above our 2003 third quarter net sales. Sales growth was achieved in all geographic areas. North America yielded the strongest sales performance with net sales up 45 percent. This was followed by Europe up 13 percent, Asia up 11 percent, and Latin America up 10 percent. When steel industry capacity utilization is high, demand for MINTEQ's premium products that provide less maintenance downtime and better steel furnace availabilities strongly increase. Based on the American Iron and Steel Institute figures, the U.S. steel capacity utilization rate ran close to 91 percent in the third quarter versus approximately 80 percent for the third quarter of last year. The sales systems, that is to say combinations of products and equipment, continues to be a key element of our growth. In North America, third quarter 2004 equipment sales were essentially 3 times those realized in the third quarter of 2003.

I would also like to comment briefly on certain other product line highlights. One of the approaches we have been emphasizing is the application of systems that MINTEQ has developed for the steel industry, in non-steel, or industrial applications. This program was highly successful in the third quarter with sales of refractory systems to industrial applications increasing 55 percent versus prior year third quarter sales. Our outlook is for continued strong growth in this segment, as additional accounts are converted, particularly in aluminum processing. Sales of metalogical wire used by [indiscernible] to improve castability and increased production rates were also strong increasing by 51 percent compared to prior year third quarter. Unlike last year, when currency charges contributed strongly to our growth, the weakening of the dollar contributed only 4 percent of our reported sales growth.

While MINTEQ was about to deliver exceptional sales growth for the third quarter, our cost of magnesium, a key raw material used in the manufacture of refractories for the steel industry, increased substantially. While the increase was muted in the first half due to our inventory position, the real impact of this increase was felt in the third quarter. The combination of strong demand in China for refractories used in the manufacture of steel and increased fuel costs, shipping rates and export license fees were the primary drivers of this cost increase. While part of this increase was passed on to our steel industry customers through a surcharge and/or a price increase, our customer, we share the pain but not bear the pain as full recovery through pricing has not been possible. MINTEQ recognizes the risk associated with over-reliance on a single country, such as China, as a primary source of raw material. As a result MINTEQ has initiated a multistep program to lesson its dependence on China as a source of raw material. While local synthetic magnesium, derived from sea water, is available in the U.S. and elsewhere, it is not cost competitive with magnesium from China or most mineralistic refractory applications.

Starting in 2004 part of MINTEQ's magnesium requirements in Europe has been secured from Turkey. We have also further secured a license to purchase magnesium from North Korea, which today can be delivered at costs lower than the current offering price of Chinese export material. Moreover, as MINTEQ completes its plans in China, an increased share of the production will not subject to export license fees. Longer term, an extensive effort has been initiated to reexamine backwater integration into the mining of magnesite and production of magnesium. As of this time, we have identified magnesite prospects with significant potential which could be developed in order to service American and European operations.

Despite sharp increases in magnesium and fuel costs, MINTEQ's gross margin increased 21 percent compared to last year third quarter. Total expenses, however, increased only 7 percent, leveraging the increase in gross margin to a 55 percent increase in operating income. The primary driver of the increasing expenses has been a planned R&D and marketing effort to support our development on laser measurement systems and [indiscernible] products for electric furnaces, ladles, and industrial markets. Overall, MINTEQ's operating income ratio increased to 9.2 percent of net sales, versus 7.7 percent that was realized in 2003, but still fell short of our double digit goal. Looking forward, we expect that in addition to continued very high magnesium costs, we will be subjected to other costs escalations, particularly in fuel and chemical raw materials. This will put pressure on operating income ratios in fourth quarter and into early next year before MINTEQ realizes the full benefits of its alternate sourcing strategy for magnesium. At the same time, we are cautiously optimistic that the global steel industry will continue to expand in the fourth quarter and into 2005 and we remain confident about the commercial prospects of our new high performance products and systems. John?

Thank you, Alain. You have just heard the descriptions of the business environment and the highlights of the operating conditions and key development programs of the Company during the third quarter. I will now review how that information is reflected in the Company's consolidated results for the quarter. As Paul mentioned overall financial performance was quite strong during the quarter. MTI achieved diluted earnings per share of 78 cents, which reflects a 26 percent increase over the 62 cents reported in the prior year. This performance reflects a continuation of double digit volume growth and accelerated margin improvement that began in the second quarter. Net sales for the quarter were 236.4 million, an increase of 38.2 million or 19 percent compared to prior year. Foreign exchange had a $5.9 million, or 3 percentage point favorable effect on sales in the quarter.

Our marketing programs delivered double digit top line growth in both of our business segments during the quarter, as our markets continue to recover and our new products gain wider acceptance. Sales in the specialty mineral segment were a $160.0 million, a 15 percent growth. Only about 2 points of that growth was generated by currency. Sales of PCC increased 14 percent to $123.6 million from 108.6 million last year as unit volumes of PCC used for filling and coating paper increased 11 percent in the third quarter. We achieved sales growth in all regions, but most significantly in Europe where sales grew 30 percent. Sales in the processed minerals product line increased 19 percent to $36.4 million from 30.6 million. We saw growth at all plants and in all product lines as a result of continued strong market conditions and increased penetration in the building products and plastics industries.

Refractory segment sales increased 29 percent to $76.4 million, as compared with 59.1 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 grew 20 percent, which had an unfavorable leveraging effect on sales, resulting in a 16 percent increase in gross margin. Our overall cost of goods sold increased to 76.7 percent of sales compared with 76.0 percent of sales in the prior year, due primarily to the effect of higher raw materials cost in the refractories and processed minerals product lines. Total marketing and administrative expenses for the quarter increased 8 percent compared to the 19 percent sales increase. These expenses include the planned increased marketing expenses to support our business development efforts worldwide in addition to higher legal costs to protect our intellectual property and higher corporate expenses associated with the Sarbanes-Oxley 404 implementation. The Company's research and development expenses for the quarter were 15 percent above last year, due to increased product development activities in both segments, but particularly in the PCC product line, which includes the filler-fiber composite mineral project. Restructuring charges related to the program announced last year had no material effect on the quarter.

