Minerals Technologies Inc (MTX) 2008 Q2 法說會逐字稿

Good morning. My name is Stephanie. I will be your conference operator, today. At this time, I would like to welcome everyone to the Minerals Technologies incorporated second quarter 2008 earnings 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). Mr. Honey, you may begin your conference.

Good morning. I'm Rick Honey, Vice President of Investor Relations. Welcome to our second quarter 2008 earnings conference call. This call is being broadcast on the company's website, www.mineralstech.com. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call with an overview of the quarter and an update on the progress of some of the initiatives we have implemented in the last year. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our second quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward and some of the challenges we face in the second half of 2008.

Before we begin, I need to remind you that on page 7 of our 2007 10-K, we list the various factors and conditions that may affect future results. Statements related to performance by members of our management are subject to these cautionary remarks and conditions. Now I will turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. Last night we released our second quarter financial results with earnings from continuing operations of $0.98 per share for the quarter, and net income of a little over $23 million. We achieved record earnings in the last two quarters, resulting in the best first half the company has had since its inception in 1992. In the first part of this call, I would like to bring you up to date on the progress we've achieved in some key target areas, primarily our efforts to improve profitability and return on capital.

As I related to you in the last call, I considered the results we achieved in the first quarter to be pivotal. Pivotal in the sense that they represented a significant improvement from the relatively flat performance track the company had been on for the previous five years. Our second quarter performance, as you can see in this earnings graph is a continuation of that higher performance track. The improvement in our return on capital in the second quarter is another strong indicator that we have moved to another place. The second quarter ROC was at an annualized rate of 9.2%, while the first half of 2008 was at 8.7%. This compares to 6% poor the full year 2006, and 6.8% in the second quarter of 2007, and is representative of a 45% improvement over 2006.

We achieved these improved results despite increased energy costs that affected all product lines. We had significantly higher raw materials and chemical costs as well as weak market conditions in the U.S. housing and automotive industries. We continue to realize the savings we had targeted from our restructuring initiatives, and we are, in fact, exceeding them. As a company, we continue to do a good job of executing this multifaceted realignment of our operations. This effort remains on track and we'll continue to focus on it until it's complete. Our expense reduction initiative which began in 2007 has also continued into 2008. We've reduced the expense ratio 13% from the 12.3% rate experienced in the second quarter of '07, and have reduced actual spending by 4.5%.

Our productivity also improved in the second quarter. Sales per employee increased from 380,000 to 448,000 on an annualized rate basis, which was -- is an increase of 18% over 2007 and 29% over 2006. Looking at the first half of the year, sales per employee increased 16%. We also saw improvement in output per employee during the same period. Paper, PCC increased tons per employee by 8% and performance minerals increased by 11%.

This chart gives you a perspective of the size of the increases in costs that we were faced with in the first half. With magnesium oxide and bauxite having the largest impact on us of over $16 million. Lime, chemicals, and energy cost increases were also very significant. We were able to offset these increases through a combination of actions, including price increases, a restructuring program, expense reduction, operational cost savings, and even some volume growth, primarily in the metallurgical area and Asia Paper PCC where we started up our new satellite facility in Thailand.

As we look at the second half of the year, we see continued and even more significant challenges from the higher energy and raw materials costs. Lime costs in particular will be driven higher than we saw in the first half due to the energy cost increases, and we'll see a lag in cost recovery in the second half, particularly in the fourth quarter. That will carry over into 2009 due to the nature of our PCC supply contracts. In addition, we also see the possibility of lower volumes in paper PCC business as a result of paper machine and paper mill shutdowns. We also expect our performance minerals business unit to see continued weakness in the U.S. housing market and further declines in the automotive market.

We plan, however, to effectively manage through these forces using the same levers that we employed in the first half. Price increases, cost savings, and some volume gains. And we'll continue to deal with these challenges as aggressively and effectively as we have during the first half. We'll also continue to focus on our four major initiatives, where progress continued to be made during the second quarter. Our cash flow improved in the second quarter through the strong earnings performance as well as improved working capital performance. Year-over-year, working capital is still higher than we'd like it to be, due to the need to build high levels of magnesium oxide inventories to protect our customers, and as we related to you in the last call, China's sourcing of MGO has become quite problematic.

Our product innovation efforts will continue to center on four areas. Filler fiber composite materials, PCC coating products for satellites, minerals for biopolymers and refractory reformulations. Our fiber trials have continued and we are still targeting fill rates of 30% or more in uncoated free sheet paper. Our refractory product formulation efforts are continuing to provide sustainable competitive advantage. We're also now focusing some of our efforts on providing lower cost formulations using substitute materials as potential alternatives for MGO. And in the biopolymers area ,we've succeeded in initial commercialization and have our first customer. Our initiatives and continuous improvement at all levels of the company continued in the second quarter, as we have rolled out the 5 S process act across all of our manufacturing facilities, and are now preparing for the second wave of the deployment in the processes of daily management control, problem solving, and total productive maintenance. The implementation of these processes will provide us over time with a more disciplined approach to operations and process management and gives us a much better foundation for continuous improvement.

