Minerals Technologies Inc (MTX) 2006 Q2 法說會逐字稿

Good day and welcome, everyone to the Minerals Technologies Incorporated second quarter 2006 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. Good morning, and welcome to the Minerals Technologies second quarter 2006 analyst conference call. On June 27, we announced that the second quarter earnings would be lower than expected. And slightly lower than the $0.64 we recorded in the first quarter. As you now know, we achieved diluted earnings per share of $0.63 for the second quarter of 2006. Unchanged from the same period last year. Despite earnings per share decreasing a $0.01 from the first quarter of this year, we showed an improvement in operations from the first to the second quarters. Our first quarter results included an insurance settlement of $0.05 per share.

MPI's worldwide net sales for the second quarter reached $266.5 million, a 9% or $21.8 million increase over prior year second quarter. The higher sales were driven by a 12% increase in specialty minerals segment sales and a 3% increase in refractory segment sales. Income from operations of $20.9 million showed only slight growth from the $20.8 million achieved in the second quarter of 2005. Operating income for MPI improved to 7.8% of sales, up from 7.1% in the first quarter of 2006, but still lower than the 8.5% achieved in the second quarter of 2005.

In a year-over-year comparison, our second quarter earnings remained flat as a result of a number of both positive and negative factors. Adverse issues included unrecovered raw material and energy cost increases, reduced contributions from the metallurgical product line, several paper mill and paper machine shut-downs, a slower than planned ramp-up of our new SYNSIL products manufacturing facility, and higher marketing and administrative expenses, particularly associated with the planned growth in worldwide infrastructure costs and increased employee benefit expenses.

However, several significant developments partially mitigated these factors, including improved paper industry performance in Finland, improved operations in our two large satellite plants in China, improved performance of the refractories product line and the systems product line and the ramp up of our European coating program. Net income of $12.6 million was approximately $0.5 million below the $13.1 million earned in the second quarter of 2005. Earnings per diluted share remained level at $0.63 per share, due to a lower share base.

In terms of the business environment, the global economy continued to expand. Second quarter 2006 U.S. GDP expanded at a 2.5% annual rate, and was 3.5% above the second quarter 2005. Total industrial production growth for the U.S. economy was estimated at 4.2%, compared to the second quarter of 2005, and it is expected to maintain growth in excess of 4% throughout the rest of the year. However, one yellow flag we see is the slow-down in both new home sales and permits for new housing starts. It should also be noted that the ever escalating price of oil to unchartered levels presents a number of challenges to the business, especially in passing through these costs via price adjustments.

Let's now take a global view of the two industry's most important MPI, paper and steel. The production of printing and writing paper in the United States increased 1.1% in the second quarter, and the forecasted growth worldwide for 2006 is 3.3%. The worldwide production of steel increased more than 10% compared to the second quarter of 2005. Unlike the first quarter, where 100% of the global steel growth came from China, North America has participated in this expansionary cycle.

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

Before proceeding further, I need to remind you that on page 6 of our 2005 10-K, we list the various factors and conditions that may affect future results. Statements related to future performance by myself or by other members of management are subject to these cautionary remarks and conditions . MTI is continuing to invest heavily in three strategic programs that will drive its long-term growth and improve operating margins. We are beginning to see benefits from these programs. They are--increasing our participation in regional markets of high growth potential, particularly China and Eastern Europe, the development and commercial success of ground-breaking technologies including SYNSIL glass, fiber composites for paper and hot shot treats for steel, and cost reduction, as a result of our operations excellence initiative. While I will not dwell on the details of these programs as they affect PCC and refractories which will be explained by Ken and Alain, I would like to mention some highlights.

In paper PCC, the ramp-up of the new China facilities is progressing nicely. We continue to penetrate the European coating market and during the quarter we continued to advance the filler fiber composite program. Our SYNSIL products program made progress during the second quarter. Although the ramp-up at Chester has been slower than expected due to issues unrelated to SYNSIL, the usage rate is increasing and we are confident we will achieve the planned volumes at this facility in South Carolina. The refractory segment has successfully started up its monolithics plant in Suzhou, China. The plant will allow MINTEQ to take advantage of lower raw material costs, lower transportation costs, and immediate access to the largest and fastest-growing steel market in the world. However, we are now incurring expenses to support this initiative, as we ramp up sales volumes at this facility. And we have been able to stabilize a portion of our raw material and energy costs and have additional programs underway to reduce raw material delivery costs, and to become even more energy efficient. I will now ask Ken Massimine to provide us with details related to our PCC business. Ken?

Thank you, Paul. I would like to begin my discussion with a few comments on the global paper industry. Followed by brief highlights of MTI's PCC business performance during the second quarter. Global demand and production of printing and writing paper showed good improvement in the second quarter of 2006, compared to the same period a year ago. Looking at specific world regions, preliminary U.S. data from RICCI consultants show the second quarter of 2006 had about a 1.1% growth in overall printing and writing paper production, versus the second quarter of last year. This minimal growth should give way to a slightly stronger second half of 2006.

However, economic pressures, such as increasing oil and commodity prices, rising interest rates, and slowing consumer spending could potentially inhibit the growth of paper production in early 2007. Production and consumption of uncoated free sheet papers, our most important market segments, appears to have reached a plateau, with little year-over-year improvement in growth. And during the past few months, several more uncoated free sheet paper mills have closed their paper-making operations. In particular, Gladfelter closed their paper mill at Kimberly, Wisconsin, and Smart Papers closed their Park Falls Wisconsin paper mill. The Park Falls closing forced us to temporarily suspend manufacturing at our on-site PCC satellite plant. I am pleased to report that we anticipate resuming production at our Park Falls PCC satellite plant next month, as recently, this mill was slowed to Flambeau River Papers who are scheduled to restart paper production in the third quarter.

Internationally, western European economies are experiencing a broad-based cyclical recovery. The rate of growth in the production of printing and writing papers advanced 2.6% year-over-year, during the first quarter. And expanded about 13% in the second quarter, due to comparisons with last year's weak second quarter. The result of labor disruptions at paper mills in Finland. Most of Asia and especially China have exhibited strong paper production growth in recent years to satisfy not only increasing domestic demand but export opportunities as well. Future annual growth is expected to become more dependent on export sales, potentially a difficult situation given our forecast of softening in the North American and Asian economies next year. Hence, Asian printing and writing paper production should see growth slowing to around 4%, well below the approximate 6% growth rate of the past two years.