Combining the above, MTI's income from operations was $24.4 million, 10.3 percent of sales, a growth of 25 percent over the third quarter of 2003. The specialty mineral segment’s operating income grew 16 percent on a sales growth of 15 percent generating an operating margin equal to 10.9 percent of sales. The refractory segment's operating margin grew 55 percent on a sales growth of 29 percent and was 9.2 percent of sales. The operating ratio in refractories was affected by about 2 points as a result of higher raw material costs, which were partially offset by surcharges. Nonoperating deductions decreased by 0.3 million for the quarter, primarily due to lower net interest costs.

For the first 9 months, the overall effective tax rate was 29.7 percent, about 1.8 points above last year's rate. The net increase year to year is primarily the result of a change in the geographic mix of earnings. As a result, net income was $16.2 million and diluted earnings per share for the quarter were 78 cents. To summarize the income statement for the quarter, sales increased 19 percent generating a 16 percent increase in gross margin. Total expenses grew 10 percent, leading to a 25 percent increase in operating income over the third quarter of 2003. A decrease in nonoperating deductions combined with a slightly higher tax rate led to a 27 percent growth in net income. Diluted earnings per share increased 26 percent to 78 cents, compared to last year's 62 cents per share.

Turning to the balance sheet, our debt to total capital ratio remained at 15 percent. The increase in receivables is consistent with the record sales volumes and recent price increases. Cash generated from operations through September was about $84 million. To date, we have invested about 66 million in capital additions. We also repurchased 289,400 shares for treasury at an average price of $55.29 per share for total expenditure of $16 million. About 120,000 of those shares were purchased in the third quarter. Depreciation and amortization expense totaled approximately 52 million for the first 9 months. Now I will turn the mic 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 strong performance in the third quarter of 2004. While we have noticed some tapering off in certain sectors of the economy, steel remains strong. On the paper side we expect that the higher production rates may begin to slow somewhat in the fourth quarter. Furthermore, MTI also faces a number of costs escalations that may have an impact on our fourth quarter results. These include increased energy intensive raw material costs primarily in lime, the main raw material for PCC, and a number of raw materials for refractories. Higher energy costs in both business segments, a seasonally slower fourth quarter for the processed minerals business. Higher corporate expenses to implement the Sarbanes-Oxley 404 requirements by year end and higher legal expenses to protect our intelectual property. We have in place a number of global strategies to control our raw material costs and we believe we will be successful in passing through many of the cost increases. However, where sales are under long-term contract, there will be a delay in passing along these increases via contract escalation clauses. Consequently, while considering these factors, we anticipate that our fourth quarter earnings will be below our earnings for the third quarter. As a result, for the full year we expect our earnings to be in the range of $2.85 to $2.92 per diluted share. Operator, we are now ready for the first question.

[Operator Instructions]. Ray Kramer, First Analysis.

Hi. First just two financial questions, if I could. Can you quantify the start-up costs, if any, for Walsum in the quarter, and then the cost of R&D on the filler-fiber composite?

Good morning, Ray. Obviously we don't give out that very specific information. There are start-up costs as you imagine with a very large facility like we have at Walsum, so that is something that obviously we plan for, but they will in fact impact the fourth quarter, and we are as you know accelerating the development of the filler-fiber composite technology in conjunction with International Paper. Now, as Ken indicated, we will be doing additional trials there in the fourth quarter, and as we previously mentioned, that is part of the increase in R&D expenses that you see in the third quarter and in the numbers year to date, so that is certainly a factor in the increase in those R&D expenses.

Okay. And in the paper markets, could you sort of take us through how you are looking at the end markets in terms of the coated growth? Is that a lot to do with all the campaign ads and stuff I'm getting in the mail, and then in terms of uncoated freesheet, given signs of a pretty strong economy, is there -- are people -- are you changing the way that people look at uncoated freesheet?

As you would imagine -- let's take the two questions separately. In terms of coated paper, that is, as you know, one of the fastest segments -- fastest growing segments of the paper industry. And as the advertisers look to improve the quality of the print media, we are seeing obviously further demand for our coating grade PCC, and certainly we're enjoying the success of that, and obviously the reason for the construction of the Walsum facility to take advantage of it. So that will continue to grow and certainly be beneficial to Minerals Technologies. As Ken indicated, in the uncoated freesheet side, there is still growth in that area more so outside of the United States as you look at Asia, for example, and other areas where Ken indicated they're increasing capacity there. But in North America, we just see limited growth as Ken indicated. The reason as Ken indicated that the capacity numbers are higher -- excuse me -- the operating numbers are higher is because the capacity has been reduced with a number of machines either taken out of service or converted to other grades of paper. And we expect that trend will continue. Why we are pushing the different technologies that we developed -- the 3G technology and the filler-fiber composite technology to increase the percent of PCC used in an uncoated freesheet paper, and certainly would have a major beneficial impact both to the paper company and to Minerals Technologies.

With that thrust into Asia, is there a difference in profitability in PCC in Asia versus the U.S.?

No, in terms of the percent profitability that we operate on, obviously we have thresholds and hurdles that we use as investment targets and those hurdles are similar whether it's in North America, Europe or Asia.

So pricing is similar globally?

Well, the pricing ratios are similar. Obviously it depends on the different costs for raw material, neighbor energy, et cetera. Those would impact the actual price itself but the ratio of pricing to those cost inputs would be similar.

And then finally with the Synsil contract you announced, can you comment on the size of that contract relative to the other two, which I believe are similar size to each other?

Okay. In terms of the new customer that we've acquired, which is a speciality glass manufacturer, they use smaller quantities of Synsil. Obviously the two that are commercially operating right now with the same glass manufacturer would be larger than a specialty glass manufacturer. The new contract is smaller, but certainly it just shows that the value, the value of using Synsil is being certainly recognized by other segments of the glass industry.

Is there a higher cost grade of Synsil that goes into spec glass, or is it the same in terms of price?

In terms of -- well, I'll talk in terms of quality. In terms of quality chemistry it is the same. Obviously, price as you know many times varies depending on the volume you're selling to a specific customer.

Okay. Thanks a lot.

Jeff Zekauskas, J.P. Morgan.

Hi, good morning. Just first a question of clarification. Did you say that it was possible that your earnings might be lower in the fourth quarter than in the year ago period?

No, not in the year ago period.

Okay, that's fine. Just lower than the third quarter. Right, because you're implying 70 to 77 cents for the fourth quarter. That's fine. Second, what does it cost to build a 200,000 ton Synsil facility and sort of why did you choose, or why do you seem to be choosing that amount for an increment and can that be expanded?

