Minerals Technologies Inc (MTX) 2009 Q3 法說會逐字稿

Good morning. My name is Cassandra, and I will be your conference operator today. At this time, I would lake to welcome everyone to the Minerals Technology third quarter 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. Mr. Honey, you may begin your conference.

Good morning. I'm Rick Honey, Vice President of Investor Relations. Welcome to our third quarter 2009 earnings conference call, which is being broadcast on the Company's web site, www.mineralstech.com. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call with an overview of of the third quarter results and update on the steps we continue to take to improve the Company's profitability. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer who will review our third quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's past performance.

Before we begin, I need to remind you that on page six 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?

Thank, Rick. Good morning, everyone. Let's take a brief look at the quarter. Last night, we announced earnings of $0.53 per share, excluding special items, which was significantly higher than the second quarter earnings of $0.15 per share. This improved performance was the result of a number of factors, which included increased sales in all of our businesses led by a Refractories segment, which saw an increase of 27% over the second quarter. Improved general consumption in the markets we serve, particularly steel, although sustainability of demand remains a question mark as we look out. A high level of involvement and support from our employees and working through the many challenges, difficulties, and adjustments encountered over the last 12 months. And we also had improved leverage on sales, as a result of the cost savings measures we have taken, and productivity improved in all of our businesses as well.

The execution of the restructuring program we announced in the second quarter is tracking well towards the annualized target of $16 million to $20 million savings for 2010 as we continue to streamline our operations. In the third quarter we realized savings in excess of $3 million. Our balance sheet remains strong. In the quarter, we generated $53 million in cash flow from operations with $44 million in free cash flow. We now have $300 million in cash and our debt to capital ratio is a very low 13%. As I will explain in a little more detail shortly, the restructuring program, which was targeted towards improving our refractory segment, operating performance, is on track. This segment showed the strongest gains with volumes increasing 18% over the previous quarter. In addition, as conditions in the steel industry have improved, we saw increased demand for our higher value products. Paper PCC, our most stable product line, continued to show an upward trend with sales increasing 7% over the previous quarter. And our processed minerals product line, which operated at a break even level in the second quarter, returned to profitability in the third quarter on a 3% increase in sales.

In the last two years, we have been implementing continuous improvement principles such as 5S, Standard Work, and daily management control. And over the past two quarters, these efforts have resulted in significant productivity improvements. In performance minerals, for example, we saw an 11% improvement in the third quarter 2008 to the same period this year to the number of tons per manufacturing hour worked, resulting in savings in excess of $500,000. Paper PCC also improved by more than 10% with commensurate savings. Minteq business productivity levels are improving, but they are still below 2008 levels. Our safety performance continues to improve as our loss work day rate year-to-date is 0.54. This represents 0.5 injuries per 200,000 hours' work and compares to a rate of 0.94 in 2008, a 40% improvement.

As you can see in this graph, we were on a strong performance improvement track until the fourth quarter of last year, when our end markets collapsed with the severe economic downturn. The first two quarters of this year reflected the effect of the deepening worldwide recession on our earnings. Our performance in the quarter is based not only on some improvements in our end markets and our responsiveness, but also the cost saving measures we took. And the improved productivity we have experienced though the foundation work and lean manufacturing that we have been engaged in. The Company's return on capital, as shown in the graph, was significantly impacted by the downturn. We were tracking over 9% or cost of capital until the fourth quarter of last year. As you can see, we had much stronger performance, as reflected in this quarter's 4.7% annualized rate. We remain committed to improving return on capital levels to greater than cost of capital as quickly as possible.

The restructuring of the Refractories business has four major aspects to it. Consolidations and aggregation strategies, realignments, and some product rationalization. We are realigning the business globally and will be transitioning to a more cost-effective business model by employing a global organization aggregation strategy. This strategy basically centralizes core strength resources and reduces a layer of management while maintaining good, local, country customer focus and responsiveness. We're 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 our businesses from competitors.

As we announced during the last call, we are targeting total savings for the refractory segment to be approximately $14 million to $16 million on an annualized basis. We expect to achieve this by the first quarter of 2010. We are well into the process of reducing the workforce by approximately 130 employees through a combination of overhead reductions, direct labor, and temporary layoffs. The overhead reductions will generate annualized savings of approximately $5 million and the manufacturing and logistics efficiencies were also targeted at around $5 million. And as you can see in this chart, we are on track to achieve these savings with the third quarter coming in slightly ahead of target. This chart illustrates the rapid downward slide that occurred in our refractory business, which went from a record operating income level of $11.6 million in the third quarter of 2008 to a loss of $7.1 million in the second quarter of 2009, which was very much in line with the downward spiral and steel production in the US and Europe.

As I discussed during our last call,It became clear that this business needed further restructuring and the actions that we began at the end of the second quarter and are continuing to execute now will enable the business to effectively compete at lower levels of demand. This will also place it in a better position strategically to obtain higher levels of profitability faster as the economy recovers. Through this restructuring initiative, along with increased demand, lower material costs, productivity improvements and improved product mix, we have been able to cut loss by $6 million in the quarter.

Before I turn it over to John, I'd like to speak for a moment about some of our efforts to return Minerals Technologies to a higher growth track. Our paper PCC business continues to have good potential for growth as evidenced by the recent announcement of our Suzano, Brazil, expansion. We are very active in seeking satellite opportunities and brick countries, particularly Asia, and where we have eight satellite PCC plants in operation and where our ninth will soon go into production in India. The Asian paper market continues to grow, and we have been adding technical and business development resources to the region to support our further penetration efforts there.

