Minerals Technologies Inc (MTX) 2009 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Mineral Technologies Inc. first quarter 2009 conference call. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I will now hand the conference to Mr. Rick Honey, Vice President Investor Relations. Thank you. Mr. Honey, you may begin the conference.

Good morning, welcome to our first quarter 2009 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 first quarter results and an update we are steps we are taking to manage this global recession. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our first quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward and some of the challenges the Company faces for the remainer of 2009.

Before we begin, I need to remind you that on page six of our 2008 10K, we list the various factors and conditions that may affect future results. Statements related to future performances 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.

Yesterday evening, we released our first quarter financial results which declined 39% from the fourth quarter of 2008. We did indicate in the last call that we expected a significant decline from the fourth quarter, and our first quarter results illustrate the magnitude of the negative effect the worldwide recession has had on our Company as demand in our primary end markets of steel, paper, construction and automotive have declined drastically. Our first quarter results were weaker than our fourth quarter because last October was still relatively strong for us, while in comparison, we felt the full recessionary impact of the volume declines throughout the entire first quarter.

As we begin this call, I would like to outline our financial performance in light of the difficult economic conditions we face and provide you with a view into what we are doing to manage through them. Even in this climate and with limited visibility into when our markets will recover, we are helped considerably by the decisions we made, prior to the downturn, to bring strength and resiliency to the organization.

Looking at our performance sequentially, earnings, excluding special items, were $0.25 per share, which compares to $0.41 a share in the fourth quarter of 2008. Our Refractories segment and Processed Minerals businesses were hit the hardest by the reduced demand that began in the last two months of the fourth quarter. Both of these businesses incurred operating losses in the first quarter.

Our PCC product line was the one bright spot, improving it's operating income in the quarter despite a 10% decline in volume. As many of you know, we also just announced an advancement of our strategy to expand in Asia, with the agreement to build a new satellite PCC plant in India to supply Ballarpur Industries, India's largest paper manufacturer.

As I said in the last call, the restructuring we executed in late 2007 and throughout 2008, helped us to focus on our core competencies and strengthen our base businesses which is allowing us to better manage through this recession. Although our linet of sight into the future is limited, we continue to take the necessary steps to conserve cash and further reduce costs to maintain our competitiveness. We will continue to pull the necessary levers at hand to manage through this effectively and emerge a stronger Company.

Our balance sheet remains strong and in the first quarter, we generated $24 million in cash flow from operations, with $19 million in free cash flow. At the end of the first quarter, we had more than $200 million in cash, and over $155 million of unused credit lines, and our debt to capital ratio is a very low 14%. I believe it is the strength of our balance sheet, our ability to generate cash under these conditions that particularly differentiate MTI from many other companies during these difficult and uncertain times.

Improving the Company's return on capital has been a primary objective since I joined MTI in 2007. The target was to raise our ROC to at least our cost of capital, about 9%, by 2010. In the third quarter of 2008, our ROC was at an annualized rate of 9.4% for the full year, and we finished the year at 8%. Compared with the 6% rate the Company recorded in 2006, this was a considerable increase, especially in light of the deteriorating economic conditions in the fourth quarter.

The deepening recession has taken its toll on ROC. In the fourth quarter of 2008, our annualized return on capital was 4.2%, and that has declined to an annualized rate of 2.9% in the first quarter. I have every confidence, however, that we will be able to get back to those higher levels relatively quickly, once the economic environment improves and volumes improve.

This graph illustrates, clearly, the performance track we were on before the economic downturn hit in November of last year. From the fourth quarter of 2007, after we restructured, to the downturn in the recent fourth quarter, the Company achieved record earnings. The chart also clearly depicts the effect of the deepening worldwide recession on our earnings over the last two quarters. During that period, our end markets experienced a steep drop in demand that resulted in widespread customer plant shutdowns and output curtailments, significantly reducing our volumes. As I related in the fourth quarter call, we expected, based on the limited visibility we had at that time, additional declines into the first quarter of 2009.

I thought I would share with you, as I did during the last call, some insights into the declines in the US steel industry and its impact on our Refractories business, which provides a stark example of what occurred late last year as the economic downturn hit. The steel industry in October was producing at a rate of more than 100 million tons a year, which had our Refractories business running at record earnings levels throughout the third quarter and into October. Steel production in the US then dropped throughout the fourth quarter, reaching levels that were less than half of what they had been.

During the first quarter, volumes have averaged at about the 50 million ton annualized rate, representing a 30% decline from the fourth quarter average level, and about a 50% decline from 2008 pre-recession levels. This pattern of deep steel industry declined began in the US and soon followed to Europe. The severe drop in our Refractories' operating income, which moved to a loss in the first quarter, is tied directly to this drastic change in market conditions.

