Minerals Technologies Inc (MTX) 2006 Q1 法說會逐字稿

Good day and welcome everyone to the Minerals Technologies, Inc. first quarter 2006 earnings conference call. Today's call is being recorded. With us today is the Chairman and CEO, Mr. Paul Saueracker. Please go ahead, sir.

Thank you, Operator, and good morning from Southern California and welcome to Minerals Technologies first quarter 2006 analyst conference call. At the top line, MTI achieved net sales in the first quarter of $266 million which was $15 million or 6% above the sales in the same period last year. Compared to the first quarter of 2005, sales growth was moderated by an unfavorable currency impact of almost $6 million.

At the bottom line, during the quarter MTI addressed a number of anticipated events, both positive and negative, that marginally offset each other allowing the Company to deliver earnings of $0.64 per diluted share. Among the factors that adversely affected results were accelerated depreciation on satellite plants that will soon cease operations, the bankruptcy of Smart Papers, labor disputes at some of our steel customers and continuing increases in energy and raw material costs. On the positive side we had an insurance settlement gain in nonoperating income of $1.8 million or approximately $0.05 per share related to storm damage at our eastern Pennsylvania facility.

So far in 2006 the macro business environment has generally been favorable for MTI. In the first quarter the U.S. economy as measured by GDP grew at an estimated 4.7% annualized rate, and industrial production increased at a 4.8% annual rate. However, we faced headwinds in the form of expenses associated with the start up of our first merchant SYNSIL facility, as well as infrastructure costs associated with our new MINTEQ facility in China, and the continued impact associated with our paper customers' rationalization of capacity. Overall, income from operations declined 21% to $19 million, which is equivalent to 7.1% of net sales.

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

Before proceeding further, I need to remind you that on pages 6 through 8 of our 2005 annual report Form 10-K we list the various risk factors that may affect future results. Any forward-looking statements by me or members of our management team are subject to these cautionary factors. On a worldwide basis, we observed improvement in our two largest markets, paper and steel. Global printing and writing paper production is up an estimated 2.5% for the first quarter of 2006, and global steel production is estimated to be up 5.4%. Slightly more than 60% of MTI's first quarter sales were domestic and tied to the U.S. economy. However, many of the markets we serve outside of the United States are exhibiting higher growth. To take part in that growth we have made a commitment to move with our markets and establish a stronger company presence in growing international markets. This enhanced commitment includes the continued ramp-up of our two new satellite PCC plants at paper mills in China, as well as the start of a MINTEQ state of the art monolithic refractory plant in Suzhon, China. We should be operational by the end of the second quarter. This plant has optimum logistics in terms of raw materials and finished goods and is located near a cluster of some 15 steel mills that produce the highest quality steels in China.

While Ken and Alain will provide with you a more detailed analysis of our PCC and refractories businesses, I would like to point out a few operational highlights. Total PCC sales are up 7% for the quarter, reaching $143.2 million. Total paper PCC volume was up 7% and exceeded 1 million tons. Reflecting the ramp-up of several satellite plants and improved sales of coating grade PCC from our Walsum, Germany merchant facility. We expect sales to the European coated paper segment to continue to increase substantially during 2006. Our filler-fiber composite product technology continues ton move forward with further commercial trials scheduled during the next several months.

Our specialty PCC product line sales increased 5%, mainly as a result of strong demand for our ultra fine PCCs for use in polymer-based construction applications. Our Processed Minerals product line achieved sales growth of 9%, primarily for construction-related products, despite rising interest rates. Refractory segment sales are up 3% driven by strong global demand for metallurgical products. This was partially offset by lower demand for refractory products and systems.

Lastly, I want to mention that an exciting development in the first quarter was a start up of our first commercial SYNSIL facility located in Chester, South Carolina. Driving sales of this product line up significantly over the last year. We expect volume will continue to grow throughout 2006. Construction of a second commercial plant in Cleburne, Texas, is proceeding. I will now ask Ken Massimine to provide us with the details related to our PCC business. Ken?

Thank you, Paul. Let me begin by providing a summary of our current market conditions followed by highlights of our business results for the first quarter, as well as some expectations for the full year. The outlook for the global paper industry in 2006 appears relatively positive, as long as the overall economy remains supportive.

Looking at various world regions, the U.S. economy staged a fairly broad rebound in the first quarter of this year, which helped to support a 2.4% increase in overall printing and writing paper production in the first quarter compared to the same period a year ago. And we expect a similar increase in the second quarter of this year. However, we do not expect this first half growth to be sustainable as high energy prices and possible continued interest rate hikes should slow consumer spending. Therefore, we anticipate paper production will be reduced in the second half of this year, continuing into next year. Production of uncoated free sheet papers, our most important market segment, has been declining for the last few quarters and although there was a rebound during this first quarter, production is expected to again flatten later this year.

The first quarter increase is due to a behind in business demand, and a slowing of imported papers from Europe. However, longer term, the continued growth of competitive electronic communications will adversely affect this paper grade. During the past few months, several paper companies have consolidated operations where we have PCC satellite facilities. Among our customers, Domtar has permanently closed their Cornwall, Ontario mill, forcing the closure of our PCC satellite plant at Hadera, Israel will close in the second quarter due to the loss of the supply contract. Most recently, Smart Papers has closed their Park Galls, Wisconsin mill, and we have temporarily suspended operations of our PCC satellite pending disposition of this mill.

Internationally, western European economies are experiencing a broad-based recovery, due to pent up consumer demand and the rebuilding of business inventories. The rate of growth in the production of printing and writing papers advanced about 2.5% during the first quarter, and is expected to expand to about 4.9% for the year as a whole. This stronger domestic demand, coupled with some consolidation in capacity, should improve our operations in Europe. Because the potential opportunity for paper exports may be limited, this could possibly benefit North American producers as well. Most of Asia, and especially China, have exhibited strong paper production growth in recent years. However, Asian printing and writing paper production should see growth this year around 2.5%, well below the rates of 4.5 to 5% seen in past years.

