Minerals Technologies Inc (MTX) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Minerals Technologies' Inc. fourth quarter and full year 2004 conference call. Today's call is being recorded. With us today is the President and Chief Executive Officer, Mr. Paul Saueracker. Please go ahead, Sir.

Thank you operator. Welcome to the fourth quarter and year end 2004 Minerals Technologies' analyst conference call. I am pleased to report that MTI was positioned to take advantage and did take advantage of the improved economic environment that prevailed in 2004.

For the fourth quarter, MTI net sales increased a strong 17 percent, reaching $248 million. Full year net sales of $923 million were $109 million ahead of prior year. Despite a number of obstacles and headwinds MTI was able to report income from operations in the fourth quarter of $22.6 million, excluding restructuring and asset impairment charges and acquisition termination costs. 13 percent ahead of fourth quarter 2003.

For the full year, operating income for MTI reached $91.9 million, again excluding restructuring asset impairment charges and acquisition termination costs.

9.9 percent of sales and 9 percent over full year 2003. Net income for the quarter of $14.6 million was up 50 percent compared to the fourth quarter of 2003. Full year net income as reported, 58.5 million was up 21 percent versus prior year.

Our reported net income translated into earnings per diluted share of 70 cents for the fourth quarter, compared to 47 cents last year. Full year earnings per diluted share of $2.82 were achieved compared to $2.36 in the prior year.

MTI definitely benefited from the strong business environment. Shipments of North American freesheet paper increased by approximately 5.5 percent. Worldwide steel production for the fourth quarter was up more than 10 percent and up 8.7 percent for the full year. In North America, while third quarter steel production was up 5.5 percent, fourth quarter only increased 2 percent as a result of capacity constraints and certain key raw material shortages.

The U.S. construction market remained extremely strong with housing stocks running at 1.9 million units annual rate for both the fourth quarter and the full year. In addition, estimates for nonresidential fixed investment also increased in excess of 10 percent for both the fourth quarter and the full year 2004.

All product lines contributed to MTI's sales growth and all grew in excess of growth reported for the respective markets -- paper, steel, and construction. Our PCC sales were up 16 percent for the fourth quarter, the refractory segment increased 22 percent and process mineral sales were up 9 percent.

For the full year 2004, PCC sales increased 11 percent, refractories increased 17 percent and process minerals increased 14 percent, reconfirming MTI's position as a growth company.

To support our commitment to technology-based growth, MTI increased R&D spending by 21 percent in the fourth quarter and 15 percent for the full year. We also incurred close to $1 million in expenses, related to an acquisition opportunity to complement one of our existing businesses that did not materialize.

Mr. Saueracker, we are unable to hear you. Please continue your presentation.

We are trying to improve the quality of the line here.

Thank you.

Thank you, Operator.

Following my remarks, Ken Massamine, Senior Vice President and Management Director of our Paper PCC business will provide more details and report on the progress we have made in the PCC product area. Alain Bouruet-Aubertot, Senior Vice President and Management Director of MINTEQ, will report on the refractory segment of our business. He will be followed up by John Sorel, our Senior Vice President of Finance and Chief Financial Officer, who will provide a brief financial summary.

After John's presentation, I will offer a few concluding remarks and then open the floor for questions.

Before proceeding further, I need to remind you that on page 6 of our 2003 10-K, we list a number of cautionary factors and uncertainties that may affect future results. Any statement related to future performance by me or by other members of management are subject to these cautionary factors and conditions.

While Ken and Alain will provide you with a detailed description about PCC and refractory business performance, I would like to highlight a few key points that will affect the overall direction of our business.

Of MTI's 109.5 million in sales growth achieved in full year 2004, 44 percent was contributed by PCC, 40 percent by MINTEQ, and 16 percent by process minerals. Net sales of PCC are up 16 percent in the fourth quarter and 11 percent for the full year. PCC product line was the focus of a lot of capital investment and expense in 2004, which will yield benefits in 2005 and 2006.

Our new merchant PCC facility in Walsum, Germany was commissioned in the fourth quarter; and shipment of commercial products for paper mill qualifications have commenced. The agreement with International Paper which revitalized and extended the commercial relationship between our two companies moved forward, with volume increasing, progress being made in the joint development of filler fiber composite materials that can significantly increase filler levels in paper.

Construction continues at our two previously announced PCC satellite plants located at the Dagang and Suzhou in China. With over 225,000 tons of annual capacity, the startup is expected in the early second quarter of 2005.

For the period 2004, 2005, we will add a total of 19 units of additional PCC capacity. Ken will provide you with more details requiring -- regarding this increase in capacity.

The refractory segment increased sales by 22 percent in the fourth quarter, as a result of sharply increased system sales and improved refractory in metal wire sales and volumes in the steel industry. Significant increases in raw material costs would have reduced fourth quarter operating margins from the MINTEQ segment to 9.1 percent. However, bad debt recovery increased operating margins for the fourth quarter to 11.9 percent.

Unrecovered raw material costs increases remain the largest outstanding issue for MINTEQ. Alain will discuss the programs which he has initiated to overcome these cost increases and how we plan to achieve a sustainable double-digit operating margin ratio in the future.

I would also like to briefly touch upon the performance of our Processed Minerals segment. With sales for the quarter up 9 percent and 14 percent for the full year. Sales in some product lines were capacity constrained in the fourth quarter. Residential construction remained extremely strong throughout full year 2004. While fourth quarter operating income was less than our expectation, mainly, as a result of increased costs of fuel and utilities, for the full year Processed Minerals' operating income was leveraged to a higher rate in sales.

Construction -- particularly on the West Coast -- is expected to remain strong in 2005. We are adding new production capacity to our Lucerne Valley plant as well as upgrading our meals at Adams and Canen (ph) to increase overall capacity.