Unfortunately, conditions have not yet stabilized and shutdown announcements have continued, particularly at integrated mills with basic oxygen furnaces, or BOFs, where we have a heavy concentration in the US. BOF mills in the US are expected to be 10% below the first quarter levels, based on currently planned mill schedules, which gives us concern about the second quarter. European steel output is also expected to be down in the second quarter, as Thiessen Krupp and ArcelorMittal recently announced further shutdowns.

In addition to the worldwide steel industry's steep decline, we experienced numerous paper machine shutdowns and production curtailments as a result of the decline in global paper demand. Many of our major customers, such as International Paper, Zontar, Emriel, Monzi, and New Page, have taken market related downtime as a result of this decline in demand. Although Paper PCC's volumes were down 10% from the fourth quarter, operating income improved approximately 20% due to the contractual price recovery of raw material cost increases and lower expenses, which more that offset the volume impact.

Our Performance Minerals business continues to feel the negative effects of the weak housing and automotive sectors. Today, new housing starts are at their lowest levels in 50 years, and the automotive sector remains severely depressed. As you all know, the customer centric model that we have with our Paper PCC satellites and steel mill service keeps us closely connected with our customers. From that vantage point, we know that unfortunately, their future visibility continues to be limited and uncertain at this time.

As I mentioned earlier, we have taken and continue to take, the necessary actions to maintain our competitive position in this economic climate. We have reduced our workforce by more than 400 people, or about 15%, we have shortened work weeks, reduced overtime, suspended our stock repurchases program, reduced capital expenditures, frozen salaries of the executive group and others, and continued our aggressive expense reduction and procurement initiatives.

At the same time, our continued focus on employee safety is yielding benefits. In the first quarter of 2009, the Company reported two lost workday injuries, compared to 13 in the same quarter last year. That's a significant improvement, particularly in light of our unstable and unsettling conditions. Three of our businesses, Refractories, Performance Minerals, and Pyrogenics had no lost workday injuries in the quarter.

Our expense reduction initiative has been successful. We've reduced overhead costs by $9 million, or 20%, from the first quarter of 2008, compared to the first quarter of 2009. In addition, we are seeing some positive effects from our operational excellence initiatives as we continue to deploy and involve all employees in the key processes of 5S, daily management control and total productive maintenance. Managing in a recession also means revisiting the strategic questions and issues we use as a framework in our thinking. I'll address some of those at the end of the presentation.

Now, I'll turn it over to John, who will provide you a detailed look at our financial performance.

Thank you, Joe. Good morning, everyone.

I would now like to review with you our consolidated and business segment results for the first quarter, highlight the key market and operational elements of our financial performance in each of our major product lines. During my presentation, I will focus heavily on the sequential comparison to the fourth quarter, which is a more relevant comparison than the prior year, when business conditions were markedly different.

The first slide provides an overview of the Company's consolidated results for the first quarter. Total reported earnings per share were $0.22, of which $0.23 per share were from continuing operations and a $0.01 loss was realized in discontinued operations. Earnings from continuing operations included a restructuring charge of $0.02 per share associated with additional costs related to the workforce reduction as we continue to adjust our operations to the current market realities. Therefore, excluding special items, earnings from continuing operations were $0.25 per share, a 39% drop from the $0.41 earned in the fourth quarter of 2008.

We have provided a reconciliation table in footnote three of the press release, which details the effect on our earnings, during the referenced periods, of the special items which are comprised of restructuring charges, asset impairment charges, and gains from the sale of vital facilities which were previously written down.

The year over year EPS decline was 73%, from $0.93 per share achieved in the first quarter of 2008, which was a record performance for the Company at that time. Sales for the quarter decreased 13%, or $31.7 million from the fourth quarter, and were 25%, or $69.2 million below the prior year levels. As Joe mentioned, the primary factor in our performance was this precipitous downturn in our end markets, which lead to an unprecedented drop in demand for our products and resulted in operating losses for both the Refractories segment and our Process Minerals product line.

Following a 66% decline in the fourth quarter, operating income, excluding special items, decreased an additional 17% to $7.8 million, from $9.4 million in the fourth quarter, and represented 3.7% of sales as compared with 3.9% of sales in the fourth quarter. Despite the effect of the steep volume declines on gross margins, the negative impact on operating income was mitigated by a $3.3 million, or 12% reduction in SG&A expenses, the contractual price recovery of raw material cost increases, primarily to pay for PCC product line, and the recession management, manpower and operational initiatives, which Joe outlined earlier.

Other deductions were $0.3million in the first quarter, which compares to other income of $2.2 million in the fourth quarter of 2008, which was primarily related to foreign exchange gains. Both interest income and interest expense declined from fourth quarter levels due to lower interest rates, but remained a minor net expense for the Company. As a result, net income and EPS, excluding special items, dropped 39% from the fourth quarter. Cash flow from operations in the first quarter remain positive at approximately $24 million. Capital expenditures are only $5 million.

