Minerals Technologies Inc (MTX) 2005 Q2 法說會逐字稿

Thank you for standing by and welcome to the Minerals Technologies Incorporated's second quarter 2005 earnings conference call. Today's call is being recorded. Now at this time I would like to turn the conference over to the Chairman, President, and Chief Executive Officer, Paul Saueracker. Mr. Saueracker, please go ahead.

Thank you operator. Good morning, and welcome to the Minerals Technologies second quarter 2005 analyst conference call. As you know, on June 15, we announced that second quarter earnings would be lower than initially anticipated. The major factors affecting our second quarter, and that will partially carry over into our third quarter performance, are all temporary. The labor actions at paper mills in Finland, the slower than expected startup of two large-scale satellite PCC facilities in China, and the ramp up of our coating PCC facility in Germany. In fact, the labor situation in Finland has been resolved. Paper production is resuming and we're now operating at normal levels.

The new large-scale satellite facilities are well along toward reaching planned production of levels, and our coating program in Europe continues to make progress and demand is increasing from key customers. MTI's worldwide sales for the second quarter of $244.7 million, or 7% above last year's second quarter sales. However, income from operations of $20.8 million was down 9% from prior year.

In terms of net income, MTI developed $13.1 million equivalent to $0.63 per diluted share, down 14% from the earnings reported in the second quarter of 2004. Our underlying businesses and strategies are delivering. Unfortunately, it was our PCC business that bore the brunt of the transitory negatives. While PCC sales for the second quarter are up 4%, or $4.5 million, sales would have been up by an additional $5 million for the quarter except for the Finnish labor situation.

Furthermore, although we are facing a slowing North American and European steel industry, the refractory segment recorded a $10 million, or 13% increase in net sales for the second quarter. While the U.S. economy continued to expand, the rate of expansion has moderated when compared to the 2004 average. U.S. GDP growth of 3.1% estimated for the second quarter is modest compared to the 4.4 rate of expansion seen in 2004.

Further, the rate of expansion is highly selective by industry with overall paper and steel production being a flat or down, while housing and construction materials continued strong. In addition to the temporary factors I've already mentioned, MTI, as well as many other companies, continues to be adversely reacted by cost escalations in raw materials and energy. These factors will be addressed in the individual business segment discussions. Following my introduction, Ken Massimine, Senior Vice President and Managing Director of our paper PCC business, will provide more detail on the issues and programs related to our PCC product area; Alain Bouruet-Aubertot, Senior Vice President and Managing Director of MINTEQ, will report on of the refractory segment of our business; and John Sorel, our Senior Vice President of Finance and Chief Financial Officer, will provide provide a brief financial summary and some detail on the factors that affected MTI's financial results.

By way of summary, a 7% increase in MTI's total second quarter net sales was accompanied by a 10% increase in cost of sales, resulting in a 5% decrease in production margin. Even with the 1% decrease in expenses, this translated to an 9% decrease in operating income and a 13% decrease in net income. It was, indeed, a tough quarter. Following John Sorel's presentation, I will conclude with a few remarks and open the floor for questions.

Before proceeding further, I need to remind you that on page 6 of our 2004 10-K, we list the various factors and conditions that may affect future results. Any statement related to future performance by me, or other members of Management, are subject to these cautionary remarks and conditions. Despite the temporary setbacks encountered in the second quarter, Management decided to vigorously proceed with its programs and strategies to seize opportunities that can ensure our long-term growth and revenue income, while serving materials industries that are generally not expanding rapidly. MTI will do this by focusing on geographic markets with high growth potential, by continuing our investment in upgrading our manufacturing processes and automation to reduce costs, and by focusing on new product innovations, such as filler/fiber composite materials in paper, and SYNSIL for glass, programs that can significantly expand the scope of our business.

While I will not dwell on the details affecting PCC and refractories, which will be explained by Ken and Alain, I would like to mention some highlights. Demand for our paper PCC continues to grow. In North America, sales were up 8%, despite flat total paper production. While the labor dispute in Finland is now officially over, production levels at our PCC customers' paper mills did not return to normal operations until mid-July. Our specialty PCC sales increased 7% due to strong demand by both the construction and consumer product segments.

Process mineral sales were up only 3%, partially due to capacity restraints that limited our participation in the continuing California housing market boom. In anticipation of this demand, a major expansion of our Lucerne Valley plant is now in the startup phase. Our SYNSIL program continues to move forward. The first large-scale commercial plant, currently under construction in Chester, South Carolina, will initially supply our key regional customer. We have contacted other customers located near the plant and have begun discussions about qualifying SYNSIL and their processes.

Discussions with a potential customer, which would trigger the construction of a second commercial SYNSIL facility in a different geographic area, are progressing. We believe that an agreement that would lead to the construction of a second facility could occur before the end of year. Currently, however, the Woodville, Ohio customer sampling facility is sold out, limiting the extent to which new customers can be developed until the South Carolina commercial facility becomes operational. With regard to the refractory segment, net sales were up 13% and operating income was up 27%. While this looks like a smooth ride, based on straight forward positive leveraging, a lot of turbulence lies beneath the surface. North American and Western European steel production is down. That's not good.

Production in China continues to rise, that's good, with our new 100,000-ton [inaudible] refractories plant coming on stream at the end of the year. North American and [inaudible] steel production is down markedly. That's not good. Many of our most profitable products are sold into this segment. Electric furnace production and continuous casting is up sharply. That's good, causing a surge in demand for our metallurgical wire products. As you can see, steel is an ever turbulent market, which I will let Alain address. I will now ask Ken to provide us with the details related to our PCC business. Ken?

Thank you, Paul. Let me begin by providing a summary of current market conditions followed by highlights of our business results for the second quarter, as well as some expectations for the full year. In general the outlook for the global paper industry is expected to remain weak for the remainder of this year. While production of mechanical papers, especially coated mechanical, are anticipated to be strong in order to restock ongoing inventories caused by the recently resolved Finnish labor dispute, demand for other paper grades will remain somewhat lackluster as a result of the general slowdown of world GDP growth.

