Minerals Technologies Inc (MTX) 2009 Q2 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the MTX second-quarter 2009 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 would now like to turn the call over to Mr. Rick Honey, Vice President of Investor Relations. Sir, please go ahead.

Good morning. Welcome to our second-quarter 2009 earnings conference call. It 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 second-quarter results and an update on the steps we continue to take to manage through this recession. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our second-quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward and some of the challenges the Company faces for the remainder of 2009.

Before we begin, I need to remind you that on page 6 of our 2008 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. Last night we announced that we had taken a pretax charge of over $50 million as a result of further significant restructuring of our operations. Our refractories business, which has been affected severely by the drastic drop in steel production especially in the US and Europe, our largest markets, was the primary focus of this restructuring. However, our other businesses in corporate resource units were also affected and some 200 people in total will be impacted going forward.

I would like to give you some insight into the actions taken, why they are needed, and the future positive impact I believe they will have on the Company's performance. Let's start with a brief overview of the quarter.

We earned $0.15 per share from continuing ops, which included a $0.05 per share impact from foreign exchange losses as a result of the weakening dollar. Our operating cash flow remained healthy at almost $40 million and our cash position at $240 million continues to be strong. Our performance minerals business provided earnings improvement with a $3 million turnaround from the first quarter. This business experienced a welcome seasonal improvement in volume but also delivered a 12% improvement in productivity.

Our paper PCC business remains our most stable because of the nature of our long-term supply agreements and good cost control in our manufacturing operations. Sales remain low at 20% below last year, which tracks to the downturn in paper production worldwide.

It was our refractory business, which serves the depressed steel industry, that was hardest hit. Our shipment volume was down 45% from our third-quarter 2008 peak performance and down 9% from the first quarter. The second-quarter steel capacity utilization rate was running about 45% in the United States and 52% in Europe. We also faced higher costs for magnesium oxide, our primary raw material for refractories as a result of continued high-cost inventory levels.

This chart clearly illustrates refractories' rapid downward slide from record operating income of $11.6 million in the third quarter of 2008 to a loss of almost $2 million in the first quarter and now a loss of little over $7 million. Current sales levels, along with a view that economic recovery and commensurate steel industry recovery would take some time led us to take further restructuring actions.

As you recall, we had already begun making adjustments in this business unit in the last quarter of 2008 when we announced restructuring charges of $4 million. The current actions are designed to enable the business to effectively compete at these low levels of demand which reflect the realities of today's marketplace and to better position it strategically in order to attain higher levels of profitability as the economy recovers.

The restructuring itself has four major aspects to it, consolidations, global organizational aggregation, realignments, and some product rationalization. We have realigned the business globally and will be transitioning to a more cost-effective business model by employing a global organization aggregation strategy. This strategy centralizes core strength resources and delayers management, while maintaining local country, customer focus and responsiveness. We are also consolidating facilities and rationalizing some product lines, as well as better aligning our key resources around the core competencies and key strengths that differentiate the business from competitors.

Our operations in North America will be consolidated in such a way that facilities will be closer to our steel mill customers. This will involve the closure of our Old Bridge, New Jersey facility and upgrading of our Bryan, Ohio and Baton Rouge, Louisiana facilities. When completed, these changes will yield $3 million in manufacturing efficiencies and transportation savings.

In Europe, we will be consolidating and rationalizing certain product lines among our facilities to also achieve efficiencies. In addition, the organization will be streamlined and realigned as part of the aggregation strategy that I mentioned. Savings are expected to be around $5 million.

Our challenge in Asia will be to better leverage our positions there to achieve higher returns. Our Asian operations, as you know, have not been meeting our growth and performance expectations particularly in China and we are now embarked on a process whereby we will be actively seeking a partner in the region. We will also gain some regional efficiencies through consolidation and organizational realignment.

Our positions in Japan, China, and South Korea are unique and will be better leveraged when combined with a partner that has complementary attributes. Further specifics and detail around the refractories restructuring and impairment charges will be covered shortly by John.