MTI's total PCC sales for paper and nonpaper applications in the second quarter increased 12% over the prior year second quarter from approximately $123 million to $138 million. Paper PCC sales grew 14%. Sales growth was achieved in all regions as worldwide unit volume grew 11%. The ramp-up of volume at our new PCC facilities in China and Germany accounted for 4 points of this growth, while 3 points were due to the improved paper industry situation in Finland. For the first time in MTI's history during the first half we shipped at an annualized rate of more than 4 million tons.

Our second quarter sales growth included gains across all paper market segments. Strong sales of volume performance at several coated and uncoated mills in North America and Europe, increased PCC volumes at uncoated free sheet mills in Latin America, plus uncoated ground wood mills in Europe, and recent satellite ramp-ups in Asia aided our second quarter sales growth. For comparison on a same store basis, second quarter sales tonnage of paper PCC from existing satellites was 7% ahead of the same period a year ago. Paper PCC sales were negatively affected by the shut-down of several paper mills and associated PCC satellites at Park Falls Wisconsin, Pasadena, Texas, and Cornwall Ontario. As well as the machine shut-down at Dryden, Ontario. In addition, our satellite plant at Hadera, Israel closed as scheduled in early April this year due to the loss of the supply contract. However, strong demand and satellite PCC expansions more than offset these volume losses.

Total PCC operating income improved more than 20% in the second quarter, compared to the same period a year ago, due to sales in Finland, not being impacted by a labor dispute as they were in 2005. Increased sales from our new PCC satellites in China, as well as additional sales coming from expansions at selected satellite facilities. Although we are cautiously optimistic about anticipated sales and operational improvements throughout the balance of this year, we are still facing continued head winds. We foresee operating income remaining under pressure from continued high energy and raw material costs. Our filler fiber composite material program continues to advance with additional trials planned for the third and fourth quarters of this year. We are hopeful that this technology can be commercialized shortly thereafter. In addition, we have broadened our discussions regarding this technology to several other paper companies.

In groundwood papers, trial activity has increased particularly for super calendered papers where PCC can economically enhance paper optics. Now that we have licensed our acid tolerant technology for employing calcium carbonate in the manufacture of groundwood papers we are hopeful that this market will expand as producers of super calender papers look for ways to improve operations and reduce costs. For mills manufacturing coated papers we have introduced a new open carb PCC analog capable of delivering improved opacity and gloss.

Now let's briefly turn our attention to specialty PCC for nonpaper applications. In the second quarter, sales within our specialty PCC group were particularly affected by a softening of the automotive and consumer markets. Consequently, sales in the second quarter did not generate the expected improvement versus last are year. Going forward, we anticipate a modest improvement in our specialty PCC segment from new product sales in construction applications.

In conclusion, we are pleased with the performance and growth of our second quarter sales and earnings. We remain confident that our focused strategic business initiatives will continue to generate a solid framework for future advances in sales, and improvements in operating income. Now, I will turn the microphone over to Alain, who will review the refractory business segment performance. Alain.

Thank you, Ken. It continues to be a growth industry particularly on a global scale. We have passed the stone age, the copper age, and the bronze age, but we are still in the steel age. The key for MINTEQ is to be in the right place at the right time with the right technology. Net sales in the second quarter of 2006 were $86.9 million, representing a $2.9 million or 3% growth over prior year second quarter. The sales increase corresponds to an 11% gain in sales of refractory products and systems partially offset by a 15% decrease in metallurgical product sales. As we be record, steel production in North America and Europe started to decline in June of last year. These favorable comparisons to last year, combined with the progress made on our marketing programs particularly the commercial rollout of our high performance SHOTCRETE products led to the 11% year-over-year progression of refractories, products, and system sales.

On the other hand, metallurgical product sales declined by 15% reflecting the drop in [OI] prices on which many of our supply agreements are based. This year, wide volumes have generally held up, decreased pricing on OI raw materials, down significantly from last year's price spikes, caused average selling prices of metallurgical products to be down. Deferred income of $7.6 million was $1 million below the peak of $8.6 million we achieved in second quarter of 2005, corresponding to an 8.8% operating margin. This was the result of both positive factors, the growth in refractories products and systems, and negative factors, the price decline in metallurgical products, and the impact of higher infrastructure expenses.

With reference to our business environment, global steel production was up 7.9% in the first half of 2006, including a year-over-year growth of 10.3% in the second quarter. While China continued to be the strongest contributor to the growth in steel production worldwide, it accounted for 59% of the total increase in the second quarter, compared to virtually 100% to the world increase during the first quarter. In other words, automations, including the U.S. and EEU, are back in the game.

During the second quarter, steel production in the U.S. was up 6%, compared to second quarter 2005, and capacity utilization again exceeded [8.7%] for most of the second quarter. However, while the U.S. was strong, Canada and Mexico continue to be down 2% and 5% respectively, compared to the second quarter of last year. As compared to prior year, steel production in the EU25, came back strongly with second quarter production of coated steel up 8%, reflecting a recovery in the European steel industry, in contrast to a production decline that occurred between the first and second quarters of last year.

In Asia, China steel production continued to surge, increasing by 17 million tons or 19% in the second quarter, while production of steel in Japan and Korea remained flat. As China continues to grow, pressure on Japanese and Korean steel producers can be expected to continue. Speaking of Asia, I am pleased to report that on June 24, 2006, we celebrated the opening of the new refractories plant in Suzhou, China. After successful commissioning and startup phases, the Suzhou plant is now in a position to support MINTEQ's commercial development efforts in China as we ramp up production. However, expenses were up compared to last year, as an organization was put in place to build business. This was necessary to enable increased forecasts on expanding our customer base and broadening our offering with product formulas that optimized performance on our Chinese steel making practices, while utilizing lower cost local raw materials. Also the benefits we really start contributing to MINTEQ's financial performance in 2007, it is critical that this program be put in place now.

As compared to second quarter last year, alloy raw material prices for the metallurgical product line returned to more normal levels closer to historical startups. This adversely affected the year-over-year operating income comparison as we benefited last year from a temporary February endenturing position, while rapidly escalating raw material costs were passed on to customers. With regard to other raw materials, we have been able to mitigate cost increases by both aggressively seeking alternate sources of supply and quantifying less expensive substitutes for certain material components, resulting in more cost effective co-formulations.