The key industries we serve remain at low operating levels today and we do not currently have a line of sight to any fundamental demand improvement in our markets. We will continue to intensely monitor the economic projections for our end markets, and aggressively manage our recession programs to maintain profitability and a positive cash flow.

MTI's sales for first quarter were $208.3 million, a decrease of 13%, or $31.7 million compared to the fourth quarter of 2008, and a decrease of 25%, or $69.2 million from the first quarter of 2008. As you can see from these graphs, sales on all of our major product lines dropped off dramatically, following the economic downturn that began in the later part of the fourth quarter and continued throughout the first quarter of 2009 as demand for our products were substantially reduced.

Sales in the Specialty Mineral segment, which is comprised of both the PCC and Processed Minerals product line in the charts, were $143.6 million or 10% below fourth quarter levels. PCC sales decreased 10%, or $14.3 million, to $123.1 million from $137.4 million in the fourth quarter, with sequential unit volume down 10%, and an unfavorable currency effect of about $1.8 million on 1 percentage points. Compared to the first quarter of the prior year, PCC sales dropped 20%, or $30.1 million on volume decreases of 18%, and the unfavorable effect of currency of 7% or $9.5 million.

Within the PCC product line, Paper PCC volumes fell to about 820,000 tons for the quarter, the lowest level since 2001. The current April sales rate per day for Paper PCC products is running about 3% below the first quarter levels, reflecting continued machine downtime within the paper industry.

Sales within the Processed Minerals product line decreased $1.9 million, or 8% compared to the fourth quarter. Sequentially, unit volumes were down an additional 4% below the already depressed levels in the fourth quarter due to a further decline in residential and commercial construction activity, and a weakening automotive market in the United States. Versus the first quarter of 2008, sales in the Processed Minerals are down 26% or $7.1 million, with unit volumes also down 26%. The current weekly April volumes are running about 2% above the first quarter average rate, due to the seasonality of this business, but are 28% below the second quarter levels of last year.

Refractories segment sales in the first quarter decreased $15.5 million, or 19%, to $64.7 million from $80.2 million in the fourth quarter as unit volumes declined 17%. Compared to the prior year's first quarter, sales decreased 33%, or $32 million, due to the dramatic drop in steel production that began late in the year. Within this segment, Refractories product sales decreased $25.6 million, or 32%, to $53.5 million, from $79.1million last year, and 18% or $11.7 million versus the fourth quarter.

Metallurgical product sales decreased 36% to $11.2 million, as compared with $17.6 million in the first quarter last year, and 25% or $3.8 million below the fourth quarter. Refractories product sales volumes are currently averaging in April, about .5 of last year's pre-recession third quarter rate, and are running about 20% below the first quarter rate.

This next chart reflects the financial results within the Specialty Minerals segment. In total, segment profitability for the first quarter increased 19% from the fourth quarter, excluding special items in both periods. The increase in profitability occurred in the PCC product line, despite a sequential sales decline of 10%. This increase was due to the contractual recovery of raw material cost increases and lower expenses in the first quarter, which more than offset the effect of the volume losses. PCC operating income was 10% of sales, as compared with 6.9% in the fourth quarter. However, compared to the first quarter of the prior year, PCC sales were down 20% and operating income was down 36%.

The Process Minerals product line recorded a loss of $2.3 million for the quarter, which was approximately twice the loss recorded in the fourth quarter as volumes continued to decline. Overall, segment operating income represented 7% of net sales in the first quarter, excluding special items, as compared with 5.2% of sales in the fourth quarter, and 10% of sales in the prior year.

Production levels within the North American and European uncoated three sheet markets, our most significant market areas, continued to contract as the industry adjusted to reduced demand, and then, customer destocking in reaction to the global economic crisis. Sequentially, compared to the fourth quarter of last year, we experienced additional paper machine shutdowns and production curtailments which resulted in the Paper PCC unit volume decline of about 10%.

Furthermore, residential housing starts have experienced further declines and were at their lowest level in more than fifty years, which continues to create a significant drag in our Processed Minerals product line, which primarily supports industrial suppliers to the residential construction industry. In addition, this product line is facing a steeper slowdown in the commercial real estate market, which represents about 15% of the Processed Mineral sales, and a 50% decline in North American automobile production rate.

Overall, we expect our end markets to remain at depressed operating levels, although we would normally expect some seasonal uptick in the Processed Minerals product line in the second quarter. However, as I mentioned, this has not been significant so far in April, and we expect full quarter volumes to remain well below last year's seasonal levels. As a result, we continue to make adjustments within the business units to better transition us for the realities of an extended slow down in our end markets.