Certainly we can't get into the capital cost of building a Synsil facility. The only guidance I think we've shared is that we think the capital efficiency of a Synsil facility will be more favorable than, say for the other operations we have. That's the guidance that we've shared at this point. We believe that as we have gone through the manufacturing design and the engineering for a Synsil facility that a 200,000 ton PR plant gives us very attractive economics and as you know, just as we do with satellite plants and other projects that we do with this company, that type of plant would obviously be able to be expanded very easily to double that capacity. So that's a type of a unit design we are looking at, and in many cases, Jeff, it matches the very large increments of Synsil demand we anticipate seeing as, in fact, the industry -- as we hope will convert to the use of Synsil.

Well, not to sort of say the same thing that I say every quarter on the conference call, but if you believe that your Synsil opportunity is as large as it seems that you think that it is, it might be a worthwhile use of capital to buy back shares before that opportunity becomes as transparent to the market as it is to you.

Right. And as you heard John say, in fact, we have -- we did buy a substantial number of shares in the third quarter, Jeff, because we look at those uses of funds just as you do, but we certainly are optimistic that as Ken, for example, moves the satellite program forward and Alain moves the refractory program forward, and hopefully the Synsil program continues to move very quickly forward that we will have certainly very productive uses of that capital.

In terms of PCC demand, what was the same store's growth in the quarter?

Let me just look at my -- in the quarter same store was 9 percent.

9 percent? So that was virtually all of the volume then.

Yeah, because -- yes, that's correct. Because most of the volume growth -- that is absolutely correct. Most of the volume growth was in fact same store growth as the industry was doing two things, one using more PCC in some of their grades of paper and producing more paper during the third quarter. The one major ramp-up we had was Sabah Forest Industries in Malaysia.

If I could just ask a last question.

As you know, that was a one-unit facility.

In terms -- I don't really know very much about the economics of magnesite mining. Is it expensive? Is it cheap? Does it require a lot of capital? Sort of, what are the orders of magnitude for being vertically integrated in refractories?

We certainly are very comfortable with mining operations, as you would expect, Jeff. We do have those mining operations at four major locations here in North America, and certainly with our knowledge of other mining operations worldwide, that as Alain is looking from a strategic perspective to look at that integration, we're comfortable with what it costs for exploration, for example, we're comfortable with what it would cost to develop a mine, and certainly something that we think would be very beneficial to this company as Alain indicated, with the opportunity there to source both North American and European requirements that we have for magnesite magnesium. So, we think it's something that this company could do very -- very comfortably and do it very well. Alain, would you care to share some additional thoughts there?

No, I mean, obviously this is part of the evaluations that we have on the various the prospects that we have identified, and as Paul indicated, this is a core expertise of Minerals Technologies that we are leveraging at MINTEQ within MTI.

Many companies this quarter, many chemical companies sort of provide information about their raw material gap. In other words, how much your raw materials have increased, how much you've been able to pass on to your consumer -- to your customers, and sort of what the penalty and earnings is both for the quarter and the year. Can you provide that information?

We certainly can. It's one of the things, as you can well imagine, Jeff, we track. And I'd ask John to elaborate a little bit further on that. John?

One way to look at it, Jeff, is in the third quarter, the major impact, although there was some in the processed mineral side, the major impact was in the refractory side of the business, and tried to quantify that for you by saying it affected the operating margins by about 2 percent. And that 2 percent really has two components to it. It is the impact of passing through costs and not generating additional margin from it. Just passing through the cost and it also includes the impact of not recovering all of it, as Alain mentioned in his comments, that we can share this and we're trying to manage it on that basis, but the industry won't bare it all. So the combined impact of those 2 factors on refractories for the quarter was about 2 percent. But, you see, what happened in the overall programs is they were able to advance the marketing programs in the industry so they had a tremendous growth in operating income. But the ratio -- the margin was suppressed by a couple of points because of that raw material.

Thank you very much.

John Roberts, Buckingham Research.

Sure. Just to follow up a little bit on the raw materials side in refractories. Did you say North Korea is also material supplier and how reliable would that source of supply be?

Yes, John. That was part of the comments Alain made that we do have permission from the U.S. government to bring refracting materials in from North Korea. But I'll let Alain answer the other part of that question, in terms of reliability.

North Korea has been a producer of magnesite for a long time and you're right to say that it hasn't been always very reliable, however, you have quantities of magnesium that are available and through the granting of the license that we've obtained, that's something that we want to take advantage of.

May I ask how big the license is? Could it be a material source of supply, or are you kind of limited to a small trial license?

Whatever is commercially available.

How much is commercially available from North Korea?

That's quantities that we have and that's something we are monitoring. We have started to place orders. I'm not going to comment in terms of the split between the various producers, but this is certainly a step forward to reduce our cost of access to magnesium.

Secondly, Paul, you said you expect the major customer -- excuse me, you said you expected by mid-'05 to make a decision on the 200,000 ton plant. Is that when you expect this latest trial to end? Is that sort of the milestone that would -- you indicated that would trigger it. But does the trial end then, or does the trial end much earlier and that would allow you to announce something earlier?

How that is going to unfold, John, as we see it today, just to give you a sense of how the Synsil program is moving and the large trial we have underway. That customer -- that potential customer is actually moving within the next week or two to put Synsil in an additional furnace, so we are moving further to additional furnaces with that customer. The trial is scheduled to run through the early part of mid-January to late January, and obviously we are expecting from the success of that trial the fact they are paying full commercial price, the fact that they're moving it on to another furnace within the next couple weeks, that we will be in a position, obviously, to know in the early part of '05 how that looks and where we are in terms of discussions with that customer. And then obviously it takes time to negotiate a contract which is where we hope to be in the early part of '05 and then certainly be in a position to announce both a contract and certainly the construction of a major Synsil manufacturing facility. That we'll need to do, by the way, because right now our customer sampling facility is operating at near capacity to supply the commercial accounts we have and to source this large trial, so we are operating our sampling facility right now at near capacity.

Thank you.

Todd Peters, American Century Investment.

Hi, good morning. Thanks for taking my call. My question is on your cash flow statement and your capital spending for the remainder of this year. Where do you see that falling out into next year?