We are targeting total savings for the refractories segment to be approximately $14 million to $16 million on an annualized basis. And we expect to achieve this by the first quarter of 2010. We will be reducing approximately 130 employees through all levels of the business. The overhead reductions will be approximately $5 million and the manufacturing and logistics efficiencies are targeted at around $5 million as well. As with the restructuring that we implemented in 2007, execution and coordination of the various aspects of the changes that I outlined will be most critical over the coming months.

This restructuring also includes changes in the paper PCC and performance minerals business units as well as refractories. We are further streamlining and making adjustments to these business unit structures along with further reducing and realigning corporate overhead. There also are some other facility impairments which John will review with you. Savings from these actions are expected to be in the $2 million to $4 million range and this will be implemented over the next three quarters.

Overall, we expect to achieve savings of between $16 million to $20 million on a run rate basis by the second quarter of 2010 and we expect the related cash flow to improve by over $10 million on an annualized basis. These actions will lower the breakeven point for our Minteq operations, leaving us better positioned strategically to compete more effectively in the present environment of low steel demand and we will be poised to achieve higher levels of profitability when the steel industry recovers. The additional actions noted for the rest of the Company will also help to provide a more competitive overall operating structure going forward.

Now I will turn it over to John, who will provide a more in-depth look at our financial performance and the restructuring initiative. John?

Thank you, Joe. Good morning, everyone. I will now review with you our consolidated and business segment results for the second quarter. We will highlight the key market and operational elements of our financial performance in each major product line before special charges associated with the restructuring program. I will focus heavily on the sequential comparison to the first quarter, which is a more relevant comparison than the prior year when business conditions were markedly different. I will then review with you the key financial elements of the restructuring program before turning the call back to Joe for closing comments.

Our consolidated earnings per share excluding special items were $0.15, which represents a 40% decrease from the $0.25 per share recorded in the first quarter of 2009. Economic conditions remained weak, affecting all of our major end markets. Overall consolidated sales were even with the prior quarter as we saw signs of stabilization and even some seasonal improvement in the specialty mineral segment product line. However, these revenue gains were offset by a continued decline in the demand for our refractories segment products, which was much more severe than expected. The net result was a 29% decline in consolidated operating income compared to the first quarter as the magnitude of the loss in refractories under these business conditions could not be offset by what was as you will see a sequentially very strong improvement in the financial performance of the specialty minerals segment.

The second quarter was also adversely affected by foreign exchange losses equivalent to $0.05 per share which are recorded in other deductions and brought the percentage change in net income to a negative 39%. This represents mark-to-market losses from a weaker dollar compared to the first quarter 2009 on our overseas US dollar deposits.

As Joe mentioned in the last call, the restructuring we executed in late 2007 and throughout 2008 helped us focus on our core competencies and strengthen our base businesses, which is allowing us to better manage through this recession. The evidence can be seen in this quarter in the profit turnaround within the processed minerals product line.

Our balance sheet remains strong and in the second quarter, we generated $39 million in cash flow from operations with $34 million in free cash flow. At the end of the second quarter, we had more than $240 million in cash and over $160 million of unused credit lines and our debt to capital ratio was a very low 13%.

The trendline in this graph paints a clear picture of 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 until the economic downturn in the fourth quarter of 2008, the Company achieved record earnings. The chart also clearly depicts the effect of the deepening worldwide recession on our earnings over the last three quarters. During that period, our end markets experienced a precipitous drop in demand that resulted in widespread plant shutdowns, significantly reducing our volumes.

The second quarter earnings drop was driven by the continued decline in the refractories segment, which required a major restructuring in order to improve the financial performance under low-volume conditions. Although operating curtailments continued in all of our key markets, performance improved and stability was achieved in the other major product lines.

Improving the Company's return on capital remains a primary objective. Our 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% and we finished the year at 8%. Compared with the 6% rate the Company recorded in 2006, this was a considerable improvement especially in light of the deteriorating economic conditions in the fourth quarter of 2008.