To provide some additional insight to the current market situation and our Paper PCC business, I have included these two graphs which show, on a three month moving average basis, the trend that uncoated three sheet paper demand for the last two years in North American and Europe, our largest markets. In North America, demand dropped at record double digit rates during the fourth quarter and continues to drop throughout the first quarter of this year as destocking occurred with the expectation that paper prices would begin to retreat.

In Europe, end customer destocking also continued for the first quarter, resulting in additional paper machine downtime in our markets. It appears that the full effect of the economic crisis arrived later in Europe, and the current forecast is for significantly lower volumes there throughout the first half of 2009. Some of the decline in the uncoated three sheet demand appears to be structural, driver by the response to the recession and is likely to put downward pressure on the industry for an extended period. There are currently no positive signs for rebound and demand, and paper demand will be further weakened by end market inventory draw downs amid the expectation of falling prices.

Although the volume price adjustment mechanisms in our long-term contracts have provided some measure of relief, further industry consolidations are possible, and paper demand remains at this level for an extended period with industry operating rates in the 80% to 85% range which could cause additional paper mill closures and PCC plants shutdowns. Housing starts are a good indicator of expected volume demand to performance in the Processed Minerals product line. Unfortunately, housing starts in the US continue to decline and are now at the lowest level in decades. The annualized rate in first quarter was only 530,000 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, which was recorded in 2005.

However, after receiving a number of downward unit volume revisions and delays in the forecast for a recovery, the latest data available suggests some stability in the market, although at these historical low levels. Based on this information, the timing for sustained recovery remains highly uncertain and we have reduced staffing and curtailed operations accordingly.

In the Refractories segment, the rapid decline of steel production in the United States that Joe graphically described earlier, significantly impacted sales and profitability for the 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 1.5 million ton rate in the fourth quarter, and further, to a 1 million ton per week rate in the first quarter of 2009, a cumulative drop in the third quarter of 55%, resulting in widespread production curtailment throughout the industry. As a result, overall Refractories product line unit volumes declined 17% compared to the fourth quarter of 2008, and 43% from the 2008 pre-recession levels.

In North America, volumes declined an additional 10% from fourth quarter levels and were 38% below 2008 pre-recession levels. In Europe, where the timing of the curtailments of steel production lags slightly behind North America, volumes dropped 15% compared to the fourth quarter, and 36% from third quarter levels. In response to this dramatic decline for Refractories product sales, the Company aggressively implemented its recession management initiatives, which included layoffs, permanent reductions in workforce, overhead expense reduction and production curtailments at its major production facilities.

During the first quarter, segment sales declined 19% from the fourth quarter levels due to volume losses in both Refractories and Metallurgical product lines, which resulted in an operating loss of $1.9 million in the first quarter, as compared with an operating profit of $1.6 million in the fourth quarter of 2008. As compared with the prior year first quarter, segment sales declined 33%, as volumes were down approximately 40% from the first quarter of 2008. Extreme volume decline was partially offset by increased pricing, necessitated by the escalating cost of magnesium oxide and other raw materials. Operating profit, excluding special items, decreased by $11 million compared to the first quarter of 2008.

The outlook for the Refractories business also remains uncertain and we continue to evaluate the latest economic forecast for the steel industry. Generally, steel industry analysts predict that global steel consumption will contract about 17% in 2009, and the industry will operate at only about 65% of capacity. The leading indicators for consumption and price remain negative for the industry with increased downtime expected in Europe as many believe further destocking will occur. The depth of this economic slowdown was not expected and has left us with higher than anticipated inventory levels of MGO, which were purchased last summer during the peak of the demand cycle for the Chinese source materials. This will result in even higher production cost for our products over the next two quarters, and consequently, further margin compression is expected.

The working capital chart here reflects our operating working capital trends as defined by trade accounts receivables, inventories, and trade accounts payable. As you can see, our total working capital decreased for the first quarter by approximately $11 million from the fourth quarter, driven by a $19 million decrease in inventory. Our days of working capital decreased to 86 days in the first quarter, from 88 days in December of 2008. Due to the decreasing sales rate related to the economic downturn, the number of days working capital remains significantly higher than in previous periods as sales have declined at a faster rate than we have been able to reduce working capital.

As we mentioned earlier, the Refractories business has excess inventory, which will be substantially reduced over the next two quarters. We are managing our accounts receivables closely. We have been able to reduce the average rate of delinquencies and we have not identified any significant new exposures. Cash flow from operations was approximately $24 million in the first quarter, well above the prior year which included the cash expenses associated with the 2007 restructuring program. Capital investments for the quarter remains at a relatively low level of $5 million.

