Minerals Technologies Inc (MTX) 2005 Q1 法說會逐字稿

Good day and welcome everyone to Minerals Technologies Incorporated First Quarter 2005 Earnings Conference Call. Today's call is being recorded. With us today is the President and Chief Executive Officer, Mr. Paul Saueracker. Please go ahead sir.

Thank you, operator. Good morning and welcome to Mineral Technologies first quarter 2005 analyst conference call. Despite a business environment in our principal markets that call -- what economist call a more sustainable rate. MTI continue to move forward aggressively with net sales up 20% and net income up 21%. Earnings per diluted share of 73 cents were 12 cents above the 61 cents this quarter for the first quarter of 2004. Our continuing success reaffirms the validity of MTI strategies for achieving growth by offering technologically advanced materials and systems to what are generally regarded as slower growth segments of the manufacturing sector.

MTI achieved net sales in the first quarter of 2005 of nearly $251 million, $41 million and 20% above first quarter 2004 sales. We achieved growth across all regions and all product lines. Sales did benefit from the fact that first quarter 2005 was 6% or 5 days longer than first quarter of 2004 due to our accounting closing convention. Despite encountering headwinds in the form of higher energy and raw material costs, start-up costs for our new facilities in Germany and China, a continued trend in customer facilities rationalization and litigation expenses. Income from operations grew 20% to 24.1 million equivalent to 9.6% of net sales.

Following my introduction, Ken Massimine, Senior Vice President responsible for Paper PCC will provide you with a more detailed explanation of the factors underlying the performance of PCC, our largest product group. Alain Bouruet-Aubertot, Senior Vice President of MINTEQ will report on the refractory segment and John Sorel, our Senior Vice President for Finance and Chief Financial Officer will provide a brief financial summary. After John’s presentation, I will conclude with a few summary remarks and open the call to questions.

Before proceeding further I need to remind you that on pages 6 through 8 of our 2004 Annual Report Form 10-K we listed various cautionary factors that may affect future results. Any forward-looking statements by me or members of our management team are subject to the influence of these factors.

So far in 2005, the business environment has been generally favorable for MTI. In the first quarter the U.S. economy, as measured by GDP, grew at a 3.9% annualized rate, not as robust as the 4.5% recorded for the first quarter of 2004 but still strong.

Industrial production increased at a 4.3 annual rate versus 5.6% reported for the first quarter of 2004. On a global basis, we have seen production improvements in our two largest markets, paper and steel. The global paper production estimated to be up 3.3% for the first quarter of 2005 and global steel production reported to be up 6.5%. In terms of paper and steel production, North America, our largest market, was more restrained. Production of printing and writing papers in North America actually decreased, and estimated 1.2% compared to the first quarter of 2004. While steel in North America increased by the only eight-tenths of a percent as construction fee and demand from the U.S. automotive and other components of the consumer durables manufacturing sector fell. Slightly over 60% of MTI's 2005 first quarter sales were domestic entire to U.S. economy. However, many of the markets we serve outside of the United States are exhibiting higher growth. To take part in that growth, we have made a commitment to establish a strong company presence in these growing international markets. This enhanced commitment includes the ramp up of our merchant coating PCC facility at Walsum, Germany and the start of the two PCC plants of paper mills in China. The two plants in China will add between 220,000 and 260,000 tons of PCC capacity on annual basis.

Construction of MINTEQ's $14 million automated refractory plant in Suzhou, China continues an operating income on stream growing the fourth quarter of this year. This plant which has optimum logistics in terms of both raw materials and finished goods is located near a cluster of some 15 steel mills that produce the highest quality steel in China.

While Ken and Alain will provide you with a more detailed analysis about PCC and refractory businesses, I would like to point out a few operational highlights. Total PCC sales were up 19% for the quarter reaching a $134 million. Of this increase approximately 14% was due to volume and 5% due to price in currency. Walsum start up has occurred in fourth quarter of 2004, the ramp up of production volumes at this plant has been slower than anticipated. However, we are now moving forward and expect sales for the European coated paper segment to increase substantially in the second half. In another key development we have been successfully and commercially introducing a technical innovation from manufacturing PCC that will allow certain grades to be made more economically and at higher rates. In our specialty PCC product line, sales increased 19% as a result of strong demand for our ultrafine and USP products.

Demand for plastic components using ultrafine PCC has been strong in markets located primarily in the South near our Brookhaven, Mississippi plant. Despite increasing interest rates, construction remains strong and our process minerals group continue to show good growth with sales up 14%. Comp product sales were particularly strong with sales up 23% due to increased demand from the polymer and healthcare market segments.

Refractory segment sales were also up 23% as a result of strong global demand from both refractory products and systems and metallurgical products. Perhaps the most exciting development was the signing of a major supply contract for our SYNSIL products and the initiation of construction of a 200,000 ton per year commercial facility in South Carolina. This plant is scheduled to come on stream during the fourth quarter of 2005. The Woodville, Ohio facility is currently operating at full capacity. When the South Carolina facility comes on stream additional market development activities can be undertaken. We hope the extended trials now taking place will result in the announcement of another major commercial SYNSIL contract before year-end.

I will now ask Ken Massimine to provide us with the details related to our PCC business. Ken?

Thanks you, Paul. Let me begin by providing the summary of current market conditions followed by highlights of our business results for the first quarter as well as some expectations for the full year. 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 improving level of business activity. However, much of this growth is expected to occur in the first half of this year, while I forecasted softening in the world economy is projected for the second half.