In safety, our recordable rate for first half was 3.1, and our lost workday rate was 1.3, both lower than our historical average but higher than we'd like it to be. We expect to drive these down during the year as we implement our key safety initiatives of new standards deployment, self assessment, risk assessment, and fatality prevention. Customer performance improvement and responsiveness to their most significant needs remains, of course, our highest priority. This quarter we introduced the new customer need survey process designed to give us better insights into areas for improvement. Now I will turn it over to John Sorel.

Thank you, Joe, and good morning, everyone. I will now provide you with an overview of our consolidated and segment financial results for the second quarter and highlight the key market and operational elements of our performance. This first slide provides an overview of the company's consolidated results for the second quarter. Overall, the company recorded earnings per share of $1.22. $0.98 were derived from continuing operation, representing the company's strongest quarterly earnings performance in its history. Earnings from discontinued operations were $0.24, of which $0.22 relates to a gain on the sale of two of the idle SYNSIL facilities. Sales increased 10% or $28 million over prior year.

Foreign exchange had a favorable impact on sales growth of $14 million, or five percentage points of growth. The additional sales growth was primarily reflected in refractory segment due to price increases necessitated by a dramatic rise in the price of raw materials and chemicals and due to volume increases of metallurgical products as a result of the continued strong demand in the U.S. steel industry. Volumes were below prior year in the specialty minerals segment in both the PCC and processed minerals product lines. Operating income increased 7% to $28.8 million, and represented 9.6% of sales, including $900,000 of additional restructuring costs. Operating income growth occurred in all product lines and was derived primarily from the savings achieved through the execution of the restructuring program laid out in the third quarter last year, and favorable effect of foreign exchange, which more than offset the market and cost pressures that Joe discussed. Income from continuing operations, which includes the benefit of lower interest expense and lower tax rate, compared to last year, grew 16% to $18.7 million. Total EPS grew 65% to $1.22 per share reflecting the improved income from continuing operations, a $0.22 per share gain on the sale of idle facilities, and an $0.11 per share derived primarily from discontinuing the SYNSIL development operations.

Our return on capital, excluding the gain on asset sales, on an annualized quarterly basis was 9.2% as compared with 6.8% in the second quarter of last year. The ROC metric improvement of 2.4 percentage points was generated primarily from the increase in net income with about one-half percentage point coming from the lower capital base resulting from the restructuring program. Cash flow from operations was approximately $33 million, and capital expenditures were only $10 million in the second quarter. We also repurchased 91,100 shares of stock for $6 million or $66 per share during the second quarter. Depreciation and amortization totaled about $20 million. We expect a more difficult third quarter as the trends in the construction automotive and paper industries continued to be unfavorable. In addition, we expect to experience margin compression in both segments due to the increasing costs for raw materials, chemicals, and energy, and a delay in our ability to mitigate these pressures through price adjustments.

MTI sales for the quarter were $299.8 million, a growth of 10% or $28.4 million. Sales in the specialty minerals segment, which is comprised of the PCC and processed minerals product lines on the table were $189.1 million, a 5% growth and $8.3 million above prior year. This growth was attributable to the favorable impact of foreign exchange as unit volumes declined in both product lines. Sales of PCC, which benefited from the favorable foreign exchange, increased 6% or $8.5 million, to $158 million from $149.5 million in the same period last year. Sales within the processed minerals product line decreased 1% in the quarter to $31.1 million. Volumes were down 7%, below the already depressed level experienced last year, due to continued decline in residential construction activity and a weak automotive market in the United States. During the quarter, both product lines began to realize the effect of higher selling prices related to the pass-through of raw material cost increases.

Refractory segment sales in the second quarter increased 22% or $20.1 million to $110.7 million from $90.6 million in the prior year. Foreign exchange had a favorable impact on sales of $6 million. Refractory product sales increased $16.7 million or 23% to $89.8 million from $73.1 million last year. This growth is primarily attributable to our pricing initiatives and to foreign exchange. Sales of metallurgical products increased 19% to $20.9 million, as compared with $17.5 million in the same period last year. The increase in metallurgical sales was primarily attributable to higher volumes. This chart reflects the financial results for the continuing operations on the specialty mineral segment. In total, segment profitability in the second quarter improved 9% over the prior year, driven primarily by cost improvements achieved through the restructuring program and from favorable currency in the paper PCC product line.