On the raw material sourcing front, starting with natural centered magnesium grades from China, a significant part of MINTEQ's raw material purchases, furnished prices indicate stabilization. However for MINTEQ when compared to prior year, this relief has been largely offset by increased price escalation for a broad range of other work materials and chemicals used in our product formulations. This raw material price for a difficult situation is the reason why we have dedicated an important part of our technical activities in the reformulation of lower cost products. The significant effort is now beginning to pay off, as we implement these cost reduction initiatives going forward. At the same time, also, our long term endeavor, we continue to make progress toward our goal of developing an internal capability to source magnesium and lessen the cost volatility caused by our dependence on imported Chinese magnesium. As was reported since the refractory products system were up from last year, while we benefited from a strong steel demand significant progress continued to be made in the marketing of high performance SHOTCRETE products in North America and Western Europe, particularly in hot applications.

As SHOTCRETE products are faster to install than grate and involve less labor, the true benefit to the steel maker, particularly in the European regions is increased equipment availability. We've increased pressure to eliminate excess capacity and to restrict subsidized financing of new capacity under WTO rules, SHOTCRETE has also become the right product for the right time for a number of developing regions including China and Eastern Europe. In this context, significant efforts have been made by MINTEQ in the commercialization of SHOTCRETE products in these products and acceptance by customers is gaining traction.

In conclusion, provided that overall economic activity levels are sustained, particularly in North America and Europe, we expect that our SHOTCRETE commercialization programs and our cost reduction initiatives will contribute to continued improvement of MINTEQ's financial performance for the rest of the year. I will now pass the microphone back to John Sorel who will provide you with further insights on the financial performance of MTI.

Thank you, Alain. You have just heard the description of the Company's business environment, highlights of the product line performance, and a summary of the key development activities during the second quarter. I will now review with you how that information is reflected in the Company's consolidated financial results. MTI achieved diluted earnings per share for the quarter of $0.63, the same as the prior year, net sales for the quarter were $266.5 million, an increase of $21.8 million, or 9% compared to prior year. Overall, foreign exchange had a minimal unfavorable effect on sales growth. Both segments again delivered top line growth during the quarter from continued success of our commercial development programs.

Sales in the specialty minerals segment were $179.6 million, an $18.9 million or 12% increase. Sales of PCC increased 12%, to $137.8 million, from 122.9 million, primarily due to the ramp-up of volumes from our new PCC facilities in China and Germany, and the improved paper industry situation in Finland. Sales of specialty PCC were level with last year at $14.1 million. Sales in the process minerals product line increased 11%, to $41.8 million from $37.8 million last year, with held product sales increasing 18% to $16.1 million, from 13.7 million in the prior year, due primarily to improved pricing, and continued strong global demand, in plastics and consumer-related end markets. Refractory segment sales increased 3% to $86.9 million. 2.9 million over the $84 million recorded in the prior year. Sales growth was driven by refractory products and systems where sales increased 11% to $66.1 million, due to strong volume demand, primarily in North America, partially offset by metallurgical wire product sales, which declined 15%, to $20.8 million from 24.5 million in the prior year.

MTI's cost of goods sold grew 9%, the same rate as sales, resulting in a 9% increase in production margin. The specialty minerals segment production margin grew 10% as compared with a 12% sales growth. This segment has been affected by unrecovered raw material and energy cost increases, paper mill shut-downs, and market development and ramp-up costs associated with our SYNSIL product line. Collectively, these factors had an impact of approximately $5 million on production margin. The prior year's production margin though was also affected by several adverse factors, including a paper industry-wide labor dispute in Finland, start-up and ramp-up costs in China and in our European coating PCC market development program. These events substantially improved in the current year and partially mitigated the total impact on production margin. In refractory segment production margin increased 7% as compared with a 3% sales growth.

Increased production margins from the higher volumes in refractory products and systems product line more than offset the decreased margins in the metallurgical product line. Total marketing and administrative expenses for the quarter increased 17%, to $27.2 million, from $23.3 million in prior year. This increase was primarily attributable to planned increases in our worldwide business infrastructure, increased bad debt expenses of $1.1 million, when compared to last year, when we had recoveries of bad debt in excess of provisions, and employee benefit expense, including stock options. Research and development expense increased 7%, to $7.9 million.

MTI second quarter 2006 income from operations was $20.9 million, essentially the same as the prior year. For the quarter, the operating ratio was 7.8% of sales, compared with 7.1% in the first quarter of this year, and with 8.5% in the prior year. Specialty minerals income from operations of $13.2 million, increased 9% from the prior year, and was 7.4% of net sales, as compared with 7.6% of sales in the prior year. The operating income ratio for this segment was primarily affected by the investment in our market development efforts for SYNSIL products, and the higher raw material and energy costs we have incurred. Refractory segment operating income was $7.6 million, 12% below the $8.6 million recorded in 2005. And was 8.8% of net sales, as compared with 10.3% of its sales in the prior year.

The decline in the operating income ratio was primarily attributable to the combination of increased infrastructure costs, and lower margins in the metallurgical product line. Total nonoperating deductions for the quarter were $1.6 million, an increase of 25% over the prior year. The increase was due primarily to higher interest costs. The overall effective tax rate for the quarter remained at 30.3%, a slight decrease from the 31.2%, in the second quarter of the prior year, due to a change in the mix of earnings, and an expected lower level of repatriation of foreign earnings in the current year.

The provision for minority interest increased to $0.9 million, from $0.3 million last year, as a result of the improved profitability of our joint ventures, primarily in China. Net income was $12.6 million, 4% below prior year, while diluted earnings per share for the quarter were $0.63 even with the prior year, as our share base was reduced through our share repurchase program. To summarize the income statement for the quarter, sales and gross margin both increased 9% from the prior year, total expenses grew 15%, resulting in an operating income performance at approximately the same level as the prior year. Net income decreased 4%, primarily due to higher minority interest provisions, and as a result of a lower share base, EPS was even with last year.

Turning to the balance sheet, our debt to total capital ratio remains at about 16%. Cash flow from operations in the first half was strong, about $70 million, our working capital remained stable during the first half of this year versus a substantial increase in the prior year. During the half, we invested about 52 million in capital additions worldwide. Depreciation and amortization expense totaled approximately 20 million for the quarter, and about $40 million for the six months. We repurchased an additional 208,300 shares for treasury during the quarter. At an average price of $56.07 per share. For a total expenditure of $11.7 million. Year to date we have repurchased 357,300 shows for $19.8 million, or $55.40 per share. Now I will turn the microphone back to Paul for the closing remarks and for questions.

Thank you, Ken, Alain, and John. As have you heard, MTI is advancing its programs to introduce new products, successfully penetrate expanding geographic markets and control costs. Although our financial performance remains unsatisfactory, we saw some improvement in the second quarter in the quality of our performance, and we expect continued improvement as the year progresses. For the full year, an earnings estimate of $2.62 to $2.72 per diluted share would be reasonable. Operator, we are now ready for the first question.

