Minerals Technologies Inc (MTX) 2005 Q4 法說會逐字稿

Good day and welcome, everyone, to this Minerals Technologies Inc. fourth 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, Sir.

Thank you, Operator, and good morning and welcome to the Minerals Technologies fourth quarter and full year 2005 analyst conference call. As you know, in general, 2005 was not a good year for the materials and chemicals producers with large-scale operations in the United States. Minerals Technologies (indiscernible) contracting markets in its two principal consuming industries -- paper and steel.

2005 paper production was down 1.5% while steel production was down 5.4%. The progress being made in our programs to improve profitability were compromised by lower customer volumes coupled with continued increases in raw material and energy costs. As we mentioned in the press release yesterday, when we compare quarters there were six fewer business days in this year's fourth quarter compared to last year, affecting the growth analysis by 6%.

Fourth quarter net sales for MTI were $253.5 million. Sales in the specialty mineral segment reached $170 billion up 3% while sales of the refractory segments decreased $800,000 or 1% to $83.2 million, resulting in a total 2% net gain for the corporation. Our refractory segment was particularly affected by the midyear drop-off in North American steel production. While the steel industry sustained some recovery in the fourth quarter, it was not enough to offset the shortfall resulting from the downturn during the third quarter.

For the full year, MTI net sales reached $996 million, an increase of $72 million or 8% over 2004. Operating income for the fourth quarter dropped to $17.8 million which was $3.9 million or 18% below the $21.7 million recorded in the fourth quarter of 2004. For the full year, Minerals Technologies generated operating income of $81.8 million which was $7.3 million or 8% below prior year.

The major contributing factors to this decline were costs associated with our China PCC plant startups and the European coding program, unrecovered energy and raw material cost increases, lost income resulting from satellite, plant, and paper machine closures, reduced refractory product sales -- particularly in Europe and North America, which were only partially offset by [fire] metallurgical wire sales and the impact of the Omya settlement on operating income.

The settlement agreement and related payment offset the growth of litigation expenses but was recorded in other income. Fortunately, the U.S. construction market remained exceptionally buoyant with housing starts exceeding two million units for the year. This bolstered the performance of portions of our process minerals business with strong growth recorded both in our limestone and talc product lines.

In markets that are not growing rapidly, MTI's focus is on the introduction of new products and technologies that can expand our market opportunities, such as advancing our SYNSIL program for glass, the commercialization of hotshot (indiscernible) steel and our developing filler fiber composites technology for paper.

Overall, fourth quarter operating income of 18.8 million translated into net income after-tax of 12.6 million, down 14% from prior year and equivalent to $0.63 per diluted share.

Following my introduction, Ken Massimine, Senior Vice President and Managing Director of our paper PCC business, will provide more detail on issues and programs related to our paper 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, Senior Vice President of Finance and Chief Financial Officer, will provide a brief financial summary and some detail on the factors that affected our financial results.

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 21 of our 2004 10-K and subsequent 10-Qs we provide a list of 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 cautions. Although not reflected in the P&L, MTI has made significant progress on a number of its strategies that can improve our future growth and profit performance.

It must be recognized that we serve service materials-producing industries. As these move globally, MTI must move with them which is why we have two large PCC satellite plants ramping up in China and one large new [monolithography] refractory plant that is scheduled to begin operation in the second quarter of 2006 -- also on time.

Our SYNSIL product program moved forward in its transition from a development project to a commercial product line. In 2005, we signed two customer contracts, each of which provided the base load for a 200,000 ton per year SYNSIL plant. The first in Chester, South Carolina and the second in Cleburne, Texas. The Chester plant will begin operations in the first quarter of 2006 and the second is expected to start up in late 2006 or early 2007. Each of the plants is located within a cluster of [glass] manufacturing facilities and will provide the basis for aggressive regional expansion. The expanded commercial plant capacity will (indiscernible) now our Woodville, Ohio customer sampling facility to go back to its original design purpose -- providing large quantities of SYNSIL for customer trials to expand the use of this unique product in multiple market segments.

Specialty PCC benefited from volume growth in our consumer and construction markets, with net sales of 5% in the fourth quarter and 10% for the year. Our efforts to pass along energy costs in this business segment have been moderately successful. Process minerals had a strong fourth quarter as our new Sun Valley, California Raymond Mill expansion continued to ramp up, largely offsetting the loss resulting from the shutdown of two floor tile customers in the Eastern U.S. with product line sales up 5% for the quarter and 6% for the year.

At this point I'll pass the microphone to Ken Massimine to comment on our paper PCC business.

Thank you Paul. Let me begin by providing a summary of current market conditions followed by highlights of our business results for the fourth quarter and the full year 2005, as well as some expectations for the coming year.

2005 was another difficult year for the worldwide paper industry. While the global economic climate remained constructive, paper demand growth was sluggish. Recent evidence suggests a continuation of moderate growth throughout 2006 with regional factors continuing to dominate the production of printing and writing paper. For example North American shipments of uncoated freesheet -- currently our most important market segment -- declined approximately 3%% through all of last year while total demand decreased at even larger 4%.

Greater levels that (indiscernible) room for us, the slight rebound in business demand and the rising popularity of competitive electronic communications are responsible for the prolonged decline in consumption of uncoated freesheet. Consequently the North American paper industry further reduced capacity by closing down mills, idling machines and taking extended downtime. We anticipate possible further closings in 2006 as uncoated freesheet as well as overall paper production is expected to show little growth.

Internationally, Western European production of printing and writing papers improved slightly in the third and fourth quarter of last year but this only neutralized a weak first-half thus resulting in no growth for the year. Europe's economic malaise kept the lid on paper demand and the small increase in exports was not enough to raise operating rates above 88%. The region's economy is expected to show modest improvement in 2006, which should strengthen the fortunes of the European paper industry somewhat.

In Asia, paper demand and production saw strong growth all year with annual increases of around 4.5%. The region's growth, as spearheaded by China, was also supported by Japan's improving economy. The entire region will continue to dominate paper growth for several years.