Looking at various regions of the world, in the United States, despite a reasonable economic environment during the second quarter, total paper shipments in the U.S. paper industry slipped 3.4%, 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 supercalendared, or SC, papers, which have been strong all year. These papers are increasingly being used for magazines and catalogs. Operating rates for uncoated papers in the U.S. are now near 98%. Production of uncoated pre-sheet (ph) papers, our most important market segment, has been steadily declining for the past few quarters. We expect soft market conditions to persist through the remainder of this year and into the next.

This continues to be the result of a weak rebound in business demand, high imports, and the continued growth of competitive electronic communications. Although, overall North American paper production is expected to be slightly more robust in the second half versus the first due to seasonal printing requirements, total paper shipments this year are forecast to be less than last year. As a consequence, the North American paper industry continues to retrench as several more paper machine shutdowns were announced, including International Paper's recent restructuring announcement. Internationally, Western European economies continue to be bogged down by weak domestic demand, high energy prices, and non-responsive governments. As a result, domestic paper consumption continued to contract during the second quarter and the first half of the year. For the second half of the year, paper production is expected to be about 2% better than the first due to inventory restocking for domestic and export markets affected by the Finnish labor dispute.

For the year as a whole, overall paper production looks to be flat while production of mechanical papers, as previously mentioned, should see continued improvement as part of the inventory rebuilding. The economies of the Asian region continue to exhibit strong growth this year and paper production should see an annual increase of 4%. However, these economies are expected to slow later this year and into next as business investment and domestic demand respond to governmental pressures, high energy prices, and slowing export requirements. MTI now has seven PCC satellite plants in Asia, including our two newest satellites in Zhenjiang and Suzhou, China. Unfortunately, during the second quarter, we experienced startup difficulties at these two satellites. These difficulties were the direct result of installing new PCC process technology and our underestimating the complexities required to commercialize this unique technology on such a large scale.

I am pleased to report, however, that both plants will become fully operational and contributing, as expected, to sales revenue and profitability during the current quarter. More importantly, our new PCC products, such as Ultra Bulk (ph) II, and Opacarb A 40 PCC are providing the customer with the unique benefits these advanced products bring to the paper maker. MTI's total PCC sales for both paper and non-paper applications in the second quarter increased 4% over last year's second quarter, from approximately $119 million to $123 million. In particular, paper PCC sales increased 3% while PCC unit volume increased slightly. This muted second quarter result is in a large merger the direct consequence of the two-month long paper industry labor dispute in Finland. Our overall sales in that country were affected by the paper industry shutdown, which caused a negative growth in our European sales region.

Obviously, we're very pleased that the Finnish paper dispute has been settled and that normal paper production has resumed. The protracted product qualification phase in the commercial startup of our Walsum merchant coating PCC facility in Germany also contributed to the weak second quarter European results. In the second half of this year, however, Walsum is expecting to improve its performance versus the first half, as our PCC products are now fully qualified and are currently being utilized on a routine basis by select key customers. I am pleased with our sales performance in our other marketing regions. On a quarterly year-over-year basis our Asian and, especially, North America regions showed positive comparisons. This success continues to validate our current strategic initiatives, and demonstrates the value that our products bring to our customers.

North America, in particular, benefited from increased PCC penetration in both build and coated papers. Also aiding our strong sales growth was the restart of our PCC satellite plant in Millinocket Maine. Total PCC operating income decreased 27% in the second quarter compared to the same period a year ago due to the aforementioned labor dispute in Finland, higher than anticipated startup expenses at the new satellites in China, and continued ramp up costs at Walsum. I am encouraged by increased customer interest, especially in coated papers, which is occurring in all regions of the world. As a consequence, overall mill trial activities and overall demand for Opacarb PCC-coated products continues to exceed our expectations. Opacarb PCC is setting the industry standard for paper coating minerals.

One such note is in Australia where we are working very closely with the development group of Swanbank Paper. They propose to build a greenfield facility to produce coated papers, primarily for the Austrian market place. Opacarb PCC from MTI is the selected product of choice, based on its unique performance characteristics. For the balance of the year, operating income, while improving, will still be under pressure, as we incur escalating raw material and incoming transportation costs due to significant increases in energy and general commodity chemical demand. We will continue to focus our R&D activities on developing unique technologies for both coating and filling products.

As you know, we have a joint development project with International Paper to develop novel filler/fiber composite materials. At this point the program continues to progress as planned. Now I will briefly turn our attention to specialty PCC for non-paper applications. Our specialty PCC group just completed another quarter of favorable performance, with sales increasing 7% continuing the business rebound started in the fall of last year. Going forward, we expect continued sales improvement in our specialty PCC segment based on our initiatives in automotive and consumer markets. In conclusion, while I am not pleased with our financial performance this quarter, I am comfortable knowing we have addressed the problems contributing to our sales and financial shortfalls. We remain confident that our focused strategic business initiatives will continue to generate a solid framework for future advances in both sales and earnings. Now I will turn the microphone over to Alain, who will review the refractory segment business performance.

Thank you, Ken. One thing I was promised when I joined Minerals Technologies, things wouldn't be dull. And indeed the business with North American steel as its [inaudible] market must deal with constant change. The refractory segment faced an increasingly struggle [inaudible] in the second quarter of 2005 as refraction (ph) production outside of China slowed and actually declined in Europe and North America. Despite the slowdown, our total net sales increased 13%, reaching $84 million in the second quarter, exceeding the previous second quarter record set in 2004. Increases in energy in raw material costs continued to adversely impact our profit margin. However, this was largely offset the operating income level by a decrease in bad debt expenses. Overall, we have seen what appears to be the beginning of a deceleration in our largest market, still, in regions other than China with declines in production observed in our two largest regional markets, North America and Europe.

[Inaudible] production reported for the second quarter was reported up 8.6% versus the second quarter of 2004. In terms of this nice environment, there is the rest of the world, and there is China. Looking at the world as a whole continues to give a [inaudible] impression. In the second quarter of 2005, China, which now accounts for 31% of the world's [inaudible] production, up from 29% in the first quarter, grew an astounding 2.5% over second quarter 2004, which when averaged with [inaudible] of the rest of the world, yields a somewhat interesting 8.6% average global growth rate. [Inaudible] no one grew at the average. Despite forecasts of a slowdown in China, as a result of government policies, China accounted for 97% of the world's increase in crude steel production in the second quarter.

