Minerals Technologies Inc (MTX) 2005 Q3 法說會逐字稿

Good day and welcome everyone to the Minerals Technologies Incorporated’s third quarter 2005 earnings conference call. Today’s call is being recorded. With us today is the Chairman, President and Chief Executive Officer; Mr. Paul Saueracker. Please go ahead, Mr. Saueracker.

Thank you, operator. And good morning and welcome to the Minerals Technologies third quarter 2005 analyst conference call. As you all know on September 29th we announced that because of weakness in the third quarter we were compelled to revise downward our third quarter and full-year 2005 earnings estimates. This announcement followed our second quarter conference call on July 29th where we cited a number of factors that adversely affected our second quarter earnings and could impact our third quarter results.

Unfortunately some of the factors cited in July did impact our results going forward and were joined in the third quarter by two other factors. First a softening of the North American and European steel market which affected our Refractory segment; and second an unexpected rapid escalation in energy and raw material cost due in part to the effects of hurricanes Katrina and Rita. These factors are being addressed and we will discuss the actions we are taking to improve our performance.

MTI’s worldwide net sales for the third quarter of $246.8 million were 4% above last year’s third quarter sales. However, income from operations of $19.1 million, equivalent to 7.8% of net sales, was down 22% from prior year.

In terms of net income MTI delivered $12.2 million equivalent to $0.60 per diluted share, a decrease of $0.18 from the third quarter of 2004, and down $0.03 from the second quarter of 2005. By way of summary, MTI’s rate of sales growth slowed a 4% increase in the third quarter while our cost of sales increased 8%. Expenses were held to a 4% increase. But the net result was a 22% decrease in operating income.

As will be discussed in greater detail, the decline in the third quarter operating income to $19.1 million from $24.5 million in the third quarter of 2004 was due to several factors including the negative impact of reduced steel demand in our principle markets in the United States and Europe, only a partial recovery of energy and raw material cost increases, the slower-than-anticipated ramp up and increased spending associated with the coating PCC program in Europe, continued delays in satellite PCC plant start ups in China, and the residual effects of the Finnish paper strike early in the quarter.

Although the US economy continued to expand, the rate of expansion has moderated compared to the levels seen in 2004. US GDP growth of 3.1 percent estimated for the third quarter is quite modest compared to the 4.6 percent highly expansionary rate reported for the third quarter of 2004. Further, the rate of expansion is highly selective by industry. Total industrial production for the US economy expanded at a 2.7 percent annual rate in the third quarter, compared to a 1.2 percent for paper and paper products and 1 percent for iron and steel finished products. Production of crude steel in the US was sharply negative while the industrial production index for finished steel products stayed flat despite the impact of high interest rates on construction and automotive.

Following my introduction Ken Massimine, Senior Vice President and Managing Director of our paper PCC business will review the PCC product area. Alain Bouruet-Aubertot, Senior Vice President and Managing Director of MINTEQ will report on the refractory segment of our business. And John Sorel, our Senior Vice President of Finance and Chief Financial Officer will provide a brief financial summary and some detail on the factors that affected MTI’s financial results. Following John Sorel’s presentation I will conclude with a few remarks and open the floor to your questions.

Before proceeding further I need to remind you that on page 6 of our 2004 10K we list the various factors and conditions that may affect future results. Statements related to future performance by other members of management are subject to these cautionary remarks and conditions.

While I will not dwell on the details affecting PCC and Refractory which will be explained by Ken and Alain, I would like to mention some highlights.

Demand for paper PCC continues to grow with PCC volumes up [33] % in the third quarter despite several machine shut-downs in North America. The operating levels achieved by our two new satellite facilities in China improved during the third quarter. Both of these plants incorporate new manufacturing technology platforms that lower the cost of producing PCC verses our conventional technologies. These platforms will form the basis of future expansion projects.

Specialty PCC sales continued to grow despite the fact that several customers of our Brookhaven Mississippi facility were at best adversely affected by the hurricanes.

With regard to the Refractory segment, actual steel production in specific geographic areas had a significant impact on the business. While global steel production statistics report a modest growth in production due to China, third quarter production in the US was down 12.8% compared to prior year and in Europe it was down 9.2%.

US steel mill capacity utilization for the third quarter 2005 was reported at about 84% verses over 90% last year. As Alain will explain, when industry production goes down, the extra capacity availability provided by MINTEQ’s premium products is foregone in favor of cost savings on our lower-priced materials.

As China continues to rapidly expand, MINTEQ’s new 100,000 ton-per-year refractory plant will be up and operational in January and we’ll be able to take advantage of low raw material costs, lower transportation costs, and immediate access to the largest and fastest-growing steel market in the world.

On the Processed Minerals side during our July conference call, I reported that our sales to the booming California construction market were limited by a lack of capacity at our Lucerne Valley facility. Since then our new number 7 [Raymond] mill started up and is supporting a significant increase in total sales from this facility.

Our SYNSIL program continues to move forward. The first large-scale commercial plant currently under construction in Chester South Carolina will initially supply a key regional customer. However [three-board] capacity will be available to accelerate our trial programs with other potential customers. We are also optimistic that we will sign a contract that will trigger the construction of a second large-scale commercial SYNSIL facility in a different geographic area prior to the end of this year. The Woodville facility in Ohio customer sampling facility remains sold out and limits the extent to which new customers can be developed until the South Carolina commercial facility comes on line.

Finally on Wednesday, our board of directors authorized a new 75 million 3-year share buyback program. This compliments the acceleration of our current program where we have already purchased about $59 million of our shares in less than two years.

I will now ask Ken Massimine to provide us with details related to the actions he has taken to improve the 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 third quarter as well as some expectations for the remainder of this year.