MTI's total PCC sales for both paper and non paper applications in the fourth quarter increased 3% over the prior year's fourth quarter from 130 million to approximately $134 million while volume gained 2%. Cost reduction remained a key focus with the North American paper industry as paper companies continue to rationalize capacity by closing paper mills or shutting down machines. Many of the closed paper mills involved our on site PCC plants or directly affected off-site customers.

In particular, we were affected in 2005 by the recent paper mill closure at Pasadena, Texas, as well as by the paper machine shutdowns at Pensacola, Florida, Cornwall Ontario and (indiscernible) and by the Kingsport, Tennessee PCC satellite closure in late 2004. In spite of these closures and with six fewer business days in the quarter, our paper PCC volumes increased 2% mainly driven by ramp ups at Walsom and China and expansions at select PCC satellites.

Total PCC operating income declined 18% in the fourth quarter compared to the same period a year ago. Our operating income was affected in part by rapidly spiraling costs of raw materials and energy, which could not be passed along immediately to our customers because of contractual terms and conditions. By accelerated depreciation for future satellite plant closures at Cornwall and [Hadara], Israel, in 2006 and by the closure of the Pasadena paper mill.

For the full year of 2005 total PCC sales gained 8% from $485 million to $521 million. This was particular due to ramp ups at [Walsom in] China, strong sales growth in Japan, a full year of sales at our [Millinocket] main facility, the positive impact of foreign currency exchange rates and expansions at selected PCC satellites. These gains more than offset the extended paper workers lockout in Finland and the aforementioned mill and machine closures.

On a same-store basis fourth quarter sales tonnage of paper PCC from existing satellites was 3% below the same period a year ago primarily due to six fewer business days. For the year as a whole, same-store sales tonnage increased 2%. Total satellite PCC volume for the year was more than 3.8 million tons. Total PCC operating income for the year decreased 8% versus the prior year, primarily due to ramp up issues at China, the previously mentioned capacity closures, cost increases in energy and raw materials, ongoing litigation expenses involving intellectual property issues and the paperworkers' lockout in Finland.

On a brighter note I am pleased to report that we have resolved the litigation with Omya AG regarding patent rights associated with our precipitated calcium carbonate as intolerant technology. We are pleased to have reached a settlement so that we can now more fully focus on promoting this unique technology that offers the groundwood paper manufacturer the opportunity to reduce production cost and improve paper quality.

During this past year we added 13 new units of PCC capacity -- eight units at our two new satellites in China and another five units representing expansions at various existing PCC facilities. Unfortunately, this increase will be mitigated somewhat by the closure of approximately five units of capacity due to mill and machine shutdowns in 2005 and 2006.

On a positive note, these capacity additions continue to demonstrate the value of our products bring to our customers and why we will remain optimistic that our PCC volumes in 2006 will continue to grow, despite planned PCC satellite closures at Hadara and announced plant closure at Cornwall and a plant paper machine shutdowns at Dryden, Ontario. I am pleased to report that our technical issues in China have been largely resolved. And the plants are currently in an accelerated ramp up mode. We anticipate that these new large satellites will contribute positively to our profit this year.

Sales of our European coating grade PCCs accelerated last year but unfortunately they did not reach full expectations because of delayed ramp up at our Wilson merchant PCC facility. Although good year-to-year growth is anticipated and performance will improve, we still expect market development expenses to continue in 2006 due to the initial delay in volume ramp ups versus original projections.

Globally, paper mill trial activity involving our (indiscernible) PCC coating products continues to remain strong and consequently bodes well for good growth in 2006 as a result. Overall, we remain optimistic about opportunities in this exciting market segment.

We are also focusing more on bringing forward disruptive technology that delivers both increased value to the customer and increased profitability for MTI. I am pleased with the current progress of our research program covering filler fiber composite materials. During 2006, we plan to increase investments in R&D for trial-related activities with this unique material. We are hopeful that we will transition from these trial-related programs to initial commercialization activities by late this year.

Lastly, we continue to make progress in our aggressive Companywide cost reduction programs which we expect will pay strong dividends in 2006.

Now let's briefly turn our attention to specialty PCC for non paper applications. Our specialty PCC group completed the full year of 2005 with strong sales volume and operating income growth. This performance was the result of our continuing success in penetrating new consumer markets and better-than-expected results in the construction plastic sector.

Going forward in 2006, we expect continuous self-improvement in our specialty PCC segment, based on initiatives in plastic, sealant, and consumer markets.

In conclusion this has been a difficult year in the marketplace and for MTI's performance, perhaps the most difficult and our history. While we are optimistic about the coming year there are headwinds that we continue to watch and plan for, such as energy-related costs -- which we cannot pass along immediately due to contractual obligations -- and further capacity rationalizations. To help offset these potential negative factors, significant cost reductions and tight control over budget expenses will be key to improving our overall leverage as well as maintaining a strong focus on offering customer value through the introduction of novel technologies.

We firmly believe that our product leadership, our comprehensive suite of PCC products, and the reach of our global sales and service organization combined to create a strong strategic asset. We remain optimistic that significant ongoing research projects will culminate in important new PCC business which will help us continue to profitably grow our business, while providing higher value to our customers. Now I'll return the microphone over to Alain who will review MINTEQ's business performance.

I am pleased to report that the refractory segments managed to show strong sequential improvement in financial performance in the fourth quarter of 2005 with operating income margin increasing to 9.3% of net sales in that period, compared with 5.3% realized in the third quarter. Net sales of $83.2 million were $7 million or 5% above the $79.5 million reported for the third quarter as (indiscernible) in North America began to recover from its third quarter drop off. Compared to the 2004 fourth quarter, sales were up 1%. For the full year 2005 MINTEQ net sales reached $327.8 million, up $27.5 million or 9% versus 2004.

In terms of operating income MINTEQ earned $7.7 million in the fourth quarter, the equivalent to 9.3% of sales and $2.3 million below the $10 million reported for the fourth quarter of 2004. It should be noted that in the fourth quarter of last year, MINTEQ recovered $2.3 million in previously written up bad debt related to steel bankruptcies.