In North America, our largest market, second quarter 2005 steel production was down 3.6%, with June reported down 8.4%. What is of most concern is the decrease steel capacity utilization reported by the American [inaudible] and the Steel Institute. This figure, which run consistently over 90% last year, dropped to less than 80% in the latter part of June and averaged 86% in the second quarter versus 90% for the same period in 2004. This has negatively impacted our financial performance, as high capacity steel utilization favors the use of our high durability products and rapid installation systems, allowing steel industry customers to minimize downtime and maximize output. The EU 25 steel refraction (ph) was down 3% in the second quarter of 2005, with June down 6.9% from the prior year, mirroring the increasingly unfavorable trend in observed North America. Asia, excluding China, reported crude steel production up 3.6%. As for China, a steel production surge has [inaudible] in 2004 ramped up and reached 346 million tons for seasonally adjusted annual rate in the second quarter compared to domestic demand of 300 million tons. As we indicated in the last conference call, this rate increase will not continue. This is because the 2004 base ramped up dramatically as 2004 progressed, lowering growth when compared to our increasingly larger base.

Moreover, due to government policies restraining capital investment and a potential elimination of steel export credits in conformance with WTO policies, 2005 third quarter production for China is expected to decrease 6% from the second quarter rate and drop a further 6% in the fourth quarter, such that the year-over-year increase is only 8%[ INAUDIBLE.] In addition to a very pronounced contrast and regional demand patterns, dramatic shifts in raw material costs have changed the economic balance between BOF shops and electric [ INAUDIBLE ] shops. In November 2004, metal scrap prices in excess of $400 per ton made electric furnace shops[ INAUDIBLE ] with integrated shops. Today, metal scrap is on the order of $170 per ton and the electric furnace shops are more cost competitive than BOF [ INAUDIBLE ] since the 2005 cost of iron ore has increased by over 50%. We are particularly sensitive to a slowdown in BOF production, as this is the area that exposes refractories to the harshest conditions and where the superior durability of our products justifies a premium price.

In light of a slowing second quarter business environment affecting the segment's largest market, steel, the 13% growth in net sales is not worth it. Strategies to achieve growth in what is traditionally seen as a low-growth market are working well. Despite the decline in steel production in North America, North American net sales were up to 2% but European sales were up 29%. Asian sales were up 19%, and Latin American sales up 59%. With the softening of steel demand in North America and Europe, shutdowns for rebuilds and annual maintenance were issued, which [inaudible] the demand for maintenance refractories.

Sales of refractory products and equipment assistance [inaudible] in Europe and North America for the second quarter, but we're a significant driver of increased sales performance in Latin America and Asia.

In contrast, our sales of metallurgical wire products increased 80% as a result of a surge in demand from the electric furnace segment and a continued [inaudible] caster shops to maximize casting yields and rates. Coupled with the largest success [inaudible] to pass through cost increases associated with a high market price of [inaudible] raw materials and high energy costs. The rise of China as a dominant force in world steel production continues to confirm the validity of our strategy to move with the market and redeploy our resources to where growth in steel is occurring. The previously announced 100,000 [inaudible] refractory plant in Suzhou, China will come in stream in the fourth quarter of 2005 allowing as to combine leading edge technology, low-cost Chinese raw materials, and improved logistics to gain a meaningful share in this market.

The most significant headwind facing this segment continues to be the cost escalation raw materials. This is the case not only for magnesium, our primary raw material, but also for all the raw materials such as refractory-grade bauxite and [ INAUDIBLE ] which costs were much higher than in 2004. Compared to second quarter last year our 2005 second quarter magnesium costs increased on average over 20%. While some of this was recovered in pricing, our production cost ratio was driven upwards in the second quarter. At this point raw material costs appear to have, at least temporarily, stabilized. As I have mentioned in earlier conference calls, we have initiated a number of programs to obtain long-term raw material cost reductions from alternate sources, broadening our sourcing of critical raw materials and optimizing our product formulations.

While these efforts are progressing well, it will take time to provide significant benefits. Looking forward, we see further softening in the third quarter, followed by a recovery in the fourth quarter. Overall, for the rest of the year, we expect sales and income growth to continue but at a slower rate than in the first half. John?

Thank you, Alain. You have just heard the description of the Company's business environment, the highlights of the operating conditions, and a summary of development activities during the second 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 over the quarter of $0.63, a decline of 14% from the prior year. Net sales for the quarter were $244.7 million, an increase of $15 million, or 7% compared to prior year, despite the shutdown of certain operations in Finland. Overall, foreign exchange had a favorable effect of about $4.9 million, representing about 2 percentage points of sales growth. Both segments continue to deliver good topline growth. Sales in the specialty minerals segment were $160.7 million, a $5.6 million increase, or 4% growth including the benefit of about 2 points of growth from a favorable foreign exchange rate.

Sales of PCC increased 4% to $122.9 million from 118.5 million last year, despite the loss of approximately $5 million due to the Finnish labor action that Ken referred to. Excluding the labor action, both the paper PCC and specialty PCC product lines experienced strong demand in all regions, except Latin America. Sales in the processed minerals product line increased 3%, to $37.8 million from 36.6 million. Demand continues to be strong, especially for our coke products and the construction-related plastics and healthcare industries. Refractory segment sales increased $10 million dollars to 84.0 million, 13% above the 74.2 million recorded in the prior year, including approximately $2 million, or 3 percentage points of growth related to the favorable impact of foreign exchange.

Metallurgical product sales were particularly strong, increasing by 80%. This exceptional performance was attributable to a combination of price increases related to the substantial escalation in the price of raw materials, and strong volume growth in all regions. MTI's cost of goods sold grew 10% which caused unfavorable leveraging effect on sales, and resulted in a decrease in gross margin of 5%. Specialty Minerals margin growth was affected primarily by the Finnish labor action, the initial startup of expenses associated with the new PCC facilities in China, and ramp up activities related to a major new PCC facility in Walsum, Germany. Collectively, these three factors had an adverse impact on production margin of approximately $5 million.

In addition, both segments continued to be affected by higher raw material and energy costs. Total marketing and administrative expenses for the quarter decreased about 1%. These expenses include our planned increases in marketing expenses to support our business development efforts worldwide, and continuing higher legal costs to protect our intellectual property, while we're offset by reduction in bad debt expense of 1.9 million compared to last year. Our overall allowance for doubtful accounts was reduced from $7.5 million at the end of the first quarter to $6.6 million at the end of the second quarter as a result of a reduction in the number of outstanding disputed balances in certain international exposures.