MTI's total PCC sales for paper and non-paper applications in the first quarter increased 7% over the prior year's first quarter from approximately $134 million to 143 million. Paper PCC sales were similarly up 7%, as sales from our new Asian facilities were particularly strong. Global PCC unit volume gained almost 7%. For the first time in MTI's history, during the first quarter, we were shipping at a 4 million-ton annualized rate.

Our first quarter sales growth include gains across all paper segments. These gains, including our successful penetration into the coated paper segment, continue to validate our current strategic initiatives and demonstrate the value that our products bring to our customers. Increased PCC volumes at several paper mills in the Americas, and recent expansions in the European region, aided our first quarter sales growth. For comparison, on a same-store basis, first quarter sales tonnage of paper PCC from existing satellites was 3% ahead of the same period a year ago. However, as expected, paper PCC sales were affected by the shutdown of paper mills at Cornwall and Park Falls, as well as several temporary machine shutdowns and higher raw materials and energy costs. As a result, total PCC operating income decreased 6% in the first quarter compared to the same period last year. Although we anticipate improving sales and operational efficiencies for the balance of the year, aided by the continuing ramp-ups in China and at Walsum, we still will be facing continued head winds.

While expected to improve we foresee operating income remaining under pressure as we anticipate continued high energy and raw material costs. We are continuing to focus our R&D efforts on developing unique technologies for coating and filling PCC products. For example, filler-fiber composite materials. Development activities for this novel technology are still ongoing with good progress being made and additional trials are planned for the second and third quarters of this year. In our previous reports, we have told you that we were working with a key customer. However, we can now tell you that we are working with another customer under confidentiality and are beginning to discuss the technology with others as well. Lastly, we are also working with co-suppliers, taking advantage of synergistic technologies to proactively offer high-valued system solutions for filling and coating paper. This initiative is part of our continuing emphasis on product innovation.

Now, let's briefly turn our attention to specialty PCC for nonpaper applications. Our specialty PCC group just completed another quarter of good sales growth, increasing 5% over the first quarter of last year. Going forward, we expect continued sales improvements in our specialty PCC segment based on our initiatives in plastics, sealant, and consumer markets. In conclusion, our first quarter sales and earnings were as anticipated and we remain confident that our focused strategic business initiatives will continue to generate a solid framework for future advances in sales and improvement in operating income. Now, I will turn the microphone over to Alain who will review the refractory segment business performance. Alain?

Thank you, Ken. Adapting and borrowing from Charles Dickens with some inversion, it was not the best of times, it was not the worst of times for the refractory segment. Despite flat steep production collection in MINTEQ's largest geographic markets, North America and Europe, MINTEQ achieved net sales of $83.6 million, representing a 3% growth over prior year's first quarter. We achieved this growth despite a $2.6 million adverse currency impact equivalent to 3% of sales. In terms of operating income, MINTEQ earned $6.7 million versus $7.7 million in the first quarter of 2005.

On a percentage basis, 2006 operating margin was equivalent to 8% of net sales versus 9.5% in the first quarter of 2005. Major factors contributing to the decline in operating income were higher infrastructure costs required by the Suzhou, China plant start up, and rated business development. In addition, there were lower sales of refractory products and equipment systems in Europe and Latin America, compared with a relatively strong prior year. We also experienced a generally less favorable product mix and incurred additional costs to introduce and support our global new products initiative. Global steel production in the first quarter of 2006 was up by an estimated 5.4%. However, as was the case last year, 14 of the 15 million-ton global increase was in China. Without China, first quarter 2006 steel production in the rest of the world was essentially even with prior year.

In North America, steel production through February was reported down 4.2% versus prior year, but was brought essentially even with last year's first quarter by a strong March. In this context, U.S. capacity utilization remained below 90%. I would also point out that there is normally a short lag between an increase in steel production and increased furnace maintenance and refractories consumption. Another factor affecting first quarter refractories demand in North America was a series of labor disputes at some of our key accounts. In Europe, a similar situation regarding steel production existed with the first two months steel production reported down 3.1%, but first quarter up 0.1%. Steal production in the EU 15 was down 0.5% with continuing fraction declines in Belgium minus 3.7%, Germany, minus 3.4%, and Spain minus 3.5% where MINTEQ has a strong presence. Other Europe was up a strong 6.4%.

Despite all of its claims, China continued to expand its steel production by an estimated 20% in the first quarter and accounted for one-third of the world's steel produced. While not exporting significant tonnage, it must be realized that durable goods manufactured in China, will over time cut into the steel consuming markets in Europe, North America, and Japan, thereby shrinking the requirements for steel in these regions. This underscores the more attractive conditions for growth in developing countries. In this respect, MINTEQ continues to built strength in its international marketing organization, not only in China, but in Eastern Europe, the Middle East, South America, and South Asia.

In the first quarter, some sales of products and equipment systems have been slowed and delayed in several cases because of planned consolidation of large customers in the steel industry. However, during this period we have been successful in incorporating the electronic furnace electric control systems acquired at the end of last year and marketing of this technology on a worldwide basis is progressing well. Overall, MINTEQ's refractories product sales declined 5%. Not good, but a far more modest decline than the decrease sustaining the fourth quarter of 2005 as compared to prior year, indicating the stabilization of demand. Fortunately, our metallurgical products, primarily used in the electric furnace segment continued to grow as a result of strong demand and new business development activities with net sales increasing 36%.

The conditioning face of our monolithic refractories plant in Suzhou, China, aimed at securing the strong participation in the Chinese market for refractories is now in progress. We expect medium to long-term benefit to be substantial in terms of increased sales, decreased costs, and additional profitability. After significant development at ports we are now in the process of successfully globalizing the shotcrete refractory technology. I'm pleased to report that large scale initial accounts were successfully added during the first quarter in both Europe and Asia where, after North America, we are seeing a growing acceptance for this high-performance technology. However, at some accounts, trial activity in the start-up of some new businesses hasn't paid increased costs.

