Minerals Technologies Inc (MTX) 2008 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Minerals Technologies, Inc. first quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Rick Honey, Vice President of Investor Relations. Mr. Honey, you may begin your conference.

Good morning. Welcome to our first quarter 2008 earnings conference call. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call with an overview of the quarter and a look at some of the changes in important metrics that have occurred since the realignment of operations last October. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our first quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward. This call is being webcast from the company website, www.MineralsTech.com. To view the webcast, go to the investor information page, presentations, and conference calls. If you are viewing the presentation on the webcast, please note that we have provided a PDF file for clearer viewing of the charts.

Before we begin, I need to remind you that on Page Seven of our 2007 10-K, we list the various factors and conditions that may affect future results. Statements related to future performance by members of our management are subject to these cautionary remarks and conditions. Now I'll turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. Last night, we released our first quarter financial results with earnings of $0.90 per share for the quarter and net income of $17.2 million. A record quarter in the company's 15-year history. What I would like to do in the first part of this call is share with you some of the improvements we've seen as a result of the restructuring of our operations, and further advancement of our major initiatives. As you can see from this chart, this quarter's results coming after an improved fourth quarter represents what I would characterize as pivotal, a significant improvement from the relatively flat performance track that MTI has been on for the previous five years. The belief that we are on a higher level of performances is further reinforced by the return on capital level achieved in the first quarter. The first quarter return on capital on an annualized rate basis was 8.4%. This compares to 6% in 2006 and 5.4% in the first quarter of 2007. This 40% improvement puts us on a very good footing to get above our cost of capital of 9% as quickly as possible.

Let's look at some of the reasons for this improvement. To begin with, our restructuring initiatives have continued on track and we are realizing the savings that we had targeted. We have executed this multifaceted realignment of our operations well and will continue to focus on it until it's complete. Our expense reduction initiative, which began in 2007 has also continued into 2008. In addition to removing $1 million of expenses associated with discontinued operations, our GS&A decreased to 11.6% of sales in the first quarter, a 10% decrease from the 12.7% rate experienced in the first quarter of 2007. This results in an 8% decrease in terms of actual spend. Our productivity also improved in the first quarter, as our sales per employee increased from $354,000 in 2007 to $405,000. Also during the first quarter, we repurchased 289,000, or approximately $18 million of our shares.

During the quarter, we faced a number of challenges that had an impact on the Company. Raw materials continued to increase in cost, as we were hit with Mag oxide and lime increases as anticipated. We've also begun to experience sharp increases in other chemicals and energy. In the case of MGO, continuity of supply also became a concern, as the threat of supply interruptions from China moved us to begin to build inventory levels for the coming months, which contributed in large part to the disappointing working capital performance in the quarter. The quarter also saw the effects of paper industry consolidations in 2007, as volume was down by 4% in PCC. The housing market was still at a very low level, with few signs of life and high energy prices continue to put pressure on our margins. We see these factors and conditions as challenges for the rest of the year and some aspects of their impact will not be fully felt until the second and third quarters.

During the first quarter, we continued to focus on the four key areas we see as critical to the Company's success and integral to its strategy, profitable growth, product innovation, operational excellence and safety, as well as customer satisfaction. In roads were made in all areas with a few exceptions, and we will continue to manage these areas more effectively than we have in the past. This was the first quarter where our new leadership team was fully in place, and I expect to see continuous improvement on all fronts as we go forward. Some of the in roads and profitable growth include our drive for improved return on capital, better use of capital in terms of where we invest, and how we manage our investment projects, as well as better expense control. All of these efforts will continue through 2008. Our product innovation efforts, which center on four areas, filler fiber composite materials, PCC coatings for satellites, minerals for biopolymers and refractory reformulation were on track in the first quarter. Filler fiber trials have continued and we are still targeting fill rates of 30% or more in uncoated free sheet paper. Our refractory products formulation efforts are continuing to provide sustainable competitive advantage, and we are also now focusing some of our efforts on providing more cost effective formulations to help mitigate higher material costs.

Our initiatives in continuous improvement at all levels of the Company continued in the first quarter, as we have rolled out the 5 S process across all of our manufacturing facilities and are now preparing for the second wave of deployment in the processes of daily management control, problem-solving and total productive maintenance. The implementation of these processes will provide us with a more disciplined approach to operations and process management, in addition to making MTI a safer place to work. Our recordable rate for the first quarter was 2.75 and our lost workday rate was 1.59, both lower than our historical average, but higher than we would like them to be. We expect to drive these down during the year, as we implement our key safety initiatives.

And most importantly, we continue to focus on providing our customers with the kind of value-added and reliable products and services that allow them profitable growth and we are doing this at a faster pace than before. Now I'll turn it over to John to discuss the financial results of the quarter. John?

