Minerals Technologies Inc (MTX) 2009 Q4 法說會逐字稿

Good morning. My name is Lindsay and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter 2009 Minerals Technologies 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. Mr. Honey, you may begin your conference.

Good morning. I am Rick Honey, Vice President of Investor Relations. Welcome to our fourth-quarter 2009 earnings conference call, which is being broadcast on the Company's website on the Investors page. Joe Muscari, Chairman and Chief Executive Officer will begin today's call with an overview of the fourth-quarter results and an 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 fourth-quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward.

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, everyone. Last night we announced earnings of $0.62 per share excluding special items. That is a 17% increase over the $0.53 we earned in the third quarter.

This quarter was highlighted by increased sales in our PCC and Refractories businesseses and improved productivity across most of our manufacturing facilities. It also marked the Refractories segment's return to profitability, which was the result of the effects of the restructuring program we announced in the second quarter as well as the steadily improving conditions in the steel industry.

Overall, our sales increased 9% over the third quarter and our operating income was up 22%. We also achieved improved productivity levels through our companywide efforts to implement lean manufacturing principles and processes, and our cost savings measures have further leveraged sales.

The restructuring program is on track to achieve the targeted annual savings of $16 million to $20 million and has helped to reduce breakeven levels across all of our businesses.

We continue to have a strong balance sheet, generating $45 million in cash flow from operations, with $36 million in free cash flow. We now have $320 million in cash and our debt-to-capital is a low 12%.

During the last call, we expected the Refractories segment to attain breakeven status after recording a $1.1 million operating loss in the third quarter. This segment, however, showed the strongest gains in the Company, driven by the successful execution of the restructuring program and higher volumes. Volumes increased 15% over the previous quarter and provided increased demand for our higher value-added products.

Since the second quarter of '09, the Refractories business has been consolidating operations and rationalizing some product lines. We are well on the way to realigning the business globally and moving to a more cost-effective business model by better aligning our key resources around core competencies and key strengths that differentiate our business from competitors.

In Specialty Minerals, Paper PCC -- our most stable product line -- continued to show an upward trend, with sales increasing 7% over the third quarter, which is attributable to some improvement in the worldwide paper industry. Our Processed Minerals product line, which returned to profitability in the third quarter after breaking even in the second quarter, faced a seasonal downturn in the construction industry during the fourth quarter. This downturn, however, was less severe than we had anticipated and the product line posted a slight profit.

In the last two and a half years, we've been implementing continuous improvement principles which over the past year have resulted in significant productivity gains. For example, we've seen sales per employee increase from $88,000 per quarter to $118,000 per quarter from the first to the fourth quarter. We've also seen sales tons per employee steadily increase throughout the year across all of our businesses.

Our safety performance continues to improve in 2009, as 2009 was the safest year in the Company's history, with our Refractories segment leading the way. Our lost work day rate was 0.61, which represents 0.61 injuries for 200,000 hours worked and compares to the 2008 rate of 0.94, a 35% improvement. This was a significant accomplishment for all of our employees given the turbulent year that everyone went through.

This earnings per share chart graphically depicts our steady improvement in 2007 and 2008 and the drastic decline that occurred when the economy turned down late in the fourth quarter of 2008. The first two quarters of '09 show the effects of the worldwide recession, when we saw steel production drop by nearly 50%; a paper declined about 20%; and the continued weakness in the construction and automobile markets. The fourth quarter reflects some improvements in those markets, but also the effect of the quick and decisive actions we took in the second quarter to stop the earnings decline.

I believe that we've emerged from 2009 a much stronger, healthier, and more productive Company that is positioned to steadily improve performance.

This graph of our return on capital shows a similar track to our earnings. In 2007 we established a 2010 target of 9% return on capital, which was our cost of capital. As you can see, we were well on track until the recession took its toll. We have now returned to a 6% annualized rate and will continue to strive to drive this higher in 2010.

We expect total savings for the Refractories segment to be between $14 million and $16 million on an annualized basis. And we are on track to achieve that. We had targeted a reduction in the workforce in that segment by approximately 130 employees through a combination of overhead reductions, direct labor, and temporary layoffs. These overhead reductions will realize about $5 million in annualized savings, while efficiencies in manufacturing and logistics will generate another $5 million.