Okay. We will continue to do two things with cash flow. One is to invest in new capital investments and also to buy back shares as part of our program. With that brief introduction I'll ask John to follow up on that. John?

Cash flow from operations, if that was the first part of the question, was about 82 million to date, so we're on track for something in excess of 100 which was the range we made last year. So far, capital spending has been 50 -- 66 million, and our guidance we had given on that was to be in the range of the low 80s for the year and that's sort of where we see it right now. We haven't given guidance for 2005 yet on capital spend. We'll do that a little later as we see the projects unfolding for next year.

What would you estimate your maintenance capital to be, just kind of steady state, keep everything productive?

Maintenance capital is fairly small by comparison in the Company. We haven't given out exact figures on it. But we have talked about the 8 to $10 million range.

Thank you.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning, all. Congratulations on a very good quarter.

Thank you.

Going back to building the plant on Synsil, even though you won't know for sure although I'm sure you have a fairly good idea to what you are going to do, to announce in the middle of next year. Have you already started planning for that particular facility in terms of engineering, designs, and so on. I am assuming that some tweaking is going to be needed going from -- what was it, 50,000 tons to 200,000 tons? And when you make the decision, if you have not done all of the engineering study already, how long will it take before you actually can bring it up online?

Those are very good questions, Rosemarie. Obviously as we have moved the Synsil program forward, when we talk of about a 200,000 ton per year facility, the engineering designs is already done for that. So, we have already done that. The site selection for a site to supply this region, because it would be a merchant plant, has already been identified and discussions are under way obviously for the ability to have that site and to look at the engineering designs on a site specific basis. So we are moving forward very quickly to be able to react rapidly when hopefully that customer says it's time to move forward with a major merchant facility to supply their needs.

And is my assumption right? Do you have currently 50,000 tons at your sample plant, or do I have that number wrong?

No, you're correct. The customer sampling facility has the capacity of about 50,000 tons per year and we're operating at near capacity right now.

And on the new large commercialized orders, which you said you have now priced at a commercialized pricing level, and I realize this English is not very good, but you know what I mean. Are you making money at this level?

At this level right now the answer is, no. Because although we have a very good commercial price from the customer sampling facility, it is not an efficient facility. It is not an efficient facility like a 200,000 ton per year plant would be. So although we cover most of the cost with it, there is a small penalty on that.

If we were to move --

-- plus the other factor that we have here, is though it's a full commercial facility, there is -- we always -- in the glass industry, you sell product on a delivered basis, and here there is some additional freight to move that product from our customer sampling facility to the location where this hopefully our first major customer will be.

If you were to take whatever the volume the customer is taking currently and move it into the new plant, you would be making money instantaneously?

With the new plant?

Yes.

It would be favorable, yes.

Okay. Could you help us on the price, volume, and mix which increased 16 percent this quarter. What was the price component?

Rosemarie, I'm not sure I understand that question.

What product line specifically --

Well, your top line grew 19 percent, 3 percent was from foreign exchange, so the balance has to be a combination of pricing, mix and volume and that is 16.

Now, we understand the question. I'm going to ask John. John, can you --

It's actually even a little more complicated than that because the pricing has the component of the pass-through, the surcharges and so on from the materials, so in the aggregate it's very difficult to look at -- you really have to look at it on a business by business basis. But I think what we tried to indicate as we went through the product line, is that it is primarily volume related. There was some mix, but the mix impact is primarily in the refractory segment where they have increased penetration with some higher value products. By and large the driver is volume in each of the segments.

Alright. And still following up on this volume, you mentioned that on a per store basis, volume was up 9 percent, but if I understood this properly, it includes the start up of the -- well, the satellite in Malaysia, and it also includes the start-up, again, of the satellite in Maine. If you eliminated two, then we would have a real per store basis type of growth.

Well, we indicated that on a same store basis it was up 9 percent. The volume on a same store basis and in total, including ramp-ups, it was up 11 percent. So the same store basis would give you a better feel for what the volume increase was, Rosemarie.

Okay. I had missed the 11 percent with the ramp-up.

That was the total. The total was 11 but the same store was 9.

All right.

That gives you a good sense of it, right?

That is very helpful. Could you talk a little bit about the joint-venture and its profitability which seems to have declined a little bit and then before I forget, could you also touch on the trends in October and give us a little more details on those areas where you see the growth slowing down?

Rosemarie, would you just clarify the question on the joint-venture? The question on there -- John and I are --

The minority interest was $400,000 --

That's what we were thinking you were referring to.

I didn't address minority interest in my comments because it was a fairly small number separately.

I was just wondering if something special was going on there?

No, no. There is a little seasonal difference and the primary one is in Indonesia -- it's our joint venture in Indonesia, there are some seasonal changes we make adjustments in price, and we have costs that we have to share in a joint venture, it affects the -- as you know we consolidate all of these. And it affects the overall profitability we pass back to the shareholder. But in the long run, over the period, those -- over the course of the year those perform right on budget. They are controlled by the contract. The joint-ventures are controlled with the PCC contract. The year-to-dates are just fine on it.

And then on the 20th of October and areas where you see a slow down.

If we look just at the early part of October, we see obviously the business has maintained some good levels as we go into October, but as we see the business unfolding into November and December, that's the area where we think there could be some slowdown, Rosemarie. As we said, we said that the paper industry, for example, may slow down in a slight decrease in the fourth quarter versus the third quarter. We think that may occur. As we look at the economy, the economy and consumer confidence has gone down, somewhat versus the third quarter, so we are expecting some slowdown there in the fourth quarter. So really it's more of a general softening that we see as opposed to any sort of a major downturn. It's more of a softening, a slight decrease in Q4 versus Q3.

And this should affect MINTEQ as well in terms of construction?

We feel it's going to impact SMI more than it will MINTEQ, because as you know in the processed minerals business, the fourth quarter is generally seasonally slower than the third quarter. Right now the steel industry is running strong and the forecast for the steel industry that is -- that it should run strong through the remaining portion of 2004.

Even though automobiles seem to be slowing down?