[OPERATOR INSTRUCTIONS] And we will go first to Rosemarie Morbelli with Ingalls Snyder.

Even though Ken and Alain talked about the potential improvement in the second half versus the first half, could you summarize why you expect the the second half to be so much stronger? What are your expectations in terms of pricing, raw materials, volumes, et cetera? And do that in the different categories.

Well, we can take a look at that Rosemarie and we would be very happy to. We expect performance to improve in the second half versus the first half, just as you said for a number of factors. As you look at the paper PCC business, for example, Ken sees continued improvement in a number of ramp-ups in the coating area, for example, in some of the expansions that have taken place in different parts of the world, and a continued improvement in China, as that -- those facilities continue to ramp up. He is also continuing to address his cost issues and his expense issues that we will continue to tightly control as we go from the first half to the second half. In a similar fashion, Alain will be doing the same thing as he explained in his prepared remarks. He will continue to move the Hot SHOTCRETE program forward. The equipment area that he has will continue to accelerate in the second half versus the first half. We will see some modest improvement in the metallurgical part of the business. Even though that was a negative in the first half of the year. And as well, with the reformulations that Alain talked about, he should see improved cost structure, as he looks at the first half, versus the second half.

As you look at continued improvement in the SYNSIL area, as the volume there continues to ramp up, we will see improvement there. So as you look at the overall business, whether it is paper, PCC, refractory, SYNSIL, or in the Processed Minerals area which Randy Harrison is responsible for, we continue to see and look for improvement half over half. So we're very confident, as we move from the first half into the second half that we will see that improvement, and bring us to the earnings estimate that I just provided a moment ago.

Do you see an end in sight in -- regarding the paper mill shut downs, either the mills themselves or just pieces of equipment?

We are -- I would say, Rosemarie to answer that question, I will just answer it briefly and then turn it over to Ken, that there are still mills that I would call on the bubble, there are still mills out there that either the mill or some of those machines in that mill are not world class machines. And that as the industry continues to consolidate, as the industry continues to look at ways to improve their efficiency, that there is certainly a risk that there could be additional either paper machine, or in fact some paper mill shut-downs, but I will ask Ken to speak further to that. Ken.

The only other comment that I would make, Rosemarie, would be that for example, even with the currency situation between the Canadian dollar and the U.S. dollar, the Canadian mills are put under a lot of pressure, so again, whether that may or may not cause any further shut downs, I can't say, but definitely the Canadian mills are under pressure.

Okay. And then lastly, if I may, could you give us a little detail as to what the problems were with the SYNSIL facility, and are you selling anything on the commercial basis? In other words, are you actually getting money for it? And how quickly can we expect to see some profits, or are you willing to share revenues and profits with us?

In terms of SYNSIL, Rosemarie, the facility at Chester is commercially operating at this point. And we have increased the number of furnaces that SYNSIL is going into at the various companies that we're working with. So the volume of SYNSIL is continuing to increase. Still, though, it is a merchant facility, and we need to increase that volume beyond where it is, so that it makes a strong financial contribution to this company. So it still is an expense to us, as we continue to develop that market. As you know, we're also constructing a facility in Texas at Cleburne, Texas, which should come onstream in the early part of 2007. So we continue to have market development expenses. But the Chester, South Carolina facility is routinely shipping on a daily basis, SYNSIL products, to commercial customers, paying commercial prices for SYNSIL, and the number of furnaces that SYNSIL is in continues to increase.

Is that facility operating at more than 50% capacity utilization and is it actually making a profit?

We have not, as I expressed before, we have not reached a, in terms of the SYNSIL program, a break-even point. It is still an investment on the part of this company.

And by year-end, do you think you will be at break-even point if things continue at current trends?

I think we have assured that that would occur in 2007.

Okay. Thanks.

You're welcome.

We will take our next question from Allan Cohen of First Analysis.

Good morning. A couple of questions if I may. To better understand the customers' behavior, can you give me some insight on the Israeli plant which I gathered is paper customers continuing to make paper, but didn't renew their contract with you. What are they doing in terms of their ingredients?

Good morning, Allan. The mill that you're talking about in Hadera, Israel, supplying Americans early paper mills, the contract that we had that with that mill, the 10-year contract that we had that mill expired and they have gone to a different PCC supplier.

So they are still using PCC, they just -- it -- somebody underbid you, obviously.

Well, the economics are such that we chose not to continue to provide PCC at that facility.

Does the alternative supplier in your opinion have a better raw material position, or just -- they just -- they provided better economics with no apparent cost position?

I would just say that the deal that they put on the table was more attractive to the customer than the deal that we put on the table.

Okay. And then Wyerhaeuser reported earlier this week that they had seen significant price increases in their fine paper area which includes as far as I can gather some uncoated free sheet. Is this some indicator of the market as capacity is closing down, selling prices are stabilizing and going up?

Well, that is correct. I will just answer that briefly, and again, ask Ken to further elaborate. The market as Ken indicated because of currency issues, a lot of capacity has been taken out of the marketplace in Canada, for example. We also have improved operations in the United States, because other facilities have shut down also in the United States. So the pricing environment for the fine paper producers is very attractive right now, and they have in fact been increasing prices routinely now, almost routinely here over the last say 18 months. We continued to benefit from that because our volume of PCC even here, different North America other places continues to increase. So it has worked out well for us. But I will ask Ken again to provide additional color to that. Ken?

In this particular case, Paul, I think you covered it very well. Right at this point, the mills continue to run very strongly. We are hopeful in the second half the year will continue very strong with uncoated free sheet for the reasons that you suggested that there is reasonable demand than with some of the capacity out of the system at this point from those that are running should continue to run strongly.

Okay. And then just building off of Rosemarie's question on SYNSIL, I believe SYNSIL has as a negative contributor, was a component of a $5 million sum. Is it, one, reasonable to assume SYNSIL was probably a little bit over half of that? And while with the existing facility by year end, you might reach break even when you open up the new facility that probably puts you a couple of quarters away yet again of -- for all of SYNSIL reaching break even?

Well, we had spoken to it, generally we rank order some of the comments that we put in our prepared comments, Allan, and if you look at some of those rank orders that we did, unrecovered raw material and energy costs was actually the biggest factor followed by the paper mills shut downs. So those were the bigger factors that impacted that performance.

That's very helpful. Thank you.

You're welcome.

And we will go next to Ray Kramer with First Analysis.