While energy costs continue to rise affecting freight rights, pricing on some of our key raw materials appears to have stabilized. We continue to make progress in terms of cost reduction initiatives, whether at the purchasing level or regarding the reformulation of refractory products. At the same time, we are still actively evaluating vertical integration opportunities to gain better cost control of critical raw materials, such as magnesia. However, as cited before this is a longer term program that will take some time to generate significant benefits. In conclusion, MINTEQ's first quarter performance reflected a number of positive and negative factors. The negatives were amplified by our efforts to obtain future benefits, particularly our China development program, and new business development initiatives in shotcrete refractories.

However, at the same time, we benefited from the strong activity in metallurgical products and the addition of new shotcrete refractory business. Assuming a continuing stable still demand, particularly in North America and Europe, our outlook is for improvement in both sales and operating margins over the remainder of the year, as our new business development initiatives gain traction. John?

Thank you, Alain. You have just heard the descriptions of the Company's business environment, highlights of the product line performance, and a summary of the key development activities during the first quarter. I will now review with you how that information's reflected in the Company's consolidated financial results. MTI achieved diluted earnings per share for the quarter of $0.64, a decline of 12% from the prior year. These results include an insurance settlement gain included in nonoperating income of $1.8 million, or about $0.05 per share after tax.

The gain is related to property damage from Hurricane Ivan which occurred at our eastern Pennsylvania facility in 2004. Net sales for the quarter were $266 million, an increase of 15 million or 6% compared to prior year. Overall, foreign exchange had an unfavorable effect of about $5.8 million representing about 2 percentage points on sales growth. Both segments, again, delivered top line growth in the quarter from continued success of our business strategies.

Sales in the Specialty Minerals segment were $182.4 million, a 12.6 million increase or 7% growth, including the unfavorable impact of about 2 points on growth for foreign exchange rates. Sales of PCC increased 7% to $143.2 million from 134 million last year. Paper PCC achieved growth in all regions as total worldwide unit volumes grew 7%. 4 percentage points of this growth were attributable to the ramp-up of volumes from our new PCC facilities in China and Germany. Sales of specialty PCC grew 5% to $15 million from 14.3 million in 2005 due to increased sales from our Brook Haven, Mississippi facility. Sales in the processed minerals product line increased 9% to $39.2 million from 35.8 million last year. Talc sales increased 6% to 14.8 million from 14 million in the prior year due to strong global demand for plastics and automotive ceramics. Other processed mineral products increased 12% to 24.4 million from 21.8 million in the prior year due to strong demand from the residential and commercial construction industries, and a ramp-up of SYNSIL products.

Refractory segment sales increased 3% to 83.6 million, 2.6 million over the $81 million recorded in the prior year. Foreign exchange had an unfavorable impact of approximately 3 percentage points on sales growth in this segment. Sales growth was driven by the metallurgical wire product line where sales increased 36% due to continued strong volume demand worldwide. Sales of refractory products and systems declined 5% to $61.1 million from 64.4 million last year. MTI's cost of goods sold grew 10%, which led to a 7% decline in gross margin. Deleveraging in the Specialty Minerals segment was due primarily to the continued effects of higher energy and raw materials costs and the effects of paper machine and paper mill shutdowns. The refractory segment margins were affected by reduced refractory product sales, a less favorable product mix, and higher expenses to introduce and support new product initiatives.

Total marketing and administrative expenses for the quarter increased 4% to $27.7 million from 26.6 million in the prior year. This increase was primarily attributable to an additional bad debt reserve established to recognize the recent Park Falls bankruptcy, in increased expenses relating to the adoption of FAS 123R for stock options. MTI's first quarter 2006 income from operations decreased 21% to $19.0 million, from 24.1 million in the prior year. For the quarter, the operating ratio was 7.1% of sales compared with 9.6% in the prior year. Specialty Minerals income from operations of $12.2 million decreased 25% from the prior year and I was 6.7% of sales. Operating income for this segment was affected by the above-mentioned higher raw material energy costs, as well as a continuing paper industry capacity rationalization which reduced margins.

In addition, this segment has been affected by the investment in our market development efforts for SYNSIL products. Refractory segment operating income was $6.7 million, 13% below the $7.7 million recorded in 2005, and was 8.0% of net sales. In addition to the development and product mix factors mentioned earlier, operating income was also affected by the start up and related business development costs in China.

During the first quarter the Company recognized an insurance settlement gain of approximately $1.8 million which is included in nonoperating income. As a result, total nonoperating income for the quarter was $0.7 million as compared with nonoperating deductions of $1.2 million in the prior year. The provision for minority interest increased as a result of improved profitability from our joint ventures, primarily in China. The overall effective tax rate for the quarter decreased to 30.3% from 31.2% in the first quarter of the prior year, due to the change in the current mix of earnings and an expected lower level of repatriation of foreign earnings in the current year. Net income was $12.8 million, 16% below prior year. Diluted earnings per share for the quarter was $0.64, 12% below prior year as a result of our share repurchase program.

To summarize the income statement for the quarter, sales increased 6% while gross margin decreased 7% from the prior year. Total expenses grew 3% resulting in an operating income decline of 21%. The benefit of the insurance settlement, a small decrease in the tax rate and a lower share base mitigated the EPS decline to 12%.

Turning to the balance sheet for the quarter, our debt to total capital ratio was about 15%. Cash generated from operations was strong, about $40 million. Our working capital remained stable in the first quarter versus a substantial increase in the prior year. During the quarter, we invested about 26 million in capital additions worldwide and we repurchased an additional 149,000 shares for treasury, at an average price of $54.47 per share for a total expenditure of $8.1 million. Depreciation and amortization expense totalled approximately $20 million for the quarter. Now I will turn it microphone back to Paul for his closing remarks and for questions.