Our SYNSIL program has reached a turning point. As we have previously discussed, two glass manufacturing locations owned by the same glassmaker are commercially utilizing SYNSIL. We have also added a new specialty glass account. The scheduled trials in commercial sales own 50,000 tons per year of Woodfield market development facility is sold out. Furthermore a large-scale SYNSIL trial continues successfully, meeting all the objectives established by the customer. We are hopeful that this trial will lead to the construction of our first large commercial SYNSIL production facility. A second large-scale trial with the potential to justify the construction of the second commercial facility is scheduled to begin in February.

We are highly encouraged by the progress made on SYNSIL in 2004 and we look forward to an exciting series of events in 2005.

I will now ask Ken Massamine to provide us with details related to our PCC business. Ken.

Let me begin by providing a summary of current market conditions followed by a highlight of our business results for the fourth quarter and full year 2004, as well as some expectations for the coming year.

The economic climate improved last year, helping North American paper producers ship slightly greater than 5 percent more printing and writing papers than the year before. Although total shipments last year showed strength over a weak 2003, total paper shipments only replicated the tonnage we saw back in 1997. While all grades contributed to this growth, there was evidence of strong tonnage improvements in selected grades, notably coated papers.

For the year shipments of North American coated freesheet papers advanced about 7 points (inaudible) 7 percent while coated groundwood advanced 8.5 percent. Both paper grades responded to a pickup in advertising pages and catalogs mailed.

North American shipments of uncoated freesheet -- currently our most important market segment -- remain tepid throughout 2004. Total demand increased only 1 percent while shipments advanced 1.9 percent, partially in response to lower import levels due to the depressed U.S. dollar. The cautious rebound in business demand and the continuing growth of competitive electronic communications have also negatively affected uncoated freesheet demand.

Internationally, Western European production of printing and writing papers improved in the fourth quarter, raising yearly output by 7.2 percent. Domestic demand and exports of graphic papers increased but access capacity kept overall operating rates around 90 percent.

In Asia, paper demand and production saw a strong growth all year with annual increases of around 4.5 percent. Not surprisingly, the region's growth leader is China. And during the next few years, we anticipate China's paper production will increase at an average 6 percent per year. MTI has five operating PCC satellite plants in Asia, including one operation in China and two more under construction in that country which are currently expected to become operational by no later than early second quarter.

The outlook for the global paper industry in 2005 is somewhat uncertain. Production of printing and writing papers is expected to rise in response to an improving level of business activity. However, much of this growth is expected to occur in the first half of the year, as a forecasted softening in the world economy is projected for the second half. We are very pleased with our sales growth during the fourth quarter and full year of 2004. MTI's total PCC sales for paper and non paper applications in the fourth quarter increased 16 percent over the prior years fourth quarter from approximately $112 million to $130 million while volume gained 12 percent.

Our quarter-over-quarter sales growth was the result in part of increased organic business in the paper industry, especially in the North American and European regions, the ramp up of our Malaysian PCC satellite and the restart of our PCC satellite plans in Millenocket (ph) Bay.

The persistent weakness of the U.S. dollar during the quarter was also a contributor to our sales growth, as foreign exchange had a positive impact of $3.5 million. For the 2004 year, total PCC sales gained 11 percent from $436 million to $485 million.

Excluding restructuring charges, total PCC operating income declined 1 percent in the fourth quarter compared to the same period last year. Our overall costs were higher than planned due in part to higher operational expenses in North America, costs associated with increased worldwide trial-related activities and ongoing litigation associated with patent infringements.

In addition, another significant factor was the planned startup of our new merchant coating PCC facility in Walsum, Germany.

For the full year 2004, total PCC operating income decreased 3 percent due in part to the aforementioned continued emphasis on R&D and funding for our filler fiber composite joint research project with International Paper. On a same-store basis, fourth quarter sales tonnage of Paper PCC from existing satellite was 12 percent ahead of the same period a year ago.

For the year as a whole, same-store sales tonnages increased 7 percent. Total PCC volume for the year was approximately 3.7 million tons.

I am happy to report that during the year we added six new units of PCC capacity, four units at our Walsum facility and another two units representing expansions at existing satellite facilities. Moreover, we are currently installing an additional 13 units of PCC capacity worldwide at several of our satellites.

A significant portion of these expansions is scheduled during the first half of this year. These ongoing additions continued to demonstrate the value of our products bring to our customers and why we remain optimistic in 2005, despite a softening world economy expected later this year.

Our new merchant coating grade PCC facility in Walsum was commissioned in the fourth quarter and customers are now commercially qualifying the product. This facility is essentially located in one of the world's largest concentrations of coated paper manufacturers.

Construction of previously announced new satellite at the Dagang and Suzhou in China are in progress with startups anticipated by no later than early second quarter. Each of these plants represents four units of additional PCC capacity. The new Dagang satellite will manufacture both filling and coating grade PCC and represent expanding Opacarb PCC coating product capability in Asia.

The marketing of coating PCC products is an integral part of our strategy to penetrate the global coating paper market. We remain optimistic about the opportunities in this exciting market spectrum. Sales of coating grade PCCs in North America and Europe accelerated last year. Current mill trial activity and demand for our Opacarb PCC coating products have exceeded our expectations. We continue to work closely with International Paper and I am satisfied with the current progress of our joint research program on filler fiber composite material. A commercial machine trial took place during the fourth quarter as part of our effort to improve the efficacy of this technology and further trial activity is planned during the current quarter.

