Minerals Technologies Inc (MTX) 2008 Q4 法說會逐字稿

Good morning. My name is Latonya and I will be your conference operator today. At this time, I would like to welcome everyone to the Minerals Technologies Inc. fourth-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)

Thank you. I will now hand the conference to Mr. Rick Honey, Vice President, Investor Relations.

Good morning. Welcome to our fourth-quarter 2008 earnings conference call, which 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 full year and fourth-quarter results, and an update on the steps we are taking to manage through this global recession. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our fourth-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 the Company faces throughout 2009.

Before we begin, I need to remind you that on page 6 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 will turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. Last night we released our fourth-quarter financial results, which were hard hit by the economic downturn. Steel, paper, construction and automotive sectors, our primary end markets, were particularly impacted. Our earnings excluding special items were $0.41 per share, which compares to $0.84 in the fourth quarter of 2007, a 51% decline. The sequential decline from the third to the fourth quarter of 2008 was 61%, which provides some further perspective into the significant drop in demand for our products.

I would like to point out that despite the perilous economic environment we are now mired in, MTI posted its record best annual earnings at $3.44 per share. I believe this as a direct result of the restructuring we undertook in the third quarter of 2007 when we refocused our strategy and placed the Company on a stronger foundation, one that is helping us manage through this difficult period.

As the economic crisis began to surface we were able to adjust quickly by taking decisive steps to conserve cash and further reduce costs to maintain MTI's competitiveness. Today, we continue to have a strong balance sheet with over $190 million of cash and $170 million of unused credit lines at year-end; and our debt-to-capital ratio is very low at 14%.

Cash flow itself during the quarter was a strong $53 million. I believe it is the strength of our balance sheet that particularly differentiates Minerals Technologies from many others during these turbulent and uncertain times.

In the first part of this call, I would like to provide a brief overview of our performance, take a closer look at the economic collapse we saw in our major end markets, and provide some insights into how we are managing through this recession.

As you can see here, our performance for the full-year 2008 showed good growth in sales and earnings despite the weakness in the fourth quarter. Throughout the year, we were able to achieve the savings we were targeting from the 2007 restructuring, which significantly improved our operating income. We also began to see some positive impact from our operational excellence initiative.

In an environment where we faced increasing raw material and chemical costs across all of our businesses, we were also successful in raising prices in all of our major product lines.

During the year, we also repurchased 691,000 shares of our stock for $42.7 million, but suspended the share repurchase program when the downturn hit.

When I joined the Company in March of 2007, one of my first objectives was to improve return on capital as quickly as possible to at least our cost of capital, targeting greater than 9% by 2010. By the third quarter, MTI's return on capital was running at an annualized rate of 9% for the full year; and we finished the year at 8%, a significant improvement, given the circumstances, over the 6% rate the Company recorded in 2006.

In reviewing our balance scorecard and assessing our performance for the full year, it is clear that we were able to deliver overall much higher performance to shareholders. There were, however, a few areas where we were somewhat off-track. Working capital and volume growth, for example.

The working capital performance was directly associated with having to purchase magnesium oxide, our primary raw material for the refractory business, when we were concerned about an interruption in supply prior to the Olympics in Beijing. The decline in steel production exacerbated our situation and has left us with considerably higher inventory levels than we had planned. We did, however, see some working capital improvement in some areas such as Paper PCC.

The lower than targeted volume growth was affected by the steep declines in all of our end markets during the fourth quarter, which in turn took us off track for the full year.

The overhead expense reduction efforts which began in 2007 remained on track, as we were able to reduce our expenses by more than 8% from our 2007 spend level, a reduction of approximately $15 million.

Our safety performance for the year enabled the Company to experience the lowest lost workday injury rate in its history. The rate of 0.93, which is less than 1 injury per 200,000 hours worked, resulted in over 30% fewer serious injuries than in 2007.

As I stated earlier, we are also now beginning to see some increased efficiencies from the global rollout of our operational excellence initiative in all facilities. We also have made progress in strengthening our research and development through a sharper focus on product innovation and speed to commercialization. We also instituted a new product development process which will allow us to maintain our focus on new products, processes, and technologies that will ensure our future growth.

The trend line in this graph paints a clear picture of where we have been heading. From the fourth quarter of 2007 after we restructured until the recent fourth-quarter economic downturn, the Company has been on a much higher performance track. In the fourth quarter, we faced the same conditions so many other companies experienced -- a precipitous decline in volumes in our end markets, as well as increasing raw material costs. We experienced plant shutdowns in paper, steel, and the construction and automotive industries.

As we related in the third-quarter call, we expected -- based on what we could see at the time, which was limited -- a 30% to 40% decline. As you can see, however, we didn't anticipate that the economic conditions in the fourth quarter would be as severe as they turned out to be.