PCC product line operating income grew 18% over prior year and was slightly below 11% of its sales. Processed minerals operating decreased 18% as volumes, although sequentially stronger, were still 7% below prior year levels. It should be noted that cost improvements derived from our operations excellence program are beginning to have a significant positive effect in mitigating these volume reductions. Particularly in our California operations, one of the hardest hit. Overall, segment operating income represented 10.6% of net sales in the second quarter. 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 markets.

Since the second quarter of last year we saw additional machine shutdowns and paper mill closures which were largely offset by increased volumes from new facilities and ramp-ups, primarily in Asia, during the quarter. As a result, paper PCC volume declined only about 1% from the prior year. Residential housing starts remained low and were at their lowest level in 17 years. This has caused a significant drag on our processed minerals and specialty PCC product lines which support all aspects of the construction industry. In addition, the U.S. automobile industry volumes remain on a downward trend.

We expect further market weakness in the third quarter of this year and the major product lines within this segment due to forecasted weakness in North American uncoated free sheet paper production as well as continued declines in construction and automotive industries. We have initiated price increases to mitigate the continued rising costs of energy and the processed minerals product line. However, pass-through of these costs are subject to delays in recovery in the paper PCC product line, in accordance with our long-term contracts. In refractory segment, the sales trend over the last three quarters has been increasingly driven by foreign exchange rates and higher selling prices associated with the increased cost of raw materials. Clearing the second quarter, increased pricing accounted for the largest component of sales growth with foreign exchange rates accounting for nearly seven percentage points of growth, and higher volumes, particularly in the United States accounting for the rest.

Operating income increased $0.4 million or 5%. The operating income performance included restructuring charges of $700,000. Profitability increased significantly in the metallurgical product line due to increased volumes and a more favorable product mix. However, our refractory product line profitability decreased due to the margin compression caused by the significant cost increases in MGO and other raw materials despite our aggressive actions to address the realities of the supply situation in the marketplace.

From a market perspective, the steel industry remains a relative highlight for MTI. During the second quarter, steel production growth occurred in all regions, and our two largest markets, North America and Europe, steel production grew 8% and 2% respectively. However, our refractories business continues to face unprecedented pressure on its magnesium and aluminum raw material costs. We expect profitability to continue to face compression later this year due to additional raw material cost increases. We have comprehensive programs in place to mitigate this cost pressure through price increases and through the introduction of more advanced product formulations and manufacturing cost improvements. As you can see from this chart, the delivered cost of 90 grade MGO imported from China, the primary report material in our refractory product line, has more than doubled since the second quarter of 2007. We have initiated a series of price increases on a global basis to address the escalating costs. However, we continue to experience margin compression in the refractory product line as a portion of this cost increase continues to be absorbed by the business.

The working capital chart reflects our operating working capital trends defined as trade accounts receivable, inventories, and trade account payable. This became a major focus area for the company's leadership as part of the initiative to improve return on capital. However, after some success in the program during the third and fourth quarters of last year, inventories and accounts receivable increased approximately $40 million from December 31st levels, of which $10 million was attributable to foreign exchange. Most of the increases occurred in the refractory segment due to the timing of purchases of higher priced raw materials imported from China. which were accelerated to avoid potential supply interruptions later in the year. Our days of working capital increased to 75 days, from 70 days in December but still decreased eight days or 10% from the prior year second quarter, and three days from the first quarter of 2008. Our cash flow from operations was approximately $32 million in the second quarter and our capital investment for the quarter remained at record load levels of $10 million, a rate well below the target of $75 million we set earlier in the year and far below the $100 million run rate we had been maintaining in the past. As I mentioned earlier, we also continued with our share repurchase program during the quarter. For the first half now, we have repurchased a total of 380,900 shares for $20 million, or an average of $63 per share.

In summary, our earnings of $0.98 from continuing operations for the quarter represent record earnings for the company. The earnings growth provided the a step improvement and 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 to date are tracking above target, primarily because we have been able to execute our key programs more quickly. We have begun to liquidate the assets being held for sale and have realized the pretax gain from that sale of two of our idle SYNSIL facilities of over $6 million, and we expect to complete the sale of additional facilities in the third quarter. We expect business conditions throughout 2008 to remain difficult in the paper PCC product line. We remain concerned about lime cost increases, which normally affect us in the fourth quarter and potential capacity closures in the North American and European paper industry, which could impact our overall growth. Processed minerals, we expect continued weakness in the residential construction and automotive market with likely downward divisions in demand forecast. There is also some uncertainty in the steel industry from the same underlying markets that could affect our refractory segment while steel demand has remained steady in our major mark we expect the escalating costs of our key raw material, MGO, to continue to pressure the refractory segment as management works to mitigate through selling price. We did not expect second half to be as strong as the first.