The Company's research and develop expenses for the quarter declined 1% compared to last year. You will recall that we sharply increased the commitment level in the second quarter of last year to support major new product initiatives in both segments. In the second quarter of the prior year, the Company recorded a charge of $400,000 for a restructuring program initiated at the end of 2003. There were no associated charges this year as the program was essentially completed in 2004. MTI's second quarter 2005 income from operations decreased 9%, to $20.8 million from 22.9 million in the prior year. Excluding charges for restructuring and asset impairment costs taken in 2004, operating income decreased 11%. For the quarter, the operating ratio was 8.5% of sales. Specialty Mineral's income from operations declined 24%, to $12.2 million and was only 7.6% of sales.

Unfavorable leveraging to operating income for this segment was primarily due to the three factors I mentioned previously, the labor dispute in Finland, the startup expenses in China, and the ramp up activities in Walsum. Excluding these items, operating income would have been approximately 10.6% of sales. Refractory segment operating income increased 27%, to $8.6 million, and was 10.3% of sales. The strong improvement in operating income was primarily attributable to the growth in the metallurgical product line, and the lower provision for bad debt. Non-operating deductions increased $0.5 million, due primarily to foreign exchange losses during the second quarter.

The overall effective tax rate for the quarter remained at 31.2% compared to 29.7% in the second quarter of the prior year. The current rate is based on our forecast for the full year and includes the one-time effect of repatriating cash under the American Jobs Creation Act of 2004. Net income was $13.1 million, a decrease of 13% ,and diluted earnings per share for the quarter were $0.63, a decrease of 14%. To summarize the income statement for the quarter, sales increased 7%, while gross margin decreased 5% from the prior year. Total expenses declined 1% resulting in an operating income decline of 9%, and net decline of 13%. Excluding the three transitory factors in the PCC product line that we have discussed today, the company sales would have grown by 9% and would have recorded a growth in operating income of about 12%.

Our balance sheet remains very strong, our debt to capital ratio is about 16.7%, cash generated from operations was only about 30 million and was affected by a seasonal increase in accounts receivable, and higher raw material inventory costs. To date, we have invested about $54 million in capital additions worldwide. The depreciation and amortization expense totaled approximately 36 million in the half. During the second quarter, we repurchased 368,200 shares for Treasury at an average price of $61.25 per share, for total expenditure of $22.6 million. Year-to-date, we have now purchased 483,900 shares at an average price of $61.50 for a total of $29.8 million. 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, MTI faced a difficult second quarter in 2005. Fortunately, the most significant issues adversely affecting our business were transitory. And although some of them will persist into the third quarter, they do not represent long-term issues. In fact, they represent new manufacturing capacity and product capability that will ensure the future growth of MTI. Our strategy of reallocating resources into growth regions is well into the process of being implemented, two satellite PCC plants in China, and a major refractory plant position MTI to grow with the world's largest and fastest growing materials market. In addition, the Walsum coating-grade PCC plant in Germany will allow us to take advantage of this high growth segment of the paper industry. Given the circumstances as they have unfolded in 2005, an earnings estimate on the order of $2.77 to $2.82 diluted share for the full year would not be unreasonable. Operator, we're now ready for the first question.

[ OPERATOR INSTRUCTIONS ] We'll first go to Jeff Zekauskas with JP Morgan.

Hi, a good morning

Good morning Jeff.

Maybe the first place to start is, it sounds as though of that 5 million hit in operating income you had, the largest pieces are in China and in Germany? And it sounds as though those issues are not immediately resolved. So is one of the reasons for your weak earnings outlook for the year, those incremental cost that will be around in the third quarter and then maybe the problems get fixed by the fourth? Is that the way to think of the timing?

Well, Jeff, let me just clarify first in terms of the $5 million that John indicated, if you just wanted to put it into a sequence of that impact, it would be the Finnish strike was the first factor, followed by China and then followed by the ramp up of the Walsum facility in Germany. So that would be the sequence of the impact on our operating income for the second quarter. As you know, the strike in Finland is resolved, the labor situation there, between the employees and the employers, so that has been resolved. But we did not get back into really full production until the latter part of July for our facilities so there is some impact there in the third quarter. In China, we are moving that forward, as Ken indicated in his prepared remarks, and we should be fully operational by the latter part of the third quarter. So we see some impact their continuing in the first part of the third quarter, but should be fully operational by the latter part of the third quarter. In Germany, we have made a very nice improvement if you go from the first quarter to the second quarter, in terms of coating-grade PCC sales, and we see a very nice step improvement in the third quarter versus the second quarter, and as Ken and his team are working with the customers, we anticipate a very nice improvement in the fourth quarter versus the third quarter, in terms of total PCC sales. So as we look at it and as we look at the forecast for the full year, knowing that we had a very difficult second quarter [ INAUDIBLE ] transitory issues will carry over into the third quarter, we see some weakness there, as you would imagine, and then that improvement and lessening of that as we go to the third quarter into the fourth quarter. As we look at in total, that's where we have, the Management team has looked at the [inaudible] expectations for full-year 2005 we're in that $2.77 to $2.82 range.

I guess I'm a little puzzled by you saying that the Finnish strike was the largest contributor because I thought you also said the revenue impact in Finland was $5 million. So assuming your incremental margins are 20%, that's only a million dollar hit, which would mean that there's 4 million from the other two places, even if the incremental margins were 33%, then what that would mean was that it was an equal reduction. So I'm puzzled as to why Finland is largest?

And I'll start there and I'll ask John to comment on it, Jeff. Obviously, when we shut down a satellite plant due to a labor dispute, we keep our employees their, so we have a lot of carrying costs, irrespective of the sales that were actually achieving in the the marketplace. So it really has a very distorted impact there in terms of sales and the financial impact on this business, but I'll ask John to further comment on that

I think that's a good summary, Paul, and I think that's an important question, Jeff, to keep in mind. We not only lost the margin and so whatever you estimate for the margin is the margin fees, but you have all of the ongoing fixed cost that range from depreciation to taxes to labor costs and so on. It's a much bigger hit than you would normally think of relating to the sales -- the loss of sales.