For the full year MINTEQ delivered operating income of $28.3 million which was 8% below the 2004 corresponding to an operating income margin of 8.6%. Besides the impact of not having the bad debt recovery that occurred in prior year's fourth quarter, MINTEQ's fourth quarter 2005 performance was shaped by two main factors. One, lower steel production and capacity utilization in our largest markets -- North America and Europe. Two, pressure on production margin resulting from lower volumes and continuing high raw material costs.

Let me review each of these factors.

First, steel production. Global steel production was up an estimated 4.4% for the fourth quarter compared to prior year and 5.9% for the year, reaching 1.13 billion tons. Of the 63 million ton global increase 69 million tons or 110% occurred in China where MINTEQ was not yet in a position to take advantage of the market which also reflects an overall lining declining steel production in the rest of the world.

In contrast, U.S. steel production was reported down 5.8% for the year and 4.7% for the fourth quarter. This was substantially better than the third quarter where the production of steel in the U.S. shrank 12.9% compared to prior years. In the fourth quarter, U.S. production of crude steel of 24.5 million metric tons was up 2.1 million tons compared to the third quarter. As we have explained in the past our refractory products and system sales are highly sensitive to capacity utilization. The value equation swings strongly in MINTEQ's favor when steel mill capacity utilization is above 90% and vice versa.

For the fourth quarter, capacity utilization averaged approximately 86% versus 95% in last year's same period. In the third quarter of 2005 weekly capacity utilization actually dropped below 80% on several occasions. And as a result many (indiscernible) took the opportunity to (indiscernible) with this.

This was even more pronounced in the [BoF] segment where refractory consumption is higher than electric furnace. Thus as refractory consumption increases over the life of the furnace, the similar steel production slowdown that occurred in the third quarter in the U.S. had a strong carryover effect on the demand for our refractory products sensory stems in the fourth quarter.

For the EU25 a similar situation existed with regard to steel production which was 2.6% down for the fourth quarter. For the full year, production was down 3.6%, primarily due to a very weak third quarter. Moreover, there were lower than average production declines in markets such as Germany, the UK, Benelux, and France where MINTEQ has a stronger presence. The [subvalues] in our principal markets cause refractories product line sales to decrease the 15% compared to fourth quarter 2004.

In contrast, fourth quarter metallurgic coiled wire sales increased $9.2 million or 59% fueled by strong volume growth, primarily due to high demand from the electronic furnace segment. As the third quarter of 2005 increase -- increases in the cost of (indiscernible) and decreases in the price of scrap we are strongly in favor of the electric furnace segment as compared to BoF. Sales in this product line also benefited from new business development initiatives, including new accounts in Latin America and Asia.

In addition, strong sales were also the result of higher prices covering cost increases. Second factor pressure on products and margins. Due to lower production levels and the carryover effect from a very low steel demand in the third quarter in our two major markets -- North America and Europe -- the benefit of new business development initiatives was not sufficient to offset the negative impact of lower refractory's volumes as compared to fourth quarter 2004.

In addition we continued to be impacted by by high energy and raw material costs. This was more of an issue in refractory products than metallurgical coiled wire where products are more -- customers are more accustomed to the price volatility of [sub] metals and price pass-throughs that's closely paralleled (indiscernible) pricing on key metallic raw materials.

Overall, MINTEQ is strategically addressing these two issues that impacted fourth quarter results. First, the construction of the [Suzchou] plant in China is progressing well. However, despite strong domestic demands, increased capacity and high inventory levels caused lower capacity utilization in the fourth quarter. Even though MINTEQ is tragically strategically focusing on specialties at steel producers (indiscernible) planning on steel grades are less affected by these overcapacity, we have targeted a broader range of customer targets including some last (indiscernible) PCC suppliers.

We have done this in order to accelerate business to support our plant startup. However, the lower capacity utilization delayed some of MINTEQ's trial activity of new accounts, thereby slowing down our ramp-up program by a few months. We are now projecting a commissioning startup in the second quarter. At the same time, we are refocusing our efforts on those accounts with whom we believe we will be conducting a successful long-term relationship.

Second, we are implementing cost reduction programs that should over time ease the pressure and production margin. These programs include the rollout of lower-cost refractory product formulations that were comprehensively tried in 2005 and will be broadly brought to market in 2006.

Another programs involves a tenant sourcing as we continue in our efforts to develop more cost-effective sources of refractory raw materials. In this regard, we are still evaluating some vertical integration of opportunities with the objective to more cost-effectively service our requirements in both Europe and North America.

On the marketing side, one of the fourth quarter high points was a successful trial activity of [shock free] products and systems in hard applications. This technology pioneered by MINTEQ and it was the steelmaker to benefit from the high durability performance of a shock free product applied with many months downtime. That is to say without having to take a furnace or [ladder] down or off-line to allow it to cool down.

We anticipate that this continuing trial activity will result in important new business opportunities in all of our markets around the world this year. Moreover, as another high point, MINTEQ acquired an advanced digital electrical control technology formally belonging to ET Electro-Technology in Germany. This business is an attractive addition to our (indiscernible) unit and as a platform for growth, we strengthened our position as a products and systems provider to the worldwide electric furnace segment.

In conclusion, after a very strong first six months, the second half of 2005 was challenging for MINTEQ; but we saw a strong improvement in the fourth quarter compared to third quarter levels. Going forward, we remain cautiously optimistic as several factors may impact our financial performance in various, in different ways. In this regard we may be facing a slower than projected ramp up of our business in China due to the current steel capacity overhang, while still relying for large part on the more cyclical North America and European steel markets.

However, at the same time due to lower international shipping rates, we should benefit in the latter part of the year from an easing in raw material pricing from China, as those raw materials come through our supply chain. Moreover, we should also benefit from [hotshot] quick marketing initiatives and further product cost reductions as these programs come to fruition.

I am now turning the microphone over to John who is going to review our financial results. John.

You have just heard a discussion of the business environment highlights of the operating conditions, and the summary of the development activities of the Company during the fourth quarter. I will now review with you how that information is reflected in the Company's consolidated financial results. MTI achieved diluted earnings per share for the quarter of $0.63 which includes nearly $0.01 per share for an impairment of assets charge, related to the expected shutdown of our satellite facility in Cornwall, Ontario, in the first quarter of 2006.