Looking at the various world regions, despite modest economic growth during the first quarter, the US paper industry fail to follow suit as total paper shipment slipped 1.2% compared to the same period a year ago. This decline in shipments was fairly broad based across all printing and writing grades except for uncoated mechanical papers particularly SE papers which have been strong all year. Operating Operating rates for uncoated mechanical papers are near 96%, while uncoated freesheet operating rates hover around 90%. Production of uncoated freesheet papers, our most important market segment, have been stagnant for the last few quarters and growth rates will struggle to gain 0.7% this year. This contain – I am sorry, this continues to be the result of a soft rebound in business demand, high imports despite a weak U.S. dollar, and the continued growth of competitive electronic communications. As a consequence, several paper machines shutdowns have been announced including International Paper at [Jammin] and Pensacola, Florida and [Dimethaid] at Cornwall, Ontario

Internationally, Western European economies continue their broad based slowdown. We expect the rate of growth in the production of printing and writing papers to be only 2% in 2005, which is a decrease from last year. Conversely, domestic demand in exports of graphic papers increased somewhat during the first quarter which helped to keep overall operating rates around 92%. In recent years, Asia and especially, China have exhibited strong paper growth. However, there are signs of the coming slow down in the economies of this region as well. While, Asian paper production will see good growth this year at around 4%, its rate of growth is forecast to slow during the second half of this year and into next.

MTI has seven PCC satellite plants in Asia including three in China. I am pleased to report that the two new Chinese satellites at Dagang and Suzhou are in their start-up phase and will be operational by the end of the second quarter. Both facilities incorporate our newest technology for manufacturing third generation PCC filler products for printing and writing papers. Moreover, the new satellite at Dagang will manufacture both filing and coating grade PCC and represents expanding Opacarb PCC coating product capability into Asia.

MTI’s total PCC sales for paper and non-paper applications in the first quarter increased 19% over the prior year's first quarter from approximately $112 million to $134 million. In spite of a lock luster paper market we are very pleased with our sales growth during the first quarter of 2005. Paper PCC sales were up 19% while PCC unit volume gained 14%. For the first time in MTI's history we are close to 4 million tons annualized sales rate.

Our quarter-over-quarter sales growth included double-digit gains across all paper market segments. These impressive sales gains including the successful penetration into global coated and groundwood papers continue to validate our current strategic initiatives and demonstrate the value of products bring to our customers.

Also aiding our sales growth was the restart of our PCC satellite plant at Millinocket, Maine and the benefit of its foreign exchange which had a positive impact of $3.5 million.

On a same store basis, first quarter sales tonnages of paper PCC from existing satellites was 13% ahead of the same period a year ago. Total PCC operating income increased 20% in the first quarter compared to the same period last year due to strong volume growth and general cost containment. Although we maintain good costs control during the quarter, our overall expenses were higher than expected due in part to the ramp up of our Walsum, Germany coating PCC facility, as well as, startup costing China. We are – we also encouraged additional expenses for increased worldwide product trial related activities and ongoing litigation associated with patent protection.

For the balance of the year, operating income maybe under pressure as PCC volumes are expected to temper somewhat due to the previously mentioned paper machine shutdowns and expectations for limited growth within the North American uncoated freesheet during the second half. Further, we expect to incur additional startup costs at our new satellites in China, as well as, continued to ramp up costs at Walsum and at various plant expansions. On a positive note, our new merchant coating PCC facility in Walsum, Germany is now supplying commercial product. This facility is centrally located in one of the world's largest concentrations of coated paper manufacturers. We are proud that this new operation will bring our total European Commission capacity to over 1 million tons of PCC.

The marketing of coating grade PCC products is in integral part of our strategy to broaden the applications of this unique mineral. Current global paper mill trial activities and demand for Opacarb PCC coating product have exceeded our expectations. Sales in North America and Europe continue to accelerate and we are now excited about new coating PCC opportunities in China as well. This exceptional PCC product is [set to industry standards] coating minerals. Customers are currently examining how best to take advantage of its un-cashed properties whether to leverage their production to improve product and paper quality or to reduce their manufacturing costs at comparable paper quality.

During this year, we also intend to continue our R&D focus on developing unique technologies for both coating and filling PCC products like the filler-fiber composite materials we are developing with International Paper. Trail activities for this novel technology are still ongoing with additional trails planned over the course of this year.

In addition, we are also working with co-suppliers taking advantage of synergistic technologies, to proactively work with high valued systems solutions for filling alkaline papers. This effort is part of our continued emphasis on product innovation.

Now let’s briefly turn our attention to specialty PCC, for non-paper applications. Our specialty PCC group just completed another quarter of strong performance with sales also increasing 19%. Continuing business rebound started in the fourth quarter of last year. Going forward, we expect continued sales improvement in our specialty PCC segment based on our initiatives in plastics, sealants and consumer markets. In conclusion, we are very pleased with our sales progress during the first quarter. Despite a weakening economic outlook, we remained confident that our focus for strategic business initiatives will continue to generate a solid framework for future advances in sales. While we remain optimistic overall for the 2005, we expect our operating income will be moderated somewhat by the aforementioned paper machine shut downs and expenses associated with our new plans start ups.

Now, I’ll turn the microphone over to Alain, who will review the refractory segment’s performance. Alain?

Thank you Ken. After our boom in 2004 world steel production growth became both normal as well regionalized in the first quarter of 2005. Despite the slowdown, MINTEQ’s first quarter’s global net sales stood 23% reaching $81 million exceeding the previous first quarter record set in 2004 and accounting for 32% of MTI’s total net sales. As sighted by Board for MTI, MINTEQ continued to face certain hindwinds, primarily in terms of increased raw material cost with limited growth in operating income to 14% or $1 million and growth approaching margin to 9.5% of net sales. As I shall explain, longer-term programs to improve operating income and margin are in place but we will take some time to run faster.

Overall, the global business environment in the first quarter was less buoyant than it was in 2004. Global steel production for the first quarter was up 6.5% versus 8.7% in 2004. In terms of MINTEQ’s business environment, there is the rest of world and there is China. Looking at the world as a whole, gives a misleading average. In the first quarter of 2005, China which accounted for 29% of the world's steel production grew at 23.8%, which when averaged with a lower rest of the world rate gives us somewhat misleading 6.5% average increase. Despite forecasts of a slowdown in China, as a result of government policies, China accounted for 91% of the world's increase in crude steel production in the first quarter of 2005. At the same time, global production of raw steel excluding China was up only 0.8% in the first quarter compared to the first quarter 2004 increase of 3.9%.