As you can see from the top chart, we are on track to achieve these savings, with the third and fourth quarters coming in slightly ahead of target. The bottom chart shows the drastic decline in our Refractories business from a record operating income level of $11.6 million in the third quarter of '08 to a loss of $7.1 million in the second quarter of '09. This downward trend followed the more than 50% drop in steel production that occurred in North America and Europe.

Restructuring in the Refractories business now allows us to effectively compete at lower levels of demand and puts us in a better position strategically to more quickly attain higher levels of profitability as the economy improves. Through this restructuring initiative, along with increased demand, lower material costs, productivity improvements, and improved product mix, we have been able to move back to a profitable position.

Before I turn it over to John I would like to highlight some of the key growth initiatives that we were able to further advance during the quarter. In India, one of our targeted growth areas, we completed construction and began operation on our new satellite PCC plan to supply PCC to Ballarpur Industries. This facility will be capable of supplying 71,000 tons per year.

We also began the expansion of another satellite facility in Brazil that supplies PCC to a paper mill owned by Suzano. In addition, we announced a few weeks ago an agreement to construct a new satellite plant in Wisconsin that will supply 70,000 tons per year to our paper mill in nearby Duluth, Minnesota, that is owned by NewPage. Resources were also added and further redirected to Asia to support our business development and technical initiatives there.

We continued to advance development (technical difficulty) products in the pipelines of each of our business units. (technical difficulty) past two years since we established a technology lead team comprised of senior scientists and managers from across the Company, along with instituting a new product development process, we have been able to generate more than 190 new ideas, many of which are in various stages of development.

Filler fiber development and trial work has now been moved to Asia while we engage in commercialization discussions with the company in Europe that we trialed with in 2009. In addition, we further advanceed through codevelopments with other companies concepts which target incremental increases in filler loading. Several of these are close to commercialization.

On the M&A front, we continue to engage in exploring and evaluating various opportunities in the minerals area.

So as we concentrated on the near-term performance targets and business needs discussed earlier, we were also able to stay focused on the key initiatives that are vital to our longer-term growth. This is something that we were able to do effectively throughout the year and positions the Company well for the future. 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 fourth quarter. I will highlight the key market and operational elements of our financial results before special charges in each major product line. My comments will focus on a sequential comparison from the third to the fourth quarter as well as to the prior year, which has now become a more relevant comparison as business volumes in our key product lines have returned to similar levels as the fourth quarter of last year. I will then turn the call back to Joe for his closing comments.

Reported earnings per share of $0.22, which included charges of $0.40, related primarily to a pension settlement charge associated with the restructuring program initiated in the second quarter and to an impairment of assets charge for our Franklin, Virginia, PCC satellite due to the announced closure of the host mill at that location.

Our consolidated earnings excluding special items were therefore $0.62, which represents a 17% increase from the $0.53 per share recorded in the third quarter and a 51% increase over the fourth quarter of 2008. The sequential EPS increase of $0.09 per share was driven by (technical difficulty) better than expected recovery in our Refractories segment performance and a successful execution of the restructuring program.

You will note that we have provided reconciliation tables in footnotes 3 and 4 of the press release which detail the effect on our earnings during the reference periods of all special items, which are comprised of restructuring charges, asset impairment charges, and gains from the sale of idle facilities which were previously written down.

Business conditions improved sequentially for our Refractories segment, as steel production in North America and Europe, our largest markets, increased approximately 13% during the fourth quarter. Although paper shipments were down slightly in North America during the fourth quarter, we experienced higher PCC sales volumes in all regions indicating a reduction in the destocking efforts of our customers.

In addition, although we saw a sequential seasonal downturn in our Processed Minerals product line, it was less than expected from a historical perspective, particularly in the construction-related industries. As a result, consolidated sales increased 9% or $21.9 million over the prior quarter and 7% or $16.2 million over the fourth quarter of 2008.