Thank you, Joe, and good morning, everyone. I'll now provide you with an overview of our consolidated and segment financial results for the first quarter, and discuss the key market and operational elements of our performance. This first slide provides an overview of the Company's consolidated results for the quarter. Overall, the Company recorded earnings per diluted share of $0.90, $0.88 from continuing operations, representing the Company's strongest quarterly earnings performance in its history. Sales grew 5% to $12 million. Overall, volume decreases were recorded in all product lines, but were more than offset by the favorable effect of foreign exchange, which was $12 million, and a similar amount that was attributable to price increases. Operating income increased 20% to $27.1 million and represented 9.8% of sales, including $1.4 million of additional restructuring costs. Operating income growth occurred mainly in the paper PCC and refractories product line, and was derived primarily from the savings achieved through the execution of the restructuring program laid out in the third quarter of last year, and to a much lesser extent, a benefit from foreign exchange. Income from continuing operations, which includes the benefit of lower interest expense and a lower tax rate compared to last year, grew 34% to $16.8 million. Growth of total earnings per share by 61% to $0.90 per share reflects improved income from continuing operations and an $0.11 per share benefit from discontinued operations, primarily SYNSIL.

Net income for the quarter was a record $17.2 million, 59% higher than the $10.8 million reported last year. Our return on capital on an annualized quarterly basis was 8.4% as compared with 5.4% in the first quarter of last year. The ROC metric was driven primarily from the increase in net income, with about one half percentage point of the improvement coming from the lower capital base, following the restructuring program. The North American and European paper industries continue to consolidate to improve operating rates and profitability, as demand continued to decline in the North American and European uncoated free sheet market. For example, in North America, one of our most important markets, uncoated free sheet demand during the quarter continued to drop by an annual rate of 1%, while operating rates remained high, at about 95%. Since the first quarter of last year, we saw additional machine shutdowns and paper mill closures, and as a result, paper PCC volumes declined approximately 4%. Residential housing starts remain low, and were at their lowest level in 17 years. March 2008 housing starts were down 36.5% from the March 2007 rate of 1.5 million units. This has caused a significant drag on our process minerals business, which supports all aspects of the construction industry. In addition, the U.S. automobile industry volumes remain on a downward trend. As a result, sales unit volumes in the process minerals product line were essentially level with the prior year, which was itself a very weak quarter, as our customers continue to adjust inventories to reflect a weaker economic outlook.

From a market perspective, the steel industry was a relative highlight, with production volumes in North America, our most important market, up 13%. However, our refractories business continues to face unprecedented pressure on its magnesia and alumina raw material cost. We have achieved considerable improvement in pricing, but more will be required to reflect increasing raw material costs. In the first quarter, cash flow from operations was only $6 million, due to substantial increase in working capital over year-end levels and cash expenditures of about 10 million related to the restructuring program.

As Joe mentioned during the quarter, we also repurchased 289,800 shares of our stock for $18 million, or $62 per share. The second quarter is generally sequentially stronger period in many of the markets we serve. However, the trends in the construction, automotive and paper industries have not been favorable to date. In addition, we will experience higher costs for raw materials and energy for the balance of the year. These factors will tend to compress our margins and will temper further income growth as volumes improve.

Here is a more detailed view of our sales performance. MTI sales for the quarter were 277.5 million, a growth of $12 million, or 5%. Although foreign exchange had a favorable effect on sales of 12 million, similar amount was also realized from our successful selling price initiatives and when combined, these factors more than offset volume decreases in all the product lines. Sales in the specialty minerals segment, which is comprised of the PCC and process minerals product lines in the table were $180.8 million for the quarter, a $4.8 million increase, or 3% growth. Although unit volumes declined in both product lines, we were able to achieve sales growth through price increases related to the pass-through of energy and raw material costs, and from foreign exchange of $6.5 million, and the PCC product line. This segment sales growth was driven by the PCC product line, which increased 3%, or $4.6 million, to 153.2 million, from 148.6 million in the same period last year, even though unit volumes decreased about 4%.

Sales within the process minerals product line rose only slightly in the quarter to $27.6 million due to the pricing initiatives. Volumes were down slightly, below the already depressed levels experienced last year due to continued decline in residential construction activity and a weak automotive market in the U.S. Refractory segment sales in the first quarter increased $7.2 million to 96.7 million from $89.5 million in the prior year. Foreign exchange had a favorable impact on sales in this segment of $5.5 million. Refractory product sales increased 7.6 million, or 11%, to $79.1 million from 71.5 million last year. Our price initiatives combined with foreign exchange provided strong sales growth in the product line, more than offsetting a 2% volume decline. Sales of metallurgical products decreased 2% to 17.6 million as compared with 18.0 million in the same period last year. The decline in metallurgical sales was primarily attributable to lower volumes in Europe.

This chart reflects the results for the continuing operations of the specialty minerals segment. The financial performance graph for the last nine quarters depicts a generally level sales performance, as our pricing initiatives and favorable foreign currency have offset the effect of paper mill closures and paper machine shutsdowns. Segment profitability in the first quarter improved over the prior year, driven primarily by cost improvements achieved so the restructuring program in both the paper, PCC and process minerals product line, and from the favorable effect of currency in the paper PCC group. The paper PCC product line operating income grew 18% over prior year and was about 12% of sales. Overall, segment operating income represented 10.2% of net sales in the first quarter. We expect some further market softening in the second quarter of this year and the major product lines in this segment, due to the forecasted weakness in North American and European uncoated free sheet paper production as well as the continued weakness in the construction and automotive industries. The second quarter is historically the strongest period for the construction industry, which affects all of our process and minerals facilities. However, we see no significant evidence of market improvement in these areas at this time.