Good morning, guys. A couple of questions. On the SYNSIL front, can you give us a little more sense of what some of these higher costs were? Was it costs to ramp up and get new capacity in the merchant plants? Was it costs related to you thought customers would be buying more than they actually did, and as soon as they buy at those levels, it makes more sense? Just a little more color on what those costs were.

Certainly, Ray, really the key issue there is obviously when are you building a new plant you are taking on fixed costs for this company in terms of depreciation, labor, other costs that you have, and you need to reach a certain volume, as you know, to cover those fixed costs that you essentially bring into the business. What we're seeing right now is that it is a slower ramp-up in volume, although the team, the SYNSIL team is gaining more furnaces, we're still not at a volume that we thought we would be at by this time, so we're running behind, and we have not reached a point which you would probably call break-even where the volume that we're selling at commercial prices covers those fixed costs, whether they're the depreciation, for example, the labor, or the plant, the other costs there, so it is really volume-related at this point.

Do you have a sense, is it a particular end market weakness, just a little more trepidation on the customer's part that is resulting in volumes a bit light of your expectations?

Probably just a slower ramp-up. They're being more cautious. I think trepidation is a word that you use that might be the appropriate word. Just very, very cautious, and moving it from one furnace to the next furnace. Some of them are doing it more quickly than others. And some are doing it more slowly. But overall, we're behind where we thought we would be at this point.

Okay. And then turning for a second to the steel side, I know 10% had sort of been an operating margin bogey there for a while, with some of these costs for the Chinese facility, and various stuff shifting around there. I mean is 10% a reasonable goal maybe for the end of next year? Or do you think you can get there sooner?

Well, I wouldn't want to speculate at the speed that we would reach it, but certainly 10% is a reasonable goal that Alain and his team are shooting for. And I will just again ask Alain in this case to add a little color to that. Alain, please?

Well, a lot of factors that contribute to the profitability of the business. There is a strong market demand right now in North America and western Europe. We have also some investments. This view, China, is a little bit like the situation in SYNSIL where we have the cost of an infrastructure, and the ramp-up, that also needs to continue to cover these fixed costs, and start contributing. So once we have these investments up and running, certainly the target is something that we have, we have the target to -- the objective to be in the double-digit margin area. When we are going to go there depends on these numbers of factors. But we clearly have that on our horizon.

Thank you.

And we will take our next question from Mike Judd with Greenwich Consultants.

With the new capacity that you brought up, how does that change the seasonality of the business in the second half of the year? I'm just trying to get a sense of that, please.

We expect overall, Mike, that our performance, our performance as a company, will improve both in the third quarter and in the fourth quarter. As you compare it to the first and second quarters of 2006. So we see for the number of reasons I mentioned earlier, an improvement in performance. One of the things that we see as we go forward for example that as John spoke about expenses we have high expense growth in the second quarter versus the second quarter of 2005, as we go forward, those ratios will improve, in terms of year-over-year growth. So a number of those factors will improve. We will continue to have a top line growth.

It will be modest as we go forward, but we will continue to see the top line growing versus year-over-year, expenses declining, and as a percent of growth year-over-year, and continued performance in each of the business areas, as we continue to go forward. So that's why we're very optimistic that we will improve the business. We show those improvements there in top line growth in expenses, other cost reduction initiatives, the reformulations that Alain is doing for example, on the MINTEQ side, all will contribute to that growth, and that's why we see the improvement in the third quarter and the fourth quarter going forward, versus the first and second quarter of 2006.

I appreciate that those comments. I just was wondering with the new capacity that you have, does it tend to -- in terms of the actual seasonality of the business, third quarter versus fourth quarter, does it tend to -- in other words, should a pattern look similar to last year on an underlying basis, excluding the expense issues or is there a new pattern that's kind of dictated based on the locations of the new plants?

At this point, I think it would be premature to try to say that there is a new pattern developing, Mike. We just see, as we look at the business, as Alain indicated, the strong steel market at this point. As Ken indicated, a very strong paper market at this point. As we look at the strengths in those businesses, we think that that will continue to cause an acceleration in our profitability in the second half versus the first half.

Okay. Well let me just -- one other way of looking at this, specialty minerals earned EBIT of around 15 million last year. Do you think that you can match that in the third quarter?

Well, we don't break things down quarter by quarter, as you know. So I wouldn't want to try to speculate on one quarter versus another quarter. We usually look at a total year, 2006 for example, versus 2005, or first half versus second half.

Okay. Thank you.

Thank you, Mike.

And we will go next to Daniel Rizzo with Sidoti & Company.

You mentioned before that the Israeli contract just kind of came up. Are there any more contracts this year that are up for renewal?

At this point, I am turning you to Ken Massimine. I believe we have one more contract -- we have a contract that is subject to renewal. My understanding is that the discussions are going very well with that renewal -- the renewal of that contract. But that's the only one that we have going forward that is near-term going forward, but that one should be renewed and discussions are going very nicely, but again I will ask Ken to provide additional clarification.

No, at this point, Paul, as you said we're in negotiations with this particular company and right now everything appears to be very reasonable.

Thank you, Ken.

Okay. Just a follow-up in another part. You said that -- well, actually, I'm sorry, the [Omniel Huebert] deal that kind of closed a few weeks ago is, that anything that is going to affect you guys in Europe? Obviously they're a lot bigger now but is that something that worries you?

Well, certainly we're always aware of what our competitors are doing and with the approval by the EU of the that transaction of only requiring the Hubert facilities with the proviso that they need to sell one of those facilities as we understand the final determination by the EU, it does provide Omniel with additional capability and participated calcium carbonate. I think what it does do though, it reinforces the philosophy that we've and as Ken indicated we are selling at over a 4 million-ton rate of PCC per paper. That precipitated calcium carbonate is certainly the preferred pigment for many of the paper grades and I think Omniel realizes that and I think the reason for their acquisition of the Huebert assets, PCC assets. It makes them certainly more capable in PCC, but I would certainly submit that we have a history of being the technology leader in PCC. But with that being said, let me ask Ken again to provide some of his thoughts on that. Ken?

No, I would just like to embellish the point that Paul just made on the value-added technology and that's really our competency, and so if you remember from some of the comments that I made, filler fiber composites, new OPA-CARB coating grade PCC analogs, those are the key things that I believe that we're bringing forward that really add the value for the paper company and that truly is -- while definitely it always be competition, it is the value that you can bring your customer and I feel very comfortable with the R&D effort that we have going forward that we will definitely bring the most value.

Okay. Thank you, guys.