Thank you, Ken, Alain, and John. As you have heard, MTI's first quarter results were in line with our forecast. Although the global economy remained supportive, we expect the U.S. economy to cool slightly as the year progresses due to higher interest rates and energy costs. However, we have positioned MTI to execute our growth strategies and to improve profitability. As you have heard, these strategies include increased paper filling and coating PCC sales; successful globalization of the shotcrete product technology, increased SYNSIL sales; increased market penetration in Asia, especially China; and additional operational savings. As a result, we continue to believe that earnings in the range of $2.85 to $2.95 per diluted share for 2006 remains reasonable. Operator, we are now ready for the first question. Operator?

Yes. Thank you. [OPERATOR INSTRUCTIONS] We'll talk our first question from Ray Kramer from First Analysis. Please go ahead, sir.

Hey, good morning, guys.

Good morning, Ray, how are you?

Good. I'm not in sunny Southern California, though.

Too bad.

A couple questions for you. One, you're looking at the Chinese PCC plants, it sound like they're finally up and running well operationally. Can you comment at all on what the capacity ramp-up's looking like there and then maybe look at the profitability compared to a typical plant in the U.S.?

Ray, certainly we'll give you some flavor with that. The plants, as we indicated, as Ken indicated in his comments, are ramping up nicely. We have gotten over the issues that we experienced in 2005 as we were bringing onstream some of that newer manufacturing technology. They are contributing positively to our earnings in 2006. But with that brief introduction, let me ask Ken to provide a little additional flavor to what we're doing there in China. Ken?

Thank you, Paul. No, just to really reiterate Paul's point, I think the satellites definitely are ramping up very nicely. We're very pleased with the progress. In terms of the general performance of the products, for example, our coating-grade PCC, customer is very pleased with what they're seeing. And definitely are ramping up nicely because of that.

This is Allan, a little bit clarity though, when I visited China a year and a half ago, and talked to your people, I certainly had the take away that long term the expectation is profitability in China would likely be below that you had experienced in the U.S. for similar products, similar technologies. Can you sort of bring us up to date on what you're actually experiencing?

Allan, I'm sorry that you sort of took away that impression, because when we look at the joint ventures, and these are joint venture plants that we have in China, we expect that the profitability to MTI from those joint ventures will be similar to the profitability that we have at other satellite PCC plants. But, again, in this case, I'll ask John to speak to that a little bit further.

The basic model remains the same regardless of the region of the world or the type of structure that we have. We have to make our hurdle rates to justify the investment. I think from a guidance standpoint, you get some sense of that by watching as joint ventures ramp up, for example, the increase in the provisions that are established for things like minority interest. But certainly the expectation should be that we would have similar operating margins from these operations.

Thank you.

Sticking with paper for just one more moment, if I heard right that the filler-fiber exclusivity period looks like it may be nearing an end, is that a fair statement? And can you comment at all on what ITs latest activity has done with that? I know you were doing some pretty late stage trials in the previous quarter.

We can provide some additional clarification there, Ray. As you know, we have spoken publicly about the relationship that we have with International Paper and the development of the technology, the filler-fiber technology with International Paper. What Ken has indicated in his remarks, is that under confidentiality we are working with another paper company, again in this field, the filler-fiber technology, in this field to increase filler levels, and, in fact, have the opportunity to take that to additional paper companies at this time. So we are still working under confidentiality agreements, but we wanted to let you know that we have expanded, expanded the opportunity that we're pursuing in this area.

Are those -- are they different technologies, just in the same field of composite or are they under the same technology umbrella?

No, those are slightly different technologies. So they are different technologies, very much so.

Thank you.

We'll take our next question from Jeff Zekauskas from JP Morgan. Please go ahead, sir.

Good morning. A few questions. The first is, why are you building a second SYNSIL plant if the first SYNSIL plant has started up and has 200,000 tons of capacity, which is expandable to 400,000 tons? Why do you need a second facility at all? And doesn't this place a large cost burden on you over the next couple of years?

Well, Jeff, when you look at developing any new new technology and trying to introduce that technology into the marketplace, just as we did with satellite PCC, for example, you work with a number of customers to generate their interest in the technology, and their agreement that that technology brings great value to them. As you continue to work with those customers and develop the technology, prove it, prove the value equation to them, you then need to supply them in very substantial commercial quantities. As you know, we constructed the customer sampling facility in Woodrow, Ohio to initiate that process. In the Chester, South Carolina facility we developed what we called a cornerstone customer whose volume was very much the baseload for that facility. And that's why we constructed the facility in Chester, South Carolina. That facility's now operational, and we are shipping to that customer and running trials from that facility at other customers, other potential customers.

Likewise, from Woodville we developed another cornerstone customer in an entirely different geographic region. And this one was in the Texas area. And we are proceeding with the construction of the -- of a SYNSIL plant in Cleburne, Texas. The logistics, the logistics of this SYNSIL technology are that, yes, for a short period of time you can ship large distances, since the material ships and handles like sand, for example, you can ship large distances since the material ships and handles like sand for example. You can ship large distances. But to supply the volume required for a cornerstone account, such as we have in the Chester area, and such as we have developed in the Cleburne, Texas area, you need to make a commitment to construct a very large facility to be able to supply those cornerstone customers who will baseload those two plants with their individual requirements, and at the same time, provide the capacity to expand the technology to many other potential class accounts. So that's the reason why we made a decision to build two plants about a year apart in terms of timing, because in both cases there is a cornerstone customer which will baseload both of those facilities.

Maybe if you could just be a tiny bit more precise in terms of sort of how long the losses at the South Carolina plant will last, or when you expect to reach break even.

What we've indicated previously is that we expect the SYNSIL program to be break even in 2007.

In '07?

In '07, that's what we have indicated previously, that in 2007 that we will reach the break even point during 2007.