The deepening recession has continued to take its toll on our return on capital performance. In the fourth quarter of 2008, our annualized ROC was 4.2% and that has declined to an annualized rate of 2.9% in the first quarter and only 1.9% in the second. However, the restructuring programs we have undertaken will allow us to return to higher levels relatively quickly once the economic environment improves and volumes and sales levels begin to increase.

We reported a loss per share of $2.18, of which $2.33 is related to the restructuring program that Joe introduced and earnings of $0.15 per share was realized from continuing operations. Earnings from discontinued operations was zero dollars excluding restructuring charges.

We have provided a reconciliation table in footnote 4 of the press release which details the effect on our earnings during the reference periods of all the special items which are comprised of restructuring charges, asset impairment charges, and gains from the sale of idle facilities which were previously written down.

Year-over-year, the EPS decline was 85% from the $1.01 per share achieved in the second quarter of 2008, which was then a record performance for the Company. Following a 66% decline in the fourth quarter of 2008, operating income on a consolidated basis excluding special items decreased an additional 17% to $7.8 million in the first quarter and an additional 29% to $5.5 million in the second quarter. Despite the effect of the steep volume declines on gross margins over the last three quarters, the negative impact on operating income has been mitigated by an average 14% reduction in SG&A expenses, contractual price recovery of raw material cost increases primarily in the paper PCC product line, and our recession management, manpower, and operational initiatives.

Included in nonoperating deductions were foreign exchange losses of $1.2 million or $0.05 per share in the second quarter as I mentioned earlier. As a result, net income and EPS excluding special items dropped 40% from the first quarter.

The key industries we reserve remain at low operating levels today and we do not currently have a line of sight to any fundamental, sustainable demand improvements 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 positive cash flow.

MTI's consolidated sales for second quarter were $208.6 million, essentially even with the first-quarter performance of $208.3 million but still 13% or $31.4 million below the fourth quarter of 2008 and a decrease of 30% or $91.2 million from the prior year. As you can see from these graphs, although MTI's sales were level with the first quarter, sales in the process minerals and PCC product lines increased 19% and 4% respectively after two quarters of steep decline. This resulted in a total improvement of 6% for the specialty minerals segment as sales reached $152 million compared to $143.6 million in the first quarter.

We expected the specialty minerals segment to be stable with a possible seasonal uptick and actual performance exceeded our expectations especially in the processed minerals and the specialty PCC product lines. Within the PCC product line, paper PCC volumes were about 839,000 tons for the quarter, about 3% better than first-quarter levels.

The current July sales rate per day for both product lines, paper PCC and processed minerals, are running at about the same rate as the second quarter. Although the second quarter represents an improvement from the recent trend for specialty minerals, total segment sales still remain 20% or $37 million below prior-year levels.

Sales of refractory products declined 13% in the second quarter following declines of 26% in the fourth quarter and 19% in the first quarter. We expected a continued decrease in this product group as steel production was forecast to decrease further especially in Europe, but overall volumes were considerably worse than expected.

Segment sales were only $56.6 million and were $8.1 million below the first quarter and a full 49% or $54.1 million below prior year. Within this segment, refractory product sales decreased $6.8 million or 13% to $46.7 million from $53.5 million in the first quarter. And metallurgical product sales decreased 12% to $9.9 million as compared with $11.2 million in the first quarter.

Refractories segment sales volumes for the first three weeks of July are about one-half last year's precession third-quarter rate. Although these volumes now appear to be about 5% higher than the second-quarter rates, the near-term outlook remains uncertain due to the lack of visibility to the fundamentals that would support a sustainable recovery.

This next chart reflects the financial results within the specialty minerals segment. In total, segment operating income for the second quarter increased 32% from the first quarter excluding special items in both periods. The increase in profitability occurred in both major product lines, with modest sales growth contributions in both areas.