Thank you.

And we will go next to Patrick Flavin with Flavin, Blake.

I just -- I had the same question on the Omniel determination, but let me take it one step further. The mandatory sale of the Kusinkaski plant and the technology, what kind of strategic implications does that have?

Well, will have a strategic implication in terms of possibly who would buy that facility, in terms of over the next several months who Omniel may be talking with to consummate a sale. We need to -- we will be obviously following how that unfolds, we don't have any idea at this point who would be in the queue there to discuss that with Omniel, but that is a requirement as we understand it of the final decision of the EU. So we will follow that very closely to see who may be involved with that acquisition or potential acquisition of the Kusinkaski facility.

With their purchase of the Huebert facilities, Paul, who is is number three in the business now?

Number three would be [Emeris]. In other words, we obviously by far are number one. It would be put the Omniel with the Huebert assets number two and then Emeris which is the publicly traded French company would be number the in terms of PCC technology and facilities.

Thank you.

Thank you, Patrick.

And we will go next to Todd Peters, American Century.

Hey, can you just talk a little bit more on the specialty PCC side, and I think you said the sales were more or less flat year-over-year there, and how that is looking into the third quarter?

Well, absolutely. Todd, I would be very happy to do that. As you know, specialty PCC is the term that we use for the nonpaper applications of our PCC product line. Those products primarily go into such things as adhesives and sealants, polymer compounds for example, PVC pipe, construction-related materials, whether it be for window pains, automotive applications for example, so there is a wide range of applications, including health care and consumer-related type applications going into food fortification for example and calcium supplements. That business was as as you heard, sales were flat during the first half. However, we do see growth in the second half. That business has introduced a number of new analogs that have come out of the research effort. We right now believe they are gaining traction with some of the major polymer customers. And we expect to see growth in the third and fourth quarters as you look at the specialty PCC product line. So we see growth in that business as it goes forward. We continue to do research in that area. And as I just said a moment ago, there were several new PCC analogs that have come out of the research effort, that should drive that business in the second half of 2006, versus the first half of 2006.

So was the weakness in the first half more related to the construction side versus the like consumer, food and fortification side?

It was primarily -- it was mostly in the automotive and consumer applications.

Okay.

Mostly in automotive and consumer. One of the things that leads us to one thing that we are doing as a company, and I think Randy Harrison's team has done it very well, is that we're trying to transition, for example, the automotive business that we have, which has been with the traditional Detroit automotive companies, whether it is a GM, Ford, or a Chrysler. And we are focusing more now on the supply as to what we call the transplants, the Toyotas, for example, the BMWs, the Mercedes, the other companies that are now building automobiles in the United States, and most of the growth we see will probably come from who we call are the transplant or the suppliers to the transplant automotive manufacturers. Just one of the things that's taking place here in the manufacturing segment of the U.S. economy. And we are, as a company, adjusting to that in terms of our effort with the specialty PCC business to supply those people supplying the transplant automotive manufacturers.

Okay. Then one other separate question, on the marketing, and the administrative expenses. The increase there, is this just a one quarter -- I think you mentioned some employee benefit costs, but you also mentioned some marketing costs to build, -- go after some additional business, so how much of this increase is permanent and how much was just kind of transitory?

Well, let me answer that quickly, and then I will turn it over to John Sorel for a little more color there. Part of it is year-over-year one-time because I indicated earlier that the growth rate year-over-year will be much less as we go into the third and fourth quarters. But a part of it was exactly what Alain spoke about in his comments, that we have built an infrastructure for example in China to support the growth efforts that we see for the new MINTEQ facility. And of course, China is the largest steel market in the world. So we have built a capability there, a very strong marketing sales capability in China that Alain is leading. And that's part of that expense that you see. But again, that build-up began last year. So as you look year-over-year, it obviously won't have the same growth rate. There were some other expenses that were included in there, bad debt, some other things that John spoke about, but let me turn it over to John to just provide a little additional clarification. John?

Thanks, Paul. I think the direction that Paul just laid out is the right one. Part of it was the business infrastructure. We listed that first. And so that has the ramp-up effect of having the full-year structure in place. And that's in both businesses. There's some in the specialty mineral side as well as refractory side. A couple of the more less -- I might say more unusual things that I spoke of were the bad debt expenses, where it was up in the first quarter, but that increase was primarily related to the fact that we had some recoveries last year. So for the rest of the year, you wouldn't expect to see a growth in that area.

We don't have any particular issues going on in the bad debt area, the increase is really related to the comparison where we had recoveries. The other thing you have to keep in mind in the area of the administrative expense is marketing administration expenses were the impact of the employee benefits which included the stock options, which we began reporting this year for the the first time, and I think that range is about $600,000 per quarter. And so the perspective that Paul gave, you won't -- we see a moderation, I guess, in the growth rate, for the rest of the year, would be the appropriate way to look at it.

Okay. Very good. Thank you.

Thank you, Todd.

And we will go next to Jeff Zekauskas, JP Morgan.

A few questions. In -- can you remind me what the capital expenditures number is for the year? And the percentage or the amount of growth capital that you're putting in, and sort of what are the larger projects this year?

Okay. Well generally, Jeff, as you know, we normally talk about $100 million in capital investment on an annual basis. I think John in his comments indicated that we've spent about $52 million to date during the first half of 2006. But as you look at the investments that we've made, there have been several in there. Obviously, we're building a SYNSIL plant, for example, in Cleburne, Texas, so there is part of that capital investment. We completed the refractory plant in China, for example, that as Alain indicated that was just recently dedicated at the end of June. So those were two of the larger capital investments that made up a portion of that, for continued growth of this company. And of course, we have PCC expansions that Ken Massimine does in his part of the business. So most, a good portion of that capital is in fact to provide growth for this company going forward.

And how much is the maintenance component of the capital expenditures of the roughly 100 million you spent?

Generally, maintenance makes up about say 20% of that capital spending so that would be in the area of about $20 million, plus or minus. I will ask maybe John, you may have a better number on that, John, but generally it is around 20% in that range.

I think that is a good perspective, Paul. That's fine.

So in rough terms, you know, if you get a 15% pre-tax return on capital, on 80 million, that's 12 million, so we tax effect it, all things being equal, your earnings should be growing by about $0.40 a year, $0.40 to $0.45 a year. And you know, that's just on the growth capital expenditures, and of course, there are timing delays in that it is not that every capital program comes to fruition. But but given sort of the longer term sort of the flatness in the earnings profile and the very, very large capital outlays, is there a point where there is a reexamination of the general capital program? And -- or how do you put controls in place, to be sure that these capital outlays are delivering adequate returns for shareholders?