Notwithstanding the relative robust North American economy, the current state of the paper industry can best be described as sluggish. And the outlook for the remainder of this year into 2006 is expected to remain muted. Globally, some economic recovery is expected, most notably in Japan and Western Europe; however, slowing prospects in North America will likely create a drag on global paper consumption.

Looking specifically at various regions of the world; the United States during the third quarter was buffeted by a series of setbacks including two devastating hurricanes, runaway energy prices and increasing consumer and producer prices. These economic shocks combined to limit overall economic activity and subsequent paper consumption. As a consequence, the North American paper industry continued to re-trench with several more paper machine shut downs recently being announced.

Production of uncoated free-sheet papers, our most important market segment, remains lackluster. We expect slump market conditions to persist throughout the remainder of this year and into next. This continues to be the result of week business demand, high imports, and the continued growth of competitive electronic communications. Next year, we expect overall North American paper production to be static or slightly negative due to a weakening economy, rising postal rates, and a continued shift to offshore production.

Internationally western European economies appear to be recovering although it is slower paced than originally anticipated due to energy increases and general price inflation. For all of 2005 we expect European paper consumption to register negative growth verses last year and only a slight increase in production.

The economies of the Asian region, particularly in China, and bolstered by improving prospects in Japan, continue to exhibit strong growth. Paper demand should see an annual increase of 4% this year. However, we expect these economies to slow over the next few quarters as business investment and domestic demand respond to governmental pressures, high energy prices, and slowing export requirements.

MTI’s total PCC sales for both paper and non-paper applications in the third quarter increased 6% over last year’s third quarter from approximately $124 million to $131 million, including about 1% due to currency exchange. In particular, sales of PCC for paper increased 5%. This increase resulted primarily from the new facilities in Asia and on our Walsum PCC merchant plant. On a global basis; same-store sales [inaudible] from existing PCC facilities was essentially flat.

I am satisfied with the sales performance within our Asian marketing region which continues to be a major source of growth for MTI. We now have seven PCC satellite plants operating in Asia, including our two newest satellites at Zhenjiang and Suzhou China. Although start-up difficulties at these facilities delayed initial PCC shipments, we are focused on the problems and as a result, ramp-up volumes are improving.

In North America, paper PCC sales improved modestly in spite of additional paper machine shut downs, both temporary and permanent.

Total PCC operating income decreased 12% in the third quarter, compared to the same period a year ago. I am pleased that our Walsum Germany merchant PCC plant is now starting to gain sales traction as we continue to ramp up production. We are fully qualified at several key customers who are receiving product on a routine commercial basis. However, continuing development costs at Walsum contributed in part to the shortfall in third quarter operating income. We expect these market development expenses will continue through year end and into 2006 due to our delay in volume ramp up verses original projections.

In addition, higher-than-anticipated start-up expenses at our new satellites in China also contributed to the operating income shortfall. I am able to report that most of the start-up problems are behind us and should be essentially rectified by year end. 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. And while not yet fully at capacity, these start up satellites are producing ongoing quantities of our newer PCC products such as Ultra-[Bulb] 2, filling grade PCC. We fully expect that these new satellites will become positive contributors to profit in 2006.

For the balance of this year, we anticipate operating income will remain under pressure as we continue to incur significant increases in raw materials due to escalating energy costs which contractually will not be passed along to customers until next year. Concurrently we plan to maintain tight control over budgeted expenses but without compromising ongoing trial-related activities. Further we will continue to pursue our strong commitment to research and development. We are progressing towards developing unique and effective technologies for both coating and filling PCC products like our joint projects with International Paper to create novel [filafiber] composite materials. At this point, the program continues to progress as planned.

Now let’s 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 9% in spite of hurricane-induced supply-chain disruptions. A key contributor to the improvement in Specialty PCC sales was our Brookhaven Mississippi facility as strategies aimed at the automotive and construction industries continue to gain momentum. Going forward, we expect continued sales improvement in our Specialty PCC segment based on our initiatives in automotive, construction and consumer markets.

In conclusion, our financial performance this quarter was not satisfactory. However I am confident that we are addressing the problems contributing to our current financial shortfall. In spite of continuing strong economic headwinds, our strategic emphasis remains focused on developing new innovative technologies which will provide high value, not only to our customers, but also to MTI in the form of improved sales and earnings.

Now I will turn the microphone over to Alain who will review the Refractory segment business performance. Alain?

Thank you, Ken. After first approaching and then exceeding this double-digit operating margin goal in the first and second quarters of 2005, delivering 9.5% and 10.3% respectively; the Refractory segment [inaudible] negatives in the third quarter, which caused its operating margin to drop to 5.3% of net sales.

Revenues continue to grow. Net sales of $79.5 million were up 4%, up $3.1 million above the $76.4 million in sales realized in third quarter of 2004. [We see] pressure in North America and Europe was notably higher. While total sales were up 4%, the situation between the Refractory and wire product lines differed significantly. Our sales of Refractory products and systems were down 6% for the quarter and sales of metallurgy called wire, were up 43%. This reflects a volume decline in Refractory products while for the wire product line, sharp raw material costs increases were to a large extent successfully passed through to customers significantly affecting the revenue growth year-on-year.

While some of the factors have compounded the lower results, the dramatic slow down in steel production, particularly in North America and Europe is the main cause of the 40 % decrease in operating income from $7 million in the third quarter to 2004 to $4.2 million in this year’s third quarter. Because of this sudden drop off I would like to step back and take the time to examine in general terms what the main drivers of the steel market are and how they affect the demand for MINTEQ’s products and systems.