Now let's briefly turn our attention to special PCCC (ph) per non paper applications. Our specialty PCCC group completed the fourth quarter of 2004 with double-digit sales and operating income growth. This performance was the result of our continued success in penetrating new consumer markets and better-than-expected results in the automotive sector. PCC sales to plastic compounders also improved.

Going forward into 2005 we expect continued sales improvement in our specialty PCC segment, based on our initiatives in plastics, sealants and consumer markets.

In conclusion we firmly believe that our comprehensive suite of PCC products, our technical and engineering prowess, and the reach of our global sales and service organization combined to create a strong strategic asset. MTI is proud of its market position's leading-edge products and strong array of customers. We remain optimistic that significant ongoing projects will culminate in important new PCC business.

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

Were we in an ideal world, conference performance performance would be steady and predictable. However in the real world these net cycles are part of life. As one pragmatic investor told me the successful company serving a cyclical industry is one whose performance goes up more than the industry in an up cycle and down less in a downcycle.

By this measure, MINTEQ had a very successful fourth quarter and a very successful 2004. The business environment was favorable for MINTEQ, with double steel reduction up 7 percent in the fourth quarter and 8.8 percent for the full year 2004. MINTEQ's net sales of $84 million for the fourth quarter were up 22 percent compared to the fourth quarter of 2003. Full year sales increased 17 percent, surpassing the $300 million mark and accounting for one-third of MTI's total sales.

Operating income for the fourth quarter, excluding prior year restructuring and impairment charges, was up 22 (ph) percent. On the same basis, full year (indiscernible) income was up 25 percent. MINTEQ's performance was based on the success of two key programs. The first involving the set of MTI's products and equipment has increased in mid output; the second, involving realignment of resources with shifting geographic markets. While all steel markets were strong certain geographic trends were particularly not worth it.

The U.S. -- I am showing only modest recovery in 2003. Production increased 5.2 percent in 2004. The increase was 7 percent through the first nine months but capacity and raw material availability limited growth in the fourth quarter. The European Union showed a steady improvement in crude steel production increasing 5.4 percent in the fourth quarter and 5 percent for the year.

Japan and Korea each increased 2 percent in 2004. China increased its 2004 production of crude steel by 23.2 percent and now accounts for 26 percent of the world's crude steel vs. 18 percent only three years ago.

MINTEQ sales were particularly strong in North America with fourth quarter sales up 26 percent and full year sales up 25 percent. The strength in North America was amplified by high steel capacity utilization, over 19 percent, which increased demand for MINTEQ's most durable premium priced products and high-speed systems. These products and systems offer extended runs and decreased downtime for repairs, allowing higher throughput.

So those sales for Europe were up 16 percent for the quarter and 8 percent for the year, due primarily to the strengthening of the euro against the U.S. dollar. The growth of China's steel industry is one of the primary drivers of MINTEQ's strategy to move with the market. In addition to starting construction of a $14 million, 100,000 ton refractory plant in Suzhou, China looked at the approximate cluster of China's most advanced high quality steel producers, MINTEQ has invested to (indiscernible) its management organization and infrastructure in Asia. Particularly in China.

MINTEQ sales to Asia were up 20 percent for the quarter and 17 percent for the year. The benefits of the new plant in China, which is expected to start operations in the fourth quarter of 2005, will ramp up for a strong impact in 2006.

China presents both the greatest opportunity for growth and also the greatest challenge for (indiscernible) profitability. Overall demand for equipment was very strong, particularly in the fourth quarter in Europe and Asia which underscores MINTEQ continuity progress of increasing market penetration through the sale of systems, that is products, equipment, and service. All product lines showed double-digit sales growth most of which strengthened in the fourth quarter.

(indiscernible) product sales were up 29 percent in the fourth quarter versus 22 percent for the year as the improved castability (indiscernible) wires was very much in demand.

Also particularly strong performance was realized in our nonferrous line as we were successful in introducing MINTEQ's product system consent to the (indiscernible) ministry. Year-to-year sales of nonferrous products increased 23 percent and fourth quarter sales were up 62 percent.

But an issue facing MINTEQ in 2004 which prevented the movement of MINTEQ emergent operating margin ratio well into the double-digit zone was the significantly increased (indiscernible) MINTEQ's primary refractory raw material magnesium. Which is largely supplied from China. Three factors get into play.

First is the policy of the Chinese government to limit the export of raw materials such as magnesium and forecasts on finished goods like bricks or steel. This is accomplished by the export license system in which the government imposes a fee on the limited number of licenses that are issued.

Second is the formation of a cartel (ph) among the largest licensers and exporters of magnesium. These, combined with the license fee, raise the price of exports by more than $80 per ton compared to the domestic in China price.

Lastly is the impact of freight to both North America and Europe. The cargo freight looks like it would come down after surging at the end of 2003 but remains at this time more than double what it was at the beginning of 2003.

In this context, MINTEQ was able to pass through to its customers only part of the increase supply to its refractory raw material. We were partially successful in North America where significant and incremental reserves of natural magnesite do not occur. We were less successful in recapturing increases in Europe, Latin America and Asia, where a number of the refractory producers are vertically integrated.

In order to improve its refractory materials, at prime cost, MINTEQ launched a program in early 2004 to identify and even up economic resources of magnesia outside of China. We have obtained a license to trade with North Korea in the third quarter and we have begun purchasing their material for Europe. Investments in further intended sources for Europe and America are also being investigated.

In addition, we are adjusting product formulas to account for the relative price movements of raw materials including magnesia. These programs and belief in a major strategy are expected to stabilize our costs in 2005 and ship began to have a February (indiscernible) in 2006.

Looking back, the batch of the raw material cost increases was moderated in the first half of 2004 by a strong inventory position. In the fourth quarter the full impact of cost increases was realized and our cost of sales increased 27 percent on a 22 percent sales increase. Fortunately, we controlled expenses and benefited by approximately $2.3 million in bad debt recovery.