As Joe pointed out, our balance sheet remains very strong, our cash position is over $200 million and we have available lines of credit of approximately $155 million that are unused. This leaves the Company well positioned to weather a protracted weak economic environment. Our debt to capital ratio is very low at 14%. Liquidity remains very strong with a current ratio of 3.9, which compares very well to the S&P 500 average of about 1.0, and represents the fundamental strength of the Company. You will note that since 2006, we have been able to increase our cash by nearly $125 million, and reduce our debt by about $90 million.

In summary, the Company recorded earnings of $0.25 per share, excluding special items, as compared with $0.41 in the fourth quarter. We are able to maintain our competitive position and remain profitable under a steadily deteriorating and adverse market environment affecting all our product lines. We achieved these results through the successful execution of our recession management programs which required us to make major operating adjustments in all of our business units. The expense reduction initiatives have been an important part of our efforts to maintain profitability and positive cash flow.

Compared to last year, this Company wide effort lead to a $9 million decrease in overhead expenses at all levels, reducing the impact of the dramatic slow down of our businesses. We have also reduced outside professional services and renegotiated supply contracts to adjust to this business environment. We expect to attain savings with the most recent restructuring program, initiated in the fourth quarter, of between $6 million to $8 million on an annualized basis. We are also incurring higher benefit cost, particularly pension expenses, which largely offset the additional savings. While there remains widespread uncertainty in our end markets, we have achieved stability in our operations and are prepared to take further actions necessary to maintain our profitability and protect our competitive position.

For the second quarter, we expect further declines of operating profits from the Refractories segment due to the high costs of raw material inventory and the deteriorating market environment, particularly in Europe. In the Processed Minerals line, we expect some leveling in the marketplace, but do not foresee a significant improvement in profitability. Paper PCC will remain our bright spot in this economy due to the nature of our supply agreement, and we expect our performance to be stable barring any additional mill closures.

MTI has an exceptionally strong balance sheet with cash and short-term investments of over $200 million, and debt of only $113 million. Despite the financial crisis, we remain a fiscally strong Company and have taken steps to ensure that our reserves are safely invested.

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

Thanks, John. I'd like to reinforce a few things and just share some additional thoughts before we move into questions. In this economic climate, there are a number of key questions that we ask ourselves as we go forward, and which provide a framework for our decision making.

Are we moving fast enough? Are we sacrificing future growth capability for current profitability? Are we improving our competitive positions? Are there opportunities in this environment to advance our key strategies faster than we otherwise could? Are all of our employees engaged in the changes needed to actually come out of this period a stronger Company? Trying to answer these questions in the unstable environment we're in is difficult, at best, but I believe most critical to ensuring the longer term success of a company as we navigate on a day to day basis.

The key operational initiatives and strategies that we embarked on prior to the downturn are being continued and are actually showing positive results which are helping us at this most critical time. Our operational excellence and continuous improvement efforts are resulting in waste reduction and increased efficiencies, which combined with our expense reduction initiatives, is significantly effecting our bottom line in a positive way. The Company, today, is experiencing the best safety performance in its history and we will continue to make MTI a safer place for our employees.

In technology and innovation, we continue to be focused on new product development with continued commitment and emphasis on filler fiber composites to increase PCC levels in paper, M Force, our product for use in bio-polymers, and with new Refractories products which reduce costs for our steel makers. We also continue to support our Asia growth strategy initiative where we have added resources and are seeing success as evidenced by our new PCC business in India.

Today, we're clearly a more disciplined organization with a better sense of direction and purpose. MTI employees have been involved in implementing these initiatives, as well as helping the Company work through this downturn with many sacrifices being made all over the world. Our key challenges today center on ensuring that we maintain the Company's core competencies and value creation zones, while we adjust in terms of structures, processes and people, to the economic realities of our markets. On balance, I believe that we are meeting those challenges well.

Cash flow is strong, our balance sheet remains solid and we have been aggressively and quickly adjusting our cost structure as this recession has progressed. We have been able to do this in part because we instituted a number of critical changes in the previous two years, which, in many ways, better prepared and positioned the Company to deal with this kind of environment. We will continue to make whatever additional changes and adjustments that are necessary, including restructuring, in order to effectively maintain our competitiveness and achieve our future growth objectives.

Now, let's go to questions.

Thank you. (Operator Instructions). The first question comes from the line of Jeff Zekauskas.

Good morning, this is Silke Kueck for Jeff. How are you?

Good, Silke, how are you?

Okay. A couple of questions. In the Refractories business, what type of utilization rates do you need in order to see profitability again? In India, it's like an 8 million ton production rate or is it something lower than that?