In North America, MINTEQ’s largest market, first quarter 2005 steel production was up only 8.3% with much reported [inaudible] 3.1%, of multi concern is the decrease in steel capacity utilization reported by the American Iron and Steel Institute. This figure which run consistently over 90% last year, drop up to 83.3% for the week ending April 9 and has averaged 88.3% year-to-date versus 90.8% for the first quarter of 2004.

Our capacity utilization favors the use of MINTEQ high durability products and robotic applications systems that allows steel industry customers to maximize output. The EU15 steel production was up 0.2% in the first quarter of 2005 with loss down 2.2% from prior year's March. Asia, excluding China, reported crude steel production up a modest 1.7%. As for China steel production growth will not continue at the current rate. This is because China's steel production went up dramatically as 2004 progressed creating an increasingly larger quarterly pace. Moreover, due to government policies restraining capital investments, 2005 quarterly gross rates for China are expected to halve by year end. In light of the automotive first quarter business environment effecting MINTEQ’s largest market steel between 3% growth in net sales is particularly not terrific. MINTEQ’s strategies to achieve growth in what is traditionally seen as a low growth market are working level. North American net sales were up 25%, European sales up 16% and Asian sales were up 19%. All product lines continued to show double-digit growth with refractory products and systems to steel at other industrial applications at 20% and metallurgical products up 35%. Despite slowing growth in demand steel production leverage remains high through most of the first quarter particularly at dealer shops where furnace relies have been put up as long as possible using MINTEQ’s maintenance products and systems. However, with moderating demand resulting from pulling domestic auto production and durable goods construction, similar operations are scheduled in furnaces starting in the second quarter which will temporarily lower maintenance refractory usage.

The strong growth in metrological products was the result of increased demand from continuous casters to maximize casting yield and rates coupled with a largely successful effort to pass through costs increases associated with the high market price of metallic raw materials and high energy costs that go into the manufacture of our products.

Another particularly noteworthy accomplishment is the success of our strategy to apply some of the technologies given up by MINTEQ for the steel industry to other industrial refractory applications. While non-steel sales still represent a small share of our business, first quarter net sales to non-steel refractory applications were very strong and constitute a validation of the strategy as a means of broadening our markets and enhancing future growth.

The rise of China as a dominant force in world steel production continues to be the major factor behind MINTEQ's strategy to move into market and reapply resources where growth in steel is occurring, MINTEQ's 100,000 ton refractory plant in Suzhou, China will come on stream during the fourth quarter of 2005 allowing MINTEQ to use it's leading edge technology, [look at] Chinese raw materials and improve logistics to gain share in this market. As part of the strategy to move with the market, we are upgrading our international organizations resulting in increased spending. However, while total expenses for MINTEQ were up in the first quarter, they were down as a percent of net sales.

The most significant headwind facing MINTEQ is escalation in raw material costs. This is the case not only for my magnesium, our primary raw material, but also for most orderable materials such as alumina waste materials and chemicals, whose costs were much higher than in 2004.

Compared to last year, our 2005 first quarter production cost ratio was driven across due to continuing raw materials cost pressure combined with the benefit of lower cost raw material inventories that were contracted for in late 2003 and carried over into the first and second quarter result 2004. At this point, raw material cost appears to have least temporarily stabilized. We are now focusing our programs on obtaining long-term raw material cost reductions from alternate sources, broadening our sourcing of critical raw materials and optimizing our production formulations. While, these of course, are progressing well, it will only provide significant benefits overtime.

In total, our outlook for 2005 remains cautiously optimistic, despite some anticipated softening in North American and European business environment, particularly in the second quarter. For the year, we expect growth to continue, but at a slower rates than in the first quarter. John.

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

MTI achieved diluted earnings per share for the quarter of 0.73 cents a growth of 20% over the prior year. It should be noted in the following analysis of performance that due our accounting closing convention there were 93 calendar days in the first quarter this year versus 88 days in the prior year, an increase of 6%. Net sales for the quarter were $250.8 million an increase of $41 million or 20% compared to prior year. Overall, foreign exchange had a favorable effect of about $5.8 million representing 3 percentage points of sales growth in each of the reportable segments during the quarter.

Both segments delivered strong topline growth, well in excess of economic growth in the quarter based on the success of our business strategies. Sales in the specialty minerals segment were $159.8 million, a $26.1 million increase or 18% growth including the benefit of favorable exchange rate. Sales of PCC increased 19% to $134.1 million from $112.2 million last year. Both the paper and Specialty PCC product line experienced strong demand in all regions except Latin America. Sales in the Processed Minerals product line increased 14% to $35.8 million from $31.4 million. We also experienced growth in all of our Processed Minerals product line as a result of the strength in domestic construction and increased penetration in the plastics and sealants industries.

Refractory segment sales increased 23% to $81 million, 15 million over the $65.8 million recorded in the prior year including approximately $2 million related to the favorable impact of foreign exchange. Metallurgical products were particularly strong increasing by 35%.

MTI's cost of goods sold grew 21%, slightly faster than sales which limited the increase in gross margin to 16%. Specialty Minerals margin growth was affected by the ramp up activities related to a major new PCC facility in Walsum Germany and the initial startup expenses associated with the new PCC facilities in China. In addition, both segments were affected by higher raw material and energy costs. Total marketing and administrative expenses for the quarter increased 20% relative to the 20% sales increase. These expenses include planned increase marketing expenses to support our business development efforts worldwide and continuing higher legal cost to protect our intellectual property, an effort which began in the second quarter of last year. The Company's research and development expense for the quarter grew 5% above last years sharply increased commitment level to continue support in our new product initiatives in both segments.