I guess my next question is for John. In that the earnings guidance for the year is 2.85 to 2.95, and in the first quarter your operating profits were down 21% or $5 million, in order to hit the bottom end of the range, your operating profits for the remainder of the year have to be up about 22%, and to hit the top end they have to be up 27%. And for the second quarter, you'd have to go from something like the 5 million deficit in operating income in Q1 to up 1 or 2 million in Q2. And since your revenues don't really change very much on a sequential basis, how are you going to do that? What are the levers?

Jeff, before John addresses that question, I was just going to ask why you don't expect revenue to increase sequentially in 2006? You made that statement. We, for example, think revenue will increase during 2006, as you look, as Ken indicated, in terms of his paper coating program, the sales in other areas, the increased sales in China. You look at what Alain indicated in his comments about the ramp-up of China, for example, the other facilities he has, the globalization of the shotcrete technology. So we see sales ramping up sequentially during 2006. So with that brief introduction, I'll now turn it over to John to address the rest of the question anyhow.

Thank you.

Thanks, Paul. Jeff, your math is correct. First of all if you look at the guidance range we're certainly not aiming at the low end. So it is a substantial income increase it's more than a 20% increase. Now, you know that we've had a number of difficult quarters and the first quarter was a lower rate, and as Paul said in his opening comments, that was as expected. We knew there were some things that had to be wrapped up from the difficulties we had last year, in order to get the businesses on track. What you saw in the first quarter is some recovery. You saw some benefit that was mentioned that China now it's obvious, apparently you can see in a number of indices that things have increased, PCC volumes were up 7%. 4 points of that growth in the quarter came from the ramp-up of those new facilities. As Paul just said you should expect a continued ramp up in these volumes, the first quarter is more difficult than some of the others.

As far as the growth ratio goes, we had declines in earnings growth last year. Beginning in the second quarter with that strike that occurred in Finland. So from a growth perspective, the hurdles are not as high for us as they were in the first quarter of this year. So as our program comes to fruition and we achieve the programs, the growth, the growth rates will be much more significant than certainly the decreases that you saw in the first quarter and the last few quarters. You should expect to see those substantial increases. And that's what the guidance is based on.

That's helpful. In terms of filler-fiber and then cuttings grade PCC, is filler-fiber likely to be a more important product initially in Europe or in the United States? And as far as cuttings grade PCC goes, you've had your issues in trying to improve profitability and you're trying to fight off some price pressure and raise volumes. Can you give us a more precise idea of what's going on in that area?

Oh, we'd be happy to Jeff. In the filler-fiber, the trials that we have underway are primarily focused in North America. So that, I would expect that that technology will primarily -- or initially, let me just use the term initially, initially would be a North American introduction. And I think that would be closely followed with European introduction after North America. So we see that technology continuing to unfold and we are very optimistic that that will move forward as we go through 2006 into 2007.

In terms of the coating program, as Ken had indicated in his remarks, that program is gaining traction. Our sales have increased from our Walsum facility in Germany to really the large number of coating paper mills in that general region. As Ken indicated, he expects those sales to increase during 2006. So we believe that we are gaining traction with our coating grade PCC products, that we have demonstrated the value equation to the customers, versus alternative ways of improving brightness and gloss and printability, in that we are gaining the traction that we expected to see with those products. Unfortunately, you're absolutely right, it has taken us longer to achieve that and there have been some competitive cost pressures that Ken and his team have had to address to bring it to success. But we're seeing the traction gaining, the volumes are increasing, and Ken and his team remain optimistic as we move that program forward.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS] We'll take our next question from Dan Rizzo from Sidoti and Company.

I just have questions about SYNSIL, if you could give clarification on the plant in South Carolina, in terms of the amount of volume percentage-wise that you're getting out of there right now?

We don't get into specific volume numbers. The plant just started up in the first quarter, the middle part of the first quarter, the plant started up, we are routinely shipping both truck and rail from that plant at this time. So the volume is increasing as we speak, but I don't want to give a specific percentage, per se. But the volume is increasing and we are routinely shipping by both rail and truck from that facility.

Okay. Thanks. And also the plant in Texas, in Cleburne, Texas, when do you expect that to be operational?

We expect that construction to be completed probably by the end of 2006 or early 2007.

Okay. And just about -- just a couple more questions, one about the PCC plant in Wisconsin that was -- that you had to close. How many units was that?

That was a one-unit facility.

Okay. So pretty small then. And do you see any more mill shutdowns in the near future?

Well, we don't see any that I could specifically point to, but as you know, the paper industry continues to consolidate and continues to rationalize their capacity. So we are always aware that we are at risk that some small machines or a small mill someplace may shut down. So it's one that we watch closely, Dan, and it's one that we think as the industry continues to consolidate, continues to rationalize inefficient capacity over the next several years, there will be continued shutdowns of some of those inefficient paper machines and facilities.

Thank you.

But we don't have any one that we can specifically point to.

Thanks a lot, guys.

Thank you, Dan.

We'll take our next question from Todd Peters from American Century. Please go ahead, sir.

Hi, good morning.

Good morning, Todd.

Good update call. I want to ask, so the depreciation for the year, is that going to be about 80 million or is it going to ramp up a little more in the second half?

I think the rate you're seeing now is pretty good for the year, Todd.

Okay, great. Then capital spending dollar, I think you said 90 million at -- earlier at the end of the fourth quarter in January, is that still a good number?

John, you want to just address that one, please?

Yes, I think the guidance we gave is to look for around 100 for the year, we're just about 25 million in the first quarter.

Okay. No problem. And I guess then with China, providing in PCC paper 3% unit growth, do you see that accelerating through the year or is that kind of like where the number's going to be? What's the utilization on those sites there?

I believe, Todd, that that will continue to improve. But let me ask Ken to address that specifically. Ken?

In terms of specific utilizations, Todd, obviously we don't want to get into specific numbers. But in terms of the ramp-up, we definitely see a progressive ramp-up, for example, first quarter to second quarter as we go forward. So definitely you can expect an increase in volume coming from those facilities.