As you have seen, if you look at the third quarter and into the fourth quarter, compare it to today. Today, I'll use the BOS as a reference point. The BOS in US is running in the 40% to 45% of capacity range. Their high point was in the 95% range and it was at those high points that we were able to achieve record earnings in the Refractories business, so roughly, ballpark, somewhere north of 50% would be a key point for us. As the steel makers have dropped below 50%, that has had a pretty significant impact on us. Bill, would you like to elaborate on that.

No, I think it's a fair characterization, Joe, particularly as it relates to our BOS business in North America. Utilization rates are the lowest we've seen in this business for many, many years, and in order for us to improve our profitability, we do need to see our utilization rates creep up in excess of 50% to 60%.

If you look at this historically, how long have downturns of this magnitude lasted? Is it three quarters, four quarters? When do you think things will begin to pick up?

I wish we could basically have insight to say this is why this particular recession would go X number of months, or steel would go X number of months as compared to other recessions. I think we are in a new arena. It's very difficult for anyone, I think, today, to determine the length of the recession. I would rather not hazard a guess. We are operating on the basis that potentially this could go on for some time and we are making the adjustments we need to make on that basis. Certainly, as we go forward, we continue to look for both bottoming, but also inflection points, particularly as it relates to steel. We haven't seen, particularly on the steel side, any inflection points. Frankly, it's as we mentioned in the call, it has been moving in the other direction.

If I could ask one question on PCC? How much price on a year-over-year basis did the Paper PCC segment recover? What was the price benefit on a year-over-year basis in the first quarter?

On a percentage basis, it was in total, about 2%, which part of that was a pass through of line cost increases.

That's a year-over-year basis?

That would be on a year-over-year basis.

Okay. And the last question on cost savings. Including the $6 million to $8 million in new savings amounts, today, what is the goal in absolute savings to be achieved in 2009, and what amount of savings may have been realized in the first quarter?

The goal, as John indicated, we are targeting $6 million to $8 million, and frankly, we continued to assess how to increase that, and there are further opportunities that we are currently identifying. So, target wise, we are going to be targeting something more than the $6 million to $8 million, but it's very hard to pin down an exact number right now because we are still looking at avenues and alternatives that could yield us additional savings.

But to give you an example, we have been able to, through utilizing levers like overtime reduction, achieve savings on a year-on-year basis in excess of $2 million. The expense reductions you are seeing are coming from all parts of the Company and it's something that does, at this point in time, involve all employees in looking for ways to save money. I would say so far, we have had some pretty good success with that.

One question to clarify. One way to think about it is in terms of the overhead cost improvement of $9 million in the quarter on a year-over-year basis, should that increase by something like $2 million or $3 million a quarter, given there would be $6 million to $8 million in savings that has been announced today?

Yes, it ramp up over the quarters, Silke, into the future. The first quarter had less of an impact, perhaps, half the run rate that we'll have by the end of the year. It takes time to implement those. So, what you have in the first quarter savings is the carryover from the original ramp, the impact of the new program and some of the one time benefits that we have from some of the other cost reduction measures we've taken, which come from a whole broad range of initiatives from supply chain to reducing outside resources, for example.

All things being equal, that rate of cost savings should go up throughout the year?

It will increase in the first quarter level, but the rate I gave you of $6 million to $8 million is based on an annualized fourth quarter rate.

Thank you very much. I'll get back into queue.

Your next question comes from the line of Mike Judd.

Yes, good morning. Looking through the release, I didn't see a couple of numbers and maybe I just missed them, so I apologize. Do you have the depreciation and CapEx numbers for the quarter?

CapEx, Mike is about $5 million, and depreciation was $17.7 million I think is the number, almost $18 million.

Don't feel put out by this question, because I'm asking the same question of everybody, today, but with General Motors announcement that they are going to be potentially shutting down some of their plants this summer for an extended period of time, can you talk a little bit about how that might impact, in particular, your talc business, and any sort of add ons to that? For instance, in your polymer business, how much of it automotive? How much is Chrysler and General Motors? I may be overstating the case by asking this question, obviously, because this is not your major market. I wanted to get a sense of how you are thinking about this for planning purposes, the impacts, what's going to happen in the June and September quarters?

I'll start and I'm going to ask Doug Mayger to jump in as well. It's very hard to predict, looking out into the summer, relative to what GM is doing, contrast that with Ford. Understand Ford now has some plans to increase output. It could have an offsetting effect. Again, we are seeing similar things in steel where one steel maker will go up for a period of time. Another one goes down for the same period of time, and that's when we talk about instability, relative to what we are seeing. Those are the patterns that are occurring right now. Doug, you want to answer that?

Well, we have different markets that we also explore and get into. The automotive markets make up maybe 10% to 15% of the total. We are also prepared to shut certain lines down if it gets too bad. We are prepared to pull a number of different levers in the talc business.