The refractory segments financial performance graph also reflects sales on operating income performance from continuing operations for the last nine quarters. The sales trend is generally positive, with increases driven equally by higher selling prices associated with the increased costs of raw materials, and foreign exchange. Operating income increased $2.1 million, or 33% from prior year, with strong income improvement in both the refractory and metallurgical wire product line, despite continued performance issues related to the 2006 acquisition of a Turkish refractory producer. During the first quarter, steel production growth occurred in all regions, and our largest market, North America, steel production grew 13% and drove the segment profit improvement. We expect our profitability in this segment to face compression later this year, due to additional cost increases for magnesia imported from China. We see this situation continuing for the rest of the year. We will not see the full effect until the second and third quarters. We have comprehensive programs in place to mitigate this cost pressure, through price increases, and through the introduction of more advanced product formulation.

The working capital chart reflects our operating working capital trends defined as trade accounts receivable, inventories, and trade accounts payable. This became a major focus area for the Company's leadership, as part of its initiative to improve return on capital. However, after some success in the program during the third and fourth quarter, working capital increased approximately $37 million from December 31 levels, of which $7 million was attributable to foreign exchange. Most of the increase occurred in refractory segment, due to the timing of purchases of higher price raw materials imported from China, which were accelerated to avoid potential supply interruptions later in the year. In addition, our accounts receivable balances increased in all product lines, a portion of which is related to foreign exchange and a portion due to the cyclical nature of some of our product lines. Although six days above year-end levels our days outstanding increased only one day from the prior year's first quarter. Our days of working capital increased 75 days from 68 days in December, but decreased four days from the prior year's first quarter. We are disappointed in the first quarter's working capital increases and expect significant improvement throughout the balance of the year.

Our cash flow from operations was lower in the first quarter and includes approximately $10 million of cash funding for the restructuring program, in addition to the working capital increase. Our capital investment for the quarter was only $10 million, a rate well below the target of 75 million we set for the year. Depreciation and amortization was about $19.6 million, as compared with 22 million in the prior year. Our earnings of $0.90 for the quarter represent a new high water mark for the Company. The earnings growth drove a step improvement in our return on capital. The anticipated savings from the restructuring program are being realized through the efforts of the management teams and all of our business units. Savings are on track and the additional costs being incurred are in line with our expectations. There is considerable work to do, but we remain confident the program will yield net annualized savings of 15 to $20 million in 2008. We have begun to dispose of the assets being held for sale, and we will realize a gain from the sale of our Chester, South Carolina facility in the second quarter. Again, there remains considerable work to sell all of the remaining assets. Going forward, we expect escalating energy costs will have an impact on all of our product lines. We expect low demand in the paper PCC product line to continue to have an impact on overall growth. And process minerals, we expect continued weakness in residential construction and automotive market, and although steel demand remains steady in our major markets, we expect the escalating costs of our key raw material, MGO, to continue to put pressure on refractory segment performance.

The Company will remain in a transition phase throughout 2008, as we continue the transformation plan. The economic outlook remains uncertain and we do not expect to see any meaningful improvements in our major markets. However, we have established stability in our product lines and have defined a clear strategic direction for each of them, as demonstrated by our first quarter performance. Now I will turn the call back to Joe for closing comments.

Thanks, John. Before I turn it over to questions, there were just a few additional thoughts that I would like to share with you. I've now been at MTI a little over a year, and in that timeframe, I believe the Company has been able to develop a new and reenergized sense of direction and purpose. We were able to instill a new discipline on expenses and capital allocation reversing a downward trend the Company had been on. For our strategic review and subsequent restructuring process, we've been able to build a stronger foundation upon which to build a future. All of our initiatives with the effort and support of our dedicated employees have contributed to the improvement we see in the first quarter results. We have a long way to go in terms of realizing the growth potential and value potential ahead of us, but as you can see from our shareholder value check list, many things came together well for us, in spite of the challenges and economic difficulties that confronted us in the first quarter, as John and I have been discussing with you. As we look ahead, we will continue to face significant challenges. Some will get tougher for us, which is energy. Raw material costs and consolidations, but I believe we are fundamentally better positioned to handle these challenges and continue the improvement process begun last year to increase shareholder value.

Now let's open it up for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Bob Koort with Goldman Sachs.

Thanks, good morning.

Good morning, Bob.

Joe, could you tell us who the counter party was to the Chester sale, and maybe what business they are in, if there's also hope they could buy the Texas facility?

Yes, the counter-party was Mississippi Line, and I think they have looked at it, but I'm not sure that they will be the party buying it. Doug, do you have anything to add around that?

No. The Mississippi Line was the counter-party. -- others also involved in the, interest in the Cleburne facility right now.

And did you say, I didn't quite catch it, John, is it nominal proceeds, or is it meaningful?

It's -- I would call it meaningful. We'll record it in about $4 million net in discontinued ops next quarter.

Got it. And then what's the scope in terms of proceeds range order magnitude for Mt. Vernon and Wellsville?

I think it's too early to get into that. We're not that close to a closing yet. We'll just keep you updated as we, as the data comes in.

Okay, and then Joe, obviously you made terrific progress here. I'm curious on the 9% return on capital, I think, in one of your original blueprints, that was a 2010 target. Maybe that looks a little too low, and with your balance sheet being substantially under utilized, does it make sense to ramp up leverage and reduce your equity base in order to reduce your cost of capital?