Okay. And then my last question, net-net, you look at Domtar and the site in Wisconsin and then some other idle capacity in the uncoated free sheet here, compare the U.S. market to the European market, and what's being done over there on the uncoated free sheet side. How much capacity do you see coming out of the uncoated free sheet market between these two markets?

There is, in this case, Todd, actually you see some pluses and minuses. For example, as you look at the market here in the U.S. where a number of paper machines and paper mills have shut down or paper machines are being converted to other paper grades, capacity is being taken out of the market. If you go to other parts of the world, for example, even in Europe, [Supercell], for example, has announced the construction of a world class uncoated free sheet paper machine. If you go into Asia, there are people looking to put in new uncoated free sheet paper machines. So the total demand worldwide continues to grow for printing and writing paper. It's a challenge here in North America, and it will even be a challenge for some of the European paper producers. Because as you look at the European producers, such as Store Enzo, as UPM, they're also taking some very drastic steps from a European perspective in terms of rationalizing some of their facilities, and also reducing the levels of manning that they have.

Right. Okay. So there's some give and takes.

Yes, that's correct.

Do you have any new facilities, new satellite PCC plants or expansions occurring this year that we're not aware of?

Well, we only talk about expansions once a year, in January, when we give you a sense of that. But I can tell you we're working on new satellite opportunities, new satellite opportunities and expansions. Those are things that we're working on.

Okay. And then let's compare your feeling about the SYNSIL product and your level of break even in '07. Are you like more confident that that break even number's going to occur in the first half of the year or is it more like a second half of the year time period?

Well, we have an overall SYNSIL program that we're working with, both that's a long-term program. We have the sampling facility in Woodville, Ohio, the plant that just came onstream in the middle part of the first quarter at Chester, the one coming onstream in Cleburne, Texas, in late '06, early '07. So we will continue to do a lot of market development activity. But the plan right now is that we expect that overall plant to reach break even in 2007.

Okay. Very good. That's all I have.

Thank you, Todd.

Thank you.

And we'll go next to Rosemarie Morbelli from Ingalls & Snyder.

Good morning, all.

Good morning.

First a clarification in your 2.85 to 2.95 guidance for the year. Do you have the $0.05 benefit from the insurance proceeds?

Yes, that would be part of that. Because that offsets some of the negatives that we had, Rosemarie so that would be, as we look at the total guidance for the year, that would be part of that guidance.

Okay. So this is one thing, thank you. Could you also talk about, in your non-PCC paper category, you are doing quite well in construction. Could you talk about different areas and other areas where you actually are seeing a decline due to competitive problems and that sort of thing?

In the special, what we call that our specialty PCC product line, that's under responsibility of Randy Harrison within our company and that product line is doing well. In fact, we have expanded the plant in England, in the U.K. which supplies the European market with our ultra fine PCC and other grades of specialty PCC nor nonpaper applications. That plant is doing well, we've recently expanded that. Also as we indicated in the comments, the Brook Haven facility that we constructed several years ago in Mississippi is also improving the performance, in that case both for construction-related products and also it goes into other products, for example, for automotive applications. So there are a number of different applications that those products go into, both construction and in some cases, automotive applications.

It also goes into consumer applications. So that's another aspect of that business for food fortification, for example, and other nutritionals. So there are a number of applications that we see for that business. And in this case, as we indicated, they have grown nicely in the first part of 2006. And our forecast is that they will continue to do well throughout this year as we go out over the next several quarters.

Including the food applications, Paul?

Yes, including the food applications. There is continued demand for calcium carbonate in food applications. We see the need for the calcium fortification. There are a lot of people that are looking at it. As you know, in both cereals. for example, other applications, even in some of your soy drinks for example are now calcium fortified. So we continue to see a need for both Precipitated Calcium Carbonate in that area, and we also make a food grade calcium carbonate that are used in those applications also, which again is part of what we call the process minerals business, again, under the responsibility of Randy Harrison. He addresses that business both from a precipitated calcium carbonated perspective and from a ground up calcium carbonate perspective. That is one that has continued to grow for this company.

At some point there was some problem in the food, in particularly the calcium application because of competitive forces. Are you saying that those are kind of gone and you are now growing?

Yes, most of that has worked its course. This was the old prop 65 from California, where we had developed a product if you remember, Rosemarie, called Cal essence PCC which was an exceptionally low lead grade of Precipitated Calcium Carbonate to meet the requirements of what was known as proposition 65, or prop 65. That pretty much has run its course at this time in terms of the impact on the use of various calcium carbonate materials in the food fortification, food pharmaceutical applications. We obviously, as a supplier, provide products, including Cal Essence, which is exceptionally low in lead and many other products that meet the USP and also the food chemicals Codecs requirements.

Thanks. I was wondering if Alain could touch on the start-up of the new China plant, how much costs were there in this quarter which will disappear in the next quarter?

Well, as we indicated in our prepared marks before I turn it over to Alain, we have incurred costs in China, as we have built an infrastructure to support the business activity that Alain sees for this company. The opportunity to supply refractories to a steel market that accounts for a quarter of all the steel produced in the world. So we have invested heavily in infrastructure. We think it's a growing market for this company, and we have the high technology products to penetrate that market. But with that brief introduction, I will turn it over to Alain. Alain, please.

Yes, Rosemarie, that's indeed a very important focus for us. We are right now in the commissioning phase of the plant. We expect the start-up to occur in the second quarter, which means in a couple of weeks. Right now, what it means is that we have the infrastructure in place which is developing the market positions so that after the start-up we ramp up the plant and we have a customer base where we can sell our products and systems. So right now, it's more a cost that is in place that is required to support the business. Without the full benefit of the volume in the business that we will ramp-up over time after the start-up.

Do you think that the customer base you have in place can realize about a quarter of the capacity of that new plant?

We expect the plant to ramp up certainly after the start-up over the year. I was asked the question before, I think it's going to be a transition. When you have the ramp-up, you need to generate the contribution from the volume, and the sales, and these volume and sales will be ramping up over time. So we expect to be in a transition phase certainly for the remainder of the year. But with the situation improving over time.