Most notably, the processed minerals product line returned to a breakeven at operating income compared to a loss of $2.3 million in the first quarter. Total PCC product line operating income was 10.4% of sales. The specialty PCC product line benefit from the additional volume as well as from the successful execution of the recession management programs that also led the recovery for the processed minerals line.

Overall, segment operating income represented 8.7% of net sales in the second quarter excluding special items as compared with 7.0% of sales in the first quarter and 10.7% of sales in the prior year when sales were 20% higher.

Production within the North American and European uncoated freesheet markets, our most significant market areas, continued at depressed but stable levels. The industry adjusted to reduce demand and end customer destocking in reaction to the global economic crisis, but is still experiencing production curtailments and paper machine shutdowns.

Residential housing starts remain at their lowest level in more than 50 years, which continues to create a significant drag on our processed minerals product line, which primarily supports industrial suppliers for the residential construction industry. In addition, this product line is facing a deeper slowdown in the commercial real estate market, which represents about 15% of processed minerals sales and a 50% decline in North American automobile production rates.

Therefore, all indications are that our end markets will remain at depressed operating levels. Although we have experienced some seasonal uptick within the processed minerals product lines, as I mentioned, we are operating far below last year's seasonal levels. The adjustments we have made within the business units have better positioned us for improved profitability during this extended recession in what is likely to be a slow recovery in our end markets.

In the refractories segment, the decline of steel production in the United States and Europe significantly affected 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 before the recession in the third quarter of 2008 to a 1.1 million ton per week rate in the second quarter of 2009, a drop of 49% from the third quarter. This resulted in widespread production curtailments throughout the industry. As a result, overall refractory product line unit volumes have declined 45% from the 2008 recession levels.

Second-quarter financial performance suffered a dramatic downturn as sales fell a further 13% from the first-quarter levels, which had a negative impact on operating income of $2.5 million. In North America, volumes declined an additional 15% from the first-quarter levels and were 49% below 2008 prerecession levels. In Europe, volumes dropped 7% compared to the first quarter and 40% from the third-quarter levels.

With this dramatic decline in refractory product sales and profitability, it became increasingly apparent that a major restructuring would be required to reposition this segment to achieve profitability at low volume levels for a sustained period and to better position the Company to seize growth opportunities in the future.

Operating losses excluding special items increased by $5.2 million to $7.1 million compared to the first quarter. In addition to the $2.5 million volume effect mentioned above, this segment's profitability was also affected by higher MgO costs of about $2.7 million compared to the first quarter. Operating income last year when unit values were nearly double was a profit of $9.6 million.

The sales outlook for the refractories business remains uncertain as we continued to evaluate the latest economic forecast for the steel industry, which seemed to point toward a slight increase in North American and European volumes. The depth and duration 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.

Third-quarter MgO costs will be similar to the second quarter and we expect to see some improvement in the fourth quarter from the purchases of lower-cost material provided that the current volume level is maintained. With the combination of modest volume increases, lower MgO costs, and the benefit for the restructuring program, we anticipate that this segment will reach breakeven by the first quarter of 2010 with marked improvement realized in each of the next two quarters.

This slide provides a stark example of what occurred last year as the economic downturn hit. The US 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 through 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 half of this year, volumes have averaged at about the 50 million ton annualized rate, representing a 30% decline from the fourth quarter average levels and about 50% decline from 2008 prerecession levels. This pattern of deep steel industry decline 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 and worsened in the second is tied directly to this drastic change in market conditions.

With forecasts for an extended slow recovery period, we decided the best course of action was a major restructuring of the assets and management structure of the refractories segment.

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, our total working capital decreased in the second quarter by approximately $17 million from the first quarter driven by a $16 million decrease in inventory levels primarily in the refractories segment. This allowed our days of working capital to decrease to 81 days in the second quarter from 86 days in the first quarter and 88 days in December of 2008.

As we mentioned earlier, although inventories have dropped by $35 million over the last two quarters, the refractories business still has excess inventory which we expect to substantially reduce over the next two quarters.