Well, we we're going to put a check plus on the shareholder checklists for the ROC. We are -- I'm pleased with where we are, but keep in mind, moving return on a billion dollar capital base is not an easy thing to do. And when we set the target, we also had envisioned, that there would be capital expenditures in terms of some growth requirements coming, so keep that in perspective as well, as you think about the target. Suffice it to say, we're pleased with the progress we've made in the first quarter. We now need to repeat it and stay on that track. And then further lift it and that's why we used the term as quickly as possible. That's what we're really trying to do, is to move above that very, very quickly.

And in terms of utilizing your balance sheet more aggressively either for return of capital or acquisitions?

Yes, I think that's something I touched on in the last call. We've begun a process of reviewing areas and companies that might make sense for us as we've reset our strategies, and that certainly would be a possibility, Bob.

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

Yes, good morning. When I look at your cost reductions and SG&A expense and R&D, I suppose that imparts some of the -- head count rationalizations. All things being equal, should your SG&A and R&D expenses follow that same trend and be lower in absolute dollars year-over-year for the next three quarters?

We're focused pretty heavily on trying to make that happen. That's why I've used the term continuous improvement. The whole company has worked hard, you know, beyond the restructuring program to reduce our expenses. We have a number of initiatives that we're focused on, including increased shared services inside the Company, as well as looking at some possible outsourcing. So I think the way we look at this, Jeff, is that it is something as a company we need to over time continue to both drive down, and leverage up, as we increase sales, be able to do that in a way that we're better utilizing the resources that we have inside the Company. So there are two aspects to it, and part of it is still process building, process collapsing, and it involves a number of things that actually went well beyond the restructuring.

You spoke of there being a 15 to 20 million cost reduction effort this year. How much did you achieve in the first quarter of that 15 to 20?

Well, I'm going to let John cover this, but the thing to keep in mind in terms, as you look at the -- our cost savings really came from a number of different fronts. It was the restructuring, and we tracked very well in terms of capturing what we envisioned when we set that target for ourselves, but we also had savings that came from expense reduction, and another area that helped us, in that we had very good operating performance from PCC manufacturing during the quarter, where we were able to get and capture some cost savings. So you have it occurring in a number of different, different areas. And I think John can probably give you a little further insight to it.

Okay.

Jeff, if you recall, when we first set this target out there, we said that it would be an annualized rate of 15 to 20 million achieved in 2008 and through the first quarter, as Joe pointed out from a number of areas were on track. And that's why we included in our $0.88 headline on the press release, the 1.4 million in charges we had in restructuring. The net effect that we're looking at to get to this annualized rate is to achieve it by getting the savings, but also recognizing there's ongoing expenses to do it. There's expenses associated with the carrying of some of the assets, as well as some of the programs that we have to do training and development within our company to achieve the savings that we projected. And so we're not all there yet, but we have had a very good start into the program and right now we believe that the net savings of 15 to 20 will be achieved in the year and we'll be at the high-end of that.

High-end of that, okay. So I guess what you're saying is that you saved something like 4.4 million in the first quarter, is that what you just said to me?

Essentially, I think that would be a good way to think of it on a net realized basis.

Okay. Joe, in terms of capital expenditures, what are the high return on capital projects that you hope to spend on this year? And I think your original idea was that you would spend 70 million and you spent 10 in the first quarter. So I take it that your capital expenditures plans are probably pruned back a little bit. But what are the higher returns on capital projects, and how much do you expect to spend?

Yes, we do based on what we're seeing right now, what we thought we would be spending in, coming in later in the year, will be less. A little hard to call exactly right now, but the higher return projects tend to be in a couple of areas. One for us is the PCC business, our satellite business, historically has provided very good return on capital and these things we're working on right now are pointed in the same direction. There are cost savings projects that we are involved in looking at that would give us higher returns, things that can give us relatively fast payback, and then selectively in the refractories business, again, opportunities where we can invest in things that can provide relatively fast returns. But I would say on balance, it would be PCC growth and support of that growth, selective growth supported in refractories and cost savings across the board--

I guess -- thank you, and then lastly for John, so you bought back about 300,000 shares in the first quarter. Is that probably a good quarterly pace for the remainder of the year? And also, you brought down your tax rate and -- which is nice to see. Is there more to be done? Is this a good rate to use for the year? Is there more tax planning you can do?

Well, thank you for mentioning the tax rate. I had a feeling you might. The -- something to perhaps take a look at without getting into laying out what our buyback rate will be, but it's helpful, I think, to look at -- if you look at the fourth quarter last year, first quarter -- let's see, the last two quarters, we've actually spent more than 90% of our free cash flow in buying back stock and returning monies to shareholders. So I don't know that I would want to say that's the pace we'll be on, but we'll continue to, again, try to, as I mentioned in last call, trying to take a balanced approach to what we're doing within the context of the economic conditions we have right now, which are quite uncertain, as well as opportunities to invest for the company, and so I think that, from that standpoint, that's, that's about as good a sense as I can give you. But I think the last two quarters reflect in part what we are open to doing when we think it makes sense. Tax rate, I'm going to defer to my financial friends over here and John.

The tax rate, Jeff, is based on our forecast for the full year at that 31.

So how did you get the rate down?

Some had to do with our mix. Some has to do with the way we're managing our dividends.

Okay. All right. Thank you very much.

Your next question comes from the line of Ike Judd with green Greenwich consultants.