We were able to leverage a sequential 9% sales increase to a 22% improvement in operating income excluding special charges. This favorable leveraging was driven by the return to profitability of the Refractories segment, which experienced higher refractory product demand and a higher level of both metallurgical wire and equipment sales. In addition, productivity improvements have been achieved (technical difficulty) lines through the effective execution of the restructuring program and our operations excellence initiatives, improving our capability to achieve higher income performance at lower volume levels.

Year-over-year operating income was up 84%, while overall sales increased 7% over the prior year.

Our balance sheet remains extremely strong, and in the fourth quarter we generated $45 million in cash flow from operations and $36 million in free cash flow. At the end of the fourth quarter, we had about $320 million in cash and $105 million of debt.

In summary, our financial results improved markedly due to improved production levels in the North American and European steel industries and from the incremental productivity gains we achieved in all product lines through the initiatives we have undertaken to improve each business unit's ability to respond to a weaker economy and more volatile market situation.

MTI's consolidated sales for the fourth quarter were $256.2 million, 9% or $22 million above the $234.3 million recorded in the third quarter and an increase of 7% or $16 million from the prior year. This is the first time since the third quarter of 2008 that our consolidated sales exceeded the year-over-year sales level.

While sales have improved considerably over the past three quarters from the depth of the recession, total sales are still about 15% off the peak levels. Specialty Minerals sales increased 5% in the fourth quarter to $170.3 million from $162.5 million in the third quarter, with a 6% increase in the PCC product line, more than offsetting a 4% seasonal downturn in the Processed Minerals product line.

The favorable effect of foreign currency accounted for about 2 percentage points (technical difficulty) PCC sales increase. Within the PCC product line, Paper PCC volumes were about 5% higher than third-quarter levels, with gains recorded in all regions as worldwide paper industry conditions began to stabilize.

Total Processed Minerals sales volumes decreased 8% from third-quarter levels, with only the talc product line volumes up at about 4%, helped primarily by a 16% increase in North American car and truck production. We expect to see some improvement in this segment during the first quarter as the January sales rate per day for Paper PCC is even with the fourth quarter and Processed Minerals sales are running about 3% above fourth-quarter levels.

Sales in Refractories increased 20% in the fourth quarter following a sequential increase of 20% in the third quarter of 2009. Segment sales were $85.9 million or $14.1 million higher than third-quarter levels and were 7% or $5.7 million higher than the prior year. The favorable effect of foreign currency accounted for about 6 percentage points of the sequential increase.

Within this segment, Refractories product sales increased (technical difficulty) or 21% to (technical difficulty) from $56.8 million in the third quarter. And metallurgical products sales increased 16% to $17.4 million; that's compared with $15 million in the third quarter.

Although we expected to see some improvement in this product line during the fourth quarter, overall volumes were better than expected, with North American Refractory product volume up 12% and European volume up 21%. Even with a 50% improvement in sales over the last two quarters, fourth-quarter sales performance is still 22% below the prerecession levels due to weak industry conditions. The January sales volume for Refractory products in North America, our largest market, is about 1% above the fourth quarter rate; but volumes are presently down slightly in the other regions.

This next chart reflects the financial results within the Specialty Minerals segment. In total, segment operating income for the quarter decreased 4% from the third quarter excluding special items in both periods. This decrease in profitability was related to the seasonal downturn in the Processed Minerals product line. The PCC product line income was flat sequentially, as a 5% increase in volumes and incremental savings from the restructuring program were offset by raw material cost increases in Paper PCC which will not be recovered until the first quarter of 2010, as well as higher-than-expected operating costs at our Adams, Massachusetts, merchant plant and planned incremental filler fiber trial-related cost. Total PCC product line operating income was 10.2% of sales for the quarter.

Processed Minerals operating income drop from $0.7 million in the third quarter to $0.2 million in the fourth quarter due to the seasonal nature of this business. However, this performance was slightly better than expected due to a 16% increase in North American auto production, stronger-than-expected sales in the consumer healthcare market, and slightly better conditions in the construction industry.

These results represent a strong improvement over the prior year, when the Processed Minerals product line generated an operating loss of over $1 million.