For the fourth quarter, the aforementioned bad debt recovery had to further leverage the 22 percent increase in sales to a 42 percent increase in operating income for the quarter. For full year 2004, operating income increased to $30.8 million equivalent to 10.3 percent of net sales and 25 percent to both 2003.

Restructuring costs were limited to $0.4 million, related to the closure of the River (indiscernible) facility in the first quarter of 2004 which was small compared to the restructuring and impairment charges of $2.8 million in 2003, increasing our purging (ph) income by 59 percent.

Looking forward, the reported consensus, we are pleased to see that the U.S. steel industry will continue to operate at the 19 percent plus capacity utilization level at least for most of the year.

While there are mixed signals for global steel, based on China's plant slowdown, China's internal requirements will continue to grow to support massive infrastructure projects solving most, if not all, of the capacity added in 2004.

We also believe that continued moves in the short medium term by U.S. teammakers to limit future growth in Heritage cost and to strive for continued high-capacity utilization should create a positive business environment while product and equipment systems in MINTEQ's largest market -- North America.

At the same time our programs in Asia and Europe, we continue to progress and are expected to make increased contributions in 2005. Overall, despite ongoing pressure from raw material prices and transportation cost we've remain cautiously optimistic for 2005 due to the positive outcome outlook for steel demand and the continuing progress of our growth strategies. John.

Thank you, Alain. You have just heard the descriptions of the business environment and the highlights of the operating conditions and key development activities of the Company during the fourth quarter. I will now review with you how that information is reflected in the Company's consolidated financial results.

As Paul indicated earlier, our overall financial performance was in the midrange of our guidance. MTI achieved diluted earnings per share for the quarter of 70 cents which includes 3 cents for expenses related to due diligence on an acquisition opportunity that did not materialize. Net sales for the quarter were $248 million, an increase of 36.3 million or 17 percent compared to prior year.

Foreign exchange had a favorable effect of $6.6 million or about 3 percentage points of sales growth during the quarter, driven by the continued weakness of the U.S. dollar. Both reporting segments delivered double-digit topline growth in the quarter due to a favorable business climate with strong demand for our products. Sales in the Specialty Minerals segment were 164 million, a $21.1 million increase or 15 percent growth, including about 3 points of growth from currency. Sales of PCC increased 16 percent to $130.1 million from 111.7 million last year.

The PCC product line experienced strong demand in all regions. Sales in the Processed Minerals product line increased 9 percent to $33.9 million from $31.2 million. We experienced growth from all plants and in all product lines as a result of continued strong market condition and increased penetration in the building products and plastics industries.

Refractory segment sales increased 22 percent to $84 million as compared with 68.8 million in the prior year. Approximately 3 million or 4 percentage points of sales growth was due to the favorable impact of foreign exchange. The remaining increase of 18 percentage points was due primarily to increased sales of high-performance products and equipment systems particularly in North America, where steel production remained high.

MTI's cost of goods sold grew 20 percent, which had an unfavorable leverage effect on sales, resulting in a 9 percent increase in gross margin. Specialty Minerals growth was affected by the startup expenses for a major new PCC facility in Walsum, Germany. And both segments were affected by higher raw material and energy costs.

Total marketing and administrative expenses for the quarter increased 19 percent compared to the 17 percent sales increase. These expenses include the planned increase 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 implementation.

The Company's research and development expenses for the quarter were 21 percent above last year due to increased product development activities in both segments, but particularly in the PCC product line due to our continuing commitments to the filler fiber composite mineral program and coating trial activities.

During the quarter, the Company recovered $2.3 million of previously written off bad debt related to steel company bankruptcies. This resulted in a net bad debt recovery for the quarter of $1.2 million as compared to a provision of $2.3 million in the prior year. As previously mentioned, the Company recognized corporate charges of $1 million related to the due diligence cost from a terminated acquisition effort in the fourth quarter.

In the fourth quarter of the prior year, the Company recorded $6.5 million for asset retirements and workforce reduction. In the current year the Company reported restructuring costs of $100,000, related to the continuation of that workforce reduction program.

MTI's income from operations increased 59 percent to $21.5 million from 13.5 million in the prior year. Excluding charges for restructuring and asset impairment costs taken in 2003 as well as restructuring and due diligence expenses in 2004, operating income increased 13 percent to 22.6 million from $20.0 million last year. Specialty Minerals income from operations of 12.5 million increased 35 percent from 9.3 million in the prior year. Excluding restructuring and asset impairment charges in both years, operating income declined 3 percent as all of the startup expenses and much of the above-mentioned trial activities, R&D expenses and litigation costs incurred in this segment.

Refractory segment operating income was 10.0 million. More than double the 4.2 million from the prior year. Excluding 2.8 million restructuring and asset impairment charges in the prior year, operating income for the refractory segment increased 42 percent, including approximately 2.3 million in bad debt recoveries.

The overall effective tax rate for the year was 28.7 percent, compared to 26.4 percent in the prior year. This resulted in a fourth quarter tax rate of 25.5 percent in 2004, compared with 19.2 percent in the prior year. Net income was $14.6 million and diluted earnings per share for the quarter was 70 cents, including due diligence and restructuring charges which totaled 3 cents per share.

Turning to the full year results, MTI sales grew 13 percent to $923.2 million from $813.7 million in 2003. Foreign exchange had a favorable impact on sales of 28.2 million accounting for about 3 points of growth overall. Operating income grew 15 percent to $88.9 million from $77.2 million in the prior year. Excluding charges for restructuring, asset impairment, and due diligence expenses, operating income was 91.1 million, a 9 percent increase over 83.7 million in 2003.