We continue to effectively manage our accounts receivable carefully and have not seen any increase in average delinquencies. Our cash flow from operations was approximately $39 million in the second quarter, $7 million above the prior year, which included about $1 million cash expenses associated with the 2007 restructuring program. Capital investment for the quarter remained a relatively low level of $5 million.

As Joe pointed out, our balance sheet remains very strong. Our cash position is over $240 million and we also have available lines of credit of approximately $160 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 13% and our liquidity remains very strong with a current ratio of 4.1, which compares very well to the S&P 500 average of about 1.0 and represents the fundamental strength of the Company. It is the strength of our balance sheet and our ability to generate cash under these adverse business conditions that differentiates MTI from many other companies during these difficult times.

You will note that since 2006, we have been able to increase our cash by nearly $165 million and reduce our debt by about $90 million.

Now I would like to address the financial effect that a realignment program on the Company. Of the total $47.1 million pretax special charges recorded in continuing operations, $37.5 million represents non-cash adjustments, the adjustments recorded on separate restructuring and impairment lines in the P&L included with the press release.

There was also a $2.3 million non-cash P&L charge recorded in other deductions due to currency translation losses associated with the closure of our refractories operations in Mexico. The effective tax rate on the discrete adjustment was low at 18.5% due to the impairment of assets in jurisdictions where tax benefit could not be realized.

There was also an additional charge of $3.5 million recorded in discontinued operations to reflect the after-tax adjustment of the value of an asset held for sale from the 2007 restructuring program to a more current market value. Therefore, the effect of the 2009 restructuring program was a loss of $43.7 million or $2.33 per share which resulted in a net loss for the quarter of $40.9 million or $2.18 per share.

As outlined in footnote 3 of the earnings release statement of income, the majority of the asset impairment charges related to realignments in the worldwide refractories segment operations. In addition, however, one PCC facility was deemed to be impaired because it has not operated since September 2008 and prospects for a future restart has become unlikely.

In addition, the value of an unsold discontinued operation was adjusted by $5.6 million pretax to reflect current market conditions. Restructuring costs relate primarily to severance and employee benefit costs and a termination of certain long-term contracts. The restructuring effort was undertaken in all business units and resource units within the corporation to streamline management structures and better position the Company for improved performance during the current economy and to improve operational effectiveness in the future.

In addition to the costs reported in the second quarter, there will be additional cash charges both in the third and fourth quarters related to this realignment program. These include additional severance costs that could not be recorded in the second quarter. In addition, certain carrying and exit costs on facilities to be disposed of were recorded when they are incurred. Combined, these costs are expected to total $2 million to $4 million with approximately half of this amount recorded in each quarter.

To capture all of the planned savings from the workforce reduction, the Company will also have to reengineer certain business processes and systems and relocate certain equipment commitment among the remaining refractories facilities. This will allow us to have the appropriate capability to meet anticipated volume demand and product mix in a more robust economy. The capital costs are expected to be $2 million to $3 million and the projects will be completed by early 2010.

We expect the total realignment program to generate preset tax savings of $16 million to $20 million in 2010 as a savings associated with the planned reduction in force will be phased in over the remainder of the year.

In summary, the Company recorded earnings of $0.15 per share excluding special items as compared with $0.25 per share in the first quarter. We were able to maintain our competitive position and remained profitable in adverse market environment. We achieved these results with the successful execution of our recession management and expense control programs and benefited from the market stability and modest improvements seen in the specialty minerals segment.

Unfortunately those gains were more than offset by losses in the refractories segment. We have undertaken a restructuring program within the refractories segment which would eliminate the losses during low-volume industry cycles and better position the Company to achieve higher probability and growth as the global economy recovers.

The restructuring program undertaken in our other businesses and within the corporate resource units will streamline the Company's infrastructure to better reflect the overall market environment and position the Company to be more agile and responsive to seize opportunity when recovery begins.

Although we are beginning to see some stability in the operating performance of our businesses, our line of sight into the future remains unclear and we will continue to take the steps necessary to conserve cash and further reduce costs to maintain our competitiveness and we will continue to make the necessary adjustments to manage through this effectively and emerged a stronger Company.