Overall segment operating income represented 8.9% of sales in the fourth quarter, excluding special items. Although slightly above the 9.7% of sales ratio achieved in the third quarter of 2009, it is a significant improvement over the 5.3% ratio to sales achieved in the prior year. Current indications are that our end-markets will remain stable and continue to improve slowly, but are expected to operate at volume levels well below prerecession levels for the remainder of 2010 as considerable capacity has been shuttered in the paper industry and there remains considerable uncertainty in the construction and automotive markets.

To provide some additional insight into the current market conditions in the paper industry, I've included these two graphs which show the trend in the uncoated freesheet segment in North America and Europe, our largest markets.

In North America, volume dropped at record double-digit rates during the fourth quarter of 2008 and further declined through the first quarter. After seeing a 4% increase in the third quarter, the current estimates for the fourth quarter indicate a 5% decline in production volume with about a 2% drop in inventory levels. Average production levels remain more than 20% below prerecession levels.

In Europe, the decrease since the last half of last year was not as dramatic, although destocking continued throughout 2009, resulting in additional paper machine downtime. It appears the full effect of the economic crisis arrived later in Europe and caused a gradual decline in production, which leveled off in the fourth quarter. Current operating levels in Europe are about 8% below year-ago levels.

Although the satellite PCC business model, which often includes a volume price adjustment mechanism, affords some measure of ongoing income 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 the expected volume demand and performance in the Processed Minerals product line. US housing starts experienced a 6% decline in the fourth quarter, decreasing to an annualized rate of approximately 555,000 units compared to 591,000 units in the third quarter. However, this is still an improvement over the average annualized rate for 2009, which was only about 550,000 units or about 60% of the full-year 2008 rate. The good news here is that forecasts for 2010 have stabilized around the 700,000 mark, which would provide stability for us in the numerous construction-related markets we serve.

This chart clearly reflects the effect on the sales and profitability of the Refractories segment from the rapid decline of steel production in the United States and Europe that began in the fourth quarter of 2008 and continued through the second quarter of 2009. The downward trend reversed in the third quarter and has continued in a positive direction into the fourth quarter.

As a result, the Refractories segment returned to profitability sooner than we expected. Its operating income excluding special charges was $3.3 million compared to a loss of $1.1 million in the third quarter and a loss of $7.1 million in the second quarter. The contributing factors to the improvement over the third quarter were increased volumes, higher equipment sales in Asia, and productivity improvements related to the restructuring program announced in the second quarter of 2009, as well as other recession management initiatives throughout the business unit.

In our largest markets, US weekly steel production improved during the fourth quarter by 14% from the third-quarter levels and by about 40% from first-half levels. In Europe, steel production increased 12% compared to the third quarter and about 30% compared to the first half.

Our North American sales volumes were 12% ahead of the third quarter, and increased about 30% from the first half. Likewise, our sales volumes in Europe were up in line with steel production, 30% above the first-half rate, 21% above the third quarter.

Worldwide our Refractory product unit volumes increased 16% from the third quarter and 35% versus the second quarter of 2009.

Capacity utilization rates in the United States steel industry increased sequentially from about 45% in the first half to 55% in the third quarter and reached 63% in the fourth-quarter 2009, which compares favorably to the 56% utilization rate in the fourth quarter of 2008. With the effective implementation of the restructuring program and volume improvement, our segment operating income performance more than doubled from the fourth quarter of last year.

The sales outlook for the Refractories business, although improving, remains uncertain as the sustainability of the improved operating rates in North America and Europe still needs to be proven. The latest utilization forecasts for the steel industry seem to point toward a production level in the first quarter similar to the fourth quarter of 2009 in both North America and Europe. We expect MgO cost remain stable for the near-term and we have substantially reduced our inventory of higher priced MgO materials.

With a combination of steady volume demand, stable MgO cost, and continued consolidation of our facilities, this segment is positioned to achieve further improvement in 2010.

This slide highlights the close correlation of our Refractories segment sales and income and performance to the volume trends in the steel industry. The US steel industry in October of 2008 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 third quarter of 2009, steel production volumes begin to increase, reaching a rate of 67 million tons versus a 50 million ton annualized rate achieved during the first six months of the year. During the fourth quarter, volumes again increased to a 78 million ton rate, representing an approximate 12% increase over the fourth quarter of last year but still about 30% below the 2008 prerecession levels.