If I can just ask one last question, so when you think of your opportunity in paper PCC, and you think of your -- in coatings-grade PCC, and you think of your opportunity in SYNSIL, and you think of the net present value of the cash flows, or the free cash flows, that you might get from these opportunities over, say, the next three years, which one is larger? And by what magnitude?

That would be a difficult question to answer, Jeff.

That's okay. [LAUGHTER.]

I'm sure that is okay. You're absolutely correct, they are significant growth opportunities that this Company is pursuing, and as we go from 2005 to 2006 and 2007 and beyond, we fully expect that both SYNSIL and coating-grade PCC will be major contributors of that growth. I really don't want to try to clarify that further than that at this point, but both of those programs will be significant contributors to the growth in both top line and bottom-line of this Company.

I just as the last question, is it the metallurgical wire is just very, very profitable and so that's what's holding up the refractories business in the difficult conditions that are out there?

Well, the metallurgical wire business is a profitable business for this Company, and certainly, as you saw, the very rapid growth in those sales. Part of the strategy that Alain has as he looks at the opportunities within the refractory industry. We have, as you know, been primarily a supplier of refractories into the BOF segment of that industry, and one of the strategies that Alain has is to expand our opportunities in the refractory industry not only into the EAF segment, for example, molten metal handling, continuous casting, other opportunities, but into other refractory opportunities, as well. But I'll ask Alain to address that also, in terms of the metallurgical wire segment, if I can say that. Alain?

I won't comment beyond the sales, but the drivers for the growth in sales, [inaudible] the first one is the significant price increases that we've got to cover a part, a large part, not completely, but a large part of the very significant cost increases we've had. Both of our products are made of steel cladding and this is much easier for the customer to understand when there is an increase in cost when you tell him that the price of steel is going up because he knows this market very well. So we are able to pass through a large part of the price increase which has been significant. So in terms of growth of sales, it is a major driver. The other drivers are the fact that, as it was indicated, the electric [inaudible] furnace disproportionately run at a much higher rate the BOF and that favored also the consumption of the metallurgical wire products for this part of the steel segment. The third driver is the fact that we're growing this business in North America, South America, Europe, and also Asia, so we have growth opportunities so it is also reflected into the [inaudible]. so it's a very good performance for us, with the factors so that part of it is related to the recovery, partial recovery of the price increases we've had.

Thank you very much

Our next question will come from Michael Judd, Greenwich Consultants

Yes, thanks for taking my question, you've obviously had some time to go through IP's announcement and, can you just give us a read, realizing, of course, that the changes at IP are occurring over a period of time, but what type of impact could that have on your place?

Thank you, Mike. Yes, IP made that announcement the early part of last week. We are reviewing that but at this point it really is premature to try to assess what the impact will be. There are a lot of moving parts, if you remember that announcement, a lot of issues that they themselves will not make decisions on into 2006, for example, so it's difficult for us to really say what that impact would be on the Company. We have, as Ken indicated, a very strong relationship with International Paper, continue to work with them well on the filler/fiber composite material, and expect those relationships to continue. But it is difficult, at this point, to really tell you what that impact would be knowing that they themselves are still evaluating how it will unfold over the next 12 to 18 months.

Fair enough. I appreciate your comments, the brief update on the filler/fiber composites. It seems like progress is being made there, but I'm just wondering if you could provide some more detail and color there so that we can, kind of, understand the progress that's being made. Are we still -- I know that you've run some machine tests and you've tested the paper, and copy machines and things like that, but when do you think we would be moving closer to either more extensive trials, or potentially commercialization?

Obviously, it is a developmental program, Mike, that we're working very closely with IP on. I don't want to get into that type of level of detail. It's still early in the program. We are, in fact, meeting with them to, in fact, plan for additional evaluations in other work that we're doing, so I say it's a very close cooperative effort between the two companies. It is moving forward, but it would be really presumptuous of me to try to clarify it more than that at this point

Would you say now that IP, obviously, keeping the uncoated free sheet business as part of their core business because it's one of their more profitable businesses with the higher margins, would you say that there is more, or less, of an impetus to move forward with those trials now that they decided to basically split up the Company?

It would be hard for me to make a judgment on that, Mike. You're absolutely correct, they are a major factor in uncoated free sheet from their announcement that they put out, they will continue to be a major factor in uncoated free sheet, and this technology that we're working on is very much applicable to that segment. So knowing those as the facts, I would hope that they will continue to be very much interested in moving that technology forward.

Okay, I don't mean to beat a dead horse here, but it just seems that given the reasons for their restructuring, it just seems to me that this would be an area that would be very, very high priority. But we really don't hear anything from IP about this particular project and we really haven't had any further details from you on it. So it's just kind of hard for many of us to kind of appreciate any kind of timing issues.

That I understand, Mike, but I will just tell you that very senior executives are aware of it.

Okay, thank you

Our next question will come from Ray Kramer with First Analysis.

Hey, good morning guys.

Good morning Ray

Couple of little questions for you, I guess, to start out with. On Walsum, can you give us any sense of what your utilization rate is there, and any projections of how that will ramp up in the back half of the year?

Certainly, I don't want to give any sense of utilization rate, obviously, for competitive reasons, and many other reasons. We are, in fact, moving that forward as, Ken indicated in his comments. The tonnage that we're producing on a quarterly basis is ramping up very nicely as we move that forward. It ramped up very nicely from the first quarter to the second quarter. We see that going from second to the third quarter, and as we work with those key customers in that area, in that region, we expect that to continue into the fourth quarter and certainly into 2006. So we're pleased with that. Would I have liked Ken and his team to move it more quickly? The answer is, of course, I would have liked him to move it more quickly, but are we moving it forward? The answer is, yes

Okay, sort of staying in the PCC vein for a minute there, you're clearly stated strategy to focus on areas where you're seeing strong growth, can you bring us up to date on, maybe, any of your longer-term plans in China? Any insight into if other new satellite plants are on the horizon there, or just sort of take us through a little more color on your strategy?

In terms of the opportunities that we're pursuing, as Ken indicated in his comments, we see the international paper market as one market that we will pursue as a Company, whether it's China, or Asia, in general for example, Latin America, these are areas that we see significant growth in paper going forward. We are pursuing opportunities in those regions, whether it's China, whether its Australia for example, there are a number of opportunities that Ken and his team are pursuing at this time. We expect those to lead to additional requirements, more precipitated calcium carbonate, and are, in fact, part of the long-term strategy and expectations that we have for this Company

Is it reasonable to assume that we might see some more plants coming on China in the next couple of years?