For the third quarter, we expect the refractories segments will improve but remain in a loss position due to the high cost of raw material inventory, a weak market environment, and the time required to effectively implement restructuring actions we discussed.

In the processed minerals line, we expect a level performance in the marketplace and commensurate financial performance. Paper PCC will remain a bright spot in this economy due to the nature of the supply agreements and we expect performance to be stable barring any additional mill closures.

MTI has an exceptionally strong balance sheet with cash and short-term investments of over $240 million and debt of only $111 million. Despite the financial crisis, we remain a fiscally strong Company and have taken steps to ensure that our cash reserve are safely invested.

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

Thanks, John. Before we open it up for questions, I'd just like to provide some further insights on the actions we've taken and how they will affect the future of the Company.

In October of 2007, we undertook a major realignment of our operations that basically eliminated many nonperforming assets and resulted in savings of around $28 million to $30 million. We also embarked on an intensive effort of cultural and leadership change to develop a more disciplined approach to how we manage the Company and began to focus on continuous improvement, new product development expense reduction and growth.

In the ensuing three quarters, minerals technologies financial performance was the best in the Company's 16-year history and we achieved our return on capital near-term goal sooner than we were originally targeting. In the fourth quarter, the financial markets collapsed and the worldwide economy went into a downturn that has been the worst since the Great Depression. We have now embarked on a process to make even further adjustments that we believe are necessary to be able to achieve near-term financial performance improvements while maintaining our capability to achieve the longer-term growth and performance objectives that we outlined two years ago.

Two of our three business units, refractories and processed minerals, face extremely difficult conditions because of the weakness of their end markets. Our paper PCC business has also been affected but remains the most stable because of the nature, as John mentioned, because of the nature of our long-term supply agreements. This current restructuring and actions that I outlined are aimed at stopping the refractory business losses as well as putting that business on a better strategic footing from which to compete. This business is now restructured in a way that will allow it to compete more effectively at the present low levels of demand as well as be positioned for higher profitable growth when the economy does recover.

As I've mentioned in past calls, we continue to manage for the long-term, maintaining focus and support for our critical growth initiatives, protecting our core competencies, and critical market positions while making the adjustments we need to make to remain competitive and perform in the near-term.

We will continue our operational excellence initiatives, which improve the efficiency and safety of all of our operations through the involvement of all employees and which have started to result in tangible benefits to the Company in cost savings and productivity gains such as we saw last quarter in performance minerals.

Our paper PCC growth opportunities in Asia, the major growth region for paper, continue to track well and we are actively engaged in negotiations and discussions for new PCC satellite facilities. We also continued to gain momentum with one paper maker for our [filler] fiber product and are currently in commercial discussions. We are also targeting and planning for trials at another paper maker in the fourth quarter.

We are staying active in the acquisition and business alliance arena as our team continues to be engaged in seeking out and evaluating opportunities. Given our strong balance sheet and cash position along with the current economic environment, we see increased potential for opportunities that could support our longer-term growth and profit objectives.

I believe the actions we are taking will make MTI an even stronger Company better able to compete in today's economic environment and well positioned for higher profitability and growth as the worldwide economic situation improves.

Now let's open it up for questions.

(Operator Instructions) Mike Judd, Greenwich Consultants.

Yes, thanks. I guess my question revolves around what's going on in the automotive industry. It seems that there is some pickup in production there potentially to begin to rebuild some depleted inventories. And I guess we're also hearing that steel production is beginning to turn up modestly. Can you just remind us what type of time lag do your products -- your refractory products and systems into the steel industry, how does that operate? In other words, my sense is that you guys probably operate on a month time lag. In other words, that they restart the steel furnaces and then it's maybe a month until they need to start realigning them in between batches. Is that sort of the time frame that we should be thinking about?