Turning to the first half results, we achieved record earnings for each of the first two quarters of 2008 despite very weak economic conditions. The primary reasons were our enhanced performance for the half with the execution of our restructuring programs and price increases to mitigate the effect of escalating costs. The result was an operating income performance on a continuing basis that was 13% above the prior year. When combined with the lower interest expense and a slightly lower tax rate, this performance led to an after-tax income from continuing operations of $35.5 million, 24% above prior year. Our total EPS, including discontinued operations, of $2.12 per share, was 63% above the prior year earnings of $1.30. However this includes a gain of about $0.22 from the sale of idle assets. For the first half, the annualized ROC rate for the company, excluding the gain from the sale of assets, was 8.7%, 43% above the 6.1 achieved in the prior year. We have to use the free cash flow from operations to fund a more aggressive share repurchase program. The company will remain in the transition phase throughout 2008 as we continue the transformation plan initiated last year. The economic outlook remains uncertain and we do not expect to see any meaningful improvements in our major markets. However, we have established stability and have defined a clear strategic direction for each of them.

Now I will turn the call back to Joe for closing comments.

Thanks, John. Before we turn it over to questions, just a few additional thoughts that I wanted to share with you.

We've accomplished a great deal in the last 16 months. We've been able to reverse many of the downward trends in performance the company has been -- had been experiencing in the past six years. We've established a clearer sense of direction and purpose that has resulted in a stronger foundation that we can now continue to build upon. Our restructuring was well executed and is now tracking to exceed the savings levels that we targeted. Cash flow remains strong and we've been able to buy back, as John mentioned, 381,000 shares of our stock in the first half, around $24 million. The second quarter is significant in that it is a continuation of the performance improvement we had in the first quarter. We have a long way to go in terms of the growth potential, and value potential ahead of us, but as you can see from our shareholder value checklist, many things came together well for us in spite of the challenge and economic difficulties that confronted us in the quarter. We're now fundamentally better positioned to move forward, and we'll continue the improvement process begun last year to increase shareholder value. We're also much better positioned to focus on growth and begin to seriously evaluate and consider acquisitions and alliances that can enhance and compliment some of our strong product and market positions. As we look ahead, we do face, as I mentioned earlier, and as John mentioned, some increased challenges and greater uncertainty in some of our markets and input factors. But we also have a more comprehensive set of tools in place along with a stronger leadership team and a higher level of employee involvement to deal with them.

Now let's open it up to questions.

(OPERATOR INSTRUCTIONS). We'll pause for a moment to compile the Q-and-A roster. Your first question comes from the line of Mike Judd with Greenwich Consulting.

Congratulations on a good quarter.

Thank you, Mike.

Just trying to get my hands around some of these leads and lags in the second half in terms of the higher raw material costs and the time lags. I'm just wondering if you could maybe help us understand perhaps on both the talc side and also on the refractory side, you know, the impact of the higher raw materials and how does that flow through, and is there a greater impact, let's say, in the third quarter than there is in the fourth quarter? Just a little help would be appreciated. Thank you.

Yeah. Typically we're expecting the -- for PCC, paper PCC, to have some lag, and it's -- primarily it will hit us more in the fourth quarter than the third quarter, but it's the size of the increases and the way it will flow, and our ability through our contracts to recover those. The flow itself will not be much different from what we've experienced before, if we look back in time. The movement or the flow -- there's nothing different relative to what we've experienced over the years. So it's going to be more the size of the increases due to the size of the energy increases that -- where we have our supply lines linked to and our supply sources linked to that will drive those and how we turn those around and the timing of the contracts relative to our customers. Talc will tend to be more immediate, and when I say immediate, we recently announced a price increase on talc, and we're working through those right now. There isn't necessarily a delay. It's a different competitive situation. The number of contracts that are long-term are much less for that business, so there we should expect to see a more immediate effect of the actions that we're taking. Refractories will tend to be the negotiating cycles are on six months, so right now we're -- we've been negotiating for the second half. We've been in that process. We have more to go. We're not complete yet, so we've got some uncertainty around there. But for the most part, the contracts in refractories are on a six-month period. It can vary some for some other customers, but on balance, it's a six-month period.

Okay. And just as a follow-up on the refractory, I realize that things have -- you have made some changes there obviously in China, you've cut back on your operating rates, et cetera. But if you were to look at it on a year over year basis, is it fair to say that you would anticipate that the operating profits in refractories would be up or down in the third quarter just as an example? Because I realize the fourth quarter at this point is well off.

Well, we have a bit of a -- fortunately, we have a nice product mix, which gives us some balance. And rate now we're getting good improvement, operating income improvement, sales improvement, in our metallurgical line, which is helping to offset in some parts of our dealing with refractories business, we haven't been able to achieve as high a level, or that may be flat. So I'm going to ask Bill if he could offer any additional insights to that.