Great, thanks for the help.

Your next question comes from the line of Steve Schwartz.

Good morning, gentlemen.

Hi, Steve.

I guess just starting off, John, thank you for once again giving us the current run rate on things. It doesn't sound like, from a topline standpoint, the seasonal uptick is going to offset are you are seeing in Refractories and Paper. It looks like the MGO continues to be an issue from costs. Is there a possibility your second quarter earnings could be around where you are at for this first quarter?

We are actually thinking it's going to be a bit lower. If you take the pressure, starting off, that we see on Refractories segments. We are looking for stability in Paper barring the pressures on the paper mills that are really distressed operations for the paper mills now that are underperforming. Someone will pull the trigger on one of these and cause a shutdown on one of our plants. Barring that, we see stability there, and the main pressure will come from Refractories and we expect Processed could have a bit of a seasonal uptick, but we haven't seen anything yet that would be notable.

A way to think about this is again from a visibility standpoint of the three businesses, the most stable for us with the most visibility to the extent it's there is Paper PCC. From there, looking at Performance Minerals, there seems to be some stability occurring, but that's only based on what we are seeing in April, and Refractories is the one where there are clear signs that there are down ticks occurring, particularly in Europe, but even in the US, as I mentioned, on the BOS. That gives you a picture of what we are seeing, but also letting you know it's very difficult to see, even through the entire quarter, particularly in the Refractories business.

I can appreciate that, Joe Thank you. In Processed Minerals, you have quantified a loss in the first quarter. Did that product line lose money in any of the quarters last year? I'm trying to get a feel for the trend, here.

In the fourth quarter, we mentioned that the loss this quarter was roughly twice the size of the loss in the fourth quarter.

On the Paper PCC contracts, you noted the pricing mechanism kicking in. Can you compare what you expect to happen in the second quarter, versus the first? Will you have similar effects going on or will there just be carry through from the first quarter?

There will be some carry through from the first quarter. It's really quite dependant on what happens in some of the major supply categories. For example, in lime. One of the benefits we have in the first quarter is that we are catching up a bit on the lime prices, the lime costs we've already absorbed. You'll remember prior quarters, fourth quarter for example, we said the product line was under pressure from the increasing cost of raw materials that couldn't be passed through until the first of the year. We got that benefit in January. Now, the future depends on the direction of some of those raw materials. Basically, we will benefit if volume picks up, but on a price basis, we are tied into this mechanism that relates to the current cost of raw material.

There are some recess possible in the second quarter?

There is nothing major in the second quarter, Steve.

Okay, and just, lastly, and then I'll get back in queue here. To focus on the positive component, the the Indian opportunity. Don't want to turn this into a campfire chat, Joe, but if you could tell us the story around how you guys secured that business, and whether or not there are some other opportunities like it out there?

Okay, well appreciate the question. If I could go back to what we have basically discussed in previous calls, is that we have had a concentrated focus on Asia, now, for a number of years, but particularly heavy emphasis on it last year and we continued to do that in the form of additional resources in the region, and these things, as you know, don't happen overnight. They come with spending time with paper makers. We have been doing that in India, China, and Southeast Asia. This is one that came out of that basic effort and from our team in Asia. I'm going to let D.J. Monagle elaborate on that since he was spearheading it.

I would just add to it a couple of things that came out of this is that our brands hold strong in the region, so in india, people recognize SMI as a leader in this technology. Our business model holds strong in that people are willing to go with a leader for these extended periods of time for satellite contracts. That's satellite business and in this case, it's a filler application. We are extremely strong, so we have validated the global brand stays there.

You asked about other opportunities. We do believe this opens up other opportunities for us in India and we continue to have very much of our global organization focused on delivering growth in that whole region. So, there has been additional talent put into the region on our Asian business team, but also, great effort and focus by our engineering groups, our R&D groups and our business development groups who have become very familiar with the culture and the business opportunities that are there. I hope that answers your question.

Yes, that's great. Thanks, D.J. Thank you all.

Thank you again. (Operator Instructions). Your next question comes from the line of Rosemarie Morbelli.

Good morning. You said as to your customers, you really didn't have any visibility as to where their business was going. Do you, on the other hand, have a feel for their inventories? Are they just about at base level and not seeing any improvement? Are your customers just about done or do we have another couple of quarters if the demand does not change from what it was in the first quarter?

It's different in different parts of the world. For instance, U.S. Steel inventories have come down, but steel is also tied heavily to automotive. Automobile inventories have come down, but they are still quite high. So, as you look at the whole chain, certainly steel centers in the US have contracted and inventories are down there. When you flip to Europe, again, in part because Europe is behind the US, there are still inventory adjustments that need to be made and inventories that need to be worked off, and that's part of what is driving the shutdown announcement by Thiessen, and recently ArcelorMittal basically said the same thing. They need to see more inventory runoff before they can start more things up.