Thank you. It sounds like -- with the June quarter, you anticipate that it sort of sequentially it looks flattish compared to the March quarter. Do you have any thoughts along those lines? I mean, is that the right conclusion, or is that the wrong conclusion?

I think that's, that's sort of the guidance principle that we have here. It's sequentially we would normally see a bigger pickup in performance minerals, or process minerals side of the business here in the United States, but we don't see signs of that yet, so we're very cautious about that element of it. And last quarter we were, we realized that we were going to have some higher costs moving into the refractories business, into this first quarter and the business did an excellent job of recovering some of that through pricing. Our pricing has been strong in all three of the business areas. So -- but we see increasing costs coming, energy, in terms of energy and raw material. So we do see pressure on the second quarter and we're not looking to see the kind of pickup you might, you might have seen traditionally in the cycle.

Okay, and then separately, you guys have obviously done a great job improving the return on capital, but I mean most companies that are involved in the basic materials space that have got issues around higher raw material and energy costs, in the past you guys have sort of lagged and, in terms of being able to pass those through. Now, with a new management team here, are there any thoughts about anything you could do differently than perhaps you might have done in the past in terms of changing your pricing and/or anything else you could do?

Yes, I think it's fair to say we literally have, with the team here through part of last year and in the first quarter, have challenged pretty much all past assumptions and paradigms, and we're continuing to do that. Where we have opportunities on contract renewals, to help better position for the future, we're trying to do that. We have done some of that, but literally I would say we're going to continue, because we need to look at all avenues, tap the full creativity of all the people that are focused on some of these different areas and because times are extremely challenging, not that they are normally not challenging, but things, both the pace of things and the rate of change, and the rate of change relative to increases and uncertainties in some of our markets, vis-a-vis the China supply positions that number of companies like Mentech and even other products that we get from China have, it does require a tremendous amount of focus, diligence and a willingness to question and try new things.

Okay, and then I see on your balance sheet, your assets under inventory is up sequentially. Is part of that due to foreign exchange, or are there some seasonal factors in that? And how do those inventories look from a volume perspective versus the end of the year?

We are up -- some is currency, but as I touched on in my remarks, the potential for supply interruption from China due to the Olympics put us in a position where we felt it was prudent to bring materials in sooner from China than we otherwise would have. And that's something actually we're going to have to continue to a certain degree for the next several months.

Thanks for the help.

You bet.

Your next question comes from the line of Daniel Riza with Sidoti & Company.

Hi, guys. You mentioned that there's probably going to be -- you're probably going need to raise prices for later in the year, just given the way the raw materials are trending. Are you seeing any pushback from your customers on that?

Yes, customers -- it's something we work with, with our customers. They in turn are working at, at raising prices. Again, that's situational, where they can, they do, and it helps the situation all around, and as you know, we're in a number of different markets. Some are healthier than some others, and so each situation is a little bit different. On balance I think we've done okay. First quarter, is a good reflection of that. However, you do get into leading and lagging aspects that are going to continue to be there for us. It doesn't -- in spite of some of the changes we made, we still will find ourselves in a position of lagging in some of the areas. That's why John said what he said. There will be some compression because of that. It will take us some time in some of our segments to get it back.

Okay, and on filler fiber, I think you said it's moving forward. Can you just provide a little color on what, what the progress is there?

Sure. I'm going to ask Ken to do that, particularly since he's just been with the major customer that we're in development with.

Okay. Just provide a brief update, just recently we ran another trial of filler fiber materials and overall it ran well and we still feel we're on track, but I do need to emphasize that we're still in development, but we do have plans to run more trials during the balance of this year. But right now so far from what we're seeing, we're positive, but still more work to do and we have work planned over the course of this year. Okay. All right. Thanks, guys. You bet.

Your next question comes from the line of Rosemarie Morbelli with Ingalls & Snyder.

Do you give us a feel, Joe you talked about that you were going to concentrate some of your investments on those areas with the highest return within refractory. Could you give us a better feel as to which those areas are?

Yes, I might ask Bill to comment as well, but there are areas where we can, let's say effect cost savings quickly, investments in things such as a kiln that allows us to have more control from an ore supply standpoint. So it will be things that right now the primary areas are things that can help us from a supply chain and cost standpoint, in other words, help compress supply chain in short supply, as well as reduce costs. Bill, do you want to add to that?

Yes, just, just to confirm what he mentioned there, Joe, certainly our refractory business is one that, you know, we are looking at finding ways and means to improve our materials and, continue to attack costs as we move forward. And so certainly looking at investments in kilns particularly with one of our businesses in Europe, where we've invested in a kiln in recent months, this is the area where we believe that we can drive the most refractive use of our investment capabilities, as well as driving higher levels of productivity at the same time. Other areas we're looking at specifically, yes we have certainly a base of maintenance that we need to be mindful of, but in addition to that, our metallurgical business is one that's strong and in many respects, it makes sense to play to our strongest suit.

Within the -- metallurgical business, are there any bolt-ons, small acquisitions that are out there in the marketplace that you could put your hands on?

Well, there's always opportunity, and it's something that Doug and the rest of the corporate development team are assessing as we move forward, and certainly my focus currently is certainly operational to make our operations as best as they can be and as Joe's echoed on previous calls, that in many respects, we have entered into a period of significant assessment and so from what I can see right now, yes, there are opportunities, but I think they may well be opportunistic.