That's one that we are watching here in North America, because North America is very strong, but yet we're reading reports, I think as all of us are, that GM and Ford may in fact slow down their production as they go into the latter part of the fourth quarter and the early part of '05 so those are things that we're watching, but yet the steel industry right now, and I'll ask Alain to comment on that, is still operating at a very high rate. We have not seen a softening of that here. Although I believe, Alain, in Europe we've seen some softening in steel production. But, Alain, I'll ask you to comment on that.

Yeah, the growth rate in Europe is lower than what it's been here in North America. However, overall the steel industry is growing very strongly. Primarily drawn also because of the Asian activity, so as Paul mentioned, there maybe some seasonal slowdown here in North America that we are monitoring closely like always at the end of the year. But overall talking about the steel industry on a worldwide basis, there is still a very strong activity coming up.

Thank you. And last question, if I may, what is the difference in your assumptions when you look at the fourth quarter at 70 cents or at 77 cents?

Rosemarie, those were really the total compilation of the issues that we see. For example we see additional raw material cost increases. We see additional increases for delivery of raw material. The freight component of that, for example. The concern we have in some of our contracts especially in the PCC side of the business, the prices are adjusted on January 1, for example, per contract, the escalation costs. So we think there will be some negative impact in terms of say, energy intensive line and the transportation costs that will not be fully recovered in the fourth quarter versus what we -- which did not impact us in the third quarter so there's some of the things that we see. Obviously higher energy costs. Processed minerals generally is a little bit slower in the fourth quarter than the third quarter. One of the things we and all corporations are facing today is the requirements of Sarbanes-Oxley 404. And that is a cost that we're bearing to meet the requirements by year end. So if we look at those number of factors and possibly some softening in the industries we serve -- a slight softening, is why we are saying that the fourth quarter earnings per share may be slightly lower than the third quarter.

Thank you.

Thank you, Rosemarie.

Steve Wilson, Reich & Tang.

Good morning, gentleman. I've got a few questions. I want to make sure I understand the commitment on the Synsil plant on a merchant basis, and I guess the analogy I'm trying to do is compare it to what you've done in Walsum. I would assume that you're willing to commit to this because a significant amount, let's call it break even type volume, would be the needs of this first trial customer, but that you're going to have a fair amount of excess capacity. Is that the approach you would take on this is that you're willing to build this as long as you have sort of a base load from this one trial?

That is correct, Steve. We believe that, for example, to construct a 200,000 ton per year facility we need a substantial base load for that new merchant Synsil facility, and we believe the customer we're working with and moving forward very nicely is, from our perspective and hopefully the customer's perspective, that their commitment will provide that significant base load for 200,000 ton per year facility.

But you would not view this as sort of a PCC type take or pay arrangement?

No, it would not be a take or pay for the merchant facility, but it would be under long-term contract.

And just help me here because you have got two plants, one customer, who's already taking Synsil. You're doing this trial and then we just talked about the third customer and you're able to support all that out of a 50 ton facility. These first two sites must be much, much smaller than the person who's trialing it now.

That is correct, absolutely, that is correct, and I think we've shared that -- that the first two customers are using at a rate that's less than 20 tons per year.

And so, I'm just trying to understand is that the scale of their plant or is it as you've described they're just using it in only a small portion of the furnaces within the plant and the new customer has a much more aggressive approach to adding furnaces.

No, the new customer's facility is that much larger. Their demand is substantially higher.

And we've talked a little bit about there are several key types of glass and you talked about trials in some of them. Could you just review for me exactly where we're seeing trials versus where we're seeing customers in the categories of glass, be it container, flat, float, fiberglass.

Steve, certainly we don't give out customers or industries where we are commercially selling other than the specialty segment that I indicated to you. The four segments we are trying to penetrate are obviously, specialty glass, which we just mentioned, then you have float, container, and fiberglass. Those are the other 3 large consuming markets for Synsil, as we reviewed the opportunity as a company. We have run trials in all 3 of those segments, and we in fact commercially supplying small customers as I indicated two locations of the same company from our customer sampling facility, and then running right now a very large trial with another potential customer of a scale that it would justify the construction of a 200,000 ton PR facility.

I guess, Paul, what I'm trying to get at is this new customer in the same category as the existing customer?

We don't get into where the different market segments are that we're working with at this point, it's all done certainly under a confidentiality agreement.

Okay. And then shifting back to Walsum to understand where you are in terms of now that that plant is up and running. You have their base load commitment but still have need for customers to fill the bulk of the 120 -- or a substantial portion of the 125,000? Is that where it stands today?

Let me just address that, certainly, Steve. Right now the plant is in the commissioning and start-up phase because when you start a new facility as you would expect for any large industry like this, you go through a qualification trial with the new product that you're producing at that plant, so we're in that commissioning and startup phase at this time, and yes. We do have commitments from a number of customers that provide the base load for that facility. Obviously, as we gain move on from the initial series of customer commitments, then we expect to not only to fill that plant but as you know, it is a modular plant that can easily be doubled in size and with an ultimate -- ultimate potential to go to 500,000 tons per year.

How much in this year's 80 -- low 80s Cap Ex was Walsum?

We announced -- when we announced the Walsum plant, Steve, we talked about 30 to -- the range of 30 to 35. As you know that project did start a little early, it started in the prior year, but the bulk of that would have been in 2004.

We announced that capital investment. It was in that 30 to 35 million range, and as John indicated, the bulk of that spending is in fact included in the 2004 capital spending amounts.

Okay. So to understand '05 capital spending, although I know you are yet to outline it, we've got the bulk of the spending for the two major Chinese satellites and then whatever you end up doing in terms of Synsil, along with when we do find out how many satellite expansions there are, is that really what's in the budget?

Remember now, we have a major MINTEQ refractory manufacturing facility that will be under construction in China. We've started the construction of that, but the bulk of that spending will be in 2005.

So it seems quite likely that '05 will be noticeably higher than '04 levels?

Well, we'll see how that unfolds and we'll provide that type of guidance as we go into the early part of '05.

Thank you, Paul.

Thank you, Steve.

Michael Judd, Greenwich Consultants.

Good morning. Question for you about the refractories business. I was just wondering if you could kind of help me understand some of the dynamics there in terms of the margin compression? What is it about the competitive dynamics in the market in terms of the slide of refractories to the steel customers that is basically inhibiting the ability -- or your ability, or your competitors' abilities to increase prices to compensate for the higher magnesium, the higher energy and higher chemical prices that you indicated?