If we look at the forecast for the back half of the year, certainly we have to deal with, as John had mentioned, some unprecedented movement in our raw material costs, which we are in process of mitigating through price increases and internal improvement activities. As we look at -- as we look at the coming quarter, certainly we have every opportunity to mitigate most of what is coming at us. So my expectation for the third quarter would be similar level of activity as we saw prior year.

Thanks for for the help.

Thank you. Your next question comes from the line of Bob Koort with Goldman Sachs.

Good morning, this is Amy Zhang sitting in for Bob. I have a couple questions. In the prepared remarks you were saying the company exceeded the cost savings target. I think that's probably 15 to $20 million dollars on an annualized basis. Did I understand your commentary in the right way?

Yes. And if I could elaborate a little on that it basically says we've been able to achieve savings sooner. If you recall, after the restructuring, we laid out that we expected to get 15 to $20 million and reported on that in the last quarter that we were tracking, and what we've been able to do is actually achieve some of those savings sooner, save that is we thought would be further out, we've been able to capture.

Okay. Then at this point do you have a new savings target for this year?

Well, again, we've got a number of things coming at us, and it gets difficult to predict. But where we were look at 15 to $20 million in savings right now, we're looking at 20 to 25.

Okay. And the second question is regarding your ROC. For the first six months you have achieved a very impressive ROC improvement, and that has made your 9% target look a little bit conservative. Do you expect the ROC improvement to continue, and is that going to have a similar or even an accelerating base, even the fundamentals may not come as strong as first half.

Well, thank you for expressing that so kindly. One, we have an entire year to go through yet, but the reality is, we have done better, relative to being able to do more in a shorter period of time. And that required a total organizational effort on all fronts, including working capital. You know, we have some additional things coming at us for the balance of the year. Would that suggest that the target we have for 2010, which is exceeding cost of capital by then, could be brought in some? Probably could. But I prefer to -- let's get through this year, see where we are, then we can reset our target.

Okay. My last question, the raw material pressure on your refractory business -- MGO, raw materials have spiked in particular, looks like the traditional price hikes you are pushing are insufficient to offset those. Why not do you just implement more aggressive actions like surcharges given the underlying demand from the steel industry is still pretty strong?

Rest assured the MINTEQ team is using every lever they possibly can. The reminder here is we are in a competitive environment, so we're able to -- I think they've done a good job of pushing through as much as possible, and then working hard at trying to make up the rest, and I think they've done a pretty good job there as well of trying to reformulations, cost savings, make up the balance. But does it suggest we need to obviously continue to go after and wherever possible continue to get price increases, and that's true of every one of our business segments.

Okay. Thank you.

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

Hi, Steve.

Going to slide 7, and I'm recalling this off of memory, I couldn't find a presentation on your website, but I got it through the webcast. That's a nice slide, because it lays out some of the components and quantifies. It looks like restructuring was $15 million in the quarter. Am I ballparking that right?

It's a little longer, but that's the ballpark.

Okay. Then if we could frame the discussion for the second half around that slide, where you show raw materials being about $16 million and energy about 6 or so, pricing at 17, for the second half, can you put some numbers around it in that context?

Well, at this point in time, you know, as you -- as we look at the -- let's say the cost pressure side, we're still working through contract negotiations, particularly in the refractories area. Also, on the material supply area. So we know enough right now to suggest it's going to be -- to share with you it's going to be more than the first half. Where we I understand up will have a better sense within the next couple months.

Did the first quarter -- if you did that chance for the first quarter, would it look similar, with the exception of restructuring? Because we know that was lower?

We've started to see more lime and phosphorics coming in, in the second quarter, or other types of chemical increases coming into the second quarter. MGO as well was higher in the second quarter.

Okay. So that 16 number was lower. How about price in the first quarter? Was it about -- it looks like about 17 million in the second quarter. Was it about the same?

Again, the pricing -- the pricing goes over a six-month period, and you have different contracts over different periods. It's hard to go to a point to point. John would like to offer a comment.

One clarification here Steve. The chart on page 7 is a full half at six months.

Oh, that's first half. I missed that then. I'm sorry.

I wasn't sure if you had -- if you're taking it as a quarter or the half. Just wanted to clarify that. Okay.

It was assumed. I was trying to play catch-up. Next question, you are talking about margin compression in refractories and paper PCC. When you make that comment, is that sequentially from the second quarter, or year-over-year? Because you had some interesting things on your comp quarter last year for the third.

Steve, I'm not totally with you. Could you remind repeating that again?