On the R&D front, our product development pipeline has been rejuvenated through our new product development process established last year as part of our broader technology innovation initiative. Over 160 new ideas have been generated this year. Today in paper PCC alone, we have over 30 at various development stage gates, with five of these in the latter stages of development. Two years ago, we had significantly fewer projects in the pipeline. The development projects today are both product and process focused. Many of them are being developed jointly with customers and other companies. Today we clearly have a higher level of engagement of both our employees and customers to create value for the future, which I believe will provide the keys to our future growth and differentiation from competitors.

Now let's turn it over to John.

Thank you, Joe. Good morning, everyone. I would now like to review with you our consolidated and business segment results for the third quarter. I will highlight the key market and operational elements of our financial results before special charges and each major product line. My comments will focus heavily on a sequential comparison to the second quarter which is a more relevant comparison than the prior year, when business conditions were markedly better. I will then turn the call back to Joe for his closing comments.

We reported earnings per share of $0.47, of which $0.06 relate to the additional special charges associated with the restructuring program initiated in the second quarter. Our consolidated earnings, excluding special items, were therefore $0.53, which represents a significant increase from the $0.15 per share recorded in the second quarter when business conditions, particularly in the steel industry, were at their low point. EPS growth of $0.38 per share, about $0.10 were derived from the savings associated with the most recent restructuring program. You will note that we have provided a reconciliation table and footnote for the press release which details the effects on our earnings during the reference period of all special items which are comprised of restructuring charges, asset impairment charges, gains from the sale of vital facilities which were previously written down.

Business conditions improved in nearly all of our major end markets during the third quarter. As a result, our consolidated sales increased 12% or $26 million over prior quarter sales as volumes improved. We were able to leverage this 12% sales growth to a 36% improvement in production margin and a 158% increase of operating income. Favorable leveraging was achieved in both segment with the most significant recorded in the Refractory and metallurgical wire product lines which served the steel industry. Although the refractory segment still operated a loss of $1.1 million in the third quarter, the operating results improved by $6 million over the second quarter. This improvement was primarily driven by volume growth, increased demand for our higher value products, and the benefits from the restructuring program. Specialty minerals operating income reflected sequential improvement of over $2.6 million or 20% from second quarter levels. This is primarily the result of volume growth, lower raw material costs, and productivity improvements achieved in both PCC and processed minerals product lines. These operating improvements more than offset increased expenses in this segment of $2.8 million primarily related to higher benefit costs, additional trial costs associated with the filler fiber program, and a bad debt provision in paper PCC.

It is also worth noting that the US dollar stabilized during the quarter and as a result, we did not occur any significant foreign exchange losses and non operating deductions as we did in the second quarter, which also contributed to our improved earnings. Our balance sheet remains strong and in the third quarter, we generated $53 million in cash flow from operations with $44 million of free cash flow. At the end of the third quarter, we had more than $295 million in cash and over $180 million of unused credit lines.

In summary, our financial results improved significantly with a modest uptick in business levels due to the steps we have taken to improve each business unit's ability to respond to a more volatile market environment. However, we remain cautious in our outlook for the next quarter as the underlying fundamental demand for products in our key industries, although improving, remains well below historic levels.

MTI's consolidated sales for the third quarter were $234.3 million, 12% above the $208.6 million recorded in the second quarter, but still a decrease of 21% or $61 million from the prior year. Specialty mineral sales increased 7% in the third quarter to $162.5 million from $152.0 million in the second quarter with sales in the PCC and process minerals product line increasing 8% and 3% respectively, with the favorable effect of foreign currency accounting for about two percentage points of the PCC growth. Within the product line, paper PCC volumes were about 4% higher than second quarter levels, with north American volumes up about 7% sequentially, but still about 12% below prior year levels. Processed minerals sales volumes increased 6% from second quarter levels, with ground calcium carbonate volumes in the western region up 10% and talc volumes up about 8%, indicating some recovery in demand for construction related materials. Overall, processed mineral volumes are still 16% below prior year levels.

Although the third quarter represents continued improvement in the sales trend for specialty minerals, total segment sales still remain 13% or $24 million below prior year levels. The current October sales rate per day for both paper PCC and processed minerals are about even with the third quarter levels. Sales of refractory products increased 27% in the third quarter following sequential declines of 26% in the fourth quarter of last year. 19% in the first quarter and 13% in the second quarter. Segment sales were $71.8 million or $15.2 million higher than second quarter levels but still remain 34% or $36.4 million below the prior year. Be with the segment, refractory product sales increased $10.1 million or 22% to $56.8 million from $46.7 million in the second quarter. metallurgical product sales increased 52% to $15 million as compared with $9.9 million in the second quarter. Although we expected to see some improvement in this product line during the third quarter, overall volumes were better than expected with North American volumes up 28% and European volume up 12%. Refractory segment sales for the first three weeks of October are slightly ahead of third quarter levels.

This next chart reflects the financial results within the specialty minerals segment. In total, segment operating income for the third quarter increased 20% from the second quarter excluding special items in both periods. An increase in profitability was achieved in both major product lines. The PCC product line benefited from additional volumes and lower raw material costs, as well as from the successful execution of the operations excellence and recession management programs. Total PCC product line operating income was 11.0% of sales, as compared with 10.4% in the second quarter, despite an increase in trial expenses and benefit costs. Processed minerals return to profitability with operating income of $0.7 million in the third quarter, after a break-even performance in the second quarter and operating losses in the two previous quarters. This was due not only to volume growth, but to productivity improvements also achieved through the operations excellence program. For example, tons per man hour increased significantly sequentially by 13%, and productivity in the processed minerals product line now exceeds pre-recession levels. Overall, segment operating income represents a 9.7% of sales in the third quarter excluding special items. This compares favorably to the 8.7% of sales achieved in the second quarter 2009 and 9.0% of sales in the prior year when sales were 13% higher.