Well, that's an excellent question, Jeff. And it is one that we challenge ourselves to review just as you're reviewing, because we see the same numbers that you see, the investment in capital, and the difficulty of improving both operating income, net income, and earnings per share. It is a fact that we have faced many challenges in this business over the last few years, I think as you were aware of, everything from energy and raw material costs, the construction or the investment in infrastructure on a worldwide basis to grow the Company, to the fact that we have had numerous shut downs of satellite plants, paper machines that have hindered our ability to grow the business, in terms of the loss and operating income from those plants, as they have shut down. So there has been a series of factors that have influenced or adversely influenced our ability to do what you just said, to convert those investments into additional earnings per share.

Let me ask John to provide again some additional clarification on that. But be assured that we, as a management team here, look at that routinely, as we look at the investments that we make, and do it as well as you would expect with the Board of Directors, as we bring capital projects to the Board, for their review and approval. But your question is a very appropriate question, and one that we wrestle with ourselves. John, for some additional insights on that?

Yes, I think that is really the challenge of this company, is to step up the earnings commensurate with the investments that we have made over the last several years, which at 100 million a year, you know is a substantial number over the last four or five years, and we've had difficulty increasing the income to match those expenses. The perspective to keep in mind, though, is that the biggest factor I think Paul mentioned was a shut down of the number of plants that we've lost. We have since 2000, we have lost 11 satellite plants, and so a substantial investment has gone into -- has gone to work to simply get us back the income we lost when we shut down those plants. They were outstanding earners for us, for 10 or 15 years, or more, in some cases, they went away, we lost that revenue, a substantial investment had to go to replace it. So that has created a head wind, as has the energy and other things that Paul mentioned. But for us, the growth resumes when we take some of these major investments and we generate the margins and the type of income that we believe we can achieve with these investments, as they ramp up.

This year, you saw substantial improvement coming into play in PCC, from the plants in China, although it was a year delayed. We have the big plant in Germany still in the ramp-up phase. We now have the first commercial SYNSIL plant, a major investment, in the very early stages of ramp-up, and we have the major investment in China for the refractories business which has just opened its doors. So these programs, we believe the investment was justified, as Paul mentioned, reviewed by, critically by the management of this company, and we believe in the long run will be very good investments for this company, but will take some time to generate that income.

I think Minerals Tech is blessed with very patient and thoughtful shareholders in that certainly wish to allow the Company to use its best judgment to explore these eventualities, but in just doing a primitive calculation, if you took your growth capital of 80 million, and you simply dividended it to shareholders annually, that would be a $4 dividend, so if you assumed a 5% yield, because you were giving up your growth possibilities, what I would say is that that would translate into an $8 stock price right there. And I think your return on equity is still in the single digit frame. And so it just seems that there needs to be some longer-term scrutiny, or shareholders would hope that there was some longer term scrutiny of these programs.

And there is, Jeff, and I can assure you that there is and we challenge ourselves, as a management committee, to continue to enhance the returns on these projects. We know that we need to provide value to the shareholders. That's our responsibility as managers. And we need to continue to enhance that ability to do that. We think that we will look at continued improvement as we go into the third and fourth quarters. And as part of the improvement in the third and fourth quarters we also critically review the investments that we've made. We do it on a routine basis. And look at the ways that we can enhance that return for those investments that this company has made.

Okay. Thank you very much.

Thank you, Jeff.

Thank you. And we will go next to a follow-up from Ray Kramer, First Analysis.

Hey, guys. Just three quick follow-ons, I know everyone wants to get to lunch here. On the raw material versus price issue you brought up, is that more in a particular segment, more in refractory versus PCC? And then what are you sort of doing to offset that?

Ray, the raw material and energy costs really impact all parts and all components of Minerals Technologies so it is an issue that we have. We have, to address that, we have very much strengthened our supply chain capability, our purchasing logistics effort, we're making inroads into that, as I indicated, and we expect to make further inroads as we go forward into the second half of '06. We are looking as Alain did, reformulating the raw materials that they use within his materials. We are obviously going back to suppliers and looking at ways to work with them to take costs out of their systems that can be translated over to us. So as you would expect, there are a number of approaches that we're taking to reduce the impact of increasing raw materials on this company. But really, it is a cost and a component of our costs that impacts all segments of this Company.

On the PCC side, is there -- you renew pricing twice a year, as I recall. When is the next opportunity to get--?

Well, that really is contract dependent when you look at that, Ray, it can be twice a year, it can be once a year but it is contract dependent but I will ask again Ken to possibly provide a little more color on that. Ken?

Yes, Ray, I would say that while it is contract specific, the next real movement would be in January.

Okay. And then on the SYNSIL side, just looking broadly at some of the challenges you faced in ramping up capacity at merchant plants, whether it is wallsome, your current SYNSIL or the Chinese refractory, has there been any thought about doing some sort of an on-site plant with SYNSIL and do you have the capabilities to be economical at a smaller scale like that?

We believed that the general direction of the SYNSIL program, Ray, would be for Merchant plants. That not a single location, for example, would have sufficient volume to justify the installation of a SYNSIL manufacturing facility. So the general concept that we see is to use a merchant regional concept.

Okay. And then just lastly with filler fiber, if it sounds like you can start doing some commercial activity, the start of 2007, I know the initial expectation there was you could roughly double PCC load levels. How long would it take you to increase capacity at your satellite plants to accommodate that potential doubling?

Well, as you move a program like that forward, there is a series of trials, and as you get the customer to agree that the technology is viable and one they can desire, then you obviously enter into a discussion with them, and then you need to expand the PCC plant, our satellite PCC plant to make that effective. So you're talking months when you're doing that, a number of months, but again I will ask Ken to provide additional information. Ken?

Yes, typically, I would say a good estimate would be that we have to pretty much, you're done with the discussions with the customer, and we're moving forward, and you are really looking at a six to nine-month time frame would be probably a fair estimate in terms of what it would take in terms of retrofitting the facility in order to be able to produce the filler fiber composite material. But we are pretty hopeful right now that we will see hopefully some commercializations next year. Definitely we're having some good trial activity and third and fourth quarter we definitely have more trials being planned with the hope being that if we continue to be successful, that that technology will commercialize shortly thereafter.

Great. And are you aware of any competitors working on similar technology?