I would expect that the answer is, yes. Knowing what discussions are taking place at various areas in China, the answer is yes, we expect to continue to be successful in our efforts in China

Okay, great, and, then, finally, on the refractory side, I know that you probably got some operating margin benefits from mix, but you've got a double-digit target there a little earlier. Is that a sustainable margin rate, and can you bring it up much from there?

Well, you know long-term, and as we look at the operating ratios, we've indicated that as a Company, our goal is to get into first, the low-digit operating ratios and to continue to build there. We were very pleased that Alain and his team moved into the plus 10% here in the second quarter. As Alain indicated, he has challenges in the third quarter, with some seasonality that he's looking at. But we are, goals that we have are to improve the ratios of this Company.

So is it safe to assume it should probably stay above 10 for the rest of the year?

One of the factors that improved the performance, as was explained by both Alain and John, was the impact of the bad debt accrual in the second quarter, that certainly helped his performance. We're comfortable that as Alain and his team continue to improve the performance of the metallurgical and the refractory business that they will continue to improve their performance

Okay, great, thanks a lot

[ OPERATOR INSTRUCTIONS ] We'll next go to Steve Wilson with LaPetas Asset Management.

Good morning, gentlemen.

Good morning, Steve.

Couple of questions. One, can we talk about where Walsum is in terms of ramping up to break even, and how that looks? Is that '05, as we ramp up quarter by quarter, or is that something that we start to see only in '06?

It still is going to take a few quarters, in my mind, to get into a more profitable mode at the Walsum facility. We are making nice progress, in terms of producing additional tonnages of PCC on a quarter-over-quarter basis, but I would expect that it will take us into probably 2006 before we have that into a financial performance that we're comfortable with.

Okay, I just want to make sure, you're saying financial performance that you're comfortable with, and I'm asking -- black ink or red ink?

I would expect it would have to be black ink.

That's what I'm saying, so you're saying minimal acceptable is black ink, I assume, as opposed to --

That's correct. That's our goal as a Company, Steve.

Right. Okay. R&D was down a little bit. Is that a reflection of the SYNSIL is well past a lot of this development and trial expense, or is that unrelated to that?

No that's somewhat unrelated to that. As John indicated in his comments, we had ramped up the R&D spending in the second quarter of 2004 to continue to fund some of our key initiatives that we had in the business. One of the other things that did reduce our R&D expenses in the second quarter here was, in fact, the labor situation in Finland because some of our trials the we had planned there were, in fact, delayed because of that labor situation. So there were a number of factors that caused that decline. But that's not what I would expect for the full year.

Okay. And just one last question in terms of the SYNSIL facility that your building in South Carolina, can you just talk about how that's coming along, and when that's going to be able to produce material?

Sure. That facility is well under construction at this time. In fact, we visited that facility, the Management team, only several days ago as part of a review that we were doing. That facility, construction will be completed by the end of the year, and we expect to be shipping commercially by the early part of 2006.

Any chance I can get you to pin that down, first quarter, second quarter?

I'm talking, probably, January or February. We absolutely, as I indicated in my comments, our customer sampling facility in Ohio is sold out. So we need to push that facility so that we can get additional capacity to run extensive trials beyond what we're doing right now. So that's why we're looking in that January, February timeframe to have commercial shipments.

Is that a scenario akin to Walsum where it takes several quarters for that to ramp up to through-put level that allows you to produce profits?

Well, any major merchant facility, whether it's PCC our SYNSIL, there is always a ramp up time, Steve, as you would imagine. You don't operate at a, this is a 200,000-ton SYNSIL facility and will not be operating at a 200,000-ton rate in the first quarter of 2006. So there is a ramp up schedule associated with that project, and what the SYNSIL Management team is forecasting for us. So, as with any merchant facility, whether it's Walsum, or in this case, SYNSIL in South Carolina, there is very much a ramp up schedule associated with that facility.

So to put a little differently, it will take at least a year from when Walsum came on line to when Walsum is going to be profitable? Maybe closer to a year-and-a-half?

I don't want to get into specific terms or specific timelines, for example, but there is a time period that you would ramp up to first get to a break-even point, and then to a very profitable point. So there is some timeline there, and a ramp up schedule that does that, one that we, as a Company, are comfortable with.

Okay, and I'm just trying to get comfortable with that, as well, [LAUGHTER]

I understand that, Steve. I can't be more specific than that. In other words, we understand, we're very comfortable with the SYNSIL program. I'll tell you, personally, that I had an opportunity to meet with some of the senior executives of one of the glass companies, and they are very much excited about the SYNSIL opportunities, and what it can bring to them as a Company. So we think SYNSIL will be a very attractive opportunity for this Company going forward. As I indicated in my prepared remarks, we believe that we have the opportunity to announce the construction of a second commercial SYNSIL facility by the end of this year. So we're very optimistic about SYNSIL, the value that it creates for the glass industry, and, certainly, a very significant growth opportunity for Minerals Technologies.

One last question, Paul, and that is, in terms of SYNSIL, the customers that will be taking the South Carolina material, are they now being sourced on a daily basis from Ohio? Or are they just not using it in their process until it's fully available?

No, the key customer for the SYNSIL plant is routinely using SYNSIL that is coming from our sampling facility in Ohio. So they are routinely using it on a daily basis, and are waiting, obviously, with the additional capacity that we'll have from the new SYNSIL merchant facility in South Carolina to significantly ramp up their consumption of SYNSIL

Great, thanks a lot.

Thank you, Steve.

Our next question comes from Robert Hardiman (ph)with Newburn (ph) and Associates

I have a question regarding one of John Sorel's' comments on the repatriation of foreign earnings under this jobs act, did you say that you have included that in your tax accrual for the second quarter? Most companies have been saying that they're studying that and won't make a decision until the third or fourth quarters. And I'm wondering how much money is involved here on a full-year basis, if you do decide to repatriate?

Robert, thank you for that. John, if you would answer that question for Robert?