Production within the north American uncoated free sheet market, our most important market area, has improved about 3% from the low point at the beginning of 2009. However, demand for uncoated free sheet in western Europe continued on a downward trend into the third quarter. Although our overall PCC volumes are increasing modestly, the industry is still rationalizing production capacity, which may affect our PCC product line in the future. Although residential housing starts in the US experienced a 9% increase in the third quarter, housing starts and construction activity remain at very low levels. In North America automobile production rates increase 33% in the second quarter levels, but are still 22% below prior year. However, the day supply of automobiles increase from about 30 days to about 53 days during September. though the current forecast is for fourth quarter rates to be at about third quarter levels, the potential remains for a pulled back in the fourth quarter. All indications are that our end markets will remain at the pressed operating levels compared to last year. We also expect the performance minerals business to experience a seasonal downturn from third quarter levels during the fourth quarter.

To provide some additional insight for the current market situation in the paper business, I've included these two graphs which show the trend in uncoated free sheet paper demand and delivery rates for the last two years in both North America and Europe, our largest markets. In North America, demand dropped and record double digit rates during the fourth quarter of 2008. And further declined through the first quarter. We have seen a small increase of about 3% in each of the second and third quarters. In Europe, these continue into the second quarter resulting in additional paper machine downtime. It appears that the full effect of the economic crisis arrived a little later in Europe. With the seasonal slowdown in the third quarter, current demand levels are averaging about 6% below second quarter levels. Although the volume price adjustment mechanisms in our long-term PCC contracts provide some measure of protection, further industry consolidations are possible if demand remains at this level for an extended period, which would cause further industry rationalization and additional PCC plant shutdowns.

Housing starts are a good indicator of expected volume demand and performance in processed minerals product line. Although US housing starts experienced a 9% improvement in the third quarter, rising to approximately 590,000 units annualized. Housing starts remains at historically low levels. The annualized rate in the first quarter was only 530,000 units and increased slightly to 540,000 in the second quarter. This compares to a peak rate of over two million units recorded in 2005. The decline of steel production in the United States and Europe significantly affected sales and profitability for the refractory segment over the last four quarters. Nearly half of our sales are based in North America, where steel production declined from a 2.2 billion ton per week rate before the recession in the third quarter 2008 to 1.3 million ton per week rate in the third quarter 2009, a drop of about 40%. As a result, overall refractory product line unit volumes have declined 35% from the 2008 pre-recession levels.

However, US weekly steel production is improved by 18% from second quarter levels was translated into a significant improvement in our sequential operation performance. North American unit volumes increased 28% from the low levels experienced in the second quarter, but we're still 34% below the prior year. In Europe, volumes increased 12% compared to the second quarter but were 33% below the prior year. Our worldwide refractory product unit volumes increased 17% from the second quarter and our metallurgical product line sales volumes were 80% above second quarter levels but still 9% below the prior year. As a result, our operating performance improved by $6 million from the second quarter levels. Contributing factors, each of which contributed about $2 million, were increased steel production, increased demand for our higher value products, and the benefits derived from the restructuring program announced in the second quarter in 2009.

Despite these sequential improvements, Refractory segments still recorded an operating loss of about $1.1 million, as compared with operating income of $11.6 million in the prior year. In addition to the the volume declines from the prior year, profitability was also negatively affected by the consumption of higher costs MGO during the quarter ,which was purchased in the third quarter of 2008 during the peak demand cycle for Chinese source materials. The sales outlook for the Refractory business remains uncertain as we continue to evaluate the latest economic forecast for the steel industry, which seemed to point toward a slight increase in North America and European volumes. However, there's typically a seasonal downturn in the fourth quarter. We expect MGO costs to be slightly lower in the fourth quarter as we will consume the final quantities of our higher priced MGO materials. With the combination of modest volume increases, lower MGO costs and accelerated implementation of the restructuring program, this segment as the potential to break even in the fourth quarter, which is sooner than we had initially targeted.

This slide provides a starch example of what occurred late last year as the economic downturn hit the steel industry. The US steel industry in October 2008 was still producing at a rate of more than 100 million tons a year, which had our refractory 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 third quarter of 2009, volume increased to an approximate annualized rate of 67 million tons, versus the 50 million ton annualized rated achieved during the first six months of this year. This represents an approximate 34% increase over the first six months. Still about 40% below 2008 pre-recession levels. Despite this production increase in the US, our largest market, we remain cautious on the sustainability of the upward trend.

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 third quarter by approximately $11 million in the second quarter, driven by a $14 million decrease in inventory levels, primarily in the Refractory segment. This allowed our days of working capital to decrease to 68 days in the third quarter from 81 days in the second quarter and 88 days at the end of 2008. Our days of sales outstanding continue to improve to 60 days from 62 days in the second quarter. Our cash flow from operations was approximately $53 million in the third quarter, $12 million above the prior year. Capital investment for the quarter remained at a relatively low level of $9 million.