Net sales for the quarter were $253.5 million, an increase of $5 million or 2% compared to the prior year. As Paul mentioned earlier, it is important to note for comparison purposes that our 2005 fourth quarter accounting period had six fewer days -- about 6% less than the same period in 2004.

Foreign exchange had an unfavorable impact on sales of approximately $2.2 million or about one percentage point of sales growth during the quarter. Sales in the specialty mineral segment for the quarter were $170.2 million, a $5.7 million or 3% growth. Sales of PCC increased 3% to $133.8 million from $130.1 million in the same period last year.

The PCC product line experienced a slight decrease in sales in North America and Latin America, due primarily to fewer days, offset in total by the growth generated from the new facilities in Asia and Europe. Sales in the process mineral product line increased 6% to $36.5 million from $34.4 million.

Refractory segment sales for the quarter decreased 1% to 83.2 million as compared with $84.0 million in the prior year. Within the segment metallurgical product sales increased 59% to $24.9 million versus $15.7 million in the prior year. The strong growth in this product line was due to a combination of increased volume particularly in North America and price increases related to the substantial escalation and raw material costs.

Sales of refractory product systems and services declined $10 million or 15% to $58.3 million due to continued weakness in the steel industry, particularly in Europe.

In total MTI's cost of goods sold grew 5%, which had an unfavorable leverage effect on sales and resulted in a 9% decrease in gross margins. Deleveraging in the specialty mineral segment was due primarily to higher raw material and energy costs and the effects of continuing paper industry capacity rationalizations, which lowered demand at several satellite plants and reduced margins. Deleveraging in the refractory segment was primarily due to much weaker steel industry conditions in North America and Europe than in the fourth quarter of the prior year, resulting in a decline in the volume of products in the system sold for the steel industry.

Marketing and administrative and research and development expense for the quarter decreased 3% and 8%, respectively. These reductions were primarily attributable to fewer business days in the quarter. Last year during the quarter the Company recovered 2.3 million of previously written off bad debts relating to the steel company bankruptcies. This resulted in a net bad debt recovery in the prior year of 1.2 million as compared to a provision of 54,000 this year.

In 2005, the Company recorded a write-down of impaired assets in the amount of $300,000. This compares to corporate charges of $1 million related to the due diligence cost from a terminated acquisition effort and restructuring charges of 100,000 in the fourth quarter of 2004. MTI's income from operations decreased 18% to $17.8 million from $21.7 million in the prior year.

Excluding charges for restructuring and acquisition termination, and acquisition termination costs taken in 2004 as well as the impairment cost in 2005; operating income decreased 21% to $18.1 million from $22.8 million in 2004. For the quarter, the operating ratio was 7.0% of sales.

Specialty minerals income from operations of $10.1 million decreased 20% from $12.7 million in the prior year and was 5.9% of sales. Refractory segment operating income was $7.7 million, 23% below the $10 million recorded in the prior year and was 9.3% of sales. Excluding the $2.3 million bad debt recovery in 2004, the refractory segment performance was level with prior year.

During the fourth quarter, the Company reached a settlement of pending commercial and patent litigation. The litigation settlement resulted in a nonoperating income of approximately $2.1 million. The costs of defending this litigation were included in marketing and administrative expenses.

The overall effective tax rate for the year was 29.75% compared to 28.7 in the prior year. The full year rate included dividend repatriation under the American Jobs Creation Act of $18.5 million which impacted the overall rate by about 1.2 points, as well as some variations in geographic mix of earnings. This resulted in a fourth quarter tax rate of 27.2% in 2005, compared with 25.6% in the prior year.

Net income for the quarter was $12.6 million, 14% below the prior year, and diluted earnings per share in the quarter were $0.63, 10% below the prior year as a result of the share repurchase program.

Turning to the full year results, MTI sales grew 8% to $995.8 million from $923.7 million in 2004. Foreign exchange for the year had a favorable impact on sales of $10.3 million or about one percentage point of growth. Operating income declined 8% to $81.8 million from $89.1 million in the prior year. Excluding charges for restructuring asset impairments and due diligence -- due diligence expenses which totaled 2.1 million in 2004 and 300,000 this year. Our operating income was $82.1 million, 8.2% of sales and decreased 10% from the prior year.

Sales in the specialty mineral segment were $668 million, a 7% increase over the $623.4 million reported in the prior year. Operating income was $53.6 million, 8% of sales and 10% below the prior year.

Sales in the refractory segment were $327.8 million, a 9% increase over the 300.3 million in the prior year. Operating income was 28.3 million. 8.6% of sales and 7% below the prior year. Excluded from the segment analysis is $1 million of nontraditional due diligence expense recorded in 2004.

In summary, the Company had a very difficult year. We had a very strong first quarter followed by three consecutive quarters of declining growth. The Company was affected by start-up and ramp-up issues at three new major facilities in Germany and China, significantly higher raw material and energy costs, consolidation in the paper industry and weakness in our largest steel markets.

Net income for the full year decreased 9% to 53.3 million from 58.6 million in 2004. Diluted earnings per share were $2.59, 8% below the $2.82 per share achieved in the previous year.

Turning to the balance sheet, our debt-to-capital ratio is about 15%. Cash generated from operations for the year was in excess of $70 million and we invested about 110 million in capital additions worldwide. Working capital increased significantly in 2005. Days of sales outstanding increased over the prior year by about five days -- an increase of nearly $30 million over last year, partly due to the implementation of our new ERP system, which was installed in a substantial portion of our domestic operation by year end.

Inventories are in line with historical levels at current prices. During 2005, we repurchased an additional 791,000 shares for treasury at an average price of $60.20 per share for a total expenditure of $47.6 million. Depreciation and amortization expense sold approximately $71 million for the year.