Net income for the full year increased 21 percent to 58.5 million from 48.2 million in 2003. Diluted earnings per share were $2.82, a 19 percent increase over the $2.36 per share in the previous year. Diluted earnings per share before the cumulative effect of an accounting change of 17 cents per share in the prior year increased 11 percent from $2.53 per share.

In 2003, the Company reported charges of approximately $6.5 million or 19 cents per share for asset retirements and workforce reductions. In 2004, the combination of the remaining restructuring costs and terminated due diligence expenses were $2.1 million or about 6 cents per share. Our balance sheet remains very strong. Our debt to capital ratio is about 14 percent. Cash generated from operations for the year was in excess of $125 million and we invested about 100 million in capital additions worldwide.

During 2004, we repurchased an additional 293,100 shares for treasury at an average price of $55.36 per share for a total expenditure of 16.2 million. Depreciation and amortization expenses totaled approximately 70 million for the year. Days of sales outstanding are down over the prior year end -- about four days -- and inventories are in line with historical levels at current prices. Our allowance for doubtful accounts is approximately 7.1 million -- the same level as the prior year end.

Now I'll turn the microphone back to Paul for his closing remarks and for questions.

Thank you Ken, Alain and John. As you can see, despite a number of factors affecting operating margin, MTI was able to deliver strong performance in the fourth quarter and for the full year 2004. Diluted earnings per share of $2.82 were 19 percent above the $2.36 delivered in 2003.

While we expect a moderation and economic growth in 2005, the economy will still be supportive of expansion in the material sector. Production of freesheet printing and writing paper is expected to increase just over 2 percent in 2005 versus 5 percent in 2004. Global crude steel production is expected to increase 4.2 percent in 2005 versus 8 percent reported in 2004.

Thus, while less exuberant, our economic environment is still expected to be expansionary. Certain regional markets will experience significantly stronger growth. For example, paper and steel in China and systems that increase the throughput of the capacity strained steel sector in the United States. MTI has positioned itself to take advantage of these opportunities so as to continue the rapid growth of its businesses. Given the programs that have been initiated in 2004 and will accelerate in 2005, diluted earnings in the range of $3.10 to $3.20 per share, including the expensing of stock options, would not be unreasonable.

Operator, we are now ready for the first question.

(OPERATOR INSTRUCTIONS) Ray Kramer of First Analysis.

I have a bunch of questions but I will maybe just go through a few first. Trying to get a handle on some of the growth costs that you have in the quarter. If you will, this filler fiber and Walsum. On the filler fiber side is it safe to assume that most of the sequential R&D increase was related to that activity and is that something that is going to be ongoing for several years? On the Walsum front, can you quantify at all how much of the gross margin decline was related to that, the trial activity there and is that something that should probably ramp down over the next few quarters?

Let me take a crack at that. When we look at our R&D expenses and as you saw they increased both in the fourth quarter and for the full year. We have increased that spending for the filler fiber composite materials and for some of the other programs like coating, for example, that we are working on. I do not expect the R&D expenses in 2005 to increase at that same rate as they did in 2004. So we will see some reduction in that rate in 2005.

When you look at a very large commercial facility, a merchant facility like Walsum where it is about a $35 million investment, as you know. We, for example, incurred some startup expenses as you'd imagine in 2004 and we will incur some additional startup expenses in 2005. As Ken indicated, we go through the qualification phase of moving that product to the potential customers in that region of Germany. So we will have some of those startup expenses in the early part of 2005.

How long do these qualification trials usually take?

They can actually take a couple of months because you need to make the paper with the product that you are qualifying and then that paper has to go out to the paper mills customers and, then, they will run that for example. So there is a time element there. We have started those trials. They are underway; and we expect they will lead to just full commercial utilization of the product out of Walsum.

Then I know January 1 is when you have the opportunity to adjust your PCC contract escalators. Can you comment at all on what sort of adjustments you've got there for rising line costs and maybe energy?

I can't comment specifically on that but you are absolutely right. The contracts still have the provision to take the increased cost of the fab whether it is line, raw material, labor, the other factors that are incorporated in the production of PCC by contractual relationship and we make those adjustments in the early cost. For example, January 1st. Another time we do that is July 1st. So we do that generally two times a year.

But they are, in fact, adjustments that we will make and we will pass through all that are allowed by that contractor.

I saw Westvaco has sold their paper mills. I think if I have my figures correct, you guys served two of their mills. Can you comment at all? Are you seeing any signs that things are going to change there? Or should we assume business as usual at those mills?

No, we have an excellent relationship with those manufacturing operations. And you should assume that business will continue as usual.

Two financial questions and I will get back in queue. What should we look for for tax rate next year? Can you explain at all why we had such a low rate in the fourth quarter?

On this case I will pass that question onto John Sorel. John? If you would answer that question, please?

The guidance we would give for 2005 would be around 30 percent which is similar to the guidance we gave for this year. We did adjust the rate downward a little bit in the fourth quarter as we did a little tax planning to prepare to take advantage of the job's creation bill next year. We held off; we patriated some dividends this year. There was a modest adjustment this year and we will accelerate some of that repatriation next year.

Lastly, with your guidance range, how much stock option expensing is included in that 310 to 320?

The guidance I would give there is -- as we have reported previously -- the current level of the net income impact of stock option expensing as we reported is about $2.2 million.

Jeff Zekauskas, J.P. Morgan.

I just wanted to be sure that I have the numbers correct. So you have got an eight unit expansion in China that will come on in '05; and then, in addition there's 13 units of expansion that will also come on. So the total's 21? Is that right or no?