I'm sorry. When you say refractory margin compression is affect and paper PCC, when you say compression, are you saying relative to the second quarter of this year, what you just reported, or relative to the third quarter of last year, so your comp quarter?

Well, relative quarter to quarter sequentially, we're seeing -- we're relating compression.

Right.

And that's also the way we're forecasting it, Steve. Further -- for that compression that chart I showed on the MGO price, shows that acceleration, so it takes some time to catch up there. So an acceleration sequential, not year-over-year.

Okay.

The MGO had doubled second quarter to second quarter. So it's that curve we're trying to account for.

Okay. And then just one last one before I get back in queue. You mentioned or noted on one slide that ForEx and refractories did carry through to op income. For every dollar you realize in revenue for ForEx, how much of that hits op income?

Obviously our expenses as well are impacted by the ForEx. So on sales dollar basis, down to operating income on a company wide basis, it's probably in the range of 20%.

20%. Great. That's great. Thank you very much.

Thank you. Your next question comes from the line of Jeff Zekauskas.

Hi, good morning. I see is you've made some further progress on your tax rate. How did you do that? And is there more to go?

Our tax man keeps it a secret. He doesn't tell us how does he that. I'm just kidding.

Okay.

I'm going to let John review that with you. Please, John.

There's actually a very minor difference between the first quarter and the second quarter. We're at 30.8, I think, for the second quarter, and year to date is 30.9. So roughly running at about 31. The change from last year, which is about 32.7, at the half, was mostly related to geographic mix. There's nothing really structurally in the overall tax strategy or structure that has a big impact.

So what's your low -- where are you selling that's giving that you benefit?

We're doing less in Germany.

And rates are down. As you know, some of the higher tax countries in Europe have reduced their rate to more or less equalize or unify throughout the European region, and that has some favorable impact on us as well.

You talked about your cost savings being ahead of schedule. How much did you pull out in the first quarter and how much did you pull out in the second?

Well, on the chart, we're roughly for the first half, we're estimating it's a little under $15 million.

So, I mean, all things being equal you've got 5 to 10 to go?

Yeah, what basically, it's not -- we also have things that get netted against that, so we have more of that coming. That's why I said if we're before we were saying 15 to 20, now we're look at 20 to 25 million on an annual basis. And the potential is higher than that but I wouldn't want to really give you a sense that it -- at this point in time. We'll obviously know better once we get through the third quarter.

Have you expanded -- has your amount of gross paper PCC capacity gone up since the beginning of the year and how much do you expect it to be up this year, if at all?

I'm going to let Ken review that with you. Ken, please.

Jeff, really, we haven't seen volume growth at all at this point, to be frank with you. We've seen some compression in volume due to the uncertainty in the market and some of the shutdowns that we have been experiencing, and we really do continue to expect to see those shutdowns continuing in the third and the fourth quarter, especially with the volatility in the marketplace and high energy prices. So really don't expect to see significant volume growth at all.

And what I'd like to add to that, what tends to get masked is we have seen some pretty decent volume growth in Asia where we had had on a half-year basis the Asia growth was over 4%. So when we have a number of those things happening, or at different businesses, there's so much downward pressure in total that they get masked in the numbers. But we actually had improvements in some volume improvements in performance minerals but you dent see it because the base business is fundamentally down because of the market, and PCC is pretty much the same way.

So your CapEx, then, you're running at about 10 million a quarter, and there shouldn't be much change in that.

We're so far along in the year, there still could be -- recall from last time, on the last call, we -- when we talked about the capital expenditures target, there was an expectation of having additional growth projects As we've moved further into the year, companies have moved their plans out. So that's pushed those capital expenditures out. Last estimate we gave you, we expected to be around 50. It could be less than that. If a project were to come in in the next month or so we could still have some additional spending in the fourth quarter.

If you were going to acquire something is it it possible that you could acquire in minerals business or in refractories, or is your acquisition intention really in only one of those businesses?

Well, we're really open in our screening process that Doug Dietrich and the corporate development team, we're really looking for opportunities in all business segments. So we're not really limiting to one of the other. Obviously some have more opportunities than others.

Just, I guess, a couple of last things. If there's a margin squeeze in the second half, presumably the squeeze is greater in the fourth quarter than in the third quarter.

That's what we're seeing right now.

Right. And all things being equal, should your earnings be higher in the second half than they were last year? Or you can't tell?

Well, you have the restructuring. It's a little difficult. John, do you have some insights?

The comparison to the third quarter is going to be extremely difficult, as you know, because of the P&L was done before the restatement. So it will be a bit challenging to do that comparison. But if you look at sequentially the way we're going, you would expect to show continuing operations improvements in both of those quarters, over both of those quarters. Remember in the fourth quarter of last year, although we did the major restructuring in the third quarter, in the fourth quarter, we only got the benefit of the fixed portion of depreciation portion of the restructuring. The other part of the program didn't begin to kick in until the first of this year. So you would expect some push from that, quarter over quarter.