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

Thank you John, Ken, and Alain. As you can see 2005 presented a challenging year for MTI. As we look forward to 2006 we will ramp up our satellite PCC facilities in Europe and Asia. Start up our refractories plant in China and initiate commercial shipments from our first (technical difficulty) in Chester, South Carolina. As a technology-based company, we will continue to support our expanded SYNSIL trial development programs, the development of our unique filler fiber composite materials for the paper industry and the commercialization of our new hotshot [free] technology for the steel industry.

Furthermore, we believe that our primary markets -- paper and steel -- will stabilize in 2006. Presently, we expect earnings in the first quarter of 2006 to be similar to the fourth quarter 2005. As a result earnings estimate for the full year of 2006 in the range of $2.85 to $2.95 per diluted share would not be unreasonable.

Operator, we're ready for our first question.

(OPERATOR INSTRUCTIONS) Rosemarie Morbelli with Ingalls & Snyder.

Good morning, all. When you are looking at 2006, and you probably talked about it during (indiscernible) call but I did not absorb everything. Are you still expecting the paper industry to continue shutting down mills and to which if you have a vague idea as to which one are expected to close down, how many satellites are you going to lose?

Yes. We continue to believe that the paper industry will continue to rationalize capacity. As Ken expressed in his comments, we know for example that [Domptar] will be shutting down their remaining paper machine at Cornwall and that we will be shutting down for example our satellite PCC facility that is located at that mill.

You have a new one you need to pull at that particular location?

That's probably in that range, one, one and a half unit facility when it was operating when both paper machines are operating there. We also know for example that Weyerhauser has announced that they will be shutting down a paper machine at [Dryden] Ontario at the end of the first quarter. So they -- so the industry will continue to rationalize some capacity. We also, as Ken indicated, will be shutting down a satellite plant in Israel at Hadara for example. So there is still some capacity rationalization that will take place that has been announced; and there may very well be additional units of capacity in terms of paper machines, for example, that may be taken out as we go into 2006 and 2007, depending on the health of the paper industry.

So it is an issue that we as a company continue to face. Certainly Ken has factored that into his projections for the coming year where we know, for example, that Dryden is shutting down a machine, that the Cornwall paper mill will be shutting down permanently at the end of the first quarter and that, certainly, there could be additional rationalizations as we go through the year. The paper industry, as you know, is going through a difficult period as they try to adjust capacity and operate with more efficient equipment.

Certainly investing in those mills that are world class and those mills that are not, certainly trying to find niches that they can profitably serve. So it is certainly an industry that will continue to rationalize as we go forward.

How many units do you have also in Ontario and in Israel? In other words how many are shutting down between those three known entities?

Probably of the machines we know that are shutting down you will probably hit an order of say three. Three to four units of capacity that we would expect in terms of the impact in manufacturing capacity.

Three to four satellites?

Not satellites, I'm just saying units of capacity.

What is the difference?

A satellite plant is a satellite facility. I'm just trying to give you a sense of the tons of PCC that may be associated between the machines and the satellite (indiscernible). Just trying to give you a sense of it.

Do you also feel that there are parts in the world where you are actually going to continue to see extensions and new featherlight and would that be enough to affect whatever is going to be shut down during 2006?

Very much so. As Ken indicated, we have added 14 units of capacity during the year, 13 or 14 units of capacity. We have expanded as he indicated several locations. We have expanded existing satellite plants during 2005 and we are bidding on additional satellite opportunities as we speak.

So we still see the paper industry as a growth opportunity for this Company. We are very positive about the paper industry providing continued growth for Minerals Technologies. We are supporting the filler fiber composite technology and as you know, we've spoken about that before. It has the potential to double the amount of PCC used and for example, uncoated freesheet paper. That is a technology that we are trialing and supporting fully supported with research and technology. And we will be doing that through 2006, but we see opportunities for the industry as we wrap up our satellite plants in China; as we continue to ramp up our coating PCC program at [Walsom] and in other locations.

So we remain very much committed to the paper industry and as it goes through the rationalization process, we continue to adapt as necessary but more importantly for us as a company, bring forward newer value-added technologies for that industry.

So, as we look at the growth rate that you experienced in the PCC side in 2006, which was -- I guess -- 3% or thereabout? And 2% in volume. Are those numbers that are reasonable for 2006 versus '05 when you put all those things together?

Representative: Right, we indicated in 2005, for example, our unit volume grew by more than 150,000 tons despite the shutdowns of paper machines and satellite PCC plants as we continue to see growth in unit volume as we go into 2006 and probably should exceed that.

And regarding pricing. Do you feel that by the end of the first quarter you will have offset all of your raw material costs?

I would not. We will certainly, as you know, the structure of our contract is that we adjust them on a periodic basis. January 1st of each year is one of those timeframes and we adjust the prices. Then we adjust in certain contracts other times during the year. We will recover a portion of the price adjustments and price escalations that we saw during 2005. But I would not say that we would recover all of it at this time.

If we look at the 2.1 million gain from the settlement could you net it -- well first of all is it netted against interest expense? And if so then interest expense would have been 1.9 million which is substantially higher than the 1.2 million in the second quarter. So what happened there? And then if you take the legal expenses out what was the net benefit from that settlement?

It isn't that line that you mentioned, Rosemary. But I will ask John to take you through the analysis there. John.

Yes, the 2.1 million we disclosed on the table in the press release is from the litigation settlement. And that means that on that net operating deduction line, that the interest was higher. Interest was up about $1 billion, $1.2 million above where it was in the fourth quarter of last year. And that comes from the additional debt we've utilized through the more aggressive stock repurchase plan this year.

So as you got more stock in the fourth quarter I was looking at it sequentially and the reason is the same?

Yes.

And then, (indiscernible) the legal expenses against the settlement? How much did the settlement benefit the bottom line?

It really didn't. The expenses, as you know we've been announcing for a number of quarters, was a substantial additional expense for the Company and for the quarter it offset legal expenses but certainly for the year, it did not.

And for the quarter how much did it add?

Basically it was neutral.

Even for the quarter? (MULTIPLE SPEAKERS). It was not neutral for the year but added to the quarter.

That's correct. Well, it didn't add to the quarter. It was neutral for the quarter.