As Joe pointed out, our balance sheet remains very strong. Cash position is over $295 million. We also have available lines of credit of over $180 million that remain unused. This leaves the Company well positioned to weather protracted weak economic environment and to finance our growth initiatives. Our liquidity remains very strong with the current ratio of 4.0, which compares very well to the S&P 500 average of about 1.0, represents a fundamental strength of the Company. It is a strength of our balance sheet and ability to generate cash under adverse business conditions that differentiates MTI from any other companies during these difficult times. You will note that since 2006 we have been able to increase our cash by nearly $220 million and at the same time reduce our debt by about $90 million.

In summary, the Company recorded earnings of $0.53 per share excluding special items as compared with $0.15 per share in the second quarter. The underlying markets we serve showed some improvement for the last two quarters which enabled us to increase our sales volumes and improve our profitability. We've also been able to realize the anticipated savings from the operations excellence and restructuring programs to the dedicated efforts to all employees throughout the Company. Savings to date are tracking above target, primarily because we have been able to execute our key programs more quickly. As Joe mentioned, the savings in the refractory segment were $2.3 million in the quarter, and in addition, we achieve savings of about another $1 million from the programs within the other business and resource units. We're uncertain about the sustainability of the economic recovery. We continue to take the necessary steps to conserve cash and further reduce costs to maintain our competitiveness. We'll continue to make the necessary adjustments to manage through this effectively. We will continue to focus on our product development and growth initiatives.

For the fourth quarter, we expect refractory segments will improve to a break-even position. Should volumes continue to improve as we begin to experience lower cost raw materials compared to the third quarter and we will attain additional savings from the restructuring program. In performance minerals, we expect a seasonal downturn and commensurate financial performance to around the break-even level. Paper PCC continues to have a consistent performance in this economy due to the nature of supply agreements. However, we are evaluating the recent announcements of potential paper mill closures in Franklin, Virginia, and Plymouth, North Carolina, and expect that both of these events will have a negative impact on our operating performance in 2010 and could result in a future impairment charge.

Now I'll turn it back to Joe for his comments.

Thanks, John. Before we open it up to questions, I'd like to share some additional thought about how the actions we've taken in the past few years have positioned the Company for improved profitability and also talk a little bit about things I touched on earlier about what we're planning to do to get MTI back on to a higher growth track. The restructuring we undertook in the second quarter, which primarily affected the refractories business will provide, as I mentioned, savings of between $16 million and $20 million on an annualized basis and has reduced the break-even point for refractories going forward. Refractories third quarter performance illustrates the benefits of that restructuring and positions that business for higher profitability as the economy continues to recover. As I mentioned earlier, as well, we are now seeing the benefits of our efforts to establish a culture of continuous improvement and safety across all of our of businesses and resource units. We are operating at higher levels of productivity, a higher level of employee involvement, and in a much safer manner throughout MTI. Going forward, we will continue to place emphasis on safety, continuous improvement in expense reduction in all of our operations.

On the growth front, I believe as I mentioned, that our paper PCC business can continue to grow through global satellite investments and potential new product developments. We continue commercial discussions with one paper maker regarding the commercialization of our filler fiber composite. We've run numerous trials with this company and are now on what I call the final stage of development, where we need to run the material out of paper machine for a long period of time to further test product efficacy. This final stage of development will require capital expenditures. It should be noted that the portable facility used to trial the material at the paper maker is now en route to another paper maker in Asia where we will be running filler fiber trials next year. On the acquisition front, we continue to actively look for the kinds of businesses that would fit with our core competencies in mineral and fine particle technology.

I thought it'd be helpful to give you some further perspective on the types of companies that we are looking at and the criteria we are employing. The screening template that we are using to review and evaluate opportunities has the following key element in it. Companies that are anyone minerals based and service markets outside of MTI's core or produce products within our core markets and give MTI access to growth and provide MTI with a more balanced portfolio. We are also looking at companies that are technology based and are of a realistic acquisition size. In terms of integrating an acquisition, I believe that we also are now -- we now have the management discipline developed through our operations excellence initiatives and other changes that we have made to effectively integrate companies and achieve the results we are targeting. Now let's go to questions.

(Operator Instructions). Your first question comes from the line of Jeff Zekauskas from JPMorgan.

Good morning, this is [Silka Cook] for Jeff. How are you?

Good, how are you?

Okay. On the refractory side, in any month of the third quarter, did the business already reach break-even levels to let's say -- was September already a break-even level month?

No. Not quite. We're trending in that direction, but not quite. John, do you want to add to that?

That's correct, Joe. The overall volumes were improving, but no month on its own stood as a positive, a favorable --

Okay. You are looking forward like 2010 or longer term in the Refractories business, so given that you expect break-even levels in the fourth quarter and additional cost savings for 2010, what utilization rates do we have to go back to, to see more normalized profits that we've seen historically? So where do utilization rates would have to go to generate $10 million a quarter and operating profits in the Refractory side again?

Well, we need a little more running room, I think, to fully answer that in terms of getting into the fourth quarter and into the first quarter. But fundamentally, Refractories will been able to reduce its break-even point by about 20% when we complete the restructuring. Right now, they've reduced it about 10%. So as you think about utilization rates that -- if before break-even was closer to 60% or 55% to 60%, right now, break-even starts to occur between 50% and 55%. And at the 20% break-even industry utilizations could be 45% to 50%, and we could break-even. At the top end, you could sort of use that math to extrapolate working backwards from where the industry was. So if the industry was at 90% utilization before in North America, then you'd be looking at potentially higher profitability level, much higher profitability levels than the 80% utilization area. Bill, you want to add to that?