Okay. Thanks for that. And then regarding the raw material costs going forward, I am assuming that you are mostly concerned about the cost of magnesia coming out of China. You had made an acquisition in Turkey, if my memory serves me right, to get some raw material there. Could you bring us up to date on that acquisition, which I think had some problems, and what you think you can do in terms of improving that magnesia situation?

Yes, I'll do my best to do that. Certainly from a raw material supply perspective we are constantly searching for different sources. We use our internal R&D activities to reformulate in order to continue to provide the highest quality of material to our customers and also in a most cost effective manner. As it relates to the operation that we acquired in the late 2006 in Turkey, certainly if we just kind of look at it from a raw materials supply perspective, it is our intent to utilize that business to satisfy not only the domestic Turkish market, but also to penetrate areas where we -- that we find attractive, specifically continuing to penetrate in the Middle East as well as eastern Europe. Looking at the business as it stands today, after having been on the job for a little over four to five months here, clearly what we have is a business that has required a significant amount of effort as it pertains to integration. It's certainly taken longer, as we have an expectation as a company what you hear from Joe is echoed by all of the operating unit heads, is that we raise the bar higher and so we have expectations to operate at higher levels of performance as well. So that, coupled with integration and cultural change, it does take time. Combination of what we're attempting to do on the ground in terms of pricing, and I've mentioned eastern European tradition and operational excellence coupled with what we have put in relative to investment, we are seeing measured improvement and we will continue to drive hard this year and I expect that we will see the operation going from success to success as we go forward.

Thank you, and Joe, if I may address one last question, given the -- making sure that I understood all of your comments and different answers, given the economic environment, do you expect the gross margin to improve further over the next three quarters or actually have we seen the gross margin in the first quarter at the highest level for the year, given, what you talked about, and then same question regarding SG&A, is that 9.4% of sales more or less the optimum number for 2008? I am not seeing longer range it will come down, but for '08.

Yes, on both fronts, we're dedicated to improving -- I can't give you a number at this stage, but all I can tell you is we're really focused on continuous improvement. The margin question is one obviously we want to continue to expand it, but there are a lot of things, as John mechanics, working, coming against us right now that we're going to continue to try to offset. Not probably specific enough answer to your question, other than to say you've got a dedicated group of folks from a business unit standpoint and been working hard at expanding it for the last four or five, six months, we're going to continue on that track. How it plays out in part is going to be impacted a lot by the rate of increases that we have coming at us and can we offset those fast enough. That's the challenge we have that Bill just talked about, and it exists in each business.

Okay. Thank you.

Your next question comes from the line of Steve Schwartz with First Analysis.

Good morning, gentlemen.

Good morning.

John, if we could talk about, again, the benefits from restructuring and so forth, you threw out a number earlier of about 4.5 million net. And so if we add back the cost in the quarter, we're at about 6 million. Do you have a feel of that 6 million how much of that fell into the R&D category?

I guess the best way to answer that, Steve, is to say that the first benefit and a large of share of this initially comes from the depreciation, from the write-off of the assets. That was the first one, and that was the benefit you saw starting in the fourth quarter of last year. Coming into this year then, we started with the benefits of the other restructuring elements, of which R&D is really not a large item.

Okay.

The changes were made throughout discontinuing operations, ceasing -- restructuring we did throughout the business. So in that context, R&D is not a particularly large share of it.

I see.

The reduction in R&D that you see on the P&L reflects not only the costs of R&D, pure, basic development, but also the reduction in the effort in the SYNSIL area.

Okay. The reason I asked, Joe, you mentioned in your commentary that trial activity was solid, but we've seen in the past where when R&D expenses drop, it's a result of lower trial activity. So I'm really trying to get a gauge there of how much of this decline in R&D is due to restructuring benefit and how much might be due to lower trial activity?

I think the way to think about it is last year I would of like to have spent more money on trail activity, which some got moved into this year. We are beginning to get back on track and that actually had more to do with customers wanting to delay because of availability of their machines to run the trials on, which means business with this particular customer we're working with is good. But as you think about the R&D area, John touched on it, that SYNSIL is a whole area of development that we're no longer spending money on other than in some ancillary areas that came out of some other research that we did in SYNSIL. And that's one area where we did have quite of bit of trial expense and R&D expense. The other is, in the course of last year, we worked at trying to get our R&D efforts aligned and make sure we have the right resources, the right sciences, the right technologist, working in the right businesses, and we restructured so that our R&D organization is now within each business unit. We have an umbrella organization, a technology lead team to pull it together, but that, that process actually allowed us to save some money particularly in the coatings R&D area where we were able to consolidate into one location from two, and again, primarily dedicate it to development work. So it's a number of factors that lead you to what itself absolute level is today.

Okay. That's definitely helpful. You've already had a few questions on the raw materials, but I wanted to ask, can you give us an idea of perhaps for the year and the quarters relatively -- you know, what -- how much were raw material costs up in the first quarter and then for the subsequent quarters relative to that, where do you expect them to fall?

Yes, I do not have those numbers handy. John, do you have a rough sense of that?

I'm sorry, I missed the, missed that part of it.

Oh, just your raw material costs for the first quarter, how much they were up.

I really don't.

Okay, okay. Can you--

I couldn't put a frame on it.