No, that's not quite exact there. We do have the eight units of expansion coming onstream in China in the early part of the late first quarter early second quarter as that comes onstream. We have for units that were counted for Walsum. We have other expansions that will be coming onstream. So those are expansions at several of the satellite PCC facilities that will be coming onstream and the total that we indicated was about 19 units.

19 will come on in -- so the 19 includes the Walsum?

Yes, that's correct. The 19 units between '04 and '05 includes Walsum. That is correct.

So it is essentially 15 units than that will come on next year?

It depends on -- we had a couple that came on in 2004.

So it is 13.

That is probably about right. 13 is about right.

All things being equal, that is pretty much a 17 percent expansion in your production. So --

Yes. It is very substantial when you look at the total units that we are adding to the PCC business; and we started some of it up in '04 and that will ramp up in '05 and then we will add again these additional units in '05 that will continue to ramp up. It is a very significant increase in total manufacturing capacity for our PCC business units. And very pleased with that progress that we are making there in moving those strategies forward.

Basically, what happened, Paul? Because for years, it was very very difficult to expend any capacity at all and now all of a sudden there's a very very large increment. Is this more technology-driven or geography-driven or something us?

It is a combination of both. Actually it's a combination of both, Jeff. What we are seen here is the introduction of some of the newer product morphologies that we have been working on. What we call the 3G Technology. We also see paper mills increasing the amount of paper they are producing and as you look at utilizing the newer morphologies, which allow them to go to slightly higher ash levels, combined with the greater paper production it leads to a very nice increase in demand for our PCC and thus, obviously, the expansion of our facilities.

And it has come together very nicely for Ken and his team in 2004 and 2005.

I guess the one thing that I would like to say about Ken and his team is that in 2004 your revenues in the whole Specialty Minerals areas were up about 110 million and your operating profits were basically flat.

That's right.

All things being equal, the incremental margins should be something like 20 percent. And so that is $20 million or $19 million that didn't show up through the income statement?

Right; and we had a lot of headwinds that I spoke about in my opening comments, Jeff. We have a lot of expenses that this Company undertook. The SOX 404, some of the intellectual property litigation, the increases in R&D that we talked about from a manufacturing perspective, very substantial raw material energy. Chemical increases. Some of those as we said earlier that we will pick up now with the contract adjustments that we make in January of this year. So we will get some of that back as we look at 2005.

We had the Walsum startup. So there were a number of factors that, obviously, hindered our ability to translate the increase in sales to a significant increase in operating income.

Can you change that next year? I mean, all the earnings throughout this year basically came from the refractory business.

Yes and Alain and his team had an outstanding year and it balanced off to some degree exactly what you said there. For the difficulties that we had and the headwinds that we had in the paper side of the business. Although as Alain indicated he had some tough things that he had to work through. We are expecting, as I indicated earlier, our expense growth will be more moderate in 2005 vs. 2004. We will make the contractual price adjustments on the Paper PCC side and Alain, as he indicated, is also looking at trying to address his cost issues, too, as part of the strategy that he has from the MINTEQ business. So we expect that improvement in 2005 vs. 2004.

Just lastly, what is the size of that specialty class customer?

I certainly can't comment on that. We are very pleased with the progress we are making there. As I indicated the customers sampling (ph) facility has sold out. We are trialing and continue to trial with a major glass company. We are meeting their objectives for the use of SYNSIL and the value equation that we believe it brings to them. And we are very hopeful that it will lead to the construction of our first merchant SYNSIL facility.

Todd Peters of American Century Investment.

My question is on the cash-flow statement. You indicated that D&A was 74 million for '04 and I'm sorry, did you say what your total capital spending was in '04 and what you're expecting to do in '05?

Todd, thank you for that. Capital spending is approaching $100 million in '04 and '05. But let me ask John to address that specifically your other part of that question.

For D&A for the year 2004 you can look for about 70 million.

70?

Yes. Paul said capital investment of about 100 million.

100 million capital investment for '05 as well?

Yes I think for directionally, that's what you should look for. As you know we announce as we get major contracts we will announce the spending rates at that time. But 100 million would put you in the range of what we have done the last several years. Normal growth rate.

And one on depreciation for '05. You see that will be up to the mid 70 level or higher?

Not higher. Moving up slightly.

Robert Kosowsky of Sidoti & Co.

I was wondering what your same-store sales were for satellite fillers?

Same sales -- excuse me, same-store sales volume. Talk about volume here, we are up about 70 percent.

For '04 vs. '03.

Okay. 7 percent volume increase?

That is correct.

How much was pricing increase?

We had a several percent increase in average selling price. And part of that obviously was currency. We had some benefit from currency in that also.

Can you give us any idea how much -- bringing up the gross margin maybe some kind of anecdotal comments on what magnitude the gross margin was down on the same-store satellite facility basis?

Robert, we don't get into that type of discussion.

Does the 100 million in CapEx. Does that includes SYNSIL construction facilities? And when could we expect to hear an announcement on that?

We certainly make provisions as we expect that program to be successful. So we would have some expectation after the SYNSIL construction opportunities in that capital expenditures for 2005. And we are hoping obviously within the next several months that will be able to make some announcement.

Can you give us any idea of how large the litigation cost increase was?

The only thing I'm comfortable saying there that our total, total litigation expenses are probably in the 2 million range, a little bit higher.

For the fourth quarter?

For the year.

For the year? Okay, what does that compare to to the last year?

That is up substantially.

Rosemarie Morbelli of Ingalls & Snyder.

Following up on the litigation expenses, do you expect that particular number to come down in 2005? Are you just about done, protecting your patents?

No, unfortunately, intellectual property litigation seems to go on much longer than I would have expected. So right now our plan is that that probably will remain about level for 2005 vs. 2004.