John will review the decline in our end markets in more detail, but I wanted to provide you with an example of how deeply one segment of our customer base, the steel industry, has been hit, which in turn had a commensurate impact on our Refractories business.

In October, the US steel industry was still running at an annualized rate of more than 100 million tons, a pace that it had been on for more than a year, which had our Refractories business tracking a record earnings through the third quarter and into October. Steel production in the US, our largest market for Refractories, dropped like a rock in November and December as this slide illustrates. The fourth-quarter steel production in the US actually declined 38% versus the third quarter.

December production, as we look at that, however, as a further reference point, had actually dropped to 60% below third-quarter levels. The steep decline began in the US and soon followed to Europe and Asia. The severe drop in our Refractories operating income was directly tied to this drastic change in market conditions.

In addition to the worldwide steel industry's steep decline we saw shutdowns at paper mills in Maine and Wisconsin where we have satellite plants, as well as production curtailments at other mills. We also experienced increases in magnesium oxide costs, which we purchase from China. And lime, our primary raw material for precipitated calcium carbonate, also rose significantly.

The housing market as you all know is at an all-time low, with December new home sales at the lowest since the Commerce Department began recording that data in 1959. In addition, the automotive sector remains in decline. And these both have a direct impact on our performance minerals business.

We have adjusted quickly to this significant turn of events by taking aggressive yet prudent steps to maintain the Company's competitive position. We are reducing our workforce by 14%, approximately 380 people, through both permanent reductions and layoffs. We established procedures to conserve our cash and contain our costs by curtailing production, we shortened work weeks, we reduced overtime, and by continuing our intensive expense control and procurement initiatives.

Now I will turn it over to John who will provide you with a more detailed look at our financial performance. John?

Thank you, Joe, and good morning, everyone. I will now review with you our consolidated and segment financial results, focusing on the fourth quarter, and highlight the key market and operational elements of our performance in each of the major product lines.

This first slide provides an overview of the Company's consolidated results for the fourth quarter. Total reported earnings per share were $0.31, of which $0.19 per share were from continuing operations and $0.12 were from discontinued operations, primarily the result of a gain from the sale of an idled facility. Earnings from continuing operations included a restructuring charge of $0.22 per share associated with a program to reduce our workforce by an additional 14% through both layoffs as well as permanent reductions, in response to the downturn in business activity.

Excluding special items, earnings from continuing operations were $0.41 a share, a 51% drop from the fourth quarter of 2007. We have provided a reconciliation table in footnote 3 of the press release, which details the effect on our earnings of the special items which are comprised of restructuring charges in both continuing and discontinued operations, asset impairment charges, and gains from the sale of idled facilities which were previously written down.

As Joe mentioned, our performance decline was steeper than we previously forecasted due to the precipitous downturn in our paper, steel, construction, and automotive end markets, which led to an unprecedented drop in demand for our products. Sales for the quarter decreased 13% or $34.3 million from the prior year. The sales reduction was driven by a substantial volume drop in all our major product lines, which more than offset the pricing gains we achieved during the year.

In addition, due to a stronger dollar in the quarter, foreign exchange had an unfavorable impact on sales of $11.4 million or 4 percentage points.

Operating income, excluding special items in both years, decreased 66% to $9.4 million and represented 3.9% of sales. The significant drop in operating income reflects the volume losses in all product lines, which represented the major portion of the decline, and higher raw material costs, primarily lime in the PCC business, where costs cannot be passed on to the customer contracts until 2009.

Savings resulting from the successful execution of the restructuring program put in place in 2007, combined with the rapid response by management to the current economic turmoil, mitigated the full potential impact of the market downturn. Net income, excluding special items, which includes the benefit of lower interest expense and a lower tax rate compared to last year, still dropped 53%, $7.6 million from $16.3 million in the prior year.

Our return on capital, excluding special items, on an annualized quarterly basis was 4.2% in the fourth quarter and was 8% for the full year, a significant improvement over the past several years, which averaged around 6%.

Cash flow from operations in the fourth quarter was approximately $53 million, reflecting a continued focus on working capital. Capital expenditures were only $7.3 million.

The rate of market deterioration accelerated throughout the fourth quarter; and as a result the overall performance was well below our expectation. The key industries we serve remain at low operating levels today; and we do not currently have a view to any fundamental demand improvement.

In addition, we face continued margin compression in both segments due to the increased cost of raw materials which have not yet begun to subside and the difficulty in mitigating these pressures through in price adjustments in today's market. We will continue to intensely monitor the economic projections for our end markets to manage our future financial performance.

MTI's sales for the quarter were $240 million, a reduction of 13% or $34.3 million compared to the fourth-quarter 2007, and a reduction of 19% or $54.9 million sequentially.

As you can see from these graphs, sales in all of the major product lines dropped off dramatically compared to both the prior year and the third-quarter levels. The economic downturn that started in the third quarter accelerated throughout the fourth quarter, substantially reducing the demand for our products.