In the first quarter of the prior year, the Company recorded a charge of $600,000 for a restructuring program initiated at the end of 2003. There were no associated charges this year as the program was essentially completed. MTI's first quarter 2005 income from operations increased 20% to $24.1 million from $20.1 million in the prior year. Excluding charges for restructuring and asset impairment costs taken in 2004, operating income increased 17%. For the quarter, the operating ratio was 9.6% of sales, essentially the same in both segments.

Specialty Minerals income from operations of $16.4 million increased 21% from $13.5 million in the prior year. Excluding restructuring and asset impairment charges last year, operating income increased 18% consistent with the segments topline growth. Refractory segment operating income was $7.7 million, 17% above the $6.6 million reported in 2004. Excluding restructuring charges in the prior year, operating income from the refractory segment increased 14%.

Non-operating deductions were $300,000 less than last year due to lower net interest expense. The overall effective tax rate for the quarter was 31.2% compared to 29.7% in the first quarter of the prior year. This rate is based on our current forecast for the year and includes the one-time effect of repatriating cash under the American Jobs Creation Act of 2004.

Net income was $15.2 million; a growth of 21% and diluted earnings per share for the quarter was 73 cents a growth of 20%. To summarize, the income statements for the quarter, sales increased 20%, excuse me, well gross margin increased 16% over the prior year. Total expenses grew 16% resulting in an operating income growth of 17% before the restructuring charges recorded last year, which yielded an operating ratio of 9.6% versus 9.9% in the prior year. The elimination of further restructuring charges, combined with the benefit of a small decrease in non-operating expenses were only partially offset by an increase in the tax rate resulting in an income growth of 21%.

Our balance sheet remains very strong. Our debt-to-capital ratio was about 14%. Cash generated from operations for the quarter was only about $5 million and was affected by a seasonal increase in working capital. During the quarter, we invested about $23 million in capital additions worldwide and we repurchased an additional 115,700 shares of treasury at an average price of $62.28 per share for total expenditure of 7.2 million. Depreciation and amortization expense totaled approximately $18 million for the quarter.

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

Thank you, Ken, Alain and John. As you have heard, MTI had a strong first quarter despite some headwinds and a moderating economic environment. Although, we are expecting the economy to cool for the remainder of 2005, we have positioned MTI to execute our growth strategies and to improve profitability. To do that, we are expanding our presence internationally to take advantage of regional growth opportunities available for both paper and steel.

Perhaps most significantly, our first major commercial Synsil facility will start operations in the fourth quarter. This facility will provide MTI with the capacity to supply this product innovation to a larger number of glass industry manufacturers. Much the same way, our worldwide network of PCC and refractory facilities allow us to supply innovative products to the paper and steel industries. Based on these considerations, we believe that earnings in the range of $3.10 and $3.20 per diluted share for 2005 remains reasonable. Operator, we are now ready for the first question.

Thank you. At this time, we'll conduct a brief electronic question and answer session. If you like to ask a question, please press "*", "1" on your touchtone phone. We'll pause a moment to give everyone an opportunity to signal. Okay. I will go first to Jeff Zekauskas of JP Morgan.

Hi, can you hear me?

Yes, good morning, Jeff.

Hi, good morning. The operating income growth, you showed in the quarter was really quite fine, but there was some puzzling elements on it. Your SG&A expense was up about 20%. So, obviously, the -- I guess, the marketing and administrative expenses are paying off in good sales growth. But do you have a goal for the increase in marketing and administrative expenses. I mean, can you get it down to, I don't know 3% or 4% growth or is 20% the sort of number you need in order to generate 20% sales growth?

Well, there is a number of things here Jeff and that's certainly a very good question. We are looking and look very hardly at our expenses for this company as we're building the international network that we need to continue to grow that far of our business and as you've heard from both coming along, we see very substantial growth opportunities in areas outside of North America. We have a good portion of that infrastructure in place at this time and we would expect that overtime that growth that you're seeing will decrease, that percent growth will decrease as you saw the numbers and comments made by Ken Massimine. Our expenses as a percent of sales continue to decrease, so our expenses as a percent of sales continue to decrease, but in addition to that the very large increase that you see there is there to support the growth that we're doing and I think as John indicated in his comments also additional litigation expenses that we have in the first quarter of 2005 that we did not have in the first quarter of 2004. So I would expect that rate of growth to decrease as we go forward.

Do you have a target for that rate of increase; I mean of course it will decrease, it's growing at 20%, I mean is the goal to get it down to low-single digits or low-double digits?

Well, I would expected that overtime it will go down into the single digits, it's not going to happen nearly in the next couple of quarters, but overtime as we develop that infrastructure, have it in place complete and hopefully resolve our litigation issues that overtime that will continue to decrease as a percentage.

Second question is what's the capacity utilization rate currently of your Coatings-Grade PCC facility in Germany?

Well, at this point it's in a ramp up phase as you would expect Jeff, as ken has expressed in his comments that plant was commissioned in the later part of 2004 last year. We’ve been wrapping up, selling routinely now to customers, so it's in a routine shipping mode but there is a ramp up schedule as you would expect during 2005 and in 2006. I really prefer not to give you any sense of what percent of capacity that is but it is in certainly a ramp up phase at this point.

Okay, that is a ramp up phase of the original capacity?

Yes, of the capacity, we indicated that the initial capacity was 125,000 tons per year.

Sure.

And that we would be ramping up during 2005 and 2006 and we're pretty much on that schedule.

And I guess the last question is, do you expect to lose money in SYNSIL next year because right now you're sort of contracts that you’ve signed or it seems not in the specially high volume compared to a rated capacity? Or is that not the right way to look at?