No, I think that's a fair representation. As we've been working in the last quarter to drive the restructuring program, that's certainly the break-even level, of around 55% of utilization and capacity in North America is about right. Clearly when we're done, that's going to put us into a 45% to 50% range. And as indicated by the increase in volume that we've seen between Q2 and Q3, it has certainly helped us drive closer to that in addition, again, to just what we've accomplished through the restructuring. We're only partway there.

So it seems getting how fast things stepped out in fourth quarter 2008 that maybe in the fourth quarter 2010, one could see that level of profitability again of $10 million and a quarter. Or does it seem unlikely?

I wish I could see out that far. It's -- that is a big question mark. It is the rate of improvement. Although it's been pretty good. There are questions right now with regard to the latter part of this quarter and into the first quarter of next year. It clearly is on a better track. The question is, I think, becomes a more broader, economic one for both the US and Europe with regard to the slope of that line to get back to previous levels or close to previous levels.

And if I can ask one question on PCC and then get back into queue. PCC sounds there maybe are two potential mill shutdowns that may pressure volumes in North America. Then there's also the expansion in Brazil and maybe another satellite plant in India that will come on. So will these things upset each other, and so on a going forward basis, is this level of $13 or $15 million in profit for special minerals? Is that sustainable?

Well, the timing of these are obviously not going to be perfect, but we do have a number of opportunities in the hopper, and some are close, some are farther out. Those can change. As you well know. I think there can be some discontinuity. It's not going to be a linear line, but we clearly have our sights set on driving the growth side of the equation to over time offset some of the declines that are occurring, have occurred in North America and to some degree Europe. D.J., do you want to add anything to that?

Just a little more flavor to it. The announcements that we saw in North America may not be the last announcements, but as we look at our business, we do feel that the performance you're seeing right now is sustainable. We're working very hard to shore that up so we have a good, solid platform to grow from. So you're looking at things that offset each other. Maybe a quarter of them might be down, but we think we're building a pretty stable platform, which we can get some growth traction.

That's very helpful, thank you. I'll get back into the queue.

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

Good morning. Going off of Silka's question. You have more machines being idled or in the process of being idled. What is happening with the pricing when you renew the contracts with your existing customers who are going to continue making paper?

'll ask D.J. Monagle to comment further on this. As I touched on in previous calls, depending on the competitive environment at a particular site, you'll have different levels of pricing impact. Normally there is a what I call a typically a normal decrease when a contract is removed after 10 or 15 years. We pretty much experienced that over the years. From there is varies. As I said, depending on the competitive situation around that particular paper mill, that typically will result in lower prices from the previous levels. D.J., maybe you can give us a little more insight to that.

I just further -- to build on to what you said, Joe. It's based on a couple of things, Rosemarie. The Competitive situation is one. We find that investing in these long-term relationships with the partners that we've got at the satellite facility as those plants fully depreciate, we share that in some way or another with the partner that keeps us both competitive and it allows us to establish some long-term supply deals with key raw material suppliers that help us keep up favorable profitability and cash flow from those operations. Yes, in general, the prices go down, but in exchange for that, we get extended periods of a stable cash flow.

Just to clarify the level of competition, are we talking about all of the PCC producers going -- trying to get that business? Are we talking about competitive product with PCC? Could you give us a better feel for what you mean by competitive pressure, and why it is different for one paper mill and another?

Absolutely. Glad to share that with you. The primary competition is alternative PCC. Especially where we're going head to head with some of our older products. And as we're trying to introduce new technologies, that's part of the things that we fight. That's the primary part. Also, as this -- particularly in Europe, as we've seen major drop offs in paper making say in the Nordic region and some other parts of northern Europe, we see an awful lot of GCC capacity that has been freed up and the competition is working hard to try and get those utilization back up on those assets. So the -- there's no new technology out there other than the ones that we're promoting that we see. We're primarily fighting against the PCC a little bit of a fight against GCC and in some cases clay, but it's tradition pigment battles.

That is very helpful. Thanks. If I could move over to new housing. You gave us the 2 million units in 2005. Obviously that high level is most likely the reason why we are in the mess we are in today. So what makes you think that new housing is going to be a lot more than the current -- than let's say half of what it used to be. We may go from 590,000 units to 1 million possibly over the next few years, but we would never reach the 2 million units. If we stick with the 1 million, what kind of profitability can you get to, and have you done enough to operate at the highest level of profitability with half the number of new units being built?

I still think anyone in terms of the management team around the table anticipates a line of sight to 2 million units in the foreseeable future. So we kind of see it in the same way you do. That the real question may be that next doubling or going to the million units, which I think is where your question is. And I think we are -- this is a business that has really over the last two years gone through some very, very difficult restructurings and right sized itself. But has also been, I think at the forefront of deploying our operational excellence initiatives that result in having a quarter where their productivity after having their volumes cut by more than 20%, with a little bit of a volume increase, were able to get back to the prefourth quarter 2008 levels. So it's indicative of what I call very good operating strengths, manufacturing strengths, where the break-even points have been lowered and manufacturing efficiencies have been improved at the same time. So, the future, I think, for this particular business unit bodes very well with some volume increases. They don't necessarily have to be a doubling overnight. But with a little bit of volume increase they have been able to do quite a bit and I expect them to be able to continue on that track. I'm going that ask Doug Mayger, who is the business unit President to comment further on that. Doug?