Certainly, Mike, there are a number of factors that is influence that, and obviously the first factor is the natural pushback that customers have for any type of price increase, so that's the first factor that we have, but there are also other supply issues and factors that are involved, and I'll ask Alain to address that. Alain?

Before getting into more specifics, I would also add to the fact that for many years, more than 10 years the refractory industry has implemented price increases. So it's also a very big change for the industry and for the customers to talk about price increases. Obviously, as Paul indicated, there is very widespread pushback from customers, even though we have been successful to some extent implementing price increases. Now getting into the specifics, we have been successful at implementing price increases, but obviously, on a worldwide basis, it is a very contrasted situation, and the major factor is that in summary as in the world, you also have local collection of magnesium -- of magnesite being calcined into magnesium. And obviously when you are competing against local companies that have their own source of magnesium it makes it much more difficult. Even though overall the sourcing from China should be the lowest cost source of collection for magnesite -- for magnesium. As you know because of the high demand in China in today's environment and because of the system that has been set up for license fees -- export license fees, the cost has gone up and even though long-term we really believe that the China -- Chinese magnesium is the low cost source of supply in today's environment. It happens that today some sources are cheaper for the players that are vertically integrated. In that case it's more difficult to implement the price increases.

Can I ask a follow-up question on that -- the same topic which is that, do you have a sense of what the overall industry operating rates is for companies like yours that are producing the refractories, and the reason I'm asking that is I'm trying to figure out whether there's any sort of, I understand that you're having a difficult time increasing prices, and that would be supported by the thesis that operating rates are not particularly high for the industry. But obviously operating rates have probably been increasing for the industry, because the demand for the product has been increasing as steel production increases. What I would like to get at here if that is the right correct dynamic, where are we in terms of operating rates, and where do you think you might need to get before you can get truly pricing power?

First I would talk about the refractory industry in general. As you may know, the cost structure is -- the raw material costs are very significant for the refractory industry, much more so than the fixed cost on overhead, so our pricing rates on not so much of a factor. When you come to MINTEQ, it's even less of a factor because we are marketing specialty products, high-performance products and we are differentiating ourselves from competitors and when we have business where we can market value, the operating rate becomes irrelevant.

Okay. But then there's plenty of industry capacity her then?

On a world wide basis, yes. Absolutely. Again, this has never been a factor for the industry.

Okay. And what were those other chemicals I know you -- higher energy, you also mentioned higher chemicals, what were the chemicals that where the prices have gone up?

The refractories are formulations with various raw materials as part of these formulations. We obviously refer a lot to magnesium, which is the most important raw material for the applications we are targeting. But you have other raw materials like aluminum-based raw materials, bauxite [indiscernible]. You have also in our metalogical products the steel strut that we use and so I would say it's across the board. Obviously, also the chemicals in general are going up in cost.

Okay. So basically for those of us who had hoped that there might be an improvement sequentially in the fourth quarter in terms of margins in that business, I think as you described we shouldn't really anticipate much of an improvement there in either the fourth quarter or first quarter. What are the types of dynamics given your description of pricing for the industry? When can we begin to anticipate improving margins above 10 percent operating profit?

I wish I could tell you exactly what the future is going to be, but I can only talk about our programs. Obviously on the purchasing side, we are very active. We are very active in terms of the sourcing key raw materials. We talked about magnesium and obviously we are also very active in accelerating the growth and the development of our high-performance products. Because these are the ones that contribute to our increased profitability over time.

So it sounds like I shouldn't assume there is going to be any improvement there really any time soon.

Well, we've indicated that there would be pressure in the fourth quarter to the beginning of 2005. At the same time we still see a very strong demand. So it is true that there is pressure on the ratios, but the volume of the activity is very strong.

Okay. So if you have higher volumes, does that mean you have lower units costs? Can you help me understand that? Because I think you're indicating that the higher volumes would obviously help the profits, but it wouldn't necessarily change the operating margin, right?

It plays a role in terms of setting part of this raw material cost increase. But overall we certainly suffer from the pressure of this raw material costs.

So there could be a slight improvement with higher volumes, but really, you still couldn't -- we shouldn't anticipate a real improvement, though, in terms of operating margin.

Not on the ratio, I don't see it for the time being. But clearly at some point it should happen.

And what types of dynamic would you anticipate? Would it just be these new contracts and in North Korea, et cetera, et cetera, is that going to be the solution?

It's part of the solution as I mentioned. A multistep approach. North Korea is one possibility. I mentioned Turkey also for Europe. We are working on longer term projects and obviously we are working also with our existing suppliers.

Very good. Thank you very much.

Thank you, Mike.

Robert Kosowsky, Sidoti & Company.

Good afternoon, guys. You guys mentioned that China steel production was up 21 percent. Do you have the number for Asia in general and start with that?

I don't have it in front of us, no. Unfortunately in front of us all the different growth in steel production by specific country, so we look at China, for example, as the major factor there in Asia. We are, as you can imagine, Robert, active in Japan, active Korea, Australia, so we service the entire Asian market, but obviously the biggest factor there is very much China with as you know over 25 percent of the world's steel production.

Okay. Because I'm just curious why your revenue growth rate was trailed China's growth so much and when we can see that kind of pick up and grow faster than the market?

We can address that specifically in terms of that. Alain, why don't you address that?

We mentioned that before we have a plant starting up next year in the third [ph] quarter, we would focus on sitting the market, qualifying our products, working with prospective customers in order to have a small base load, where we would ramp-up our business from this plant. So China is not going to be a factor much more than what it is today; although, it's going to be growing until the startup date, but it's really when we have a plant that we plan to have a much bigger activity. As Paul indicated we also present throughout Asia. We have two plants, one in Korea, one in Japan. And obviously we benefit from the high demand from China in this market. I don't have with me the overall number for Asia, but clearly does grow and for us also a growing market.

Okay. And do you guys have a number as to how much magnesium prices were up, in the third quarter of this year compared to third quarter last year?

They were up very substantially but it's over $100 a ton on a delivered basis.

As compared to last year --

As compared to third quarter of 2003, the third quarter of 2004, the price of magnesium is up over $100 a ton.

What does that imply in terms of a percentage?

More than 40 -- it's more than 50 percent.

More than 50 -- I was going to say actually higher. More than 50 percent increase.