That’s probably not the right way to look at it and I wouldn’t want to make a forecast now for 2006 obviously. But we will continue to operate the Woodville plant as you would expect for 2005 at capacity in us what we are doing right now and then the new facility will come on stream in the fourth quarter of this year and we will balance out the production needs of both Woodville and the capacity of the new facility. So it will be a transition phase in 2006 and certainly that business team will have to provide us that guidance as we go forward into 2006.

Okay, I’ll get back on the queue. Thank you.

Thank you, Jeff.

Our next question comes from Ray Kramer of First Analysis.

Hey, good morning guys.

Good morning Ray.

I guess, I would start with the question on the paper size. Did you add any new units of capacity expansion in Q1 and could you sort of summarize again your goals for us this year in terms of units of capacity expansion?

Well, we don't -- we give the sense of that in the January conference call in terms of units of capacity that we've added and as you saw we had a very nice ramp up in the first quarter in terms of additional volume from existing satellite. So we had a very nice growth there. In terms of new facilities coming on stream right, we have the two very large plants in China that are coming on stream that are in the start-up mode now. Obviously, the construction was being finished there in the start-up mode and as Ken indicated in his comments that they will be operational by the end of second quarter, but I would ask Ken to share any additional thoughts that he would like to share there. Ken?

I think, Paul you covered well in terms of the renewal activities as the China start up in terms of bringing those satellites on stream for the timings that you suggested. In terms of other activities, a lot of activities going on right now away and hopefully we'll be in a position later on in the year to be able to talk in very favorable like in terms of outcomes with respect to trial what we're doing now.

Alright, great, thanks. And I guess turning to the SYNSIL front Ken, can you give us any sense of what the CapEx cost is on that plant in South Carolina? I know it's 200,000 tons, if I multiply by 2, the 14 million for the refractory plant, is that a good ballpark or can you comment at all on that?

Yeah, we -- I think, we've indicated really that couple of things we've indicated. One, the capital efficiency of that plant is good and we've indicated that is probably in the range of $15 million to $20 million for that facility.

Okay. And then with that second major commercial contract you are expecting this -- hopefully signed by year-end. If that that gets signed, would that generate another commercial plant or would that be supplied out of either Woodville or the South Carolina plant?

Oh! That’s an excellent question Ray. Obviously we have to see how that unfolds during the rest of this year, but if it is a large contract and certainly we would hope it would be, it certainly has the potential, has the potential to trigger the construction of the second commercial Synsil facility.

Okay. And then just one more question, probably for John, should we be assuming a 31.2 tax rate through the remainder of the year and into '06 or is it just a one-time adjustment this quarter?

I would forecast -- our forecast for the year is based on the 31.2, there will be some impact from the Jobs Creation bill which is a one-time effect, so hopefully it will trend down a little bit in the following year.

Okay, thanks.

Thank you, Ray.

Our next question comes from Rosemarie Morbelli from Ingalls and Snyder.

Good morning, all.

Good morning, Rosemarie.

Back to Synsil, you currently -- I mean if I do the math properly that 200,000 tons [turned] into 440 million tons and you currently are manufacturing 50 million tons in your [pilot plants] and it is fully operational with products going to both your large customers which has triggered the decision to built the new plant, plus all of the trials and if my memory serves me right, in the last quarter you said it would not be four 50 million tons line, that it could be one facility, one huge line, producing 200, well 440 million tons, does that mean that in with only the orders you have currently only 50 million or less, coming out of that plant?

I am not sure if I fully understand the question, Rosemarie, but let me just give you a sense of where we are.

Okay.

At the present time, as you know the Woodville customer sampling facility has a capacity of about 50,000 tons per year and we are operating that plant, that capacity at this point to supply our existing customers and as you know, we have two accounts with 1 glass manufacturer. We just signed a contract in March with another glass manufacturer. We have also indicated we have a small specialty glass manufacturer. That we are supplying, so we have commercial locations that we are supplying at this time as well sourcing other trials. So we are running that plant at full capacity at this time. So that’s why we need two things. One, hopefully those trials as I indicated will lead to another commercial commitment during 2005 but also in new facility that we are constructing in South Carolina to meet the requirements of the contract that we signed in March for that glass manufacturer and will also provide us with additional material to run other trials with other glass manufacturers, which we are unable to do at this point of time because of the capacity constraints.

It looks as though at the beginning it will be operating well at the [onset] at about 25% capacity utilization.

There will be a ramp up scheduled for that new facility just as there is with any merchant facility, there will be a ramp up schedule that we have obviously looked at when from a company perspective. I don’t want to get into what that is because obviously we have commitments with a very major glass manufacturer.

You are talking about one gigantic piece of equipment producing 200,000 tons, not --

I would say, it's a facility Rosemarie and we at this point have scale that facility for 200,000 tons and I think we've indicated that in terms of the manufacturing process that is a very economical breakpoint from an engineering perspective, a very economical breakpoint. The facility as I indicated also is constructed similar to our satellite facilities that we can expand it and they are in this type of facility again based on sound engineering and expansion with essentially double that 400,000 tons per year. So that's how we look at the facility, it's facility that's designed to be most economical introducing SYNSIL and at the same time having the infrastructure and capability to be easily double the size to 400,000 tons again on a very economical basis.

Following up on Jeff's question, it's sounds though may breakeven by the time you are getting 100,000 tons out of it, is that a fair assessment?

Again I prefer not to get into those details but in terms of many manufacturing or merchant plant as you put more volume through it becomes more attractive.

Okay, now could you take us through the difference in growth rate between North America -- well the U.S. actually in your international businesses. There is a huge difference even though in international, we have this enormous growth rate in Asia.

Well, as we must looked at --

And you said -- you gave us 27% growth rate in the U.S. and 9% international and I am assuming that international rate there is quite a bit of currency.