Rosemarie -- thanks, Joe. We've focused aggressively on expense reduction, all of the continuous improvement programs over the last year, maybe year and a half. It's showing fruit in our operations. This is across the business. So we're excited to see the trends coming out of the basement a little bit. And the plants the way they sit today are well positioned for the future.

One last question if I may. You all had on the restructuring, are you sticking, Joe with the $16 million to $20 million or do you think that number's going to move up as you go?

Right now, we're kind of sticking with that. What is really occurring is we're getting it sooner but the targeted reductions are about the same. To the extent that we can better that, some of that will come through these manufacturing efficiencies that I talked about. But for right now, we feel pretty good about hitting that targeted savings range.

Thank you.

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

Hi, good morning, everyone.

Hi, Steve.

Just a question on the Refractory segment. The improvement sequentially in Refractory products, is it safe to say that that's coming from the 40% or 45% of capacity that's not being utilized and being relined during the downturn?

Being relined? No, I wouldn't describe it that way. Maybe -- could you explain that a little further, Steve?

Sure. I would imagine your Refractory products -- I understand it come under high demand when utilization rates are very high and your technologies and hot creek products are in demand for online spot relining. Then you also have Refractory linings that are used when a furnace is taken down and the Refractory brick is replaced. Utilization rates aren't high enough right now, so I can't imagine there is a big demand for your hot creek, on-the-go relining products. I have to presume that the improvement sequentially is coming from these downed furnaces being relined.

Yes, well, I'd say you're seeing the effects of, the relinings having what I call a dampening effect for -- as we've talked about before for the first several months after a relining. That has occurred, that occurred through the first quarter, second quarter, it occurred in the third quarter, it is continuing to occur. But we continue to be in basic oxygen furnace shops, which is where our higher value added products services are. We continue to go and use the shot creek products there to keep the furnaces running. The number of heats that may be running in a given shift or a given day are less, but the need for our product is still there, not to the degree as to when a steel mill is running flat out but still there nonetheless. So that has been a part of this improvement. And this upswing.

Okay. The nature of the question is to try and understand whether or not there is any pull forward in demand because the industry is operating at lower rates. And the way you're describing it sounds like there is not pull forward.

Yes. I'm looking at Bill Wilkins. We're basically -- he's indicating the same thing. We don't see a full force Bill, would you like to comment on that?

Yes. Couple of things. First, I agree that at the higher operating rates, that's where we get to see the full impact of the -- our shot products and [lip ring] products and so forth. The underlying change that we've seen between Q3 or Q2 and Q3 goes hand in hand with the increase in operating rates in that our business also reinvolves around ongoing gunning maintenance of the furnaces, so it doesn't necessarily mean that the steel companies have to rebrick in order for us to bring in volume. It's an ongoing process. So what we've certainly seen in Q3 is start-ups at BOS that have been idled. And we've gained the benefit of that as we brought back our crews from furloughs. What is happening from Q4 of last year to Q2, steel companies have burned down their inventory significantly where there's almost a built in demand. So I don't think that's any pull forward. Basically, orders are being produced as they see them.

Okay. When you say they have drawn down inventories then, how much of the boost sequentially could be from restocking? Is that a factor?

There's going to be a partial impact of that, of course, but I still believe that there's just volume. If you look at the various companies that we do business with, and also the number of BOS that were taken down in the first part of the year, there is a boost primarily from the fact that these businesses are starting to make steel again are coming back online.

If I could ask one question generally about the gross market improvement sequentially. John, maybe you can answer this. You had a 331 basis point improvement. That equates to $7.7 million. I'm wondering if you could aggregate that into what is reabsorbed overhead, what is coming from restructuring savings, and what's coming from raw material costs.

Okay, Steve. A couple pieces when we tried to break that out for you, the biggest piece is overall about 3 million L throughout the Company from the restructuring program. Another large piece came from the volume increase that we had, and so that has two elements to it. That has the fixed cost piece of that absorption piece, of course. Because you generate extra margin. It's also -- in that category, it's also the benefit of having some higher value products in the case of Refractories and the BLF area. Those are probably the major components of it. Would be the restructuring, the volume, increase.

So if I had to maybe guess, based on your commentary, $3 million from restructuring, maybe another $3 million from the reabsorbed overhead, fixed and variable, and then maybe you got $1.5 million of benefit from lower raw material costs sequentially?

The raw material costs benefit, yes. That's the range. It's primarily in the PCC side of the business. You didn't see all of that. Of course we talked about a productivity gains on both sides of the business. You didn't see as strong an increase as you might have seen from the volume uptick because in the PCC area, we did have some lower raw material costs during the quarter as we seasonally do this time of year. We had the offsetting costs of the expense, the increased trail expense in the area. For example, we had some benefit cost and we had a bad debt in the paper side of the business. The uptick actually contributed more than that and the offset was in the expense.

You mentioned PCC. As far as MGO dropping off next quarter, how many million do you think that helps you in gross margin?

Yes. The potential there, and it depends again on the rate. One of the concerns that we had, as Bill pointed out, is the sustainability of these rates in the steel industry. As you know, it has taking us a lit longer than we anticipated to drive down the high cost material. But the potential there is in the range of $1 to $2 million.

That's great. Thanks for your patience with all of the questions.

(Operator Instructions). You have a follow-up question from Rosemarie Morbelli with Ingalls & Snyder.

Hi again. I should have congratulated you on a very good quarter when I first talked, so I am doing it now.

Rosemarie, thank you very, very much. We appreciate that.