Sales in the Specialty Minerals segment, which is comprised of both the PCC and Processed Minerals product lines on the chart, were $158.9 million, $20.6 million or 11% below prior year. PCC's sales decreased 11% or $16.7 million to $137.4 million from $154.1 million in the same period last year, with unit volume down 10% and an unfavorable currency effect of about $5.1 million or 3 percentage points. Versus the third quarter, PCC's sales dropped 13% or $19.8 million on volume decreases of 14%.

Within the PCC product line, Paper PCC volumes fell to about 900,000 tons for the quarter, the lowest level since the first quarter of 2004. The current sales rate for Paper PCC products is about $1.3 million per day, only about 2% lower than the fourth-quarter rate.

Sales within the Processed Minerals product line decreased $3.9 million or 15% compared to last year. Unit volumes were down 24% below the already depressed level experienced last year due to a further decline in residential and commercial construction activity and a weakening automotive market in the United States. Versus the third quarter of 2008, sales in Processed Minerals dropped 24% or $7.1 million with unit volumes down 26%.

Current unit volumes are running about 31% below third-quarter levels. The current sales rate for Processed Minerals is about $235,000 per day, about 13% lower than the fourth-quarter rate.

Refractories segment sales in the fourth quarter decreased $13.7 million or 15% to $80.2 million from $93.9 million in the prior year. This decline was primarily driven by a decrease in Refractory product unit volumes, which declined 27%.

The effect on total sales dollars was partially offset by price increases which were phased in throughout 2008 as necessitated by a dramatic rise in the prices of raw materials, particularly MgO.

Foreign exchange had an unfavorable impact on sales of $6.3 million or 7 percentage points.

Versus the third quarter, sales decreased 26% or $28 million on a 26% reduction in volume. Within the segment, Refractory product sales decreased $11 million or 14% to $65.2 million from $76.2 million last year and 25% to $21.5 million versus the prior quarter.

Refractory products sales volumes are currently averaging about one-half the third-quarter rate and about 25% below the December rate.

Metallurgical products sales also decreased 15% to $15.0 million as compared with $17.7 million in the same period last year and 30% or $6.5 million versus the third quarter. The current sales rate for the Refractories segment is about $660,000 per day, or 20% lower than the fourth-quarter rate.

This next chart reflects the financial results within the Specialty Minerals segment. In total, segment profitability for the quarter declined 52% from prior year, excluding special items in both years. This decline was primarily due to the significant volume losses in both product lines, increased raw material costs, price concessions related to contract extensions in the Paper PCC product line, and unfavorable foreign exchange. These factors combined to more than offset the savings generated from the restructuring program initiated in 2007.

PCC operating income declined 45% from the prior year and was 6.9% of its sales. Processed Minerals recorded a loss at the operating income line as volumes collapsed to 24% below prior-year levels and 26% below third-quarter levels.

Overall, segment operating income represented 5.2% of net sales in the fourth quarter, excluding the special items.

Production levels within the North American and European uncoated freesheet market, our most significant market areas, continued to contract to adjust to reduced demand and destocking in reaction to the global economic crisis. Compared to the fourth quarter of last year, we saw additional machine shutdowns and paper mill closures, which could only be partially offset by increased volumes from our new facilities in Thailand and Brazil. As a result, Paper PCC unit volume declined about 10% from the prior year and 8% versus the third quarter.

In addition increased lime costs had an unfavorable impact on operating income during the quarter, as these cost increases are not passed on to customers until 2009.

Furthermore, residential housing starts have experienced further declines and were at their lowest level in more than 24 years, which has caused a significant drag on our Processed Minerals product line, which primary supports industrial suppliers to the residential construction industry. We also began to experience the impact of a deeper slowdown in the commercial real estate market, which represents about 15% of the Processed Minerals business.

In addition, US automobile industry volumes were down about 35% in the quarter versus last year and about 18% compared to the third quarter.

To further adjust to this rapid decline in demand and uncertain future outlook, we recorded an additional restructuring charge of $3.3 million in this segment during the quarter.

Overall, we expect our end markets to remain at depressed operating levels or even decline further. As a result, we are cautious about the future levels of profitability from the major product lines within this segment due to these economic uncertainties. We are making adjustments within the business units to better position us for the realities of an extended slowdown in our end markets.

To provide some additional insight to the current market situation in the paper business, I've included these two graphs which show the trend in uncoated freesheet paper demand and operating rates for 2007 and 2008 in both North America and Europe, our largest markets. In North America, demand dropped at double-digit rates during the fourth quarter, as destocking occurred with the expectation that paper prices would be further reduced as deliveries continued to fall.