There is certainly some impact of currency in the international rate that would be correct, Rosemarie. And as you look at the programs that we have underway, I think as both Ken and Alain indicated is that we have been very successful with our programs here both in the paper perspective in North America and also as Alain indicated in terms of refractory growth in the North American business has been very attractive from his perspective. So it has had some very substantial growth in North America and we are very pleased with that. As -- also we need to be aware that as we go forward, we are concerned in terms of the continued growth in these markets both paper and steel in North America compared to the regional growth that both Ken and Alain indicated for areas and regions outside of North America. But you are correct and just as we reported in the earnings release is that the sales increase was primarily from North America in the first quarter.

And so, it looks as that we are not going to see that for the balance of the year actually towards the second half of the year, could that growth be negative?

No. Rosemarie. You are absolutely right because we have the two very large plants in China coming on stream in the second -- at the end of the second quarter, so they would be operational in the second half of this year and make a very nice contribution and also Ken indicated that there are shutdowns in North America. So they were adversely impacting North American side of the paper business. So we will see some shift there, but the North American business will still be a growth business for us as a company.

And you said, did I understand properly on the cost of the SYNSIL plant is only $15 million to $20 million?

Yes. That’s what I indicated for the plant that we are constructing there in South Carolina. It's in that range.

You are sitting on quite a bit of cash, so you can do that without adding to your debt level, is that the game plan or do you have other use for the cash?

Well, we have uses for the cash, but I will ask John to address that in terms of, yes we do have a lot of cash and we can make those investments in SYNSIL, although, it's John your part there.

You will see also in the first quarter, Rosemarie, we did increase the rate at which we have been repurchasing our shares as well.

Okay. All right, thanks. I will get back on queue.

Okay. Thank you, Rosemarie.

Our next question comes from Greg Spiegel (phonetic) of Private Advisors (phonetic).

Hey, good morning guys.

Good morning Greg.

I just want to clarify, probably I am sorry, if you mentioned that. I have been jumping on and off the call but just in terms of the outlook for the U.S. business on the paper side, could you just refresh what exactly the outlook is there and then also on the fuel side in the U.S. first?

Okay. I will just give a little overview there and I will ask Ken and Alain to just comment on that. As we look at the paper business -- look at the paper business in the U.S. It is one that is growing slowly for us as we work at the new products that we are introducing, so we will have both growth from new products for example, coating-grade materials and materials going into the groundwood segment. We will tamper that as I indicated the few moments ago with some shutdowns IP, for example, will be shutting down two paper machines, Dopter (phonetic) is shutting down the paper machine. So, some of that growth will be tampered, but overall, we still view North America as an area that will continue to grow for us as a company, but knowing that it's growth would be tampered by somebody's machine shutdowns. In terms of the skill side --

Before you move on, are those shutdowns, those are permanent or temporary?

No, they have been announced as permanent shutdowns. Those are permanent shutdowns. They are taking out uncoated freesheet paper out of the system.

Got you.

So that’s one of the things that they are doing. And on the refractory side of North America, as Alain indicated that you have seen some softening at this point in the North America steel industry. With that brief introduction, I will ask Ken to first address paper and then Alain to address the steel side. Ken?

We still do see good growth in North America, so I don’t want to leave you with the impression that we see poor performance for North America. We do feel that the business -- second half though will be moderate versus the first half as we see a little bit of slow down coming. Combination of that plus the shutdowns before indicated definitely the performance in the second half of the year in North America probably will not be as slow as in the first half. However conversely, for example as will also indicated as I did with a ramp up of the China satellites coming on screen in the second half. Firstly, that will add significant volume to the overall business. So again we see reasonable growth in North America and definitely in the second half. The international growth will be stronger especially with those satellites in China coming on screen. Paul?

Yes on the steel side as I indicated there is a softening of the production and which is induced by the demands. I indicated that for the first three months there was only a growth of 0.3% and the month of March in fact, there was a decline of 3.1%. What was happening there is that the demand softening, a lot of the steel makers have taken some of their furnace down and as a result the pricing has been cut down for the whole industry. For us, [weakness] is that obviously the consumption of refectory units is declining at this time and also, when you realign a furnace, the usage of refractory increases over the life of the furnace. So, when the furnace is realigned the consumption of refractory is minimum at the beginning of the campaign. So, that will have an impact on the -- certainly on the second quarter, but as I indicated for the year, we are still cautiously optimistic that what we are going to see is a small decline of the growth rate, rather than a decline.

: Thank you.

Thank you, Greg.

Again it's "*" "0" if you wish to ask a question today. Sorry, it is "*" "1" if you wish to ask a question today, "*" "1". We will go to Jeff Zekauskas of JP Morgan.

Hi, I just got a few more questions. In the course of your prepared remarks you spoke of technical breakthrough you had made in PCC that lowered your operating costs and allowed you to operate at higher rates. Is this an achievement that applies broadly across your PCC production spectrum or is it apply to a sort of a narrower range of products?

Excellent question Jeff. As you know we [inaudible] research and development and technology and one of the things that we constantly try to do is to improve on manufacturing processes. And one of the things that Ken and his team have done is to look at some of the newer generation products. The newer generation of reform internally, 3G third generation, fourth generation products for example. So, can we produce those products more efficiently and I'm pleased to say that in terms of some of the newer products, the 3G type products that we talk about here internally, that technology, and research team has come up with a new manufacturing process that is more efficient and more productive than the one that we have been using previously. And that is in fact being installed in new satellite plants and as we introduce these products we can replicate that into existent satellite plans. And we're very pleased as you can imagine with that technology breakthrough.

So, I guess then what percentage of your products are 3G products?

While those of the newer ones that are being introduced now, so that's a small segment right now, primarily fulfilling applications at this time and those are the newer ones that are permitting the paper makers to take the amount of filler in a sheet of paper to higher levels. So, this is something that we're installing in a couple of satellite plants now and we hope that it will be a retrofitted as we continue to move those technologies forward into other satellite plants.

Alright. Do you have update on your fiber-filler composite technology?