We thought it more meaningful, Jeff, as we were just reviewing information that we're going to share in this call, that we hope you'd be better served by having a sense of sequentially what we see happening because we've got a much more stable platform now in the first half.

And then lastly, what kind of Al alliance might be of interest to you?

Well, it could range from a partner in Asia to an alliance in marketing with people in the paper, supplying the paper industry. So alliances can take many different forms. And it could range from something in the refractories business to better position ourselves to the paper industry as well to get to have -- be able to complement some of our products with other companies that have strong positions.

Okay. Thank you very much.

You're welcome.

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

Good morning, all. Following up on Jeff's question regarding the second half, last year in the third quarter you earned $0.59, and John said that the third quarter would be a difficult comparison with '07, and it is going to be down sequentially from the $0.98 in the second quarter of this year. Are we dropping below $0.69, or are you looking at another number for Q3 of last year? Am I missing something? Is that $0.69 wrong?

Yeah, John is looking -- is pulling out some backup material. He can better answer the question.

I'm not sure I can derive the $0.59.

$0.69.

Last quarter we had --

$0.69, John.

There you go. That $0.69 sounds better. The $0.69 was take out all the restructuring charges we took. But that still left operations that have been discontinued. That's before we restated that to discontinued ops. So that's not a direct comparison, and that was my point.

Okay. So when we are talking about a difficult comparison it is not had adverse of that $0.69. You have to adjust it --

That's correct. What became discontinued operations were obviously a significant drag embedded in that.

Do you know, do you have a feel for how much of a drag?

I don't recall, offhand, no. But it is restated. It will be restated when we do obviously the reporting next quarter. I don't know if it's been stated before that.

Okay.

I could probably derive that for you, Rosemarie, I could go back to the K, I'll go back and derive that for you.

Thanks. That would be very helpful. You said also, John that you expected no change in economic outlook for the second half. Isn't the general expectation based on what I am reading, that actually the second half is going to be weaker than the first half, at least in western Europe, and most likely in the U.S.? Is.

Yeah, that's what I thought I said. I'll be happy to repeat. That my conclusion on the summary, I said because of all these factors, we expect second quarter to be weaker. We're expecting downward revisions in housing and automotive. We're concerned that some of the things that have already affected the processed minerals group will begin to affect the steel industry as well, and the paper industry has been reporting downward trends in demand, as we pointed out. The lime cost increases generally impact the fourth quarter more heavily than any other quarter of the year. And remember, in a good year, there's seasonality in the processed minerals business when the fourth quarter tends to be weak.

Okay.

So our direction is downward for the second half.

I understood that your direction was downward but I was wondering if you had been looking at a flat economy as opposed to a down economy. So sorry for missing your comment.

That's okay. No, the economy was the primary driver for it. The business performance is really ahead of schedule on some of the things. We're needing that to cover these economic conditions.

Okay. And on the MGO, you are putting through price increases. Do you think you will ever catch up, or are you going to have, because of competitive pressure, to give up some of that, and in the end, until you find a substitute minerals, it is going to be quite a difficult environment?

I guess -- this is Bill Wilkins. I guess to answer your question, Rosemarie, it's a balancing act that we have to really play, particularly with relationships we have, very close relationships we have with many of our key customers. It's never easy -- conversations are never easy relative to pricing, but given the cost of magnesium oxide and the bauxite-based materials that we source from China it's pretty evident that we do have to pass on these costs. What we try to do is certainly not due to a lack of aggressiveness on our part, but again, we try to balance what we do since we are a service based business, and so in many respects, yeah, we will be recovering as much as we can. I believe we will not be recovering dollar for dollar, because, again, as Joe had had mentioned earlier, we do to have balance what we do with the competitive nature of the marketplace we're in. So the way that we try to recover to the best degree possible, again is through internal improvements that we are beginning to enjoy the benefits of in addition to the continued reformulation activities and looking at substitute materials. I mean, that's the smart approach and the balanced approach which we'll continue to undertake.

How long do you think it will take before you find a substitute that works, and is accepted by your customers?

Difficult question. It's an ongoing activity relative to looking at materials such as [dolimer] based as opposed to MGO based. We use many of these products in some of our reformulations today. Again, it's a balancing act because of the fact that MGO has particularly unique qualities. For quality, for that matter. So as a business that prides itself on high levels of quality in the products that we produce, finding substitutions is a difficult thing to undertake, given the acceptance that we have for this material in the marketplace. So it takes time, Rosemarie. I really wouldn't be able to put a time frame on it, but it's something we're actively pursuing.