First of all steel production rate has a direct effect on the use of refractories and consumption of metal wire products. The wear of refractory linings and addition of metals for metallurgical treatment such as calcium are a direct function of the quantity of steel produced. Second, capacity utilization rates have an impact on both volumes and makes of refractory products and systems as the justification for high durability products is reduced where there is space in making capacity. Third, the conception of refractory products varies over the life cycle of a furnace. As increasing quantities of metallurgics are used to offset the wear of the lining, generally breaks. This means that after furnace relines, there is a time when the application of monolithic refractories is non-existent or kept at a minimal before steadily increasing until the next reline occurs. Fourth, steel-making technology, namely basic oxygen furnace, or BOF; and electric arc furnace or EAF, commence very separating conditions requiring different volumes and types of refractory products and systems to be used. Consequently relative variations of BOF and EAF run rates translate into volume and mix differences in refractory products and systems.

Let me now look at why these four factors related to steel industry operations; that is production level, capacity utilization, timing of furnace relines and relative BOF and EAF run rates, have combined to be the main cause of MINTEQ’s significant decline in third quarter financial results and why we believe that future results starting in the fourth quarter should show marked improvement.

Total raw steel production in the third quarter decreased 10.3 million tons or 3.9%; not bad. Amazingly China reported crude steel production of 90.4 million tons, an increase of 18.5 million tons; 26% above the 2004 third quarter level. Since the total global increase in steel production was approximately 8 million tons less than the increase in China, the world production outside of China provided a negative contribution to growth. Thus we are exposed to strikingly different market conditions by region.

In the United States, MINTEQ’s largest market, crude steel production for the third quarter of 2005 was down 12.9%. In the third quarter last year US steel mills capacity utilization exceeded 90%. However, during the third quarter of 2005 this was not the case as production was falling. Utilization of US steel mill capacity was reported at less than 84% for the third quarter of 2005. Moreover this capacity underutilization was more pronounced in the BOFs where MINTEQ’s premium products are normally in high demand to ensure high productivity. Taking advantage of the slow down, many BOF [inaudible] were taken at the end of the second quarter and through the third quarter and [gunning] rates of monolithic products suffered accordingly. Going forward, tracking steel production volumes by month, it appears that by September the declines in North America have started to reverse. As a result we are now seeing an increased consumption of MINTEQ’s products and systems including in the BOF shops; returning to levels close to pre third-quarter volumes.

In Europe EU25 steel production was down 9.2% compared to third quarter prior year, corresponding to a general slowdown above and beyond the traditional extended July and August shut downs that reduce steel production. Within Europe, in Germany, Belgium and the UK where MINTEQ has some of its strongest market positions, steel production was down 11.2%, 20.7% and 14.7% respectively. Although there still appear to be slowdowns and extended shutdowns at some mills, we are seeing a pick up in demand for our products and systems in the fourth quarter.

In Asia the story is China where the steel production increase more than offset the decline from the rest of the world. However, while there appears to be an oversupply of low-grade long steel products, high-grade flat products were still in high demand, requiring continuing imports from other countries such as Japan and Korea. In this context, our large-scale refractories plant in China is nearing completion and will commence operations early next year. The new plant in Suzhou, near Shanghai where a large part of the Chinese high-quality steel is made, we start producing our most-advanced products including Shotcrete. With products which offer durability and more uptime to the steel production, we’ll be successful in the Chinese market as the result of capacity shortages in high-grade steels such as for [inaudible].

Through the third quarter MINTEQ has been ramping up its effort in anticipation of its start up. MINTEQ has hired 51 people in China associated with the manufacturing, marketing and installation of the products to be made in the new plant. These expenses will have a strong future payoff but were a drain on the third quarter operating margin. Not having this facility, we haven’t been able to take advantage of the boom in Asia. Next year, we will.

All in all the drastic steel production in North America and Europe was the main cause for MINTEQ’s sharp decline in third quarter results. Retrospectively this can be attributed to two reasons, starting with steel company’s efforts to preserve profitability by limiting production and reducing inventory levels. Moreover there was an unusual situation where the spot price of metals scrap for EAF mills happened to be lower than the price of iron ore used in BOF shops due to long-term supply contracts at much higher prices for iron ore. This impacted MINTEQ in terms of both volume and product mix.

In addition, other factors affected MINTEQ’s third quarter results. Our R&D expenses were up compared to prior year. This increase in spending reflects the extensive effort to reformulate our refractory products to reduce our costs while maintaining or enhancing performance. Some of these programs have reached the large-scale customer trial stage and a first phase of implementation should proceed rapidly leading to significant cost savings starting in the fourth quarter.

While prices for virtually all monolithic refractory raw materials remained at very high levels, market price of calcium metal for our wire-product line escalated sharply, causing us to reexamine our make-or-buy strategy. To this effect the decision was made to significantly increase our lower cost internal production from Canaan Connecticut. It is also important to note that during the third quarter MINTEQ continued to make [inaudible] in the marketing of its superior technology while the use of its high-performance [inaudible] Shotcrete products is gaining wide acceptance in North America in steel and non-steel applications, its render refractory products is also getting traction in Europe and Asia. At the same time progress continues to be made on the sale of other refractory products and equipment systems that allow not only improved productivity, but also reduced labor and installation cost. This is exemplified with the growing market acceptance of [Scanford] systems.

Overall the third quarter was very difficult for the Refractory segment primarily as the result of the demand volatility in North America and Europe, caused by a particular combination of steel industry and raw materials price dynamics. As the steel demand continues to improve and as MINTEQ is implementing the necessary actions to offset the factors that have impacted its results, we believe that the fourth quarter will show a marked improvement. In this context, MINTEQ continues to be focused on implementation of short and long-term solutions that get us back on the double-digit path. John?