That is continuing to move forward. We have run trails in just -- within the last month, Ken can speak to this also, within the last couple of months we have run some additional trails. They have been very favorable in terms of increasing the amount of ash and in fact we will be moving that to additional trails as we go forward. But Ken, I'll ask you to elaborate a little bit further on that.

Again Paul especially you covered it well, I mean we are still in the I'll call it the commercial development mode. You know trail work, trail activities still continues to grow well and trails are planned for the second quarter and we're still very hopefully that technology will be deployed later on in the year on a much more substantial basis in terms of continuing trail activity.

I got a question of clarification, was there a comment made that if you were successful in signing another Synsil contract this year you might have to extend your capacity in South Carolina, did one of the members of the management say that or did I miss hear?

No I addressed that Jeff. What I indicated is that we are hopeful that will sign another major Synsil contract, before year-end and it has the potential, the potential to trigger the construction of the another new Synsil facility.

I see, that’s what I thought you said right? There was a comment made about how the rate of steel growth in China should moderate from call it 20% in the first half to 10% in the second half? What’s the reason for that?

Okay at this point I'll ask Alain to address that because obviously that is a key focus for as a Alain.

There are two reasons as I indicated. The first reason is that the base where from which you calculate the growth rate has been increasing dramatically over the past few years. So when you take the 2004 production rate it's already a very high base, so when you increase by an absolute number of tons – mechanically the growth rate goes down. The other reason also that is producing some effects is the restraining from the Chinese authorities in terms of capital investments. As you know about a year ago the Chinese authorities had been restraining the use of capital to expand capacity and create new capacity, and this effect is felt now. So, the combination of both we believe and in fact we are just repeating what we can look at in terms of industry analysis that we expect -- the industry expects that the rate is going to high, but it's still going to be a significant growth.

You know, I guess just a general question about your investing in China. Many companies are very cautious about taking their best technology and moving it to China, whereas it sounds like in both refractory and in PCC, you are not bashful about doing that? Why is that? How do you protect your technology in China?

Okay. That's an excellent question Jeff. That is one that we have struggled with internally as you can well imagine because of the horror stories that you hear about the stealing of technology and the replication of technology. In terms of our satellite PCC facilities, we are in all cases for example the operator of those facilities. We design, we construct and we operate those. So, in that case, we always are the guardian of the technology that we have within those facilities. The operating systems, the computer controls, the programming for those computer controls are all things that as you can imagine we guard very closely.

In terms of the refractory side of the business, there are you know some of the key sensitive components of those products are guarded very closely and I will ask Alain to address that because there are very specific strategies we have to address that. I mean our refractory product maybe magnesia-based, but there are many other ingredients that give it the unique properties that we bring to the marketplace and those unique ingredients are things that of things that we protect very closely, but I will ask Alain to specifically address that. Alain?

Yes first of all one should take note of the fact that the steel industry in China is very sophisticated in the way that have -- they are incrementing and building leading edge technology. So, the technology that is installed, that is in place is leading edge and obviously to do business and we mentioned also that we are targeting the high grades of steel where we believe we provide the best value creation for the costumer. We require also sophisticated technology. So, we believe that this is the way to do the business there.

Having said that, as Paul indicated, there are risks also in terms of the technology and we believe that we have covered the risks. We have trade secrets and we are also -- when [you have people] after a technology in terms of production with full automation, you would think that building a capacity in China where labor cost is low, you wouldn't justify automation but that is the primary [force] why we are so having developing sophisticated manufacturing processes and also investing in technology for production control. That’s also a response to keeping these trade secrets for doing business in China.

So you can see Jeff we have addressed that from both perspectives, both the paper perspective and the MINTEQ perspective, but to be honest only time will tell.

Just I guess the last question for John Sorel. You've got 90 million in cash on the balance sheet which is about I don’t know about 11% of your equity and your cost of equity is sort of low double digits. And you know the return on the cash is I don’t know 2%? Is there anyway -- is that the most efficient use of capital or is that the right amount of cash for [Minerals respect] to have on the balance sheet?

I would like it to be lower myself Jeff. I would like to see more projects to consume the cash and actually leverage the Company a bit. You see the first quarter’s cash consumption for projects was about -- was almost 24 million, I think it was 23.8 million, and we had about a little over 7 million in purchases of shares. So we spent about 35 million in existing programs we had in the first quarter with about $90 million of cash on hand. The question really comes up as to how fast some of these programs will accelerate and what those program investments requirements will be. If can't consume it that way then of course the Board can also consider additional forms to bring the cash down or take on some debt. As you know at one point in our history we did take on a $150 million in debt and made a fairly aggressive stock repurchase program. So there are options, but right now as you have been following us a number of years, you know our Company is really based on investing long-term in some of our key strategies that have been developed for our own internal innovations.

okay. Thank you very much.

Thank you Jeff.

Our next question comes from Rosemarie Morbelli of Ingalls and Snyder.

Following up on Jeff's last question, any thought of increasing dividend?

Good question Rosemarie. Obviously as John indicated, these are discussions that we have both at the management committee level and at the Board level. You know it would be assumptions are made to, to share those discussions, but we do reviewed the dividend policy, we review as John indicated, we share buyback policy and also as we look at potential acquisitions and the funding of some of our internal projects. So as the balance that we look at and we do discuss that at the board level and we will continue to review that as we go forward.

Do you still have CapEx estimated at 100 million for the year?

Yes we do. We see the opportunities to utilize capital for those opportunities, as we continue to grow the company.

And do you care to guess some CapEx in 2006?

I think, that would be premature for me to has it that guess, Rosemarie.

Alright, so now going back on the growth, the impact of the FAS today was 6% on revenues. What was the impact on the operating income or on the earnings to have better yet?

It would have been similar.

At 6% benefit?

In that range, right.

Okay. Could you also give us a feel for this product cost in Germany in other words, how much is going to go away by the third quarter?