This segment of our business has made the changes necessary to remain profitable at these lower volume levels and to be able to service the market and achieve a higher level of profitability as volumes increase. Despite the current steel production increase in the United States, our largest market, we remain cautious about the sustainability of this upward trend in demand.

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 fourth quarter by approximately $23 million from the third quarter, driven by a $14 million decrease in accounts receivable and a $10 million decrease in inventory levels. Our receivables decreased in the PCC and Processed Minerals product lines and further inventory reductions were achieved in the Refractories segment to adjust to the current sales levels.

During 2009, our total working capital decreased by $62 million, representing a 33% improvement in efficiency, as total days of working capital dropped from 88 to 59. The 59 days of working capital represents the lowest point in more than 10 years.

Our cash flow from operations was approximately $45 million in the fourth quarter. Capital investment for the quarter remained at a relatively low level of $9 million and included construction costs related to the new facility in India.

As Joe pointed out earlier, our balance sheet remains very strong with a cash position of about $320 million. It is the strength of the balance sheet and our ability to generate cash under adverse business conditions as we experienced in 2009 that differentiates MTI from many other companies during difficult times and positions us well to pursue our internal growth and acquisition strategies. You will note that since 2006 we have been able to increase our cash by nearly $244 million and reduce our debt by about $100 million.

I would also like to take a moment to quantify the productivity improvements that Joe and I have referred to. This chart highlights the sales dollars generated per quarter per employee. Throughout 2007 and 2008 we were on a good track following the third-quarter 2007 restructuring program. We reached record levels of about $110,000 per employee in the second and third quarters of 2008.

As our sales volumes collapsed with the recession, beginning in the fourth quarter of 2008, sales per employee fell to about $96,000 and then to $88,000 in the first quarter as operating volumes continued to tumble. Over the next three quarters, we were able to execute our restructuring program and develop new operating parameters, which allowed us to reach a level of about $119,000 per employee by the fourth quarter.

This slide also highlights the extent of the success of the productivity initiatives throughout the Company. Using a baseline of tons per employees, from early 2007 you can see the progress made by each of our business units during 2008 as the Company drove toward record profitability. Tons per employee averaged 106% by mid-2008 and were on an upward trend prior to the recession.

Immediate action by the business unit has mitigated the negative effect of the recession that began in 2008 and allowed us to return to or exceed the prerecession efficiency levels in all business units by the end of 2009.

For the full year, we recorded sales of $907 million, an 18% decline from the prior year, and operating income excluding especial charges of $44.8 million, a 53% increase from the prior year. As shown in the quarterly performance graph, there was a dramatic difference in our performance between the first and second halves of the year.

From a market perspective, the industries we serve -- paper, steel, and construction -- continued to contract during the first half and began to stabilize and even increase slightly in the second half. From a reporting segment perspective, the differences were equally dramatic.

The Specialty Minerals segment not only maintained profitability throughout the recession, but began to improve performance beginning in the first quarter, a testament to the satellite PCC business model, the effective management of the Processed Minerals operations, and the realignment of the business strategies in 2007.

However, in contrast, the recession drove the Refractories segment into an unprecedented loss position, requiring a reassessment and a realignment of its strategies. As the second quarter restructuring program within Refractories began to take hold in the third quarter, this segment quickly returned to profitability, a major turnaround in just a few months.

By the fourth quarter, MTI's financial performance improved as sales were 7% above the prior year and operating income was up 84% over the prior year. Sales, operating income, and the resulting EPS are all on a positive track, although still far below the record-setting earnings of the first three quarters of 2008.

For the year, we were able to generate $161 million in cash flow from operations and maintain focus on future growth opportunities. For the first quarter of 2010, we see stability returning to our end-markets, with volumes generally expected to be even with or slightly above the fourth-quarter levels.

We expect to further improve profits with the completion of the restructuring program, primarily in the Refractories segment, and through continued productivity improvement and cost control in all businesses. In summary, we are now in a far better position for the future, in contrast to this time last year.