Thank you, Alain. You have just heard a discussion of the Company’s business environment, highlights of the operating conditions, and a summary of the major development activities and action plans to improve performance. 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 $0.60, a decline of $0.18 or 23% from the prior year. Net sales for the quarter were $246.8 million, an increase of 10.4 million or 4% compared to prior year.

Overall foreign exchange had a favorable effect of only about $1.8 million, representing about 1 percentage point of sales growth. Both segments continue to achieve top line growth.

Sales in the Specialty Minerals segment were $167.3 million, a 7.3 million increase or 5% growth including the benefit of about 1 point of growth from favorable foreign exchange rate.

Sales of PCC increased 6% to 130.6 million from 123.6 million last year as a Finnish labor action that severely affected last quarter’s performance was settled in early July. Both the paper PCC and Specialty PCC product lines experienced sales growth in all regions. The largest growth occurred in Asia and Europe where sales volumes grew primarily due to the ramp up from new facilities in these regions.

Sales in the Processed Minerals product line increased 1% to $36.7 million from 36.4 million. Sales in this product line were disrupted by the recent hurricanes.

Refractory segment sales increased $3.2 million to $79.5 million, 4% above the 76.4 million recorded in the prior year, including approximately 1 percentage point of growth related to the favorable impact of foreign exchange. Within this segment, metallurgical product sales increased by 43% to $22.4 million. This growth was primarily attributable to price increases related to the substantial escalation in the cost of raw materials. Sales of refractory products and systems to steel and other industrial applications decreased 6% to $57.1 million. This decline was due to weakness in the steel industry, particularly in the United States and Europe.

MTI’s cost of goods sold, 8%, which caused an unfavorable leveraging effect on sales and resulted in the decrease in gross margin of 7%. De-leveraging in the specialty mineral segment was due to the rapid increase in energy cost, disruption from the recent hurricanes in the Processed Minerals line combined with the difficulties encountered at the new PCC facilities in Walsum Germany and in China.

Collectively these factors had an adverse impact on production margin of approximately $3 million. Unfavorable leveraging in the Refractory segment was primarily due to a decline in the volume of products and systems sold to the steel industry.

Total marketing and administrative expenses for the quarter increased about 4%. These expenses include our planned increased marketing expenses to support our business development efforts worldwide which were offset somewhat by reduction in bad debt expense of $.9 million compared to last year.

Our overall allowance for doubtful accounts was reduced from $6.6 million at the end of the second quarter to $6.2 million at the end of the third quarter as a result of a reduction in number of outstanding disputed balances and certain international exposures.

The Company’s research and development expense for the quarter increased 6% 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.

MTI’s third quarter 2005 income from operations decreased 22% to $19.1 million from $24.4 million in the prior year. For the quarter the operating ratio was 7.8% of sales.

Specialty Minerals income from operations declined 14% to $14.9 million and was 8.9% of its sales. Unfavorable leveraging to operating income for this segment was primarily due to the factors affecting production margin; higher energy costs and hurricane-related disruptions and the Processed Minerals product line and the paper PCC ramp up and start-up activities in Germany and China.

Refractory segment operating income decreased 40% to $4.2 million and was only 5.3% of sales. The operating income decline was primarily attributable to the effect of lower volumes of product sold in North America and Europe.

Non-operating deductions increased $.4 million due primarily to higher interest expense related to increased borrowings. The full-year effect of tax rate decreased to 30.5% from 31.2% due to a change in that mix of earnings. As a result, effective tax rate for the quarter decreased to 28.8% compared to 29.7% in the third 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 $12.2 million, a decrease of 24%. And diluted earnings per share for the quarter were $0.60, a decrease of 23%.

To summarize the income statement for the quarter; sales increased 4% while gross margin decreased 7% from the prior year. Total expenses increased 4% resulting in an operating income decline of 22%. Net income declined 24%.

Collectively the weakness in the North American and European steel industry, the PCC program costs in Germany and China and increased energy costs and market disruptions have a negative effect on operating income of between $5 and $6 million during this quarter.

Our balance sheet remains very strong. Our debt-to-capital ratio is about 17%. You will note that this quarter we reclassified $50 million of senior debt notes due July 24th 2006 into current maturities of long-term debt until we arrange refinancing. Cash generated from operations is about $54 million and it was affected by a seasonal increase in accounts receivable and a higher raw material and higher raw material values. To date we have invested about $83 million in capital additions worldwide. Depreciation and amortization expense totaled approximately $54 million for the first three quarters. During the third quarter we repurchased 161,200 shares for treasury at an average price of $61.01 per share for a total expenditure of 9.8 million. Year to date we have repurchased 645,100 shares at an average price of $61.38 for a total of 39.6 million. This brings a total amount to 59.6 million under the $75 million program initiated at the beginning of 2004. And as Paul mentioned, the board has authorized a new $75 million share repurchase program.

Now I will return the microphone back to Paul for some closing remarks and for questions.

Thank you Ken, Alain and John. As you can see MTI faced a difficult third quarter in 2005. However the steps taken in terms of refocusing investment and resources into geographic markets with high growth potential, aggressive price increases, imposition of energy surcharges, tight control of expenses and our commitment to research and development will ensure the continued success of MTI.

Near term, given the confluence of adverse factors that have come together in the second and third quarters, an earnings estimate on the order of $2.60 to $2.65 per share for 2005 would not be unreasonable. Operator, we are ready for the first question.

Thank you. [Operator Instructions] And we’ll take our first question from Jeff Zekauskas with JP Morgan.

Hi, good morning.

Good morning, Jeff.

John was kind of enough to quantify the earnings drag from the offshore PCC plants at 3 million for the quarter. What has it been for the year and does 3 million mean a 3 million operating profit loss?