(OPERATOR INSTRUCTIONS). Mike Judd with Greenwich Consultants.

How much do you expect to spend on the filler fiber-related trial activity this year?

We certainly don't go into that kind of discussion. We book, as you know, as a company that research and development and technology are critical for our continued growth. And why we continue to grow the pipeline very nicely in very difficult periods. That is one of our key programs that Ken has fully funded -- Ken Massimine -- in terms of paper PCC has that effort fully funded in his projected expenses for 2006.

So that is why it'll be a key activity for us. Because we see as we develop the program that we will experience increased trial activity in 2006 versus 2005. And that, certainly, is part of that budgeting process that Ken and his team go through when they prepare the budget. But certainly we continue to support the hotshot treat Alain spoke about in his remarks and the SYNSIL program now will be accelerating its trialing effort for example. And those are programs that are critical for the continued success of MTI.

I think it's in January of each year you typically talk about if you are going to be adding any capacity to existing units. Can I read from your comments about the shutdowns that there aren't any expansions this year to existing units?

No I wouldn't read into that at all in terms of how you perceive that. What we do as you know is, once a year in January, we give you a sense of what we added -- or in this case, unfortunately -- subtracted from our units of capacity for the year 2005. (technical difficulty)

But there's not a look forward?

So in January 2000 -- excuse me January 2007 we will provide that update for 2006. But we very much expect to expand and add additional units of capacity for 2006 as a company.

Just quickly, what tax rate should we be using for '06?

I will ask John to address that please. John.

I think we'll stick with about 30% to go forward.

Ray Kramer of First Analysis.

Looking on the paper side, would you state relative to the operating margin shortfall was the mill closures or the raw material versus price gap the bigger factor there?

Actually it was, as you look at the shortfall in 2005 it was the difficulty of the wrap up of the satellite plants and the coding program caused a good portion of that shortfall. After that then it was the raw materials and energy cost that we assumed and that was then followed by the capacity closures, paper machines, etc..

Even in the fourth quarter were there still ramp up costs in China and Walsom?

No, we were pretty neutral when we got to the fourth quarter.

Taking a bigger step back, it sounds like the refractory is going to be maybe a quarter or so delayed in coming fully on where you'd want it. Walsom maybe the same amount. If we look at the second quarter should that -- is there anything that would make that look materially different from the first quarter next year?

We expect the refraction business -- and I will ask Alain to address it -- we expect the refractory business to improve as we go through to 2006 with the programs that he has underway. And as we look -- as we come in to the second quarter for example for the opportunities to come to fruition in China. But on a global basis we expect that business to improve as we go through 2006. Alain, I will ask you to provide a little more clarity there.

Yes. It's always difficult to predict what the steel industry is going to be in the coming year. But as I explained, we are still incurring the cost of the ramp up without having the benefit of the operation in China for the time being and of this deal so the ramp up after the startup. At the same time as I indicated also before, we may have an (indiscernible) on the raw material cost in the latter part of the year. That may positively benefit the business. But at the same time we are still subject to the steel industry in Europe and North America, which we see the economy improving right now. But I think it is very difficult to say what it is going to be later in this year.

Two shorter follow-up questions. With regards to the mill closures and shutdowns should those basically be viewed as permanent at this point?

Yes I would look at those, Ray, as the industry rationalizes their capacity that when they shut down a machine at this point most likely it is a permanent shutdown.

Lastly on the Omya settlement, is it basically just that onetime fee or will there be some ongoing royalty payments coming from that as well?

As part of the settlement and what we disclosed is that there was a fee that was provided to the Company as part of that settlement agreement and then also in exchange for that, Omya received a nonexclusive license that would pay royalty to MTI as the technology is utilized.

Is that -- that's probably not going to have a material effect on forward earnings for a few years at least?

We'll have to see how that develops.

Jeff Zekauskas with J.P. Morgan.

Can you talk about your expectations for the utilization rate of your SYNSIL facility in South Carolina?

We certainly see a very significant growth in SYNSIL sales in 2006. We have the major customer that was the cornerstone that accounted for the construction of our plant at Chester. We are in the start-up phase of that plant as we speak; and we have that customer obviously prepared to take that material in larger qualities than we can supply out of the Woodville sampling facility. So we would expect that to ramp up during 2006. As you know, it is a merchant plant; and we are very optimistic as we move forward. The program certainly as we now have capacity as I indicated in my comments at Woodville when we shift the product from Woodville to Chester that then frees up the Woodville facility to really perform as it was designed to, as a customer sampling facility.

We already have a number of trials planned to be sourced from Woodville to move into other market segments and other potential customers and run very hard trials with them in 2006.

Yes. But as you close the year, is your -- what's your utilization expectation? That is it's a 200 -- I mean, how should we think about it? It's a 200,000 metric ton plant. Are we going to be at 50% utilization and you are going to be losing money at the end of the year? Are we going to be at a higher utilization? What's your goal?

I wouldn't want to speculate on that. Our goal obviously is to advance the program, as rapidly as we can. We are very confident that we will do that and we'll was a very significant growth in sales for the SYNSIL products. That is something that we fully are confident of achieving but I really don't want to say that we will be at X or Y for example, in terms of where we would be by the end of 2006.

Could you talk a little bit about that filler fiber composite technology? That is, do you think there will be paper sold in 2006 with the filler fiber composite technology? And can you just give us a sense of the magnitude of the trials that you are running with your customer?

That is a good question and certainly we will -- we are continuing to move that technology forward. We have already run some trials with that material and it has performed very very well. We will be running additional trials in 2006 and Ken certainly has the plans and provisions for that in his budget to do that.

We expect, as we get to the end of 2006, that we are hoping that we will be in a position to move more from a trial and phase what could be the initial phases of commercialization at that point. So we think the technology is a very strong, very promising technology for the paper industry.

I guess as far as I can see it at least at this point, there really aren't any concrete margin or financial targets for Minerals Tech and there are very large amounts of capital which are being deployed on various projects. And it's very difficult without having a sense of your expectations about utilization rates or volume growth or margin targets to assess the decision-making process in allocating so much capital in the sense that Minerals Tech is unleveraged. It has the ability to pay a very very large dividend and it's really been suffering under tremendous (indiscernible) pressure in its key businesses over time.