And when we look at the operating margin for that particular segment, do you see an improvement in the second quarter? And forgive me if you have already touched on that.

Well, we expect to see an improvement over the remainder of the year, both in terms of growth of sales and margins. So over the year, yes.

But not necessarily as soon -- as early as in the second quarter? Am I translating that properly?

No, I think we will improve over the year, and I hope obviously to always improve from the previous quarter.

All right. And if we could look at PCC, if I read the report and heard everything properly, sales were up 7%, volume was up 7%. Did you have any price in that or was price actually down, given the environment?

Rosemarie, the primary reason why the pricing appeared flat was because of currency. As we indicated that we had a negative impact in total of two pens of growth based on currency. Most of that occurred in Europe and it did impact the average, as you would look at it, say average realized selling price. But the impact was in Europe. Other areas, Ken and his team were able to achieve price adjustments. Favorable price adjustments.

Okay. And then lastly, as you are beginning to sell products from your SYNSIL plant in South Carolina, any quality problems that you are encountering? And I will add another question to that, if I may, what is your definition of a cornerstone customer?

Okay, well I'll take the first one. The first question first, Rosemarie, actually the product being produced at Chester is better than the product that was produced at the customer's sampling facility.

Oh, that's very good.

The product is actually better and performs better in the customer's furnace than the material from the customer sampling facility. In terms of the cornerstone customer, I won't give you obviously an exact percentage, but it would be a customer that justifies the construction of a 200,000-ton facility.

Okay. Thank you.

Thank you, Rosemarie.

[OPERATOR INSTRUCTIONS] And we'll go -- have a follow-up question from Jeff Zekauskas from JP Morgan. Please go ahead, sir.

Thanks very much. In the Israeli operation that you've closed down, was that a lost piece of business? And if you lost it, why did you lose it?

The answer is that was a lost business, Jeff. We are shutting down that satellite. It is still operating at this time but we will be shutting it down. That, by the way, has impacted our financial results because, as you know, when you have a planned shutdown, you have to accelerate depreciation to accommodate that. And add accelerated depreciation after you started in the second quarter of '05. So it impacted us in the first quarter of '06, by the way.

We lost out to competition mainly because we have a facility on-site and long term the CO2 supply to that facility was going to be questionable. So there was a need to construct an entirely new facility at some other location. It would have required us to write off the facility we had to construct a new one. As we looked at the economics of that and the ability to get a return that we thought was appropriate for this company, we made a decision not to pursue it.

So how did the other supplier, how is the other supplier able to negotiate those issues?

Because they didn't have a facility that they would have had to write off.

So they built a new PCC facility?

Off-site. Yes, they built a new facility at another source of CO2. The total economic package for them, obviously, was one that for them was attractive. For us to have to build an entirely new facility at the same time shut down our existing facility, was an economic equation that we, as a company, decided was not favorable for us to pursue.

So their particle manipulation was comparable to yours for these applications?

I wouldn't say it was comparable, but probably would provide some benefit that the customer was willing to accept. For the price that the other supplier was willing going to charge for it.

To go back to the issue of the shutdowns of various paper machines, there are permanent shutdowns, there are temporary shutdowns. How much of the shutdowns were done or completed in the first quarter and how much more is there to go? And can you just give some gross quantification of PCC tonnage that was lost either for the quarter or what you expect for the year? We can sort of have some idea of the magnitude of all of these events in the aggregate. Or how much more is to come after what we've seen in Q1?

Well, we've seen a number, for example, we've indicated to you that Park Falls was shut down, and that was a one-unit plant. Cornwall, the Domtar facility that shut down was a little over a one-unit plant. Capacity in a Texas shut down after the hurricane last September. That was a one-unit plant. We have Dryden, a warehousing facility that is going to -- they shut down a machine, for example, and the total requirement there was probably in the order of about one unit, for example, of a facility, the other, that our satellite plant continues to operate because they have another paper machine there.

So if you look at that, for example, just to give you that as an impression. We know that Pensacola, for example, an IP in Pensacola is converting a machine there from uncoated free sheet to another grade of paper. That will again be probably in the order of one to two units of capacity. That will take place sometime in 2007. So you're looking, as I was just going to, probably eight units, eight units of capacity that is -- has shut down or will shut down over the next, say, 12 to 18 months, as we look at it. Just to give you a quick sense of responding to your question.

So there's no other -- there are no other units that you expect to shut down this year; is that right?

Not that we're aware of. In other words, we know that IP is shutting down that paper machine in 2007. We know that Hadera will be shutting down over the next probably 30 to 60 days in terms of their time schedule. But beyond that, at this point, and I'll ask Ken Massimine to respond, we're not aware of at this point -- not to say that something can't happen in a relatively short period of time, in 30, 60, 90 days, but right now, we're not aware of any. But I'll ask Ken to address that also. Ken?

Jeff, to the best of our knowledge, there's nothing on the horizon with respect to anticipated shutdowns. Obviously, anything could happen. But at this point, there's nothing that we foresee.

I think isn't Warehouser supposed to, haven't they declared that they wish to sell their uncoated-free sheet assets?

I don't know if they've actually said anything that I'm aware of, by the way, Jeff. I have not seen any public announcements. We do expect that there will be continued consolidation, as we said earlier, in both paper and steel. We think that the bulk of those industries will continue to consolidate over the next 12, 18, 36 months, and we as a company have to have the agility to be able to respond to those closures and adjust our businesses as we move forward. That's what we think, we as a management team, have the ability to do.

I'm not an expert at all in the paper area, but my understanding is that there's a newer grade of paper in the United States. I think it's called 94 bright. And this is sort of a brighter, higher quality sheet.

Yes, it's actually 92 brightness.

92 bright, there we are. And my understanding is that that's brightened more by TIO2 than by PCC. Is that correct? And is the filler-fiber composite paper competitive with this grade or is it cheaper or how might you compare it?