Let me ask John to take that question, John?

First point Jeff is the 3 million that I spoke about in the SMI site was made up of a number of things. It was the energy and cost issues along with the market disruptions in the Processed Minerals as well as the start up and the ramp-up activities in both Germany and China. So that was an aggregate amount of money.

Well then if you looked at the losses in Germany and China for the year or for all of the new PCC operations that you have this year; what’s the net drag as an order of magnitude?

Jeff we haven’t got into that detail but if you look at the second quarter and the third quarter we have booked out a total reduction in operating income based on a multiple number of factors, probably in the range of $10 to $11 million. That included, as John just indicated there, a whole series of factors both on the Specialty Minerals side and on the Refractory side of the business, including for example Germany. It included China and it included the strike in Finland for example. It included other energy and raw material cost factors that impacted the business. We’ve tried to give a sense of that by the way in terms of how we have sequenced the issues in the earnings release for example and some of the other documents that we put out for example in the 10Qs. But we haven’t got into specific numbers per se, but we did try to give an impression of the factors that were there, in other words a ranking of those numbers. And the total between the second and third quarter was in that range of $10 to $11 million, but that did include like in Finland which you know adversely impacted us in the second quarter and did adversely impact us in the early part of the third quarter. Of course those paper mills in Finland really didn’t get back on stream until the latter part of July after that lengthy 8-week shutdown that they had.

Well I guess just to frame it a different way, if it’s 10 to 11 million, that’s $0.35 per share. Are you saying that these are all temporary—or many of these are relatively temporary costs and 2006 should really be a year in which you recoup a sizeable amount of them?

Well obviously some of them were temporary Jeff and you are absolutely correct. The strike in Finland for example is now over in our satellite plants as well as the paper companies in Finland are operating on more normal rates as you would expect. And as Ken indicated in his comments we should have the facilities in China essentially on track by the end of the year. So they will improve their performance in 2006. And we also see the continued ramp up of our coating program in Germany. So that is continuing. So yes we expect those facilities, whether it’s a geographic grouping for example Finland, or whether it’s in China or whether it’s our coating program in Germany that they will provide additional opportunities for this Company as we go forward.

It’s premature at this point to really start speculating for forecasting for 2006 because of the uncertainties in the economy, whether it’s here in the United States or overseas. But as you know, in the January conference call we do give you a sense of how we view that year.

Well if you take the costs of the Finnish strike and the costs of the plants that have the slower-than-expected ramp up, and you add those together; what does that come to?

Well it comes to an improvement in our performance going forward.

And of course we’ll have the new SYNSIL plant and we’ll have the new Refractories plant starting up at the beginning of ’06.

And they will ramp up. As we know it takes time for a large merchant plant, whether it’s a refractory plant in China or the new SYNSIL facility in Chester South Carolina and our Walsum facility in Germany that there is as you know a ramp-up timeframe that is required to bring them up to good operating levels. But that will take place and we expect that to occur in 2006 and going forward into 2007.

So how much will we lose, all things being equal on those plants? That is, how much will next year’s earnings be depressed by SYNSIL and refractories?

Well that’s something obviously that we will look at as we do go through the budgeting process here in the fourth quarter of 2005 and obviously look at our budgets for 2006, Jeff. And then as we do that in January we will give you a sense of how we see the 2006 full year unfolding to this Company.

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

Thank you, Jeff.

[Operator Instructions] and we’ll move to Rosemariemarie Morbelli with Ingalls and Snyder.

Good morning all.

Good morning, Rosemariemarie.

There is no way I can get you to actually pin down the dollar amount that you were hurt by directly from the plant in Germany and the Chinese plants?

You could certainly try Rosemariemarie but I would hopefully be reluctant to give you an exact number. By the way I hear an echo on my side, I don’t know if you hear an echo on your side.

Yes, there is a vague echo and I am holding my phone. I am not on the speakerphone so I don’t know what the problem is. I apologize.

No problem, Rosemariemarie.

When you reported the second quarter you were confident that things were really going to improve in Q3 for both the German plant and the Chinese plants. And it obviously did not happen in line with your expectations? What kind of [inaudible] did you have and what was the source? If you could give us a little detail there; and I guess the reason I am asking that is I’m trying to figure out how much you are anticipating other problems next year when SYNSIL and refractories start and how much you were off on the Chinese and German projects; and therefore whether you are compensating or lowering your expectations for the other two next year in order not to have any surprises?

Okay, a very good question Rosemariemarie; to give you a sense of the impact in the third quarter, our operations both in China and in Germany improved verses the second quarter. And the way to look at that is in my prepared comments where I indicated some of the factors that had bolstered the decline in the third quarter. We had those ranked. We had those ranked in terms of what was the biggest impact. And the biggest impact in the third quarter as you go down our list was obviously the decline in steel demand, was number-one; only a partial recovery of energy and raw material costs was number-two; and number-three by the way was the coating program in Europe; and number-four was the PCC start ups in China. And that was the ranking that I had given you. And that was done because we tried to give you a sense of the impact of those factors. So when you look at the decline in the third quarter you can see that the coating program in Europe and the satellite start ups in China were further down that list, which reflects the improvement in the operations there verses the second quarter.

And when you are going to talk in January about ’06 will you have increased what you thought was going to be a negative hit from SYNSIL and the refractories in China verses your previous expectations? In other words, the estimates will be more conservative in light of what happened this year with the other two projects?

Well we always try to use a conservative approach, Rosemariemarie. But we are very comfortable as we look at both the start ups of our refractory plants in China and certainly the [inaudible] plant in Chester. Both of those started up in the first quarter of 2006. So we are comfortable with those in terms of our expectations of their performance. And we expect them to help us continue to grow this business.