In Europe, the destocking occurred earlier in the year; and as a result fourth-quarter volumes were more stable, although still in the negative growth territory. It appears that the full effect of the economic crisis arrived later in Europe. And the current forecast is for significantly lower volumes there during the first half of 2009.

There are currently no positive signs of a rebound in demand, and additional paper production curtailments continue to be announced in both regions.

Although the volume price adjustment mechanisms in our long-term PCC contracts provide some measure of protection, further industry consolidations are possible if demand remains at this level for an extended period, which could cause additional PCC plant shutdowns.

This chart on housing starts is a good indicator of the expected performance of the Processed Minerals product line. Housing starts in the US are at the lowest levels of about 24 years. The annualized rate in December was only 550,000 units; and 2008 as a whole only represented about 900,000 units, which is less than half the peak rate of 2.07 million units recorded in 2005. You will also note that the industry forecasts continue to move toward lower activity levels and toward a slower recovery.

Based on this information, we do not believe we have reached the bottom in this market and the timing for a recovery remains uncertain.

In Refractories segment, the rapid decline of steel production in the United States that Joe graphically described earlier significantly impacted sales and profitability for this segment.

Nearly half of our sales are based in North America, where steel production declined from a 2.2 million ton per week rate in the third quarter to a 1.6 million ton per week rate in the fourth quarter, or a drop of about 30%. Many major steel mills curtailed production and laid off thousands of employees.

As a result, overall our Refractory product line unit volumes declined 26% compared to both fourth-quarter 2007 and the third quarter of 2008. In North America, volumes declined 29% from prior-year levels and fell 31% from the third quarter. And that performance included a relatively strong October period, when steel production remained at about a 2.1 million ton per week rate. However, by December, steel production had declined to a weekly rate of about 1.2 million tons, 45% below third-quarter levels.

In Europe, where the timing of the curtailments of steel production lagged slightly behind North America, volumes dropped 25% compared to both the prior year and the third quarter. In response to the rapid decline in demand for Refractory products, the Company recorded an additional restructuring charge of $3 million to better align our cost structure for the closure of mills and reduced sales volume levels. The majority of the layoffs were related to our steel mill service employees who provide technical support at the mill.

During the fourth quarter, segment sales declined 15% with Refractory product line volume losses accounting for the majority of the reduced segment sales and with unfavorable foreign exchange related to the stronger dollar accounting for 6 points of the decline. The metallurgical product line also recorded a 15% sales decline from prior year and a 30% decline from the third quarter due to reduced steel output.

The extreme volume sales declines were slightly offset by increased pricing related to the passthrough of increased raw material cost of magnesium oxide. As a result of the severe volume decline, operating income excluding special items dropped by 85% in the fourth quarter of 2007 and 86% versus prior quarter.

The outlook for the Refractories business is also uncertain as we continue to evaluate the latest economic forecast for the steel industry. Generally, steel analysts predict market conditions will slowly improve in the second half of 2009. However, fundamentally automakers have a high level of inventory which they are trying to sell off; and the commercial construction industry is weathering a sharp decline in activity as many projects have either been suspended or cancelled. Therefore, the timing of any sustainable recovery remains uncertain.

The economic slowdown in the fourth quarter has left us with a higher than anticipated inventory level of MgO, which was purchased during the peak of the demand cycle for the Chinese sourced materials. This will result in even higher production costs for us in the first half of 2009.

As summarized in this chart, the major restructuring, price initiative, and cost improvement programs undertaken by the business unit leaders since the third quarter of 2007 allowed us to largely mitigate the extreme cost pressures and unfavorable market factors we were to face in 2008, despite a dramatic decrease in business activity in the fourth quarter.

This chart gives you a perspective of the size of the cost increases that we faced in 2008. Magnesium oxide and bauxite had the largest negative impact, over $34 million; and lime and chemical costs were up over $15 million.

Although the market environment had not been exceptionally positive during the year, the fourth-quarter volume losses represented about $20 million, significantly impacting our net full-year improvement. We were able to offset these increased costs and market factors through a combination of actions including price increases; our restructuring program, which gave us about $30 million in gross savings; expense reduction; operational cost savings; and some volume growth, primarily in the metallurgical wiring area, Paper PCC, where we started up a new satellite facility in Thailand and increased our operations in Brazil.

This chart will give you perspective of the significance of the individual elements of the decline in our sequential operating income performance. As you can see, the market factors had the most significant impact on performance, with volume accounting for a decrease of approximately $20 million versus the third quarter.

All product lines were affected, but hardest hit were Refractories and Processed Minerals. Even with the favorable impact of the price initiatives and cost savings programs, the net resulting impact on operating income was dramatic.

The working capital chart here reflects our operating working capital trends as defined by trade accounts receivable, inventories, and trade accounts payable. As you can see, after some unfavorable results in the first three quarters of 2008, total working capital was reduced in the fourth quarter of 2008 to a level just 2% higher than December 2007. The increase is being driven by the Refractories segment, due to the higher cost of raw materials imported from China, and a slowdown in steel production that resulted in higher MgO inventory levels than planned at year-end.