Okay. And how long is it going to take build the -- switching gears to Synsil. How long will it take you to build the plant once you guys decide that -- or once you guys issue the press release next year?

That plant should actually move fairly quickly. We think it should be in the -- probably in the 7 to 8 month range to build that plant.

Thank you.

Thank you, Robert.

Jeff Zekauskas.

Hi. In the refractories business, was there a change in the quarter in bad debt expense and if there was, what was the order of magnitude?

No, I was going to say that's Jeff. No, there was no change in bad debt expense in the quarter.

Second, what was the magnitude of the price surcharge in refractories?

We have not disclosed that, Jeff. Obviously, it's on a product by product basis that you do that, and certainly it's different for different regions. It would be tough to put a general sense of that. Alain, I don't know if you are able to do that, but I know it's so -- so product and market specific.

I would just confirm what Paul says, it's a contrasted situation depending on the market dynamics and the competitive environment. I can only say that it's a partial recovery.

Okay. What's the probability of the fiber filler product coming to the market in 2005?

Well, that's a good question, Jeff. Obviously we are very pleased with the progress we are making. Obviously it's a joint development program with International Paper and they would be the first to employ that technology as you would expect. We're hoping as we get to the middle part of 2005 that we will have that employed in one of their paper manufacturing facilities.

Really? Mid-'05 you think you can begin to sell it.

In terms of selling it within the IP type of program, that the activity that we have over the next few quarters, as we continue to develop the technology we think if it proves to be as effective as we believe it will be, as the preliminary trials indicate, and certainly we have critical trials coming up over the next couple quarters, but if it's successful and the sense of urgency that even IP has, they would like to roll that out hopefully by the middle part -- at least at one of their paper mills to start using it on a first time basis by the middle part of next year. So there is very much a sense of urgency to move this forward.

So you would book revenues, or you wouldn't book revenues?

I don't know if I would want to go say we'll book revenues at that point, but we think that it will be commercially on a machine hopefully by the middle part of 2005.

I guess then I should have asked my question differently. What's the probability that you'll book revenues in '05?

That's a good question. Obviously it's still the development program with International Paper. But that is moving very quickly. And it has the full support of International Paper, just as it has the full support of us in the effort that we're putting into it, as you can imagine. And if it continues to move well, we are expecting that will be on that machine as things move well by the middle part of third quarter of 2005.

When can you sell it -- if the product actually works, when would you be able to sell it to a customer other than IP?

Oh, I don't want to get -- obviously as we indicated before, the agreement with IP permits us to do that, but a period, as you would imagine, of exclusivity for IP within that agreement.

Yes, that's why I asked the question. That is what's --

I know -- I know that, but that's why I'm not going to answer the question. It's a contractual relationship that we have with International Paper.

And last question, so in general in sort of summing up Synsil, I guess what you would say is that all things being equal in terms of 2004, Synsil is behind schedule. That is, you wished you could have sold more tonnage, it looks like you won't be able to really sell more than approximately 20,000 tons you sell now, but that all things being equal, your opportunity in '05 maybe it's larger than you first expected. Is that a fair way to characterize?

Not entirely because we have commercial sales, as you know, to the two locations of that one customer. Just started a specialty glass customer commercially, so that is commercial sales, and we have a large trial at full commercial price under way right now and we are producing at near capacity.

Oh, I'm sorry. It's at full commercial price even for the trials.

Yes. That's what I'm saying. So that's why we are very optimistic in terms of how this is progressing. As I indicated earlier, within the next couple weeks they're moving -- adding into another furnace which is very positive, and we think as the trial is now scheduled to go through January that they're paying full commercial price, they're seeing the benefits of it, we're confirming all the benefits, we know the charts and all the improvements that they are seeing from the different metrics that they use to measure that, and that's why we are very optimistic that it will lead to that first commercial facility.

And I know that facility has been described as having 50,000 tons of capacity, but my memory is that it was between 50 and 70,000 tons? Is my memory incorrect?

70,000 tons certainly is incorrect.

What about 60?

I won't comment in between. I won't comment in between. We are selling near capacity.

Thank you very much.

Thank you, Jeff.

Rosemarie Morbelli.

Could you touch on the progress on the groundwood -- the penetration of PCC in groundwood? Is it still growing substantially? How much of a grow -- how much more can they get in that particular category of paper?

Very much so, Rosemarie. And I'll ask Ken to comment. We see the groundwood market continuing to improve. Obviously the Millinocket restart we talked about earlier is a groundwood, paper making super calendar cheat [ph] for that marketplace using our PCC so we see that demand for PCC in those grades of wood containing paper continuing to increase and, in fact it is. I'll ask Ken to just comment further on that.

Just to add on to what Paul said. We have good activity and inquiries with respect to PCC and groundwood both in North America and in Europe. As you with imagine there's significant cost savings available for the use of PCC versus continuing -- for the mills to continue using clay, so at this point in terms of cost reduction opportunities, as well as the ability to enhance the quality of a groundwood sheet, we're seeing a lot of activity, and we're still very bullish on that market segment.

What do you think your penetration is currently and where is it reasonable to think you can get?

I don't want to comment fully at this point on penetration per se, Rosemarie, but in terms of the activity of where we are focusing our activity is primarily in the SC market segment, and that's the top end segment where there is a significant opportunity for cost reduction or improving the quality, so right now, we are really focused on that particular market segment.

And if we look at the PCC growth, same store was -- you said 9 percent, what can you separate same store the growth for the -- for your regular PCC and then the one going to the groundwood application? And I understand that the base number is smaller, but --

Actually the growth in the groundwood was higher. The growth rate, the percentage growth rate, Rosemarie, was higher in the groundwood than it was in the overall side.

Could it be double the other one, given the --?

Rosemarie, I don't want to get into that. But I do want to tell you the growth in the groundwood side, as you look at that 9 percent was higher than the 9 percent and the growth in fact was higher than the total growth of 11 percent, so it was higher than even the total growth of PCC during that period. As Ken indicated, it is a growth opportunity for this company and we continue to pursue it very aggressively.

And the market size is about similar to that of the other kinds of paper?