Mike, that's a good assessment. As we have described previously, that there typically is when a BOF furnace gets rebuilt, the -- a lag and it could be more than a month. It can be one to two months, but there's typically a lag in the number of heat that -- between which require us to go in and reline on a spot basis. Starts are slow and then build up as the furnace goes into production.

And so for the first one, two, three months, the average rates typically will be lower than what you see at normal production levels. So that's part of what we are actually experiencing right now. You saw the little uptick on the steel production in the US slide, which began to indicate steel production going up in the June timeframe slightly, continuing to every week go up a little bit. Yet you'll note our sales volume was down. That is attributable to a good degree to this lag effect that's going on right now.

Product mix is also a factor where there is more long steel then sheet, which also is a mixed effect for us. So those are the things that are going on. Your observations about the automotive and steel areas coincide with ours in terms of seeing steel service centers in the month of June increase by about 9%. There are orders from steel mills -- which reflects in part restocking potentially some increased underlying demand.

At this point, it is a little too soon to tell whether the underlying demand is sustainable, but we are seeing it.

Just as a follow-on to that, I realize it's really hard to have any kind of visibility in this market. But it seems that we are seeing an end to destocking throughout the chemical industry in general and businesses getting back to normal, albeit at a lower rate. But in terms of talking to your customers about the rest of the year, in particular the fourth quarter, what are you hearing from your customers about their plants? What type of operating schedules do you think will be in place in the fourth quarter?

Do you think we will see something similar to last year where everybody wanted to keep their inventory levels extremely low going into year-end and so you had perhaps December being a bit of a washout? What's your thought process and what are you hearing from customers in regard to that question please?

Yes, from a thought process standpoint, what we do know is still operating out there is the need for cash and we still have -- there are still many companies today that are under cash pressure. So that speaks to the need to keep inventory levels as low as possible. So I don't see that changing much in the next three to four months which would set up the year-end to be -- could be low in terms of how people want to end the year and conserve cash.

Customers are -- I would describe them as being leery and the same questions we are talking about here in terms of sustainability of where we are. But also a sense that maybe we are at a bottom so that it presents an opportunity to do more in the way of planning because things are more stable.

That's very helpful. Thank you.

Steve Schwartz, First Analysis.

Good morning, everyone. You know, normally in situations like this with the economy with a downturn, you will see a shakeout in market share and so forth, and I am wondering in your refractories business, have you seen a shift in share in the US and in Europe?

Well, our -- there's a shift in this sense not for us so much as between BOF steel companies, the integrated steel makers and the electric arc furnace steel makers in that the EAF was able to respond faster and so in terms of total steel production, there is a percentage shift from before to now that over time is going to balance out to prerecession levels, but there has been a shift there.

From the standpoint of our refractories sales, and I'm going to ask Bill Wilkins to elaborate further or comment as well, but we haven't seen any loss in share relative to other competitors in the positions we have both in EAF and BOF. Bill?

That's correct, Joe. Even though our positions have not changed with our key customers relative to share, we have all obviously felt the downturn, but where steel is being produced, we still have crews and our positions really have not changed from that perspective.

Okay. And then my other question is on paper PCC. You know, when you did your last call at the end of April, at that point your demand was actually lower than the first quarter, so that would imply that May and June came on very strong considering that sequentially you saw this growth of 19,000 tons. Do you think that was restocking or what was behind that?

I am going to ask D.J. Monagle to comment on that. D.J., please.

Steve, we do think it was restocking and we are seeing I guess the right way to say it is less bad news coming out. So it's a combination of restocking and an indication from the market that we are just slightly above the bottom. So I don't expect a dynamic turnaround, but it just seems like we hit the bottom and that's where we bounced.

Okay, sounds good. And then just one question for John, a quick accounting question. Currency translation gains and losses occur every quarter. Why did you guys choose to call that a special item this quarter?

The one that we had, the currency translation item we had this time was related to the closure, exiting a company of business in Mexico, and so that was the cumulative currency impact that had to be closed out and liquidated.