Our days of working capital increased to 88 days from 71 days in 2007. The lower sales level related to the economic downturn in the fourth-quarter, particularly November and December, is a primary driver in the substantial increase in the number of days.

Our cash flow from operations was approximately $53 million in the fourth quarter and included about $30 million from the working capital reduction.

Our capital investment for the quarter remained at a relatively low level of $7.3 million, and was $31.5 million for all of 2008, an expenditure rate well below the $100 million run rate we had been maintaining in the past.

Our balance sheet remains very strong. Our year-end cash position is over $190 million; and we also have available lines of credit of $170 million that remain unused. This leaves the Company well positioned to weather a protracted weak economic environment.

Our debt-to-capital ratio is very low at 14%, and our liquidity remains very strong with a current ratio of 3.5. This compares very well to the S&P 500 average of about 1.0 and represents the fundamental strength of the Company.

We continued to pay down debt during the year, and we repurchased 691,400 shares for $42.7 million prior to suspending the program to conserve cash. You will note that since 2006, we have been able to increase our cash by $115 million and reduce our debt by about $90 million.

The Company achieved record earnings of $3.44 per share, excluding special items, despite a very weak performance of only $0.41 per share in the fourth quarter. The anticipated savings from the restructuring program initiated last year was fully realized through the efforts of the management teams in all our business units. We have recognized the realities of the current market situation and have implemented additional restructuring programs to meet the challenges.

As expressed throughout this presentation, there remains considerable uncertainty in the major industrial markets we serve. We are now experiencing production slowdowns in all of our global markets and expect even steeper declines in steel and paper as the general economy is affected by a continued recession.

It is also worth noting that our projected periodic pension costs in 2009 will increase significantly, about $7 million or $0.25 per share, as a result of the lower asset base and amortization of unrealized losses following the financial crisis of the fourth quarter. Our funding status in the largest US plant remains at high levels, over 95%; and we have adopted a capital conservation strategy for the remaining invested funds.

As a result of all these factors related to the economic crisis, we expect our first-quarter 2009 results to be significantly lower than the fourth-quarter performance. However, MTI has an exceptionally strong balance sheet with cash and short-term investments of over $190 million and debt of only $116 million. Despite the financial crisis, we remain a fiscally strong Company and have taken steps to ensure that our reserves are safely invested.

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

Thanks, John. Before we go to questions I have just a few additional thoughts I would like to share with you. It is clear, as I mentioned earlier, that many companies today are facing great difficulty because of the economic downturn. MTI is no exception.

Our biggest challenge at the moment is to steer the Company through these uncharted waters with very limited forward visibility. The transformation initiatives that we undertook in 2007 have created a stronger and more responsive Company than we had in the past. So MTI is better able to deal with the conditions currently confronting us.

Today, the Company is clearly also a more disciplined organization with a better sense of direction and purpose.

Looking ahead, as I mentioned, there is no clear visibility on the economic front. Our primary end markets are in the midst of a downturn that as yet does not seem to have hit bottom. We have already taken many actions as a Company to manage through this global recession and will continue to make the adjustments we find necessary to maintain our competitiveness, including further restructuring.

As I said earlier, our balance sheet continues to be strong, which I believe is one of our key strengths in these difficult times.

We will also continue to execute the major initiatives we established in 2007. Operations excellence is beginning to gain traction and we will continue to maintain focus on it. Safety remains a top priority, and we will also continue our initiatives to make MTI a safer place to work. Expense reduction will continue to be a major focus, and we will maintain our new product development efforts in filler fiber, [M-force], and new Refractory products, key areas for our future growth.

Maintaining our lines of sight to our longer-term objectives while making the adjustments necessary in the coming months to ensure our economic competitiveness will be our key challenges for 2009. We will continue to take the necessary actions, as I have said, to manage through this recession. --aggressive cash conservation, cost reduction, market position enhancements, selective repositioning, and restructuring will be our key near-term levers.

With our strong balance sheet and cash position, there may well also be some opportunities out there that we can take advantage of to further strengthen the Company and improve shareholder value. Given what the Company and its employees have done so far to transform and strengthen MTI through a strong performance improvement focus and a values-based balanced approach to everything we do, I fully expect that we will come out of this recession stronger than when we went in.

Now let's open it up for questions.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

Good morning. This is Silke Kueck for Jeff. A couple of questions.

On the PCC side, how many satellite plants do you have at the end of the year? And what is the expectation of how many may have to be shut down given the very steep decline in volumes?

Are those costs already in the restructuring that has been taken -- in the restructuring cost that has been announced for the fourth quarter?