Your inventories came down substantially. Are you satisfied with the new level? Do you think that if the economy continues to pick up at the level, the rate you have seen sequentially, you have to rebuild it? Could you give us a better feel for that?

Yes. To preface my remarks with I'm never satisfied with the inventory levels, they could always be lower, so that's part of our continuous improvement focus of, obviously as the volume increases, we will be using some cash for working capital. Our focus in our businesses is working capital days and reducing over time -- like we've been doing, reducing over time the days required to sustain whatever level of business that we are running at. So the focus and the initiatives in operational excellence are continuing and they're an integral part of the overall process of continuous improvement. I think you need to -- as I look at it in terms of days working capital, there will be continued objectives to reduce further, which again, as I say, should require less as we move up, as volumes move up, should require less cash than it did in the past. To support.

Is the days of working capital, is that the 60 days you mentioned earlier down from --

68. We're at a 68 level. We had been running in the 80s.

Days working capital. And what would be the ultimate number that you would like to reach at one point?

I don't have one. This is continuous improvement. I think in terms of our opportunities it's worth taking a minute and sharing where we see a good part of the opportunity. It does lie in our Refractories business. Our Refractories business accounts for roughly 45% of our working capital, and in part because we have some long lead time supplies that come from China, Latin America, but that particular business unit has more opportunities than let's say our PCC business, which is onsite, typically has what, D.J., two or three days onsite. So as we look at our intake business I think the opportunities are going to be there. The business unit is heavily engaged in both looking at alternative sources of supply that can reduce the length of the supply line, as well as what we can do to improve reliability of our operations, reduce flow time, and get our facilities more insync with the pull that's coming from our steel mills. That over time should help us reduce further. In terms of what that number will be, that's something that, I could say it's going to be less. That doesn't help you very much, but I think for that particular business unit alone, the opportunity is probably in the 10% to 20% reduction range.

That is very helpful. Thank you. As long as we are on the Refractories, if you -- let's say that revenues remain at the third quarter level, can that quarter be profitable ar that particular revenue level once the restructuring is done?

Yes, we can. That's -- as you recall what we set out to do was to restructure in away that we could be profitable at the much lower levels that we were experiencing in the second quarter. So clearly third quarter level should allow us to be profitable once we get through the restructuring. Bill, would you like to be comment on that?

No. I think that that's fair. Fair representation. The month of September, as John pointed out, although no single month was profitable. We have every -- we had all the ingredients for the month of September to be back in the black, but didn't quite make it. But certainly, the volumes that we saw in Q3 particularly ramping up towards September, if those rates are sustainable in Q4, then clearly it would be very, very attainable.

Okay. And on the bad debt, are you satisfied with the reserve level, or do you think that given the environment out there, you will need to add to it on a quarterly basis?

We think we're in very good shape there. We had one bad debt that we recorded from the paper side of the business in the quarter, but our balances are good there. Receivable rates are in very good position right now. So we don't see any increases in that area .

And then if I may ask one last question. Joe, you talked about 160 new ideas. Generally speaking, how many -- you said five are close to going to the marketplace. 30 at the event stage. When you start looking at all of those potential new products, first of all, are they real new products, or are they old products that are being tweaked? And how long -- what is the percentage? Well, two things, what is the percentage that eventually will find their way into the marketplace? How much are they cannibalizing from your old products, and how long does it take to get there?

I use the word rejuvenation. So we're into a bit of a new experience mode. I do know from past experience that it takes moving many ideas into evaluation to get a few. What we're seeing is one of the most critical things is to actually have ideas for when you look at what's required to have a healthy innovation cycle. It starts with having ideas, many ideas. So that's an aspect that we're seeing today that we didn't see a few years ago, but what we're also seeing is that more of those are being moved into -- from a stage one or stage two, which is taking an idea and beginning the preliminary sculpt it, and then determining whether or not it is worth moving into formal development at stage three. We have more ideas in stage three than we've ever had, and many of those we will use the term parking. We will park those. Others we will move forward because we believe they have commercial potential.

So as I say, we're basically in a new arena, a very positive and exciting place to be right now. And the fact we were able to move as many as we did into those later stages is a good sign. The testing and commercialization stages are still yet to come. Some of them are adaptations. Particularly in our Refractories business unit, and PCC we have some of those that are variations, but a number are there right now in the latter stages are quite innovative. Some are old ideas that have been brought forward again that are making their way through. So,basically, what I was trying to convey, it feels better today in terms of where we are than it did when I first came into the Company. 'd ask D.J. Monagle to comment as well. D.J.?

To build on what Joe was saying, Rosemarie, it's a blend. We're trying consciously to keep a blend out there. Joe mentioned earlier we're continuing and trying to get final validation phase of our filler fiber. In baseball terms we call that a home run, and made a we made conscious effort to start looking on some things that can give revenue growth and pops more quickly, so the Brazil expansion would be an example of an old product tweaked with new applications ideas that has given us the growth. But then the other ideas that are in the pipeline, are quite honestly, not all of them are ours, meaning we are licensing or working with industry partners to better apply some products, and then we've got ,of course filler fiber which would be a major transition. We also have elements of the process change that are very different process changes, and I really can't go into the specifics too much but the PCC looks the same. But the process that helps it get this provides more value to the customer, either through lower capital costs or through other benefits of the PCC process. So not trying to be vague, it's a blend of those different things.

That is very helpful. Thank you.

Your next question comes from the line of Richard O'Reilly from Standard & Poors.

HI, good afternoon, gentlemen.

Hi.