In our first quarter 10-Q, we did say that even though we're still studying it that we had already made a decision on a part of it, about $3 million worth. Since that time we've made a decision on what we think is the rest for the rest of the year, and that will be included in our 10-Q, a breakdown will be in our 10-Q. But, basically, the tax rate that we're using is our forecast and it includes what we believe will be the full forecast for the year.

And so how much money is involved in terms of the total repatriation? Is it just a little bit, 3 million, plus 3 million more? Something like that? It's not a huge number?

It was 3 million in the first quarter. We're adding another 15.6 million now, so the total will be 18.6, with the tax impact of about 1.3 million.

Okay, good.

Our next question comes from Rosemarie Morbelli with Ingalls & Snyder.

Good morning, all.

Good morning, Rosemarie.

If I look at the refractory, Alain, did you say that part of the benefit was the 1.9 million reverse? Is that a reversal of accrual on the bad debt, so in other words, you would have on the 6.7 million at the operating income level and had a margin of 8%. Am I looking at this properly?

Rosemarie, thank you for that question. Let me ask John to address that from a financial perspective. John?

Year-over-year, Rosemarie, the change is about $1.9 million, and that's because we were accruing additional reserves last year. This year we actually reduced them. The bad debt expense allowance at the end of the second quarter was about 7.5 million, it's 6.6 now. So you combine that decrease, which was due to reducing the number of disputes, and we settled a contract issue we had in a foreign operation. You combine that with the fact that last year we were accruing the delta as 1.9 million.

Okay, so in my calculation that operating income would have been 6.7 million in March and 8.0% is correct? Right?

No, it was not in one particular business.

Both segments of the business were affected by it.

So could you state that 1.9 million between refractories and Specialty Minerals?

No. Not specifically, we couldn't relate it, we haven't prepared to relate it that way. Normally we don't break down in the kind of detail.

Okay, so is the bottom line that margin, and I am pulling a number out of a hat since I don't know the split, but margin on the refractory side would have been around 9% and it could decline a little in the second quarter, I mean, in the third quarter?

I don't understand your comment about the third quarter.

I am trying to figure out what the real margin in the second quarter was, and then where we go from there in the third, whether it declined from that level, as opposed to declining from the 10.2% reported.

Rosemarie, let me ask Alain to look at that, but from the perspective of the bad debt, that did have some impact on the margin of the MINTEQ business in the second quarter, but I'll ask Alain to address that. Alain, please?

Yes, Rosemarie. If I understand correctly, you asked two questions. The first one on the margin, I'm not going to go beyond what John indicated, but the bad debt, in fact, for the whole Company, so, therefore, I'm not going give you what the margin is going to be, would have been before the bad debt benefit. What I can say is that, overall, we are our making progress on our programs that bring, over time, improved profitability, and as Paul indicated, our goal is still to be in the double digit area. So we are working hard on that, and this is our target. Now your second question is about the third quarter and it is true that in the third quarter we are anticipating to have a continuation of a very slow demand in North America, and in Europe, which is combined also with the fact that seasonally it's also a weak period for the steel industry, with a number of shutdowns, particularly in Europe. So, indeed, in the third quarter it's going to be a slow period, but as I indicated for the year, we still anticipate to grow our sales and operating income. We still target, overall, to be in the double digit area.

Okay, thanks, that is a very helpful. And on the SYNSIL, Paul, the new plant, did I understand properly, it is more or less totally dedicated to the one customer, commercial customer, that you currently have?

Rosemarie, no not dedicated to one customer. We will have one very large customer for that plant, and we'll use a large portion of the capability of that plant, but that is a very a large glass producing region, that area where we're building the plant. If you go out in a 200 or 300-mile radius, it's a very large glass producing region and that's why the plant, as we've spoken about, it is actually easily expandable from 200,000 to 400,000 tons per year. But the one large customer that we have will be, I would expect, the largest specific customer for that plant. But then we are, in fact, have already initiated discussions with other glass companies in that region to continue to build the base, not only for the initial capacity, but our expectation that we will have to increase that capacity as we go forward.

Any thought as to how quickly you will need to expand the capacity? Are you expecting to need to do that in about two years or so?

That would be premature for me to speculate on that, Rosemarie, but we fully expect to expand it and that is how the plan is designed.

And your expanding it will have nothing to do with your building a second plant in another region, is that correct? You can do both at the same time?

That is correct. It's two geographically distinct regions.

Where is the other large region, the other region with the large portion of glass manufacturers?

I would prefer not to comment on that at this time.

All right.

The only reason I say that, Rosemarie, is that there are several glass producing regions in North America that we see as opportunities for SYNSIL. We have identified, we're working with a customer that we think will lead to that determination to construct a second commercial SYNSIL facility at another geographic location.

Since there our several, without telling us which one is the next one, can you give us all of those regions?

I prefer not to.

All right. And then on the PCC business, I may have missed it, but did you talk about the SYNSIL sales growth? I mean volume growth, rather?

In terms of volume growth, the only volume growth that we indicated at this point for the second quarter, it was just up slightly, in terms of second quarter, and that was primarily, as Ken indicated in his remarks, that was primarily the impact of the Finnish strike, which limited our growth and total sales volume, I'm talking sales volume in the second quarter. For the first half of the year, for the first 6 months of the year, our unit growth is up about 7%.

And if you exclude Finland in the second quarter and look at [ INAUDIBLE ] are we still in the 7% range?

I'm just trying to -- obviously, the Finnish situation cost us several points of growth in the second quarter. I'm just trying to think quickly how that would impact the year-to-date number. But it was several percentage points of volume growth due to the labor situation in Finland in the second quarter.

Okay, thanks a lot.

Thank you, Rosemarie.

You have a follow-up from Jeff Zekauskas with JP Morgan.

All right, in thinking about your quarterly performance, what you said was that it was a 5 million operating hit from the three events, and that in rough terms, you had a 2 million benefit from lower bad debt expense. So if you net that out, that's a positive 3 million. Positive 3 million added to your 20.8 in operating income gives you roughly 23.8, which makes you roughly flat on an operating income basis with the previous year. Your first quarter operating income was up about 15% or 16%. So in rough terms, net of these two eccentric items, why was the growth so good in the first quarter and so weak in the second, or is this just lumpy?