Okay, so I understand you still have a long way to go in Europe, but do you feel that we still have another, even though the US started earlier and so on? Do we still have the until the end of the year for that to be behind us, and therefore, your business beginning to pick up a little?

You know, again, areas that we watch are the consumer durables like automotive. Fourth quarter automotives, there was something like 100 some days of automobiles in inventory. End of the first quarter, it got down to the mid 80s, so it's being worked off. Historical levels, I think, tend to be more in the 60s. So the answer to the question is going to lie in how quickly the auto inventories can be worked off as well as other inventories for other steel products. The other factor that is going on that's affecting steel today is the commercial real estate market where new projects extremely limited, existing projects, some have been shut down, curtailed, stalled. That's playing into it as well. That's why the steel makers themselves, as you talk to some of the CEOs, for them it's a very unstable market because you have different currents running through it right now.

That is quite helpful, actually. What about on the taper side? I know you said there would be more capacity ticking up, maybe additional consolidation of the industry. Do they have the typical kind of inventory similar to the steel or do they produce the paper as demand goes and you don't have as much of a hangover?

There are inventories. They do have inventory issues, they are working through them. They may be closer to getting to the right levels or balance levels, but I'll let D.J. or John add to that.

On a broad basis, Rosemarie, they haven't decreased their inventories, from a producer's side, over the last year. The issues they are facing, even though they curtailed a lot of production, is that their end customers are doing a lot of de-stocking yet. The levels are still fairly high within the paper industry as well, as a producer side. It takes a fundamental change to drive anything from the end user's side to get this thing moving again.

Do you see that customers of the encoded three sheets taking advantage of that to change the way they are operating? In other words, even with the economy picking up, there will be more papers being read on the computer, people are going to count on their screen as opposed to printing everything they are interested in, and therefore, we may never go back? We are seeing everyone taking advantage of the recession and we will have a fundamental change in the level of demand for papers, and a lot of those mills or machines shut down currently on a temporary basis, may actually never come back to life?

Well, I don't want to put a value on that question, Rosemarie, but that is the question. We are facing systematic and systemic changes. But having said that, the basic thoughts that we have got are that's why we are shifting a lot of our resources to Asia where we see some fundamental growth in Asia because those, not just the growth in people, but their work habits, their reading habits are consuming more paper. There is some growth in South America, as well, so the nature of the question that you asked is changing in the regions, we think. We think some of these are fundamental and sustaining, and therefore, we are trying to position ourselves for where we see that growth. Does that help?

Yes, it does, it does. Thank you. At least we can see that everybody has their eyes open and really looking at their markets, and seeing what comes next. So, that is very helpful. If I may, I have two quick questions. CapEx for $35 million, in 2008 you spent $5 million in the first quarter, that would be $20 million if we were to annualize it. Would $20 million be enough for you to operate or was there something special in the first quarter you decided to really put the brakes on because of the environment?

I would say sustaining for the Company at that level feels about right, essentially even a little less. However, our own targeting, not targeting, but potential for this year could be as much as $50 million. Again, those would be driven by projects such as the one we just announced for India. Roughly, sustaining is something that you also, as you go forward, you also probe and develop new experiences and ways to bring ingenuity and innovation to needing less capital. So we've had that going on in the Company, as well, in the last two years. We are finding ourselves able to find solutions to problems, where in the past, we would have spent capital today, we are spending less capital and coming up with other solutions. So roughly, $20 million a year or a little less would be a good target for sustaining.

That would be the maintenance CapEx. Any projects would add?

Yes, as I said, projects would ad, that's why this year we've said our capital could be $50 million. And frankly, as I mentioned in the last call, if we have opportunities with good projects like the one we have in India, we are prepared to spend more.

Okay, and then lastly, at similar revenue levels to the first quarter for the next three quarters, let's say that everything kind of more or less stabilizes, given the up in one particular business and down in another, based on all of the steps that you have taken at this revenue level, can we anticipate gross margin to improve sequentially for the balance of the next three quarters?

I think what we tried to convey on this call, the second quarter will be difficult. The savings initiatives, the expense reduction initiatives will continue. We will see some additional benefit, but we have some difficult challenges in front of us right now in our Refractories business, as well as the Performance Minerals business, but the Refractories business in particular because of what we talked about earlier. The improvement potential that we see in terms of depending on where Refractories or steel ends up in the second quarter would be coming in the second half.

All right, thanks a lot.

Thank you. (Operator Instructions). At this time, there are no further audio questions.

Well, thank you very much for your interest in Minerals Technologies. We are going to sign off.

Thank you.

Thank you for participating in today's conference call. You may now disconnect.