Okay, and typically -- I suppose I could look this up in your filings, but what is it typically every quarter? I guess it all depends on the currency.

Yes, in other deductions, we normally have the mark-to-market implications from the foreign holdings we have in nonfunctional currencies that vary having so much cash as we have and having some of it in some of the Eastern European countries for example causes the month-to-month fluctuations as the dollar moves. That was probably the biggest impact that we had in the quarter. That was the $0.05 that Joe mentioned early in his comments that that was a negative $0.05 as the dollar weakened from the first quarter to the second quarter. The translation, the special charge translation adjustment was strictly related to that Mexican liquidation.

Okay, thanks for taking the questions.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

Good morning. This is Silke Kueck for Jeff. A couple of questions related to the asset impairment charges. How many plant closures on the refractories side are associated with these asset impairment charges? And is the goal to service refractories out of the Americas and just exit the footprint in Europe and in Asia?

Silke, this is John. I will start with the financial side of it. The plant that we are doing a permanent closure on, there was one company in Mexico that I just mentioned we closed and there's the Old Bridge facility is a major one here in North America. Those are the facilities that are really being permanently closed. The others were impaired related to the volumes that we are running at and the repositioning or the realignment of those plants and the product mix that they make from one location to another.

But there was considerable excess capacity throughout the business on a global basis and we could reline those facilities to produce the proper volumes and mix as we need. We had tremendous excess capacity in those areas.

The other thing that you will see as a separate line item in the impairment is the equipment that we had throughout the world placed in the steel industry for application equipment, some had become obsolete. Some just -- we did not see a future long-term need for. So there was a restructuring in that area as well. Do you want to address the market side?

Yes, in terms of relative to Europe, there's no implication of being supplied from the US -- the Europe -- whatever is being supplied today from Europe, that's going to continue.

Okay and one other question on the refractories business. What level of steel utilization rates in US North America and Europe are assumed to get to the breakeven levels in refractories in the first quarter of 2010?

Yes, what -- if you'll recall on the last call around the question of where is the breakeven point for the refractories business and we indicated for North America in terms of trying to give some insight into that that it was north of 50% and Bill indicated that we are in the 55% range, but again that -- there's a pretty wide range because of the mix effect that you can have when you're looking at breakeven from a product standpoint.

But with the actions we are currently taking, what we're basically going to be doing is dropping our breakeven point by about 20%. So as you think about utilization rates and steel and let's take North America as an example, if you look at the north of 50% to begin to move -- to be profitable, we are now saying we can actually get there at below 50% and closer to the levels of where we were running during the second quarter. That really is the target for us and what we're trying to get to.

So we've dropped at least this plan we have has us dropping quite a bit. That's what we mean when we say that we are adjusting ourselves and making changes structurally and strategically to be profitable at these very, very low rates if in fact they stay there so that we can actually -- that the business can actually perform.

Thank you for clarifying. And if I can ask a last question, I'll get back into queue. In terms of operating cash flow, if I remember right in the first half of 2008, the operating cash flow was (technical difficulty) like at $38 million and I think in the first half of this year, $63 million and given that probably some of the inventories we worked down through year-end, should the level of operating cash flow stay at the same level or improve through year-end? Do you have any visibility on that?

We expect it to stay strong. However, we will have some increased capital expenditures in the last half of the year. As you recall, we are building a satellite facility in India and we are targeting to be completed before the end of the year. So that will raise the capital draw. It will be higher towards the second half, but overall, we do expect the cash flow to remain strong. John, do you want to add anything to that?

I would just add, Silke, that yes, we continue to draw down some inventory in the refractories business, but we will also have the cash draw of implementing the restructuring as well. So overall, the picture is pretty steady. It's still strong, what I would call a strong cash flow going forward, similar to the first-half rates.

Okay, thanks very much. I'll get back into queue.

At this time, there are no further questions.

No further questions, we will close the call. Thank you very much for your interest in Minerals Technologies.

Thank you.

Thank you. This concludes today's conference. You may now disconnect.