Okay, thank you Jeff, for that question. One thing, for example, was that there were additional days in the first quarter, five additional days, so that had some impact there on our sales growth. But in terms of the impact of those three major events that offset by, for example, the bad debt adjustment, I'll ask John just to take a, an explanation of that. John?

Yes, Jeff, the five extra days we had in the first quarter had an impact of about 6% on the growth factors in the [inaudible] quarter. So that is something of a distortion.

Okay.

And the rest of it really does relate to seasonality that you have in the business. We also had in the first quarter the fact that Millinocket didn't operate at all in the prior year so PCC had a big boost from that in the prior year. It ramped up beginning in the early to mid-second quarter, so it doesn't have that some impact on the second quarter. You have those kind of individual items that move from one quarter to another, and you have some seasonal implications. If you did the math that you did, this quarter would have been up about 4%.

Up about 4%, okay. I guess, secondly, you bought back 360,000 shares at 61, which sounds very opportunistic. So does that mean that you only buy opportunistically, or do you plan to buy any shares this quarter?

Well, Jeff, as you know, that has been the way we have purchased shares with the authorization that we received back in 2003, to purchase up to $75 million, or up to $75 million at our discretion. As you know, as John indicated, we're close to $50 million, in terms of what we've utilized under that authorization. And all of those shares have been bought and purchased on an opportunistic basis, so that has been, in fact, how we have executed this program during that period. Will we continue to purchase shares? The answer is yes, we will. We will continue to so that on an opportunistic basis, and that's how we've done it for this entire transaction, this authorization that we have from the Board, and how we will continue to execute that program.

Last question, if you think of your PCC growth over time, it seems that there are three components. There are new plants that are built that use PCC. There's the expansion of plants that already use PCC, that is they have more capacity and then there's the increase in filler rates in the current plants that you've already got. In general, what do you think is the longer-term growth rate of PCC for you, and if you had to weight those three components, how would you weight them?

That's an excellent question, Jeff, that you ask there, and the those are, in fact, the key three factors that continue to grow PCC, both in good times and in bad times, that we continue to build new plants, we expand them and, as you know, in January of each year we give you a sense of the number of units of capacity that we have, in fact, installed in the previous year. So we provide that to you. And, in fact, yes, we have expanded several satellite plants, or will have completed those expansions in 2005. That is part of what we do as a Company, as well as work very closely, from a technical perspective to increase the ash levels. I would be hard pressed to weight that, in terms of as we go forward which is the most important factor. Obviously, we need to continue to build new plants so that is important for us as a Company, to continue to build new plants, such as the two in the China, which we've indicated is in excess of eight units of capacity between those two plants. So two very large plants that we've built there, and as I've expressed earlier in this conference call, we see additional opportunities to build other plants in China and in Asia, for example, other locations. So building new plants will continue to be a growth opportunity for us just as we have a expanded plants this year, 2005, we expect that to continue as we go forward also. Filler/fiber composite materials that we're working with, [inaudible] has the opportunity to significantly increase the amount of filler in a sheet of paper. So I would not want to try to say how I would weight those programs in terms of growing the business here. But only collectively reiterate that we see PCC as a major growth opportunity for this Company going forward. We'll continue to invest in both research and technology and in the opportunity to market those products on a worldwide basis.

Does Ken Massimine have a view as to what the long-term growth rate of PCC, as a whole, is in volume terms?

Yes, he does, by the way. I would be disappointed if he did not by the way.

Maybe we can hear from him. [LAUGHTER.]

I would expect that he would probably say something similar to what I did, but I will ask him. Ken, are there any other thoughts that you may want to share? [LAUGHTER.]

Paul, I think you summed it up quite nicely. But I think, Jeff, just to reiterate, there really truly is various approaches that we're taking. The new plants, clearly, very important to us because it continues to show we're advancing the technology, and, just of course, as Paul indicated, we're increasing the filler rates, like, for example, through filler/fiber. That is also very critical. So I think the underlying theme that I'd like to leave you with is really, is technology. In other words, the ability for us to continue to build plants and be successful versus our competition, as well as to continue to improve our overall business, for example, increasing the filler in a sheet of paper will be based on technology. So, clearly, being research-based, technology-based is what's going to drive our programs and make all three of those that you're suggesting successful.

So what are the remaining obstacles with the filler/fiber technology?

To be frank with you, Jeff, it's a lot of work that needs to get done to prove the commercial efficacy. It's not something that you can just essentially run one particular trial and then assume you can just ramp it up. So some of it is the continual testing to make sure that what you're seeing the first time you're going to see on a continual basis. Potentially, that's what it's all about. It's consistently testing the materials to ensure you have commercial efficacy when you scale up that process.

So the issue is production, it's not whether the sheet tears or whether the ink runs?

That's all part of it, Jeff. Part of it, again, as you increase filler in a sheet of paper you're definitely going to alter the sheet's properties, and so, therefore, part of what you're looking at is the totality of what has to be studied. Whether it's ensuring that the sheet properties can continue to be used in a commercial basis, as well as then being able to scale up and be able to produce that paper commercially. So you really have to look at both items, one, the final quality of the sheet of paper and its ability to be used in the end use markets, And then also the ability to scale it up on a paper machine. So you really have to look at both avenues.

Okay, thank you very much.

Jeff, I would just, and to the other individuals on the call, just reiterate that not only do we have PCC to continue the growth of the top line of this Company, but this Company is fortunate in the fact that we have many, many avenues of growth in all our businesses. The PCC that Ken just mentioned, the programs that Alain has, the facility in China, for example, metallurgical products, the other technologies that Alain is working on, the SYNSIL opportunities we discussed, and in Randy Harrison's business for the processing minerals portion of our Company. The major expansion that's coming on stream at Lucerne Valley, for example. So this Company is very, very fortunate in having many, many opportunities to continue to grow very rapidly as we go forward.

Thanks very much.

And with that, there are no further questions at this time. I'd like to turn the conference back over to Paul Saueracker for any additional, or closing remarks.

Thank you, operator, and thank you for all those individuals for participating on the call. Yes, we did, in fact, have a very difficult second quarter. We think we have worked our way through that as we've discussed here over the last hour in terms of moving this Company forward. We see improved performance as we go into the third and fourth quarters of this Company, and we are very confident about the future of Minerals Technologies, and thank you for your interest in MTI. Have a very great day. Thank you.

Again, this does conclude today's conference call.