Yes, I'm going to let D.J. Monagle answer this, and then to give you a perspective. D.J., as you know, is the business unit President of Paper PCC. D.J.?

Let me take -- we may have to go back and forth on this one, so I understand the sequence of questions. But let me give you -- the essence was, where did we close out the year in our number? And how do we see this recession affecting our basic footprint of satellites that are out there?

The best way I can answer that is as we closed out the year we have about 57 satellite locations; and as we look forward to the year, we see probably in the neighborhood of five customers that are under stress, but it's very hard to project whether they will or will not make it through the year. Those customers, then, those customers that are -- every day we open up the paper we see some level of curtailment or shutdown. So the more likely scenario that we are looking at for the next two quarters is reduced volumes that still keep our satellite plants where, with the base. Does that help answer your question?

Yes, so that means the restructuring charge taken in the fourth quarter doesn't really include a provision for plant shutdowns at this point?

No, it does not.

No impairment.

Okay, thanks. Secondarily, regarding the restructuring cost taken, regarding the headcount reductions, where are you today with that? Is half of that implemented, or a third of that?

And what are the ultimate cost savings that you expect over the next 12 months?

Yes, we have, if you recall, when we announced the layoffs and the restructuring, we announced around 340 people would be affected. As we moved into 2008, we made some additional adjustments; and that number is now 380.

The large majority of those folks are in our Minteq business. I would say, probably at this point we have 70%, 80% either through permanent or temporary layoffs -- or layoffs per se have occurred. Occurred last year, and then continue to occur in January.

The expectations are estimated savings would be in the $6 million to $7 million range in 2009 with the biggest impact obviously occurring in the third and fourth quarters.

If I can ask a last question on operating cash flow, so for the year you announced that you achieved very good operating cash flow of $132 million; and the free cash flow was $115 million. How do you get to that number, given that CapEx was I think, about $30 million in the year as well?

This is John. We had cash flow from operations at about $132 million, with the capital of $31 million, and we had proceeds from the sale of assets of about $14 million.

Okay.

Those are the major components there, bringing you to $115 million.

And given that this may be a run rate that you may even be able to achieve in '09; and let's say it's only $100 million; and given that you have $190 million in cash on your balance sheet, what do you plan to do with that cash?

Well, as I mentioned in my remarks, we are taking a very conservative approach to the future because the future as we all know is quite uncertain right now. So we do have a number of potential opportunities in our Paper PCC business that are under development right now, that could put us in a position to make some investments there later in the year.

As you know, we continue to be very active in certain parts of the world on new opportunities for growth and new satellites, as I have mentioned in previous calls. So there clearly is a potential for additional capital spending there. Again, that remains to be seen relative to the economic climate and how that evolves through the rest of the year.

At this point in time, we are going to conserve and work our way through the conditions we have right now. As I also mentioned, we could be presented with some opportunities from an acquisition standpoint that might make sense later in the year. Given our strong cash position, if it is something that can have a significant positive effect on the Company from a repositioning standpoint long-term, and is in line with our strategy, then we would certainly consider doing that.

Would those be other minerals businesses, or what would you consider acquiring?

Well, as we have mentioned, we have a fairly comprehensive targeting process where we look at a number of areas. The minerals industry is one particular area given that we are a minerals-based company. There also potentially could be Refractories opportunities for us that might make sense.

Thanks very much. I will get back into queue.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning, all. When you talked about the restructuring in December, you mentioned the additional layoffs; but you didn't talk about the capacity. Could you give us any feel as to what you have done in that particular area, and what is your capacity utilization at this particular low level?

It probably makes more sense to try to come at it by the two businesses that have been most affected; and that is in our performance minerals business, Processed Minerals business, and the Refractories business.

In the performance minerals business, you know, we are below 50% utilization. Probably in the -- Doug, would you say in the 40% range, or a little lower than that right now? So it is quite low.

I would say that's right.

And the way we are adjusting there is by fundamentally, as I indicated in the remarks, reducing work hours, number of people, and making people adjustments.

The Refractories business, which also was very hard hit, is running in the range of 30% to 40% of capacity right now.

As we think about the future and try to ascertain further areas where we can save money, certainly things such as further consolidations between some of our facilities are areas that we have on the table right now that we are beginning -- that we are taking a look at, not beginning to take a look. But to see if we can conserve cash and also reduce costs by combining some of our operations around the world.

As you combine operations, any thought of doing that -- announcing those particular steps sometime in the first quarter when you have a better feel, if you do, for what the industry is going to be like in the second half of this year?

Or do you think that that particular business should just be smaller regardless of the economic environment, in order to operate more efficiently in major downturns, which I am sure will come again?

Those are good questions. They are very germane and they are the key questions we have on the table right now in terms of -- at what point do you further consolidate based on what you believe is going to happen over a longer time period? So we are right in the middle of doing that right now and trying to assess what makes sense for us as we move into the second half.