The primary material in the 92 brightness paper, Jeff, is Precipitated Calcium Carbonate. That is the major component of the pigment filler used in that grade of paper. I can't address the other additives they use, because in some cases, each paper mill considers that confidential. But the vast majority of the filler used in those papers is Precipitated Calcium Carbonate. That's the most cost-effective way to get the brightness that they're looking for, the brightness and opacity. The filler-fiber technology will complement that exceptionally well because you're raising the PCC level, which has a brightness in the range of 98 to 99 from, say, 15% to 25 to 30%. So you will actually enhance the performance of that sheet of paper because of the higher level of very high brightness PCC in that sheet of paper.

So the 92 bright, does that represent an addition of the amount of PCC in the paper or is that where the new brightness comes from or is that something which has remained relatively constant?

The new grade of 92 brightness is that most paper companies are using PCC, which they have continued to use, and are using some other materials to give it a little higher boost in brightness. But most of them are doing that, again, with their own unique formulations. But, again, the vast majority of the filler is Precipitated Calcium Carbonate.

But is the 92 bright, does that have a higher filler level than whatever grade that paper replaced?

No, it does not.

It does not.

Does not.

Okay.

They do it either by bleaching the fiber, more PCC, or using other additives that in some cases are expensive. But, again, each paper mill uses their own combination of bleaching, PCC, and other brightness additives to achieve the 92 brightness.

So all things being equal, when am I going to be able to buy a sheet of paper with the filler-fiber composite technology in it when I go to the local Staples?

We're hoping that you're going to be able to do that probably in 2007.

In 2007?

That's what we're expecting.

In the first half or first quarter or the last quarter o?

Jeff, I said 2007. But, if they're open on a Monday or a Tuesday, it could be a Monday or a Tuesday.

Thank you very much.

Thank you, Jeff.

[OPERATOR INSTRUCTIONS] We'll take a follow-up question Ray Kramer from First Analysis. Please go ahead.

Hey, good morning guys, just a couple little questions again. Looking at SYNSIL, now that you've got the South Carolina facility up and running, as I understand it you really have been limited in doing trial activity as a result of that. Given the typical duration in getting a complete trial done, when do you think you'd be prepared to announce another big SYNSIL facility?

That would take time. It's a great question, Ray, but it takes time to run the trials. The trials we are running right now, we are running additional trials. Some of those are regional in nature, for example. We will, as you would expect, to load the Chester plant, to bring that up into a good economic loading, then we bring on the Cleburne plant at the end of this year, early next year, and we'll work to bring that up to a good loading level in terms of volume of SYNSIL produced. But in the interim, we will continue to run trials so that we will be in a position to hopefully announce a third commercial SYNSIL facility. But it would be presumptuous of me to try to give you a time when we'd be in a position to do that.

Do you think you'd have another one in '07, or is that reasonable?

That's hard to say. We would hope that as we come to the end of '06 and into '07 and we've been running trials that it could possibly lead to an announcement that we would be in a position to construct a third facility. But that's just really speculation on my part at this time, Ray.

Okay. Then turning to PCC price, it sounds like you got a couple points of price in the quarter but based on your other comments, that's probably not enough to offset raw material and energy. Should we look for similar type increases going forward and when do you think you offset those higher costs?

Well, two ways of answering that. One, we did get higher pricing. As we said earlier, a good portion of that was offset by currency. All right, so a good portion of that was offset by currency. And as we look at the contracts, the contracts that we have for the satellite PCC facilities, with those host mill customers, there are formulas in there of when we can pass through the additional cost, raw materials, energy, other chemicals that are used in the production of PCC. So there is a schedule then, a schedule, there's a formula and then a schedule of when those prices implemented. Ken and his team have obviously been doing that very effectively. In this case, as I mentioned a moment ago, a good portion of that was offset by the currency impact.

Does the schedule allow further increases in the June quarter?

That's on a customer contract-by-contract basis.

Okay. And then lastly with some of these shut downs that you talked about before, what are you doing with the equipment? Are you packing it up and shipping to it China? What's the strategy there?

Well, we don't pack it up and ship it to China, but what we do, do, under the contracts that we have, when a satellite plant is shut down, we are obligated to remove that satellite plant to ground level, don't have to remove the foundations but have to remove the satellite plant to ground level. We salvage out of those facilities the equipment that we can use at other satellite plants, it could be motors, it could be agitators, various types of equipment that we use. At that point, then when we have salvaged everything out of it that we think is useful, then we'll hire someone, for example, to come in and remove the rest of the facility. Many times that's done at very little cost to us because it may not be of value to us, but it is of value to a salvage contractor. So generally, that's of little cost to us.

If you look, for example, at the Park Falls facility, that one is just temporarily suspended right now because smart papers has indicated that they're attempting to sell that facility. So right now we have just idled the Park Falls facility . Although, we're not producing anything, and as John indicated in his remarks, we've had to take a bad debt adjustment because of the bankruptcy provision, the facility itself at this point has just been idle because the Smart Papers has announced that they are attempting to sell that facility.

Okay. Thanks a lot, Paul.

All right. Thank you. We'll just take one more question, Operator.

Mr. Saueracker, there appear to be no further questions so I'll turn the conference back over to you for any additional or closing remarks.

Well, first of all, thank you everyone for your interest in Minerals Technologies. We did have a challenging first quarter, we came in at $0.64 with some pluses and minuses. However, as we go through 2006, we think that the strategies that we have to both grow the business and improve profitability, whether it's paper filling and coating PCC, whether it's the globalization of the shotcrete technology, increased SYNSIL sales, for example, that we will continue to grow Minerals Technologies, both top line and bottom line. As a result, we continue to believe that the earnings in the range of $2.85 to $2.95 per diluted share remains reasonable. But with that final comment, I want to thank you again for your participation and everyone please have a very fine day. You take care now.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.