And then if I may, regarding price increases; you have announced price increase recently. Is that enough to cover your costs and improve margins or are the costs still running ahead of the price increases? And linked to that, can you get your PCC contracts to be shorter in order to offset those higher costs faster than you have been able to?

Well we always approach the pricing and entity surcharge in an effort to recover the costs that have impacted this Company. But there is a timeframe involved in terms of sitting down with the customer and negotiating that price increase and the imposition of a surcharge. Some may accept it immediately and in some cases there may be some negotiations that take place. And in some cases there may be some contractual relations that also must be included in that discussion.

Do you feel that—so the answer is probably that at this stage you have not covered your costs?

That’s probably correct. At this point we have not fully recovered and that was one of the comments if you saw in my prepared comments. It was the partial recovery of energy and raw material costs and that was part of my prepared comments. We have not recovered 100% of those cost increases.

Do you believe that you will recover 100% of it by the end of the year or you have gotten so much in terms of raw material cost additional increases that you are going to continue lagging until maybe the end of the first quarter of ’06?

It’s going to be a combination that we will continue to recover more of it going through the fourth quarter. But some of it will impact or go over into the first quarter of 2006.

And lastly, if I may, any signs of slow down in the construction market? Actually I think you said there was some, but is that global or is it only in North America?

No right now we see the construction market doing well. The California market is still very strong for our products out of Lucerne Valley. And we expect that with the reconstruction that will take place in the gulf coast that that will remain strong as we go into 2006.

Okay, thank you.

Thank you, Rosemariemarie.

And our next question comes from Mike Judd with Greenwich Consultants.

Yes, thanks for taking my question.

Good morning, Mike.

Good morning. The last couple of quarters you mentioned that your filler fiber composites technology that you’re working on with IT that it’s moving along, but we really haven’t gotten any more detail than that. Can you provide a little bit more color please?

I can certainly provide a little more color. We continue to work closely with IT. As you know we have the agreement with them to look at developing and hopefully commercializing this technology. We are very pleased with the progress that we are making in this area. We have run trials that clearly demonstrate the benefits that are achieved with this technology and we will continue to work with IT as we go into 2006.

Are there any—how close are we to commercialization I suppose is a good question?

That is an excellent questions and it’s one that really depends on the speed with which the potential customer wants to implement the technology. We are there supporting it. We are there providing the research and technology support and it is by the way a very cooperative program on both sides. And we will continue to move that forward in 2006. Obviously there are significant savings that can be accomplished with this technology so we’re hoping that as the customer will meet that program in terms of commercial introduction that they will see fit to move that quickly.

So in terms of what’s actually been accomplished so far, I believe I’ve heard in the past that there have been some full-scale machine trials done. Is that ramping up at this point? Where are we with that?

Well it takes more than one or two trials to prove the technology so we expect that we will run additional trials in 2006 and hopefully continue to move the technology forward. But we still remain very confident that the technology will move forward.

Do you think that it’s been proven at this point that the technology works? I mean in your mind obviously it does.

In our mind we have no doubt that the technology works, but it’s really too soon to say that it is a fully commercial technology because the technology [inaudible] is yes. Is it a fully commercial technology? That’s what we’re trying to determine at this point with partner.

Okay, then what was the CapEx number for the full year? What was the forecast for that please?

John I think it’s about $100 million, John?

Right. And we spent about 83.

And we spent about 83-84 so far. But we are expecting about a total of $100 million for the year.

Okay and then just lastly, I think you mentioned this but I wrote down the wrong number. But what did you say the tax rate would be for the fourth quarter, please?

30.5.

And is that a good number to use for next year.

The guidance we’ve given is in that range of 30-31 going into the future.

Thank you very much.

Thank you, Mike.

Next we’ll go to Ray Kramer with First Analysis.

Hey, good morning, guys.

Good morning, Ray.

A question with your refractory plant in China; I know since you’re already serving existing customers in that area you’re probably going to have a higher base load in there than in maybe the Walsum plant for example. Can you comment number one am I correct on that? And number two, do you think that that’ll maybe give it a little easier ramp up than some other merchant plants you’ve had?

Let me start and then I’ll ask Alain to comment on it. Obviously the plant is under construction and is Alain indicated we are staffing up and are selling refractory products in China as we speak, those being produced at other locations but being brought into China as part of the development program so that when the plant come on screen that the customers will have been exposed to some of the newer technology such as Shotcrete and some of the more durable products that we have for the steel industry, especially for the high-quality steel grades that Alain mentioned.

So with that brief introduction, let me ask Alain to provide some additional clarification. Alain?

Yes, Paul. We have been in China for a while and we are ramping up already today our market positions in China. So the staffing that we have in place obviously is sized for the new plant. But significant activity also is actually taking place for a while in terms of bidding up market positions. So when we start up the plant we will have also a base load that will allow us also to minimize the [inaudible] of the start up and the ramp up. And we are confident also that with the cost structure and let me also remind you that all the major raw materials are coming from China so with a plant in China and the cost structure in China, we foresee some improvement. Obviously we will need to have enough volume also absorb the fixed costs but we see the ramp up in an optimistic fashion. So we are doing well. We are proceeding according to plan and obviously the year next year is going to be a very important year for our success in China and in Asia.

Given those factors looking sequentially at the operating margin in refractory when that plant comes on line, you might normally expect to see a little bit of a down tick but since you’ve got some costs already in the P&L if you will and much lower at least incremental cost of production at the Chinese facility verses wherever you’re making it now; is it unreasonable to assume that we might see refractory margins actually go up the first quarter that this plant is in?