So can you speak a little bit to your longer-term financial targets and how shareholder value might be created if I guess -- can you speak to some of those issues?

I'd be happy to. Obviously your concern is one that we, as a management committee, look at on an ongoing basis. The returns on the capital that we invested with this company that the shareholders provide us for investment we have target thresholds. I'm sure that as you know that John and I have spoken to in terms of hurdle rates that we use internally and the projects as we bring them forward whether it's filler fiber or with SYNSIL, for example -- all our projects and programs, technologies, that would enable us to hit those threshold parts that we talk about.

We have as a company unfortunately not hit those for a number of reasons and those have to do in some cases with the cyclicalities of the industry's reserve. For example the capacity rationalization that is going on in the paper industry. We are up to -- now we've shut down eight satellite plants and with the two coming up in the early part of 2006, we will shut down two more satellite plants for a total of ten satellite plants that will be shut down.

So we are constantly challenged as a company by some of the dislocations that we see in the industries that we serve. But as we go forward we know, as a management and being responsible to the shareholders, that we need to improve their return on the capital that is employed by this Company.

With that brief introduction I would ask John to share some of his thoughts on terms of the capital utilization.

What I might add, Paul, is that some of the -- we've had a few very big projects, very large projects we've had some difficulty with in the short term. As we mentioned earlier today in response to another question, China, for example with very large eight units. And we talked all year about the difficulties we had starting it up. But we also just said that it did not -- it was not a negative impact in the fourth quarter. Well you know how our model works so that once we iron out those problems, it is a very large investment that will make our objectives that we've set out earlier over the long-term. And those are very long-term contracts and once we resolve the initial issues we have, you can expect that we will meet the kind of shareholder value and return from those types of projects that you'd expect.

The more difficult ones are the plants that are merchant plants. We talked about Walsom and we talked a little bit here about SYNSIL today where it is a different model. The revenues and margins aren't as assured as they are in the traditional PCC model so it takes us a little time to ramp them up. Now, again, we had some trouble ramping up in the case of Walsom. That seems to be behind us. The market acceptance is there and over time again, we should be able to deliver the performance on that investment that you've come to expect.

SYNSIL, we are being cautious because, of course, it is the first of its type in the world.

If I may follow up? The value of having concrete margin targets and concrete earnings and growth targets is that this way the shareholders can assess whether the capital is being deployed effectively; and it's able to better gauge some of the bumps that occur along the road and what the financial impact of those bumps are. But I appreciate the difficulties that there are in forecasting certain cyclical industries.

Todd Peters. American Century.

Just maybe three or four questions. Your capital spending, then, for the year for '06. Where do you see that coming in?

We are probably as we look at '06 -- just sort of looking here at John -- we are probably going to the in the range of $80 to $100 million in '06.

Okay. And then what was it for '05?

Paul Saueracker I was going to say I think we -- (indiscernible) was 110 million. So it will be down slightly in '06.

And depreciation is still running 75 million?

71 in '05.

Do you see that moving up a little bit as these plants are completed?

Yes, that would be right.

The six-day impact to the fourth quarter, is there any earnings attributed to that? You had had those six days in the quarter. Were your earnings -- was there an earnings per share impact there?

It's difficult to be really specific about it because of course mix changes so much from year-to-year. But if you look at the very strong course we made up the six days was in the first quarter. You can see that we had very strong performance with growth rate and a 20% range in the first quarter. Business conditions were strong. We had an additional six days.

This quarter we lost the six days and the market situation was weaker. But, it's hard to get any more specific than that. Basically our plans run 24/7. So six days on the calendar is six days of operating income. So you could project it to be 6%.

That's fine. I'm trying to more or less track your number of satellites. The number of units I should say on PCC and you said that you closed five in '05 and two more in '06. Then you said something about ten total that were shut. Then offset that with eight units -- ?

Let me try to clarify that a little bit. What I was trying to indicate there in terms of as the industry has gone through some very difficult periods over the last several years that we have closed right now eight sunlight PCC facilities. Eight satellite PCC facilities from a network and that in the early part of this year '06 we know that two more facilities will shutdown -- Cornwall and (indiscernible) which would give us a total of ten satellite facilities that will have been shut down since the program was initiated. Right now we have 55 satellite facilities operating -- 55 facilities operating at this time. This is after we have shut down eight of them and we are expecting to shut down as I indicated two more over the next few months, which would bring that number down to 53 satellite facilities. Of the 53 remaining as Ken indicated we have in 2005 expanded several of those facilities.

So where we have expanded them as you would imagine those are very profitable from a he paper industry prospective, very efficient, very profitable operations for those paper companies. And we have expanded our satellite facilities there to provide them with additional quantities of PCC as they continue to make larger volumes of paper from the more efficient paper machines that they operate.

Good. That 55 number is the number that I had. So everything comes out.

(OPERATOR INSTRUCTIONS). Follow-up from Rosemarie Morbelli of Ingalls & Snyder.

Going back to the PCC. The PCC comes in it's about 16, 17% on average and I remember previous conversations where you were expecting that particular percentage to go up but based on the conversation today, it sounds as though until the filler fiber composites with IP comes on stream there may not be any increase of additional PCC shall we call it in paper manufacturing or am I wrong?

No you're not wrong. What the industry has done over the last several years is they have maintained a filler level at the 15 to 16% range to 17% range as you indicated. But they continued to run the machines faster. They have not increased. They have traded off to some degree the increase in ash levels plus many times as you know as you increase ash levels fiber to fiber debombing and why we are looking at a filler fiber composite by the way to overcome that phenomenon? That -- without that, you experience debombing in the paper sheet. You weaken the sheet. So in many cases the paper companies have kept the ash level fairly stable but have increased machine speeds to actually produce more paper.