If we just call, you know, on an index basis the first quarter 100, where would you expect the second, third and fourth quarters to fall? Because it sounds like you guys at least have a feel for what's coming.

We do. If we take Mag oxide, we're up roughly for the first half I think we're up -- excuse me?

8.5%.

About 8.0%, just on Mag oxide, which is -- what is that tracking, Bill? I think we're in the neighborhood -- we're looking at at least $4 million, ball park, on Mag. But Mag has been coming in in waves in terms of -- we've been seeing Mag increases starting last year and the last wave of increases started around the November-December timeframe.

That's right. It started in November.

Okay, okay, and on azimuth, you've mentioned this has been underperforming. Can you give us some ideas of what areas it's not up to your expectations?

Well, again, from the perspective of the ability to be able to produce tonnages at, to support the local market, really what we've been trying to do is we've been trying to become much more self-sufficient in terms of conversion of ore into center, and so in terms of performance, what we are looking -- what we are looking to do is obviously part of our strategy, is with the investments that we've made in the additional kiln capacity is to provide us with the ability to process more of our ore so we can produce -- so we can have our own center, as opposed to being totally reliant on some of the third-party activity that we have engaged in, in terms of purchasing raw material. So in terms of, in terms of performance or perhaps disappointment, just a question of getting from A to B and how quickly we were getting there. We set a very aggressive time line. We've had some setbacks for a variety of reasons, which we are addressing. We have an excellent team on the ground that I've got complete confidence in, and we're working the equation and moving forward. So it's really a question of the expectation we had, the plan that we had, and the ability to be able to execute in the timeframe.

Okay, great. Thanks, guys. Have a good weekend.

Thank you. You, too.

(OPERATOR INSTRUCTIONS) . Your next question is from Richard O'Reilly with stand Standard &

Good morning, still, gentlemen. I couldn't get the slides, couldn't find the file for the slides, so I might be asking you to repeat something. But can you quantify the volume declines by the various product lines? I know you, you did PCC down 4%. Can you give us an idea what the other product lines were like?

Yes, go ahead. Go ahead, John.

In the sales chart, which I appreciate you didn't have, during those comments we identified refractory's down around 2% and the process minerals group, although they -- we said they were down slightly, it was only slightly, they had picked up, because of last years levels were also very, very weak. They continued to operate at a relatively low level, not much of a change volume-wise there.

Okay, good. So clearly, just a complement, clearly all the actions you've done in the last year have really flowed to the bottom line. I mean if you're having this head wind of raw volume decline, so I got to complement you guys. Okay. That's it. Thank you.

Thank you very much. Appreciate it.

Your next question is a follow-up question from Jeff Zekauskas with JPMorgan.

Yes, good morning. This is Cecil [Cacao] for Jeff. How are you?

How are you?

Good. I have one set of follow-ups. Did you say you consolidated the Belgium coated PCC plant into [Balsam] at this point? And maybe you can just comment how does is this progressing and if you have made any progress into moving into a more satellite approach on the PCC coatings area?

Sure, that was, as you know, an integral part of the restructuring. I'm going to let Ken just update you on where we are in the consolidation process.

Sure, no problem, Joe. In terms of the consolidation, yes, everything now is operational in [Balsam]-- and effectively we are still running trials with key customers, with various new products. We're very pleased with the performance of our new over (inaudible) 3000 product for the coated wood-free segment, as well as we're continuing to work with select customers in the development of additional products that are targeted other market segments within the coating, coated papers market. So overall, I would say, we're -- it's slow, but I feel that we are making progress and with where were planned.

And secondly, can you roughly allocate the 1.4 million restructuring costs among the PCC and the refractory segment and maybe also just allocate the cost savings you achieved from the quarter of 4 to 5 million among PCC and refractories? Just very rough terms. Is it 60/40 or 50/50, or how do we think about it?

First of all, the expense is -- some of the expenses are in a more general area. We haven't really split them out by individual product line that way. We've just consolidated them into one group. Some of the expenses go not only with the facilities, but also with some of the training and development we have to do internally in order to achieve some of the changes we have to make in the company to operate the way we envision operating it.

How about the cost savings?

Well, in the savings, I think we gave a little guidance back in what you could derive basically in the previous call, when we disclosed the breakdown of the assets. As I said a little earlier, a major portion of the savings came from the reduction, depreciation costs related to the shutdown of the facilities and the values of the facilities were laid out in the K and in the, what we broke down, for example, the major components and SYNSIL's part of it is down in discontinued ops and from the PCC part, for example which is still an operating piece so you are really looking at components of cost that affect not only the P&L, they also affect the below the line discontinued Op lines, so your best sense is to follow the P&L area. If you want more clarity on that, perhaps give Rick a call and he can take you through the K.

Okay.

That's probably the best source.

Okay, and then on the refractory side in China, is that plan now right-sized, is it where you want it to be? Are you doing anything in the refractory business in China currently?

Yes, actually, that may be a good way to phrases it. I think we, we've been in process as part of the restructuring -- part of that was the plan itself. The other was the overhead structure that Bill has been at work on putting together. I'm going to ask Bill to kind of give us a brief update on what's happening in China.