There are some additional highlights for 2009, that I would like to call your attention to as we reflect on the full-year financial performance. We have already covered in some detail the improved safety performance, restructuring, and elements of our operations excellence programs. I think it is also important to recognize as we close out a difficult year that the expense reduction program has made a major contribution to our performance.

The combined SG&A and plant administrative expenses were reduced $21 million year-over-year not only from the reduction in force but also from close control of all categories of spending in the overhead areas. An expense reduction team generated ideas for savings from around the Company that were implemented systemwide.

Our supply-chain organization took an aggressive stance based on a deep understanding of the cost drivers of our suppliers, helping us to quickly reduce our supply chain costs in all of our business units. And while working on these cost and performance initiatives, the Company was able to remain focused on investments for the future such as our Oracle-based ERP system deployment throughout Europe.

We are also pleased that each business unit was able to secure new business in their respective markets and were able to renew a number of our long-term PCC contracts during a difficult market environment. Throughout the year, we employed a cash conservation strategy that reinforced an already strong balance sheet, providing us the flexibility to stay focused on the longer-term opportunities for the Company.

I will conclude here and turn the call back to Joe, who will share with you some additional thoughts on these items during his closing comments. Joe?

Thanks, John. Before we open it up to questions, I would like to share some thoughts about what we've done in the last year to strengthen the Company and, as we've touched on, better position it for the future while actually also continuing to advance the key aspects of our strategy that we developed about two and a half years ago.

When I first came into MTI almost three years ago, we were facing a number of critical challenges that ranged from a product development process that was generally off-track and unfocused, an overhead structure that was too big and costly for the competitive environment we faced, a manufacturing base that was not as efficient and effective as we needed it to be, a work safety environment that was not what we wanted it to be, and return on capital was below our cost of capital, while as you know our profitable growth had stalled.

Amongst these challenges, however, we also saw excellent future potential in the Company's worldwide market positions. Our core competencies, solid values system, and innovative employees.

We embarked as you are aware with all our employees on a mission to address these issues as quickly as we could. We did this by establishing and focusing on the key initiatives that you see in this slide. By the third quarter of 2008 we had achieved good traction in each of these and were on track to achieve the targets we had set for ourselves.

Return on capital, for example, that I mentioned earlier was at an annualized rate of 9.4% in that quarter (technical difficulty) earnings were around $1.00 a share. Then the recession hit us, and we moved quickly to make the adjustments necessary to keep our heads above water and get to the improved position we find ourselves in today.

These adjustments involved major workforce reductions, rapid streamlining of our operations, strategic realignments of resources, and significant changes in our customer support models to help them work through the crisis as well. It is fair to say that everyone in the Company was affected in some way, whether it was a job change, more responsibilities, or simply doing things differently.

Today I would submit to you that we are a healthier and more competitive Company than when the recession started. I say this not just because of the short-term things we did to stay profitable, but because we stayed focused on and continued to implement our longer-term targets and strategies through these key initiatives. We continued to fully support our R&D efforts and actually improved our product development pipeline.

Using PCC as an example, this chart shows our pipeline as of the end of the year. As you can see, we have five development ideas in stages four and five, close to commercialization.

This is what our pipeline looked like in 2007. Clearly, as you can see by the dramatic difference between the two, we have been able to rejuvenate our R&D capability.

On the operational excellence front, we trained and educated more employees in 2009 than in the year prior, conducting over 70-some kaizen learning events throughout the world.

Our longer-term expense reduction initiatives continued as we began deployment of our Oracle ERP in Europe, as John mentioned, during the year. And we continued to support our growth initiatives in BRIC countries by adding and deploying resources.

Our M&A activities, as I noted earlier, continued unabated as we actively looked for the types of businesses that would fit our core competencies in minerals and fine particle technology, companies that are minerals based and service markets either within or outside of our core markets.

On the safety front as you heard earlier, we also clearly stayed at the course of continuous improvement.

I share this with you simply to help try to put this most difficult year into perspective. We stayed the course and never lost sight of where we were going, despite the impediments encountered; and we made some very good progress. Now let's go to questions.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

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

Good, Silke. How are you?