At this point in time, it is hard to tell exactly when we will make those decisions. But suffice it to say that we are monitoring the forward situation as best we can on a day-to-day basis, while we make contingency plans for that business, in particular in terms of how to maintain -- stay cash positive in the business. Because they are being impacted the most of the three businesses we have right now.

If I could ask one last question on PCC, you mentioned that your raw material costs for that particular business were continuing to increase. You said that you would most likely pass those price increases in 2009. I guess I am wondering what makes you think that you can pass them through when the demand is down the way it is. If my memory serves me right, you also said that you had to give some price concessions when you renewed some contracts in 2008.

Rosemarie, that is as much as I can say. I have a lot of confidence in the head of my BU, President of PCC, which I do. The reality is, we are in uncharted waters as I said earlier, with regard to the impact on all industries today. So there are never any guarantees in this kind of environment around price increases. Suffice it to say, though, that we are going to continue to, wherever we can, to make the adjustments in prices that we have contractual arrangements to.

And then as we also have, make adjustments where it makes sense to make those adjustments. I'm going to let D.J. answer that, if you would like to, D.J.

Yes, I would just reaffirm two elements that Joe said, Rosemarie. The first one is that we do have some contractual commitments; and many of our customers are committed to honoring that relationship with us.

But as Joe mentioned, we are in some uncharted waters. So we are interested -- the long-term health of that relationship of that facility and the proper cash generation over time. So if there is something that we can do to help these viable customers make it through this difficult time we will do that.

But in general, I think we will be able to recover most of those costs; but it's going to be a tougher year than usual.

Thanks a lot. Good luck.

(Operator Instructions) Steve Schwartz, First Analysis.

Good morning, everyone. John, thanks for the detail on operating stats and so forth. But I would like to go back to operating income and what happened there relative to revenue.

If I understand you correctly, in both segments unabsorbed overhead and higher costs without price increases are what really, really pinched operating income. Is that true?

Yes, it's the volume impact of the slowdown. The volume, unabsorbed volume issue was in excess of $40 million on a quarter-to-quarter basis.

Okay.

But by and large, it outweighs everything else. We have a little bit unfavorable on currency. We had some cost pressures. But we also had some savings, as we showed you in the chart on the positive influence of the programs we have. But those were just overwhelmed by the magnitude of the volume decreases.

Okay. So where you're losing op income at 30% to 40% of the revenue decline, we could expect to see that kind of dynamic for the next couple quarters?

Not sequentially.

Okay. Because, yes, even sequentially you dropped about $27 million, $28 million in each of these segments, and op income dropped by $8 million to $10 million, and this is on an adjusted basis. But I mean, you're looking at a 30% to 35% decline in op income relative to the revenue decline.

I guess the other thing that I need to ask about here is your adjusted operating margin in Refractories was about 2% in the fourth quarter. I think you mentioned you're continuing to see higher costs and that will continue to be an issue in the first quarter. Is there a possibility your operating margin could go negative in the first quarter?

I'll take that one, Steve.

Okay.

As we look at the Refractory sector, we are minimizing our costs; we are balancing our operating needs throughout the network to help us maintain our margins. We monitor our breakeven ratios. And really what it comes down to is we are in very uncharted waters.

As we had alluded, the volumes could be lower in Q1 as compared to Q4 of this year. So it's tough to predict, Steve. But again, we're doing everything we possibly can to minimize any shortfall in volumes that we see.

As far as these contract resets and where you get pricing, what does that wave look like this year?

I would imagine maybe you have modeled this out for what your pricing wave looks like. I guess if you could give me an idea both in the Minerals and the Refractories business.

Let me start, Steve. It's John. Let me come back to a couple points and try to summarize just a little bit on the Refractories side. There is an overall view from your earlier question I think is worth touching back on. That is, when you look at the leverage to operating income compared to the decrease in sales.

If you follow those through the production margin line you will see that that is really where the major variance is coming. It is coming from the loss of gross margin. We are having savings, as Joe pointed out, a very good success on reducing expenses. We've controlled costs for more than two years now.

But that cannot materially impact the weight of the volume decreases, which I said just quarter-to-quarter was more than $40 million.

So if you look at the segments, also look at the impact of the gross margin coming down to the operating income. So what that leads you to is at these volumes, the very low utilization rates that you are having in the Refractory business, you could go to a negative operating position in the Refractory business if the steel mills don't operate, particularly in North America and Europe.

I think also for certain other segments of our businesses, such as Processed Minerals, if there isn't a seasonal rebound that we typically would get as we move into warm weather, then they also, some of those sub-business segments, could be negative as well.

We would say the fourth quarter in Processed Minerals was -- it did have an operating loss for the period. And it was the worst fourth quarter we had seen in the history of the Company.