I mean, you (indiscernible) steps that you are taking which would, could get that number to be higher in 2006 or is this more or less what you have in the books, so to speak?

Rosemarie, could you please repeat that question? I'm not sure of the reference that we are looking at.

I was wondering if there were additional -- I am assuming that you are protecting patents and there must be some kind of a backlog. I was just wondering if you see further problems down the road which would require that particular number to grow.

Now I understand the question. The growth that we saw in 2004 vs. 2003 and the level that we see going into 2005 is related to the litigation that we are undertaking at this point. But not -- at this point I am not expecting any significant additional litigation beyond that.

When I look at the refractory segment and pull out all of the non-recurring expenses last year and this year and pull out, as well, the recoveries of the bad debt, you actually that particular segment actually earned 7.7 million this year in the fourth quarter vs. 7 million last year, which is nowhere near the growth that you talk about during the conference call. Am I looking at that those numbers the right way?

Well actually you are looking at them I think correctly but I think the issue that we look at I think Alain addressed that is that, as you look at the cost as you utilize inventories and you look at replacing that with higher cost raw materials -- magnesia, for example -- the impact of that has rolled from a limited impact in the early part in 2004 to a larger impact into the latter part of 2004 and obviously the programs that Alain has to control that as we move into 2005. But I will ask Alain to speak to that directly.

It is true that in the fourth quarter, like in the third quarter, we had the full back of the increase cost of the raw materials; and as Paul indicated, we had the benefit of the beginning of the year last year of the lower-cost inventory. So we are in the situation that represents the current economic conditions. As for the recovery of bad debt for the whole year, this corresponds to costs that we incurred before. So it is more a timing issue.

Okay, but when we look at, if we look at that 7.7 million in the operating margin in the fourth quarter was 9.2 percent. Is it fair to assume that with all of the steps you are taking next year we could be substantially above 10 percent for the full year?

Rosemarie, we will improve that operating ratio as we go from 2004 to 2005 on that base operating ratio; and that is certainly the direction of Alain and his team. I don't want to be so bold this early in the year to say that we are going to be way above a certain number; but we will certainly be making improvements in that ratio as we go through 2005.

Two more general types of questions. On the special TPCC, could you give us some details in terms of the new products and the new applications you mentioned which helped results this year and should help going forward?

Yes. We made some significant progress in penetrating the market with our products, especially in Europe, for example. And we have also used -- have improved the use of our special PCCC's in two fortifications. As you know we have had a difficult time vs. natural ground calcium carbonate in some applications. We believe that that has in fact played out in terms of substitution for our specialty PCCs and, in fact, that part of the business -- the use of our specialty PCC in food fortification -- is growing very nicely and was one of the major contributors to the growth and performance that we had in 2004.

Do you see more coming in 2005 in new areas?

Yes, we do. Yes, we do. We see continued growth both in the food applications for example; and also in some of the newer products that we are introducing into the business, especially in the plastic and automotive areas.

Lastly you talked about capacity constraints for Processed Minerals in the fourth quarter. Could you address that?

Yes. We have been very successful. That team -- headed by Randy Harrison -- has done an outstanding job in moving that business forward. And as we look at our Processed Minerals plant which are producing as you know our natural ground calcium carbonate and cal products primarily, they have been gaining market acceptance with some of the newer products that they have introduced. (indiscernible) for example on the upside is doing exceptionally well, that we have had to in order to meet the continuing demand for some of the constraints that we have -- capacity constraints. Certain of those product lines are expanding in a number of our plants both in the calcium carbonate area and in the talc area to meet the demand for those products.

So we should expect higher margins next year on those categories?

Rosemarie, that is our goal. Our goal is always to improve margins; and I think that we will. As we bring on that new capacity and satisfy the market requirements.

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

Are the costs of construction per ton for SYNSIL higher or lower than the cost of construction per ton for PCC?

Jeff, as we've briefly discussed at other conference calls, in terms of capital efficiency, the capital efficiency cost per ton for SYNSIL is better than the capital deficiency for PCC.

Given that right now you have got -- your 50,000 ton facility is about sold out, why do you want to build a facility that is as large as 200,000 tons?

I think we have indicated previously that we see this as a very large opportunity for this Company; and the potential customers that we are working with have demands for SYNSIL. If we prove the value equation that would require, collectively, that type of volume to satisfy their requirements.

All things being equal, if you committed to build it you would expect to run that facility at a relatively higher rate of capacity in this section?

As with any facility, any margin facilitate, Jeff, as you know, there is a ramp up. There is a time that it takes to obviously build the facility and then start ramping up that facility. Just as we are doing at Walsum, as we do at other major facilities, there is a time element there. But, yes, we would not build a facility if we did not expect it to be fully utilized.

Could you expand it if you built it?

Yes. All facilities are built so that they can be expanded. In this case for example if we built that facility such that it could easily be doubled in size from 200 to 400.

Do you have any dividend increase plans?

That is a decision that the board has to make; and it would be presumptuous of me to really comment on that at this point.

Because, still, you continue to have virtually no financial leverage. And I guess I wonder what your -- maybe another way of putting it is what's your plans for your capital structure over a longer period of time? What do you think the right level of debt to total capital is?

That's a very philosophical discussion that we can have and one that we can review with the board periodically as we look at the long-range plan for this Company. And I will address that specifically because those are discussions that are confidential between us and the board. We are very comfortable as we look at the opportunities that we have for this Company to grow. The opportunities that Alain is pursuing in China for example, the coating opportunities that Ken has, the Processed Minerals expansion, the SYNSIL opportunity that, as we look at those opportunities, the share buy back program that we have and that we use as John has indicated that we use our capital resources prudently and wisely; and if we think it is appropriate to change that we will certainly recommend that to the board.