When they do that, we sell more PCC and why we impact our expanding satellite PC plans and our volume goes up each year, even though we have unfortunately had to shut down a number of satellite plants as we spoke earlier today. What we are doing with the filler fiber technology is really creating a disruptive technology -- a technology that permits you to very substantially increase that ash level and still maintain the sheet properties in terms of strength for example and other properties that they are looking for. So that they cannot only run the machines at the high speeds that they desire to run them with the technology and the machine manufacturers going forward but at the same time significantly increase the ash content.

So is this your composite? You will actually cannibalizes the PCC? The traditional PCC. Correct?

I wouldn't say we would cannibalize the traditional PCC.

Or you will replace one by the other, won't you?

Yes we will. We will be using our facilities. Obviously we would have to modify them to incorporate the new technology but it provides for, obviously, ability to very substantially increase the amount of PCC that we would produce at a specific paper mill provided to them that they have to include in the sheet of paper that they are producing.

So this is because the silicon content will be higher. Will you at the same time have higher margin on the new composites than you do currently on the PCC so you'll benefit both ways? Higher content and higher margins?

We think this is a win-win for both companies, very much so.

It's a unique technology that we are bringing forward and we think it has, obviously, it's a very attractive opportunity for the paper companies and the people we are working with. And I believe it truly would be a win-win for both companies.

And I am assuming that IP will have an exclusive for how many years?

Well certainly there is a period of exclusivity but I certainly would not be able to speak to that since those are confidential agreements.

What is the percentage of the IP of the business that you do with IP as a percentage of your total PCC business?

As we've continued to grow the business, one point, as you remember they represented 10% of our sales. They know longer represent 10% of our sales so we did not report that exact number anymore.

They are by the way our largest customer. I just want to let you know that. They continue to remain our largest customer.

Then on the SYNSIL category. Is it fair to say that as you are selling -- I am assuming you are selling it and not giving it away -- all of the protection of the pilot plant you generate about $20 million a year? In revenues?

I'm sorry I did not completely understand the question.

You also -- you have sold out the pilot trend to higher and I am assuming that you are selling it and you are not giving it away for trials. Do you generate about $20 million a year in revenues from that plant? Would that be an okay number?

No that certainly would not just -- I won't get into exact numbers but just to give you a sense of it, we've always indicated that SYNSIL sells for three or four times the cost of other alternative raw materials used by the glass industry. Those alternative raw materials might be on average anywhere from 25 to 30, $35, 40 a ton. SYNSIL price is three to four times some number and we've indicated that the capacity of that plant at Woodville is about 50,000 tons a year. So I will let you work the numbers there (MULTIPLE SPEAKERS).

I have my cost way, way low. Now you have the new plant, the new commercial plant starting up I guess you said in the first quarter of '06. Will you that customers probably will use, I would say, 50,000 tons since more than likely all of the Ohio plant is going to that customer. Once the plant is operating at a 50% capacity utilization will you make money at that level?

I don't want to get into how we transition from Woodville to the new plant at Chester and we run other trials, for example. We will be running trials from Woodville certainly. We expect to expand sales to trials in the Chester region because as we indicated that is a regional glass manufacturing area. We will be doing that in 2006 and the SYNSIL team certainly has outlined those programs for example. So I don't want to get into all of those specifics. It is a very growing program. You are right about that. We will see substantial growth in that program in 2006 but I really don't want to get more specific at that as we begin 2006 here.

When we look at -- I remember at one of your meetings -- when we looked at the trend of revenue growth for PCC at the beginning of its existence it took about -- you had about a flat curve for about ten years and then it really jumped. Are we looking at only a two-year type of flattish curve for the SYNSIL? And then it will jump? Or is the trend going to go slowly up but at a faster rate right off the bat?

Very good question. We have the facility at Woodville. We have the facility at Chester coming onstream and then we will have the facility at Cleburne by late '06, early '07 coming onstream. Each one, 50,000, 200 and 200 so we will have at that point about 450,000 tons of capacity. Both of the commercial plants have a cornerstone customer that will take substantial volume from those facilities and we, through the trial forum, expect to develop other customers in both major glass manufacturing regions as well as look at other opportunities to construct SYNSIL plant. So we see a very good growth rate for SYNSIL as we go forward.

It's premature for me to indicate types of growth rates but certainly, we expect it to grow very nicely in 2006 and 2007 versus 2005.

All right, you will not be pinned down.

At this point we have been at this for a while. We will take one more question, Operator.

Jeff Zekauskas. J.P. Morgan.

I have two very brief last questions. The first is, does your guidance include SFAS 123R?

Yes it does.

And I take it that it's about $0.06, $0.05?

It's in that range.

Lastly, you were kind enough to supply supplementary sales data for the -- for a fair amount of your operations.

Yes we have that as a table now in the earnings release.

But I didn't notice any SYNSIL sales. I was wondering why you chose not to break it out this quarter and whether you plan to break it out in the coming quarters?

We would expect that when SYNSIL becomes a significant product line of the Company then we will certainly break it out as a separate line on the sales information that we would provide but right now it's still a product -- a program under development. And it would be premature to break it out as a separate one.

Because the TALC sales are only 12 or 13 million and all things being equal you should be able to reach that number sometime in '06.

I won't speculate on when we would reach that number but the total TALC business is over $50 million.

Forgive me. That was the quarterly number.

That's a very nice business for those technologies. Randy Harrison is responsible for (inaudible) . But, at the appropriate time we will break out SYNSIL but right now would be premature to do that.

But it will go into specialty minerals?

Yes it's part of specialty minerals. Minerals that's included in other process minerals products.

Thank you.

Thank you, Jeff.

At this time, I'd like to turn the conference over to your host for any concluding comments.

Thank you, Operator, and certainly thank you for the participants on the call. We had, as you know, a very challenging 2005. But with the programs and strategies that we have in place we expect to see improvement as I indicated to you for 2006. We see that improvement across all our product lines as we go from 2005 to 2006. We look for our strategies to continue to provide growth opportunities for MTI. And we will continue to improve the operations of MTI as we go forward.

Again, thank you for your participation on the call and look forward to speaking to you again in April. Thank you very much.

Once again, ladies and gentlemen, we thank you for your participation. This does conclude today's conference.