On the other hand, it is seasonally typically a weak quarter. But in a strong quarter, though it usually comes in Processed Minerals in the second quarter; and it is yet to be determined whether it will be a seasonally strong period for paint, housing, and those types of things in the second quarter. It is a bit early.

Now coming to your third question, it was really around, I think, the contract renewals for Paper PCC. Was that the major (multiple speakers)?

Yes, what the pricing looks like through the year. When do you expect to see -- how do you expect to see that wave of pricing move through on these contracts this year?

As you probably know, the long-term contracts generally provide for two adjustments per year. One in January, based on fourth-quarter data; one in July, based on second-quarter data. That is a normal cycle that most of them take. And not all that way, but probably 65%, 70% of our contracts operate on that basis.

Okay, that is exactly what I was looking for. Okay. Thank you, John.

Rich O'Reilly, Standard & Poor's.

Good morning, gentlemen. One quick clarification, then I have a bigger question for Joe. What was the volume decline for PCC in the fourth quarter?

I have it here.

John, do you --?

I do.

It was -- Q4, I think, it was about 10% volume decline. Is that --?

Yes, versus the third quarter, so sequentially, it was a decrease of 14%, versus prior year it was down 10%.

Okay, fine. Great. Okay, good. Then my question for Joe, it's a bigger picture. There was a couple questions -- there was a question on possible M&A. But how open are you to a transaction in which Mineral Tech is not the surviving entity?

Right now our focus, to be quite candid with you, is on the Company and what we need to do to stay what I call a strategic course and make it through a very, very tough period. So we have some core strengths of the Company, and as we have looked at our strategy for the long term, it is one of looking at how do we enhance the positions we have and how can we grow more profitably at faster rates than we have in the past.

Those things become very difficult to have clear lines of sight to; yet they still are our longer-term objectives. So we are going to be looking for things in spite of the difficulty of doing transactions in these kinds of time periods, of areas that can help us to future growth and the future strategies that we have laid out for the Company.

I recognize, and this is tough for any company today, to entertain any type of transaction with a degree of uncertainty. But you know, potentially in six to nine months things may be a little clearer. And opportunities, depending on the length of this recession, could be even greater than they may be today, which could provide a good opportunity for us to utilize the strong balance sheet we have.

Okay. Good. Thank you for the answer.

Jeff Zekauskas, JPMorgan.

Yes, good morning. I just want to touch one more time on the restructuring initiatives. If I remember that right, in the fourth quarter of 2007 the restructuring that was announced then included the elimination of maybe 200 positions. If I remember it correctly, the related savings were about $10 million.

Should the ultimate cost savings that you expect from this restructuring be larger than the $6 million to $7 million?

Yes, as you recall, when we did our restructuring in '07, we indicated that we expected to save $15 million to $20 million. On our last call, we indicated that we actually were saving at a rate that was $20 million to $25 million. And as we look at where we ended the year, again just from that restructuring, the savings were approaching closer to $28 million or $30 million. Okay?

So we have been able to capture on the bottom line, although it gets harder to see because of the significant volume drop that occurred in the fourth quarter, but we were able to execute what we set out to do and capture those savings.

As we -- that we were into the fourth quarter, the $6 million to $8 million that I mentioned that we expect from what we announced in the fourth quarter, is in addition to what we were doing or what we were targeting in 2007. I'm going to let John elaborate on that a little bit. John?

Okay, thanks, Joe. A couple points. First of all, the $30 million gross that we saved from the restructuring last year, included impairments as well. There were a significant number of impairments there, so that we had a depreciation savings. The savings wasn't just from the reductions in manpower; it was also from -- a significant portion came from depreciation as well. So you have to keep that in balance.

In addition to that, as Joe pointed out, we ended up -- at the time we said we would end up with a savings of around $20 million or more, because we had additional restructuring charges coming in that were not recorded until the first quarter of this year related to that one. So there are additional restructuring charges that goes with that first restructuring of the third quarter of 2007.

Now when you come into 2008, we have an additional restructuring charge coming in. It includes no impairments. I think that was an answer to a question someone else asked. In this case, it is a reduction in force with no additional impairments at this time, although we have looked carefully at the loadings that we have.

The other element of that is of the 380 people that we talked about, a significant portion of those, as we said in the prepared text, were related to layoffs in the steel mills. So those are a savings of direct labor, if you will, directly proportional to the business volume we have.

It's the portion that is related to overhead that ultimately gives you the longer-term savings. So it's a little different structure. Considerably different structure than the last one.

That makes it clear. Thanks very much.

Thank you. At this time, there are no further questions.

With that, we would like to conclude this call and thank everyone for their interest in Minerals Technologies.

Thank you.

Bye-bye.

Thank you. This concludes today's Minerals Technologies, Inc., fourth-quarter 2008 earnings conference call. You may now disconnect.