Well, the only way we define that is the groundwood market itself is a very large market and that includes many segments within the groundwood market, but the groundwood market is a very large market and that includes obviously newsprints, super calendar paper, mechanical grades, directory, machine finish. There are a whole series of grades that are in that, but combined is a very large market opportunity, and in fact we sell PCC now to many of those market segments. Newsprint, super calendared, director, machine finish are now using PCC at selected locations, but we see that as opportunities for this company.

Could you put a dollar amount as to the size of that market? Potential size?

I prefer not to, Rosemarie. We obviously look at very sizable markets for this company, whether it's the coating opportunity which we've defined, the uncoated freesheet and we see the ability to -- obviously significant increase in the amount of PCC for the technologies that Ken and his team are developing in that area, so we are very bullish, as you know, about the future of this company and the market opportunities that we see from paper to refractories, for example, to processed minerals to Synsil. This is very much a growth company.

And if we look at the regular PCC, have you seen an increase in the content of the -- percentage content of the PCC in the paper? For example the plant, the IP mill we visited, the fellow was operating at -- and I think that is right number, at about 15 percent PCC inside his paper. While the plants next door or a few miles down the road was at 30 percent. Do you see a change there or is IP waiting for the fiber fill?

I don't want to talk specifically about any individual customer, but certainly the dynamics of the industry, and the cost differential between PCC and wood fiber always is an incentive for them to use more PCC, as long as they can maintain the paper qualities. So those are the technologies that we in research here and under Ken's guidance are certainly trying to implement and certainly we see the filler-fiber technology with IP as one way -- especially uncoated freesheets to a very significant increase in that ash level.

So without the fiber fill, there hasn't been any change really in the percentage content?

No. There's been some small improvement, but you're right. Not a major step increase and part of that, as we've spoken before, is they are running their machines faster. And as you run the machine faster, there are certainly certain stresses and dynamics on that sheet of paper and they balance off machine speed versus filler level to run machines faster. But as you see us expanding our satellite plants, running that machine faster even at the same ash level enables us to sell more PCC, expand our plants, and reinitiate long-term contracts for those host mills. So it is a very attractive model for this company.

And when you renegotiate those contracts, are you able to increase pricing in this environment? If my memory serves me right, the price was actually coming down.

We have been actually effective in increasing pricing, Rosemarie, because we've introduced some new, more efficient grades of PCC. We've done that very well. Our average price for PCC continues to improve.

Okay. And the last question, SG&A was at the reasonably -- I mean at the lowest level that I can remember, was there something specific or is that sustainable either as a percentage of sales or in dollar terms?

The percentage is reduced because of the increase in sales, so as a percent of sales, it has declined and certainly that's a direction that we wanted to see it move at. We see SG&A expenses as a percent of sales declining over time as we continue to grow this company. We will continue, and support, for example, the R&D spending within this company and we'll continue to do that because that is the future opportunity we see as a company, so the SG&A absolute dollars will continue to increase. Research, for example, those types of spending, but as a percent of sales, I expect those to decrease over time.

You are giving us R&D expense separately so I was really looking at the pure selling and administrative specific expenses. So that 10 percent of revenues, is that something that is sustainable, I guess, is the question.

We expect those to -- as a percent to decrease over time.

And how low do you think you can get and still operate efficiently?

Well, I wouldn't want to make that judgment right this moment. We, as a company and as a percent of sales, our SG&A expenses have gone down. We see us operating this company more efficiently, Rosemarie, putting in an Oracle ERP system, for example, and expect that will enable us to run Minerals Technologies more efficiently worldwide going forward, so we see these opportunities as a company to continue to look at reducing SG&A as a percent of sales. There will still be growth in SG&A, but it will be growing at a slower rate than in fact the growth at the top line.

Thank you.

And it's been a long conference call. We're ready for one more question if there is one, operator. Hello. Operator?

Yes, sir. Your line is still open.

Okay. I was going to say, I think it's been a long conference call. We'll take one more question if there is one, if not I will be ready to conclude.

Michael Judd.

A question about the filler-fiber composites. What is the -- the paper that you've actually produced, you've obviously been testing it in copy machines and various other types of applications where uncoated freesheet is used, how does -- what is the performance characteristics of the paper?

Well, we're certainly as you can imagine in a development phase as I've indicated, Mike. We are in this development phase with International Paper working very closely with them since it's a joint effort. And as we run various machine trials, we test that paper, we run the various machine trials at different levels, but of course, as you would imagine, it's all done under a confidentiality agreement. Obviously we and IP are encouraged by what we see, and I'm certainly comfortable sharing that with you that we are encouraged by the results, and we're hoping that this actually moves forward very rapidly, and we're able to move it forward so it is then -- and the term -- I don't want to use the term commercialized, per se, but actually is used on the machines on a routine basis.

And as a follow-up in terms of the actual process, we can all visualize doubling the amount of PCC and the obvious benefits to someone like IP in terms of reduced cost from the fiber. I think in reading some of the patent literature, there's a description that potentially there could be a need for less retention aids and I'm just wondering if you can give me a sense of -- what are some of the -- because obviously the paper making process is a very highly chemical intensive process and there's more than just PCC and fiber that's going into the paper. Can you give us a sense what -- where there might be additional cost savings for a paper producer, and how meaningful it might be?

I think, Mike, obviously when you look at it from a theorical basis, that not only do you increase the amount of filler that you put in that sheet, and again a very significant benefit to the paper maker, but you are right. There are ancillary benefits to the filler-fiber technology, but it really would be premature for me to try to get into that type of discussion. It's premature as we're developing the technology, but you're right. There are ancillary benefits we expect to evolve from this technology that we think will provide additional value to the paper maker.

Thank you.

Thank you, Mike. I want to thank all those who participated on the conference call. We have covered a lot of ground today during the conference call and obviously there are cautionary statements we have in our 10-K to be, obviously, familiar with. We think we had a terrific third quarter. We are very pleased with the performance of 78 cents we delivered, and certainly an environment that also has challenges associated with it, in terms of raw material, energy and other issues. We expect in the fourth quarter we'll see a business that will continue to grow, but in terms of operating income -- excuse me, in terms of earnings per share might be below the 78 cents we had in the third quarter. Overall Minerals Technology continues to be a growth company, and certainly appreciate your interest in Minerals Technologies and thank you for participating on this conference call. Thank you, operator. And thank you all the participants.

And this does conclude today's conference call. At this time you may disconnect.