As Paul indicated we are working on our budgets right now so I think it’s too premature to give some guidance on what is going to happen in China. But I would say that the year 2006 for us is going to be a year of transition with probably a ramp up during the first half of the year and starting to get some benefits in the second half of the year.

Okay, that’s helpful. And then just some questions on the paper side; can you comment on how much volume you lost because of shutdowns in the third quarter? And then looking at the fourth quarter given the increases from ramp up at the two Chinese plants and the Walsum plant verses some volume losses from the shutdowns; any sense of directionally which way volume is going to go?

Well if you look at the total volumes for the Company, as Ken indicated we’ve had very nice growth in volume both in the third quarter and in a year-to-date fashion. So the total volume of satellite PCC continues to grow. Now we’ve had a number as you know, a number of shutdowns that have been announced either machines or mills for example due to the hurricane. As you know the Pasadena satellite plant in Pasadena Texas is now permanently shut. That paper company has gone out of business. But also we’ve had separate machine shutdowns. Cornwall for example shutdown a machine; Pensacola shut down a machine; [J. Maine] has shut down a machine. So we have had a number of machine shutdowns. But despite those shutdowns we continue to grow our total satellite PCC volume. A portion of that growth is in fact coming from our satellites both in China and in the Walsum coating plant.

On the same-store basis, on a same-store basis; it’s been fairly flat in the third quarter, fairly flat on a same-store basis. But we continue to grow the volumes because of new satellites that we are bringing on stream and it’s more than overcoming the shutdowns of both satellite plants and paper machines that have occurred here during 2005.

Alright, thanks. That’s helpful.

Thank you, Ray.

And Todd Peters with American Century Investments has our next question.

Good morning, thank you very much.

Good morning, Todd.

Hey, my question; a couple of them—the capital spending this year, do you see that ramping down much next year?

We have been fairly consistent in our capital spending in the range of say $80 to $100 million but unless John—from your perspective John?

That’s correct Paul, and over the long term we generally run a little under 100, occasionally a little over 100. It really depends on the number of new facilities that we construct. It’s general to give quarterly guidance when we see that changing – when we announce—we give an update when we announce new contracts.

Okay, very good. And then if you could talk to me a little bit more on the satellites in China and the ramp up there; and I think the commentary is that it’s a lower cost structure. What would you say the margin differential is on those plants once they are operating at a normal level verses some of you other sites? What is sort of the incremental positive impact is there?

Well we’ll partially answer that question because we only give out certain amounts of information, Todd. But the two satellite plants in China that are completed are very large satellite facilities, in excess of 8 units of capacity between those facilities. And as Ken has indicated we are at those satellite facilities moving forward right now. They’re moving forward right now. They’re ramping up their volumes and essentially we’ll be fully on stream by the end of this year. So we’ll add quite a significant ramp up of volume to our satellite PCC network.

We’ve also indicated that we have introduced some new manufacturing technology into those satellite plants. The new manufacturing platforms as we call them which help us do two things; one produce some of the innovative products like Ken indicated an [Artic2] which is a new PCC product that we’re introducing as well as a more cost-effective manufacturing platform that we will use as we go forward. So that will help us but we choose not to give a sense of what that improvement is.

Alright. Then just overall you’re fill rates here in North America; have they been holding steady? And is there any opportunity to – I know you’ve talked in the past about potentially moving those up and part of that is with International Paper and the R&D being spent there. So I guess my question is really—have fill rates moved up? Is that why same-store sales are flattish despite the macro paper industry going through a sluggish time as you call it?

The fill rate has remained fairly level over the last few years, in the range of about 15 to 16 percent. And we’re looking at- just as you mentioned Todd, the [filler fiber] technology as a way to significantly increase that fill rate in for example uncoated free sheet. And the economics there are certainly driving that technology and we have in relationship with International Paper to develop that technology.

But the growth in the satellite in this case you see same-store sales being about flat. It has remained flat. Where we’re seeing the growth is in the ability of the paper company to speed up the machine, to produce more paper on a specific mill as they take out for example some of the older machines, less efficient machines. So we see the growth in terms of the total paper being produced at a specific mill site.

[Operator Instructions] and we’ll move to John Roberts with Buckingham Research.

Good morning, guys.

Good morning, John.

I apologize. I jumped on late but is the tightness in the [TI-02] market having any short-term impact on your business?

John, not that we’re seeing clearly. It may have some slight impact, positive impact, but where we are selling our PCC products for example, most of the TI-02 has already been taken out of those systems.

Thank you.

Okay, thank you, John.

And we have a follow-up question from Jeff Zekauskas with JP Morgan.

A few follow ups if you don’t mind; how many plants do you have currently operating in PCC?

Right now in terms of satellite plants we have 55 operating because we shut down a number of them as you know. We’d have well over 60 if we had not shut down some plants where the paper mills are shut down; so right now 55.

The second thing is – Ken was making a remark about sort of a raw materials squeeze and a delay before the increased raw material costs could be captured. So is there a catch up or that is are you compensated for your increased raw material costs or there’s just a lag that right now you’re on the short end of that you may gain if and when raw materials come down?

Right now Jeff when you look at the contractual formulas that we use, we have a lag right now in terms of the increase in some of our raw material costs being passed along to the customer. But generally over time the [inaudible] will catch us up with that lag and we do fine. But right now there is a little bit of a lag, but generally over time we in fact do okay.

And so that raw material lag is part of that 3 million you were talking about?

I’m sorry; I missed that question, Jeff.

The raw material lag was part of that original 3 million in the quarter you were talking about when you gave the laundry list of cost pressures?

Yes it was; it was a portion of it.

So in the fourth quarter does that lag become greater as natural gas goes way up?