Hi. Just a few quick questions. On the processed minerals segment, did you quantify what the profit was for the quarter?

I did. I said processed minerals went from a break-even to about a $700,000 operating income margin on my prepared comments.

Okay. Great, thanks. I don't have the slides but the savings in the Refractories segment, I think you said was $2.3 million for the quarter. Is that an annualized amount? Or is that the absolute for the quarter?

That was the absolute for the quarter.

So you are close to $10 million on an annual rate, then?

Exactly.

That's fine.

We estimate it's about $2.3 million. Our target was $2 million.

Okay. When do you think you're going to hit that $14 million, $15 million target?

We're saying around Q1.

Q1? That early? Okay, fine. And on the mills, you have a plant in India. Is that coming up soon or supposed to come up soon?

Yes. D.J. Monagle, that's one of his units. D.J.?

We expect to be delivering product to the customer in the fourth quarter.

Okay. Then Brazil is early next year. So then those other North America mills, that's sometime early in the year?

The other north American mills are still working through the specifics on. o actually the early indications are that they're spread through the year, and we have to wait for our customers to deliver their specifics to us in the marketplace before I'm in a position to comment with clarity on the reductions. Regarding the Brazil operation, though, yes, we would imagine that it will be delivering product to the customer in the, call it end of the first quarter beginning of the second. We would hope to be up to full utilization of that capacity in 12 plus months.

Great. Thanks a lot, gentlemen.

You have a follow-up question from Steve Schwartz.

Thanks for taking the question over the hour. This one on restructuring. Forgive me if you've said this in the past, but have you talked about the split between savings and cost of sales versus the marketing and administrative?

Yes. We laid that out last quarter, Steve, in our prepared comments as well. And it's about cost of sales would be about 45%.

Okay.

I think we said nearly half and half last time.

Okay. And then, some of it is -- where is your head count at these days? I think when you started restructuring in 2007, you were at about 2.700 employees.

Actually, we were closer to 2,900. Closer to 3,000. 3,000 employees. Today we were at 2,200, let's say.

3,000 to 2,200, okay. And how much of it is sustainable in the recovery versus temporary savings? I think, Joe, you might have mentioned there were some temporary layoffs and so forth.

Yes. The overhead reductions in terms of salary reductions that were made we're viewing as permanent for the most part, but you have to qualify that a little bit. We are continuing to add people to growth areas like Asia. I talked about adding technical resources to the Company where they're needed. So we will selectively add resources as needed as we go forward. But fundamentally, the restructurings that we did in both the first one of 2007 and the follow on, the most recent one were designed to operate at a -- with a much reduced overhead structure. And so the intention is to add selectively and carefully as the economy recovers.

Great, thanks.

We have a follow up from Rosemarie Morbelli.

I promise it will be short.

Okay.

Just looking at the seasonality of the business, 2008 was kind of a freakish year with the fourth quarter way down versus the third, but I was going back to 2004. It looks as though it is more or less the two quarters are very similar. Am I looking at it the right way, or has there been a change in such a way that there is now going to be a seasonality that did not exist, or if the pickup continues, you will do better in Q4 than you did in Q3? Could you give us a little -- somewhat of a feel for what you're expecting in the fourth quarter?

I'll try and then I'll ask others to help. Part of the difficulty we have is the same as everybody else. What is normal, and what is a normal seasonal downturn? So we struggle with that as well. What would be a normal downturn we'd expect to see in the performance minerals business starting in November, or actually starting sometimes late in October in the Northeast. A decline due to weather, seasonality, in terms of building and construction. And so we're anticipating that. In other words, that is a pretty normal thing to happen and will continue to happen in that business unit. In a broader sense, steel is subject to seasonality as you will find auto production will typically be off in December. So it's a question mark, will there be some adjustments made? How will that back up into steel? That would affect us both in Refractories business and performance minerals business. So from our standpoint, we're anticipating some of that occurring. That's why in John's remarks, we shared our thoughts a long those lines with you. John, do you want to add anything to that?

The only thing that I would add, Joe, is that I think in performance minerals because of some of the industries they serve, it is always a downturn in the fourth quarter. In the steel industry, it is most frequent that there is some modest downturn. Paper is the one that goes both ways. Paper is the hardest one to predict. Depending on how the rest of the year was going, and the inventory levels, they sometimes run strong through the holidays because they've already taken the shutdowns in the late summer. Other times they make major adjustments in inventory at year end. I've seen it go both ways and D.J.,you might have a sense of where that is now.

No, I agree. I totally agree with John, that it's difficult to predict.

Do you see a lot of summer shutdowns?

We did.

More than usual?

Yes, we did.

You did. So maybe -- all right. So if we just net all of this, unless something in the demand picture changes a lot, then it looks as though it could be a similar quarter revenue-wise versus Q3. If the paper did all of shutdowns in the summer and they are now going to go ahead and build for the holidays.

Yes. I think it could very well be.

And then based on that, because you are moving further into the restructuring program, and your costs are down on the raw materials side, then bottom line should be higher sequentially.

This is where we're looking at some of the cost reductions to offset as we talk about seasonality that we know is going to happen. We're looking for that to offset some of that. That's why John was basically sharing something that said we're -- our sense is that it's looking flat to us.

Okay.

Net-net.

That is very helpful. Thank you so much. Thank you for taking my call way past the hour.

You're welcome. Take care.

You, too.

There are no further questions.

Thank you for your interest in Minerals Technologies. We're going to sign off now.

Yes, thank you.

This concludes today's conference call. You may now disconnect.