We are aware that the field to some degree, is crowded, Ray, when you look at it, because the goal of all paper makers and suppliers to the paper industry is to put more calcium carbonate, more filler, other materials into that sheet to replace expensive wood fiber and as you know, wood fiber now is well over $700 a ton for wood fiber. So the desire is there to do it. People have looked and are looking at different approaches to that. We believe that the approach that we are taking, that Ken and his team are taking with the filler fiber concept and the reaction and the reception that we're getting from the paper companies is one that both we and the paper companies I think are very comfortable with and probably see as the most practical to implement.

All right. Thanks a lot.

Thank you, Ray.

We will go next to a follow-up from Jeff Zekauskas, JP Morgan.

When you look at your SYNSIL volumes in July, have they picked up at all? I know that you were somewhat disappointed at the degree of acceptance in second quarter and thought that it had to do with some unfamiliarity with the customers, that the customers had with the product. Has that changed at all?

Yes, we expect the volumes, Jeff, in the third quarter to be higher than they were in the second quarter.

Well, yes, I would assume that they would be higher as well, but has the rate of change improved? That is, does it seem that the slowness is giving way to a more ready acceptance?

Two things that impact that. Is one, the acceptance of the material, and I believe that is taking place by the way. But you also have impacts in terms of the operations of the glass companies themselves. Sometimes they may run into issues which will delay the acceptance or the utilization of SYNSIL, for example, that may delay something for a month or two. But the general trend is that the number of furnaces that we're going into, the number of furnaces using SYNSIL is continuing to increase.

And that's because you're getting more business with customers that you have already? Or are there new customers that you're adding?

A combination of both.

A combination of both. So are these new customers that you're adding large customers? Or--?

I don't want to get into that type of detail, Jeff. But we're continuing to add more furnaces, both with existing customers, using it in more of the furnaces that they have, and obviously, trying and working to expand it, to other customers also into additional furnaces.

I guess, maybe lastly for John, I think John talked about their being a $5 million operating profit penalty from shutdowns of mills and maybe startup costs, if I remember correctly. Does that number diminish or go away in the third quarter? Or does it go up because of the new refractories plant that has come onstream? And how much is the penalty for refractories in the third quarter?

Well, I think one thing, Jeff, and I will turn it over to John, I think John indicated that there was a collective, a collective total of $5 million impact on production margin that is made of a number of factors, including raw materials, for example, paper mill shutdowns, ramp-up costs with SYNSIL, for example, but the collectively, they had an impact of $5 million of production margin. With that introduction, let me just turn it over to John again for additional clarification.

And those key points, Jeff, that Paul just said, we see steady improvements throughout the year, and that's what we try to address on sort of a broad sense here, is that we have made some progress, as we went through here, in passing on the raw material and energy costs, it has varied somewhat by product line but some areas we've done very well. The one I pointed out in this quarter was the pricing in the talc area, for example. So we're making progress against those things. SYNSIL that Paul mentioned is in this ramp-up phase. We were disappointed with the rate in the most recent quarter, because we had projected obviously a substantial improvement for the year, we were behind in that quarter. But year-over-year, we still expect to see these programs making a major contribution. The paper mill shut downs, we just had one more than we had anticipated. And we lost Park Falls to bankruptcy in the first quarter. But offsetting that, we have seen some very good increases, Ken talked about the 11% growth in volumes in PCC, and so the paper industry is doing well, and we're doing very well along with it, with the expansions, the plant expansions kicking in, as well as resolving the issues we had last year, and places like China. So we still see the year-over-year projection and if you look total at the guidance that Paul has given at the end of his comments, we still see a very nice picture for the full year, just delayed a quarter from when we thought that ramp-up would begin.

What happens to that 5 million cost in the third quarter? Is this ongoing?

It is year-over-year. And some of it gets mitigated, again if you take those three items, you look at raw material and energy, we're making progress each quarter with that. SYNSIL is ramping up each quarter, and the paper mill volumes are doing very well. We can't replace a shut down. That will be a difference over the prior year. Until you get to the point where they cycle the year, of course. But that gets mitigated as the quarters go by. And what we tried to say is that if you look at the press release that we put out, we said that we had these factors affecting it, affecting the quarter's performance, but offsetting that were the tremendous advancements we made in some of these other areas, year-over-year basis.

So what about the incremental costs of the new plant in China? Is that significant to the third quarter?

I'm not sure what you mean by--.

The question was, I was going to say I'm wasn't sure what you meant by that question.

The refractories, the fact that you have coming on, that will operate at low levels of utilization, will that -- and I guess you will have to book the depreciation, you will have to treat it in a different way in the third quarter. And I was wondering what that incremental burden to the income statement was going to be from that?

Well, we certainly don't get into the -- those types of numbers in detail, Jeff, but as Alain, in his own comments indicated that there would be a burden because of the infrastructure that we have built in China to support the new facility that came onstream, as Alain indicated at the end of June be, when it was celebrated, the opening of that facility. So there will be a cost, as we go through the second half of '06, but Alain indicated it would be providing contributions as we go into into '07. But let me just ask Alain, again to provide a little additional clarification on that.

Yes, Jeff, I think it is a combination of several things. It is true that the depreciation and cost is going to impact us, going forward. But at the same time, we were also doing business in China, so the fact that the plant is starting up, allows us also to reduce our costs, so we are going to find all sorts of benefits, and the factor is the ramp-up, as we start up the plant, we are ramping up the volume, and we have already the infrastructure in place. So as we move along, overall, over time, that will be an improvement. It gives us today, with the impact of the depreciation, there may be also a time lag in terms of getting the benefits, also, with -- to the inventory, from before. But as we move along, we are going to have the benefit of all these factors, the cost structure, and the ramp-up, the volume of the business, so all the time we are going to increase our contribution coming from China, as compared to the previous period.

Thank you very much.

Thank you, Jeff.

And with no further questions, I would like to turn the conference back over for any additional or closing remarks.

Thank you, operator. We are pleased that everyone has joined us on this conference call. Although our financial performance was not where we wanted it to be, as you look at the second quarter and the first quarter, I think you have a good sense that we expect to see improvement as we go from the first half to the second half of 2006. The programs are gaining traction in terms of the key strategies for growing this company. We continue to work at controlling our raw material costs and expenses. And I believe as we pull those all together, and continue to see those improvements and gain that traction, that our earnings will continue to improve in the third and fourth quarter, and again we reiterate the full year earnings estimate of $2.62 to $2.72 per diluted share for the full year. So with that, I want to thank everybody for their participation. Enjoy the summer. And again, we will have an opportunity to speak with you in October. Thank you very much.

And once again, this does conclude today's call. We thank you for your participation. And have a great day.