Yes, we've been looking at I guess two elements for one thing. Joe was alluding to, one was the actual business model itself that supports our China business as well as our, as well as our overhead structure. Again, in the spirit of continuous improvement, we never finish, but certainly what we have, what we embarked on in the restructuring, we are seeing the benefits of that so we are moving ahead as we had planned in the China operations, as it relates to structure. From a business model perspective, we have seen first quarter improvements through that business, and that's really attributable to two things. One is higher refractory sales and also higher equipment sales, which obviously is a significant benefit to our operation there. The process still continues in terms of trialing with key customers. Certainly the model that we have deployed in the U.S. and to a greater degree, Europe, we've had to modify in Asia. Process is slow to some degree. We are looking at export opportunities out of our (inaudible) operation to support nondomestic customers and other Mentech production facilities for that matter. So again, it's a slow process. I thank that in many respects we have to take the approach to a long-term investment approach in the China markets, which is what we continue to do. So I think that in many respects, we're on track. It's not where we wanted to be ultimately, but we're making improvements.

Okay, and the last question on working capital, what is your working capital target for the year, and will it be back in positive territory by the end of the year or maybe already by the second quarter? Can you tell?

Well, the plan is to have, as Joe mentioned before, continuous improvement in this area. And as I mentioned in my slide here, the days outstanding had increased significantly and so our goal is to get down not only to last year's level, but below last years level.

Yes, I'm thinking as I mentioned, to add on to what John was saying, we will have some periods, up to the Beijing Olympics, where there will be some inventory build that we'll then be working off after that. Some of that might carry into 2009.

So does it mean that working capital will be direct this year, or will it be a benefit by the end of the year?

We're focused on it beginning to become somewhat becoming a benefit starting in the next quarter, but, again, part of that is when you're looking at the supply issues and interruption of supply, that can throw a wrinkle or a wrench into what we're doing pretty quickly, so that can be a mitigating factor to us getting down as fast as we want to, and we're still, keep in mind, that for a company that historically has not focused on working capital in the way that we're focusing now, we're still in some respects building processes and systems that speak to materials flow, compression of time, reduction of safety stocks. Those are things that take time to do. And so the first quarter severance as a good data point, that we still have a lot of learning in some of our business segments and how to effectively manage working capital.

So I guess one more time, in 2007, the working capital changes were a positive 35 million, so for the year, do you think it would be -- you can work it down to at least being neutral, or do you think it would still be maybe slightly negative or positive?

From the receivables standpoint, we should be able to make it neutral.

Okay.

From the inventory side, as Joe mentioned, we could still have an exposure.

Okay, okay. Thanks very much.

Time for one more question.

Your last question comes from Bob Koort with Goldman Sachs.

-- sitting with Bob. Some quick follow-up questions regarding raw materials costs. Do you -- I was wondering, do you have some of your -- or are you going to hedge some of your key raw materials or your fuel costs, and given the substantial head winds there, or can you source some of your key raw materials from some low cost regions on a global basis?

In terms of sourcing some of them?

Yes. Or you do some hedging programs, try to offset some of the raw materials head winds there.

We have done that in the past. It's one of the tools we have used. In terms of the raw materials such as Mag oxide, most of it comes from China that for us. The issue is, that's also what's causing some of the potential interruptions, slowness, tightness. It's a very tight market right now that's helping to drive up the costs, as well as the Chinese government has raised the export tax levels, or also removed the incentives for export, which has contributed to the higher prices. So the answer to the question is yes, we are looking at other sources and we're going to continue to do that to mitigate the China supply position, of the dominance of that supply position. We also -- procurement group is actively looking at in all corners of the world as I guess most companies are, we have been at it, that's not new for us. We are in the process of actually setting up a low cost country center in China. It will be in [Chen] We've had a person there for sometime. We're going -- we're adding to that group to, for the very reason of being able to, to help provide lower cost materials that, lower than we historically have been able to get, both on the materials side as well as the equipment side.

Okay, got you. My second question is, curious, because you have been very aggressive in terms of pushing higher prices in a relatively weak demanding environment, and I'm curious, did the pricing benefit 1Q '08 fully high raw materials cost?

I'm sorry? Could you repeat that, please?

I'm wondering, did the pricing benefit that you got in the first quarter '08 fully offset higher raw materials cost you see?

No, not 100%.

But most of that being off site, most of the cost being off site?

Well, it depends on the material. We had areas, for instance, in the chemicals area that we were not able to fully offset. Some of those -- I touched on that. That's what I meant in the remarks, that we were going to see some of the -- there will be additional impacts from some of the areas that we've started to see price increases from, and those were in the chemicals -- those we were not in the fourth quarter able to offset. We're going to try to deal with those in the second quarter, but they are continuing up.

And then do you -- how quickly do you think you can close the raw materials pricing gap?

Well, again, part of the gap can be closed. Another areas, particularly in refractories, we have Bill and his team working on reformulation that can substitute, and so part of it is pricing and the other part is substitute.

Okay, thank you very much.

Gentlemen, do you have any closing remarks?

Yes, I would just like to, again, thank everybody for their questions. The quarter, as I indicated for us, I review -- I called it pivotal. I do believe it is a turning point for the Company. And we're off to a good start for the year, which is important, but we also have a lot coming at us, but as I said, I think we're much better positioned to deal with the things coming at us than we were last year. So in any event, thank you.

That concludes today's call. Thank you for your interest in Minerals Technologies.

You may now disconnect.