I wouldn’t look at it from that prospective, Rosemarie, I would look at that, you know, as Ken Massimine and the team there are moving at forward according to the plan as put in place, that we will see the volume of the Coated-Grade PCC increase as we go from the first quarter to the second quarter to the third and fourth quarter. So we will see a steady ramp up of that production in line with what their plan is for that for 2005.

So is it more a lack of capacity utilization than it is at the low cost that will go away?

I am sorry, I missed that you said, it's a lack of capacity utilization or --

Well, what I mean, is as oppose to some specific expenses which are now incurred but will go away?

Yeah, there is a combination of some start-up costs and capacity utilization as we ramp up, so it's a combination of both at this time.

You want -- or this to product cost ordering at the moment?

I will try to -- has it -- trying to break that apart.

Alright. You had a 19% growth. We talked a lot about the PCC to the paper industry, but you had 19% growth in the Specialty PCC product. Could you give us a feel of which were the strongest areas and whether you are seeing a slowdown in those categories?

Actually, we haven't seen the slowdown, Rosemarie actually we had been very, very pleased with the progress that we are making there, both in the ultrafine PCC that goes into adhesives and sealants, for example and other polymer applications. And also some renewed growth in the healthcare side of the business for the USP products. And both of those have grown very nicely. We are expanding our capacity at the Lyford, UK plant, because of the demand for those products in Europe, so that expansion is underway right now. We will be completing within the third, fourth quarter of this year as we move that forward. We will get the full benefit of that really in 2006 is when the full benefit will come. But we should get some benefit at the later part of 2005, but again there is substantial demand there for the products because we think that we have a very attractive value equation for the sealants for if adhesive polymer manufacturer for the products that we bring forward. So that has grown very nicely in fact, for all three of our manufacturing sides for [plated, for Kevin and Adams]. So we've been very pleased with the progress that we have made on the Specialty side.

You have a feel of to while your sales of products are growing because of the demand and you are picking at market still, then you tell however, whether the industry per se is beginning to slow down not that [inaudible], I think, you since -- you are gaining market share?

We are watching that closely, as we indicated, we expect the economy to close somewhat for the second half of '05 so it's something that we are watching closely both as Ken and Alain have indicated. We think, we will be okay, it will cool but still be growth, so they will still -- the markets will still be growing but at a slower rate. So, between the growth in the market although had a slower rate and our increased market penetration, we think, we should be okay as a company going forward in 2005.

Latin America, if my memory says me right, you said no growth in that region, any particular reason and do you see a trend?

We saw only slow growth in Latin America and that is one of the areas that we are looking at. We have as you know a good paper presence in Latin America and it's one that we are looking at for the MINTEQ side in terms of trying to increase our presence in the steel industry in Latin America. So, right now of the areas that we see for growth it would be a slower growth opportunity for us as a company.

Okay. And then lastly, you didn’t talked about bad debt this quarter. Are you expecting that to pick up in, well as we're starting the second quarter, as the economy slows down are you expecting some of your customers to get into trouble.

No we always have, as any company we make prudent provision for bad debts. We're not expecting any significant change in that, but I’ll ask John to comment. John?

Yeah, Rosemarie I think its bad luck to say that things are going well in the bad debt department. You know the industry, particularly the steel industry has been quite healthy, and our situation has improved there considerably, and we'll have to keep assessing that because the outlook is actually considerably better than it was at the even at the end of the year.

Okay. And then I actually have another question for Alain. Do you think that you can get back to the 10% margin by the fourth quarter?

This is Aubertot

Okay.

We're pushing very hard for that Rosemarie.

Alright, thanks a lot.

Thank you. And, I’ll take one more question if there is one, we've been going at this for quite sometime operator.

Certainly, the next question and final question will from Robert Hardeman (phonetic) of Newbern Associates (phonetic).

Hi, I just had two quick questions, one has to do with whether there will be any special charge related to the International Paper and the [inaudible] paper machine closing that you mentioned and the second one has to do with your development of the fiber composite technology, you suggested that you'll likely broaden the use of it in the second half of this year and I was wondering that, that mean, you would expect to be commercial, I mean is that the right definition or would it just be a broader trial.

Well, I'll take those one at a time there Robert, in terms of the machine shutdowns that we're announced for example by IP. We do not take a special charge for that because we continue to operate the satellite PCC plans at those locations. So, they have shutdown at those locations and inefficient machine of the machines that they have there. So, they have shut those down. In terms of the filler-fiber, we are still certainly in the product development phase of the filter-fiber and as Ken indicated we will be accelerating that in the second half of the 2005.

Well, I guess, I am doing some [inaudible] but at what point do you consider it no longer a trial and national commercial application?

Of course that’s when we finally reach an agreement with the customer that you wanted to then deploy that material on a routine basis at a specific mill. So, you have to get to the point from learning a trial which may only last for several days or possibly a couple of weeks for example until we reach a point where the customer says I would like to use this routinely on a daily basis. I don't expect that will be there in 2005, I think we are making very good progress the customer is very pleased and we working very closely with them on a very strong cooperative basis. But we will run additional trials and accelerate those trials in the second half of 2005 and I think it will lead to commercial success.

Okay, good enough. That’s what I wanted you to say was that whether or not it will be commercial in the second half of this year. And it sounds we are waiting till 2006.

That’s absolutely, that would be a more appropriate timeframe Robert.

Okay. Thanks.

Thank you. And operator, I would like to thank you for your help. As you have heard we had a very strong first quarter despite some head ones and we're expecting a moderating economic environment as we go forward. I think you had heard it both from Ken along that we have I think very focused and very thought out strategies to continue to grow this Company. We expect the second half of this year to be better than the first half in terms of our performance and that we still feel that earnings per diluted share of $2.10 and $3.20 is a very reasonable estimate for 2005. So thank you very much for your participation on the conference call and we look forward to speaking to you again in July. Thank you very much. Take care. Enjoy.

This thus concludes today's conference call. You may disconnect at this time.