It will increase overall for the Company. It will have a little more difficult time in the fourth quarter verses the third quarter because of the lag, not only from the contractual relationships that we have, but also the general passing along of price increases to our customers as I discussed earlier.

Okay so all things staying equal; the raw material gap grows larger in the fourth quarter and then we expect that to reverse once we get into next year?

That is correct. Overall, that is correct.

In Germany is there any price competition with the makers of ground calcium carbonate and if there is, what’s the magnitude and is that a reason why you’ve been slow to ramp up that facility?

First of all there is always competition. But we would always like to think that we are only game in town, but as we know that never exists in the commercial marketplace. So there is always competition and we compete with alternative products; alternative products whether they are ground calcium carbonate, other PCC [inaudible] and optical brighteners. It is a competitive situation that we deal in. And I believe we as a Company deal very well in it by the way in terms of competitive companies and competitive technologies that we face in the marketplace. The slowness in the ramp up of the Walsum plant is not so much that that you would suspect in terms of pricing per se, what it is is two things. One as you know the plant was brought on stream a little bit later than we had hoped it would be brought on stream. And as you go through the customers they really qualify the product the on a grade-by-grade basis. In other words the plant may be producing several grades of paper.

As Ken had indicated, we are selling commercially to a number of paper mills that are using it in specific grades of paper and they have told us that as they continue to qualify that product, they will increase the number of grades of paper that they will put that coating grade PCC into. So that is part of the ramp up that we’re talking about, that they will on a grade-by-grade basis continue to use larger quantities of the Opacarb 840 from the Walsum plant. So as Ken indicated, that will become a better loaded plant in 2006 verses 2005. But there obviously competitive technologies out there that we continue to face; I think we’re doing a very fine job, Ken and his team are in terms of addressing those competitive issues. And on a grade-by-grade basis customer by customer we will continue to ramp up the sales and the volume of the Opacarb 840 at the Walsum facility.

Well I guess maybe put another way; are the competitive conditions above average in Germany?

No, I wouldn’t say they’re above average. But you do have to remember that they have been for many, many years using other materials to produce their coated paper. So we’re bringing in what we have demonstrated is a more effective coating pigment and a more effective coating technology. So we are displacing other technologies for the use of precipitated calcium carbonate. And we in fact are being successful at that.

Okay and just a last question I guess on your capital expenditures; if same-store sales growth in PCC is zero. It doesn’t seem that anybody is going to need to expand their PCC requirements next year.

That’s actually a false assumption. I don’t know why you would say that, Jeff. I said for the third quarter that same-store sales—that was just for the third quarter.

Well what were same-store sales for the first nine months, then?

Let me just get that number. For the first nine months they were up actually 4% for the first nine months. So I just mentioned that that number was flat for the third quarter, not for the year-to-date. So we see obviously continued growing demand for precipitated calcium carbonate.

Because it just seems to me that the paper conditions have worsened. I mean it may be that your CapEx comes down materially next year in the sense that when you were growing at the 100 million rate or so, sort of the general paper outlook was a little bit stronger than it seems to be now; or that’s not applicable?

We are very comfortable with the growth of our satellite PCC business, Jeff. And I’m just trying to think how to answer this. Of course we have a number of expansions coming on stream. As you know we give you a tally of those expansions in the January conference call. But as paper companies produce more paper at existing mills, they require more PCC even if the fill rate is fairly level from one year to the next. And as a result we have expansions that are coming on stream and we will give you an indication on the number of units of expansions as we always do in the January conference call.

Okay, thanks very much. I look forward to that.

And Robert Hardiman from New Vernon Associates is next.

Hi, I have a question regarding the six different product lines that you break out in your 10Q.

Okay, Robert.

I’m wondering if John Sorel possibly could give us those numbers now or is there any reason why you couldn’t just put that product line sales comparison in your press release next time?

Well eventually the press releases become very complicated and very lengthy but certainly that information we have and I’ll ask John to address that, John?

Robert I don’t know if you want to get it now. It is rather complicated because it has so many parts to it now—

I think we just need six numbers for this year and six numbers for last year. So paper PCCs, Specialty PCCs—

If you’re set up I’m happy to read them to you.

We can do that Robert, why don’t you just call Rick Honey directly instead of taking the time on the conference call if that’s okay.

Okay then my other question just had to do with your M&A activity and I think you were looking for some sort of specialty chemical acquisitions in the past and I wonder what you appetite for acquisitions is right now.

We continue to, as a company, look for acquisitions that are complimentary to what we’re doing and can certainly enhance this business. That is an activity Robert, that we have ongoing and we do that continuously. Opportunities are presented to this company and likewise we search out opportunities and if we bring any of those to fruition we certainly will obviously make that as a public announcement. But it is an activity that is an ongoing activity for this company. We have not backed off or shied away from that.

Is there anything to be read into—that you’ve stepped up your share repurchase program here? Does that mean that acquisition ideas that you might have hoped for have not happened or don’t seem like they’re going to happen?

Absolutely not. I think it’s just the confidence that we have in this company and we think it’s appropriate to buy back shares.

Well good, that’s all I had.

Okay, and we’ll take one more question if there is one, it’s been quite a while that we’ve been on the line here.

It appears that there are no further questions at this time Mr. Saueracker. I’d like to turn the conference back over to you for any additional or closing remarks.

Thank you, operator. And thank you to all the participants on the conference call. Obviously we have faced a difficult third quarter in 2005. But we think the steps that we’re taking and the strategies that we have in place to continue to grow this company will be very effective as we go forward through this year and into 2006 and beyond. We see MTI as very much a growth company and certainly appreciate your confidence in MTI and your support and participation on the conference call. Thank you very much and have a very good day.

And this concludes our conference call. We thank you for your participation and you may disconnect at this time.