Okay. Lastly, if I may, any chance of changing the length of the contract, whether -- and in refractory?

One of the challenges that PCC has had -- I will start with them -- is to -- where we do have longer contracts, attempt to shorten as they come up. But again, as new contracts come up, it is a negotiation process. So if we're able to shorten, then we're trading potentially something else off, and Ken and his team have also, as contracts have come due, looked carefully at some of the terms we have, the formulas that are being used to help shorten that time frame, as well as some of the indexes to make sure we've got effective indexes that we're tieing these increases to. And in the refractories area, the team there is also trying as much as possible to shorten wherever they can, so in the upward market to minimize the time exposure. But it's not a -- again, different customer by customer based on what the relationship has been, and also the degree sometimes of if the customer is global, we're negotiating a global contract or the framework for the various regions.

Okay. Thank you very much.

Thank you. Your next question comes from the line of Daniel Rizzo with Sidoti & Company.

Thanks, guys. Actually, everything was just covered.

Thank you, Daniel. (OPERATOR INSTRUCTIONS). Your next question comes from the line of Steve Schwartz with First Analysis.

Thank you for taking the follow-up here. On R&D expense, it looks like 6 million a quarter is your new run rate. Is that safe to say going forward?

Well, it could be higher. If we move into more filler fiber trials, you could see that move up pretty quickly. And that's our objective, is to, one, increase the level of trial activity there. The recent trial we held was successful, in the sense that we moved our own learning and the customers forward, and we're scheduled at this customer for another trial in September. Ken, perhaps you'd like to elaborate on that a little bit.

No problem. I think, just to add to what Joe is saying, in terms of focusing the R&D expenses, I think the key opportunity for us is that we will fund what we need to fund to make sure that we're continuing to grow our new product programs the way we need to, for the future, with respect to the filler fiber, we do have another trial planned, though we continue to make good progress. It will be a development program but we are making progress. In that regard, we are going to actually another potential customer is now expected to trial a product in the late third quarter, early fourth quarter. So as the opportunities come up to spend the money to support our new programs you can be assured that's definitely what we're going do.

And the 6 million that we've seen over each of the past three-quarters, have you been comfortable with -- at that level with what you've been doing in bio polymers, refractory, PCC, then the filler fiber, or do you feel like you need to do more and would that drive an increase?

Right now, and I'll let DJ Monogle add to that I think in the biopolymers we have the right compliment of people focused on it. We've had our first commercialization. I think we've got a good marketing and sales team, and we're well positioned to move that forward. Again, if we need to add there, we clearly will, but I think what I've seen so far we've got a nice team focused on it. DJ, you want to add to that?

I would affirm those statements. I think from my perspective, the current run rate in that area is good. As Joe mentioned, in the highlights, we've commercialized with our first recurring customer. So the continued development in spend will be on taking that technology to other locations. But also, as biopolymers develop, it will be augmenting the product portfolio with some new products that would be adjustments to support the evolution of biopolymers. So to answer the root of your question, I'm pretty comfortable that the current spend will allow us to grow in that area.

If I could just add to that a little from a just from a reference standpoint, if you look at where we were, let's say in 2006 versus where we are now, a good percentage of the Delta was in SYNSIL and we no longer have SYNSIL. That we also had a refocusing in the revised strategy for our performance minerals business that fundamental mine to market strategy that allowed us to hone in on the key areas where we felt we had the greatest chance of success in the shortest period of time. The other area where we had consolidation in our coatings development and in our facilities for coating, again, because we've shifted to a satellite model focus from a merchant model focus. So if you think of those three areas, those are the major reasons for the Delta that will you find over the period.

Okay. And then just one last one. This will be quick. Regarding your gross interest expense, even though your average debt level stayed about the same, your interest expense sequentially here in the recent quarter dropped 25%, almost half a million. What was behind that?

Debt levels are down. Half over half, debt levels are down from about $50 million, from $180 down to about 130.

From the first half of last year to the first half of this year?

Right.

Okay. Am I missing something here, though, in terms of you spent about a million and a half on interest in the first quarter, 1.1 million in the second quarter, but your average debt in the first quarter was at about 132 and it's now at about 129?

This is DJ. It's about $121 million at the end of the second quarter. But I think it agencies two things. It's both year-over-year debt levels are down about $50 million as John said but also the interest -- our interest rates are down year over year about 120 basis points.

Okay. Thank you.

Thank you. At this time I'm showing no further questions. Do you have any comments or closing remarks?

No, I think we're all set, Stephanie. I want to thank everybody for their interest in Minerals Technologies and to have a good day.

Thank you, ladies and gentlemen. This concludes today's Minerals Technologies, Incorporated, second quarter 2008 conference call. You may now disconnect.