But right now I think we and the board are very comfortable with what we're doing. We did pursue as we spoke earlier an acquisition opportunity that came to us. It did not materialize and we took a charge for that as we explained. But, again, we have the financial resources to do this; and that is how we look at properly using the resources and responsibilities that we have.

Was the acquisition opportunity large? I mean, order of magnitude, was it under 100 million or above 100 million?

I certainly don't want to get into that because that was certainly done under a confidentiality agreement but it was one that would complement our existing businesses and one that we certainly when you look at $1 million dollar charge we put a lot of effort and a lot of resources into it, including outside services.

Was it in PCC or in refractories?

Certainly I can't answer that question. It would just complement one of our existing businesses.

Robert Hardeman of Newbern and Associates.

I would like to follow up on that last question on the acquisition ideas and are you still actively looking for acquisitions? And would that be a major use of cash out of the cash balance that you have or the ability to leverage the balance sheet? Is that a key reason for keeping the dividend payouts so low? The absence of a significant buyback program?

Robert, thank you for that question. Yes. We do have an active program, looking for ways to grow Minerals Technologies. Not only through internal growth that we are pursuing very rapidly, but also looking for other opportunities. Acquisitions, for example, licensing of technologies, things that prudent companies to to acquire new technologies and to continue to grow and add value to the shareholders.

So are you limiting yourself to things that would fit in with the PCC or the MINTEQ's side of the business or are you thinking of a third leg to the Company?

The only way I would look at that or answer that question, Robert, is just to say that, certainly, we have compensees within this Company in areas of knowledge and technologies that we work with; and that certainly would be one area that we would be looking at. Not to exclude other areas but, certainly, that would be one of the key screening criteria.

I'm not sure I understood the question. I was asking if you were thinking of adding a third leg or maybe a fourth leg if we consider SYNSIL the third leg.

Again I will say it has to do with our compensees as a Company. SYNSIL is a third leg and it fits within the compensees of this Company. We are looking at synthetic minerals -- SYNSIL. So that is the reason I say that is one of the screening criteria would be the technologies and compensees that we have as a Company. SYNSIL is a new leg that we are developing and we are very optimistic with that, especially in 2005. And if we can find a fourth leg we certainly will do that.

Robert Kosowsky, Sidoti & Company.

Following up on the acquisition questions. Has that business been acquired over the past couple of months?

I certainly can't comment on that.

In terms of fiber fill, how long do you think it is going to take for that to start to trickle in to your financial results in terms of revenue? And how much does it cost for you to bring fiber fill to a paper mill and for IP to bring it to a paper mill?

Robert we are certainly optimistic and working very closely with International Paper on developing that technology. As Ken indicated, we ran a full machine trial in the fourth quarter of 2004; and there are additional trials scheduled here in 2005.

But it would be presumptuous of me to say more than that because of the relationship and the working effort that we have with International Paper. Both we and IP are certainly optimistic about the progress that we are making with that program.

Is it the type of thing that commercial trials are pretty successful, pretty quickly ramp that up on some existing paper mill?

I think we can move fairly quickly. Yes.

How much does it cost for you to retrofit some of your satellite facilities and for them to incorporate that into their paper mill?

That is certainly proprietary information.

Rosemarie Morbelli of Ingalls & Snyder.

I guess when I punched I had a question on the acquisition which I'm not going to get an answer to. So I will move to SYNSIL. Are you making money on the existing 50,000 tons of products you are selling for trials?

No, Rosemarie. SYNSIL is still an expense to this Company. That expense, obviously, is small with the sales that we have from the market development facility that was supplying from. As we have added more times the expense has gone down because we are getting essentially full commercial price from that facility but it is not an efficient facility, unfortunately. The scale and nature of the operation there is not an efficient operation.

So we will need to go to a full commercial facility. And the other element that impacts the performance there and costs associated with SYNSIL is that the location of that plant is in Woodville, Ohio as you know. And a lot of the trials we are doing are not in that geographic location.

So there is a very large freight component that we have to incur. Again, that is one of the expenses of developing that program. As we then move to a commercial facility, it will be regionally located where there is a very large demand that we expect will develop for SYNSIL. So freight is certainly another component that impacts the development cost of SYNSIL.

As you build the new plant with the capacity of 200,000 tons are we talking about four lines for example of 50,000 tons, which would come onstream as needed? Is that how it works?

I don't want to get into that detail in terms of the construction of our plants. It is expandable from 200 to 400. I will leave it at that. I think that would indicate that the initial capacity would be essentially 200,000 tons.

With this particular plant, if you were to sell out at the beginning 50,000 tons of it, at that particular level of production, would you be profitable because of the location? Because of the different system and so on?

It would certainly change the economics but I don't want to get into where the breakeven point is in terms of our facilities as you move from a market development facility to a commercial facility. But you would gain the benefit exactly as you said, Rosemarie, in terms of reduced freight to the customer. So it gives you a higher effective FOB price, certainly improves the economics for us.

Lastly, do you think it would take a year to get that plant operating at the full capacity?

I don't like to speculate on terms of how quickly we ramp up the facilities. But we would expect it would ramp up rather quickly if we were going to construct it.

I think we will take one more question, Operator.

(OPERATOR INSTRUCTIONS) At this time, no one else has signaled.

Thank you, Operator, and I certainly want to thank all of the participants on today's conference call for listening in on our 2004 results. We expect, obviously, to continue to grow this Company in 2005, to build upon the investments and strategies that we have implemented in 2004. We think 2005 will continue to show growth for Minerals Technologies and we thank you for your interest and support in our Company. Please have a good day and that ends the conference call.

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.