Doing okay. A couple of questions. In PCC, can you remind me how large the various additions are this year? There are 70,000 tons being added in India; 70,000 tons being added in a new plant in Wisconsin; and how large is the expansion in Brazil?

Brazil is what, 8,000 tons?

Closer to 15.

15, I'm sorry. 15,000.

So with this expansion and given that some of the long-term PCC contracts have been renewed in 2009, would you think that the business should continue to grow in 2010, even if it turns out there may be further mill shutdowns?

Well, as I've touched on over the last several calls, we have really over the last two years put a heavy emphasis on what we call the growth regions for paper around the world, which are the BRIC countries. India, China, Southeast Asia, Eastern Europe, Russia, Brazil. So as we look out and look at what the potential is for PCC in those markets, we clearly view this business as a continued growth business for us in spite of the fact that there will be discontinuities occurring in the US and Europe and other parts of the world, but in the more developed parts of the world, through further consolidations and basic trends around paper consumption in those regions.

D.J., do you have anything you would like to add to that?

Well, Silke, we have announced that we will be down with the two locations in Franklin and Plymouth. Those are two US locations. Much of that volume will make its way through our network, but that is net down.

The Suzano expansion will come online at the beginning of the second quarter. And we expect the India operation to be ramping up quite quickly to its full production capacity. Then the Duluth operation that we had announced is more of a 2011 impact on those volumes. So to just frame up those elements for you.

How large are the two plants in Plymouth and Franklin?

About 75,000 at Franklin and maybe another 20,000 that Plymouth is working out. You are in the 75,000 to 90,000 range for the total impact of those.

And I apologize; those were shut down in the fourth quarter or they are going to be shut down early in 2010?

They were announced in the third and fourth quarter of 2009. The most recent projections from the customer -- they ultimately control the timing of this -- would be that both of those operations, two different customers, will cease to produce paper in the early second quarter of 2010.

And on the Refractories side, if it turns out that utilization rates (technical difficulty) improve from this 60% rate or a little bit higher than 60% rate, what else would have to happen that we get back to operating margins that were closer to 7% or 8%, which is what I guess the margins were historically?

Well, we basically positioned ourselves and we are executing and we are well along in terms of the restructuring of the business to allow us to get to higher profit levels and higher margins with lower volumes than we did before. I think the question of when will we get back to prerecession levels, I think that is anyone's guess right now.

What we're seeing is a more steady improvement. We're seeing stabilization. And the market is beginning to be healthier.

So it's a very tough one to answer from a timing standpoint. That is going to have a lot more to do with, obviously, the economic environment here and in Europe with regard to the rate of GDP growth in 2010 and 2011. John, do you want to answer that?

Just outside the market conditions, Silke, which is quite an uncertainty for us as to how that market develops, remember that this is also the area, as Joe pointed out, it is one of his charts, where there is additional restructuring work going on here.

They're still doing some complicated consolidation and rationalization of their mix and their plants. So there is more work to be done here in 2010.

But the fourth-quarter margin of about 3.5% can be driven, one, by the market; two, by the improvements that they are making in the business.

If I can ask a last question on cost savings, when I look at the slides you presented, did I understand it right that you generated cost savings of $2.5 million in the fourth quarter and you expect it to be $3.5 million in the first quarter of 2010?

That's correct.

Yes, that's in the Refractories segment; there were also some savings generated from that restructuring charge in the other parts of the business. So the idea here is we are on track with what we told you, to achieve a 16% to 20% improvement (technical difficulty) million improvement over what we were prerestructuring. So that's working and the major piece is in Refractories which is why we showed that chart.

Okay. What were total savings for the quarter, and expected for the first quarter?

From the restructuring program? Total savings were about $4 million.

Thanks very much. I will get back into queue.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning and congratulations on a great quarter.

Thank you, Rosemarie.

Going back to the Refractories, this major improvement that we saw in the fourth quarter, can you tell by talking to your customers, Joe, as to whether this is inventory buildup or that products are actually going out the door?

Well, I would say based on what (technical difficulty) with our (technical difficulty) the plants that we're in both here and in Europe this is real increased demand. There were some inventory adjustments, obviously, as part of that. But for instance in the US, be higher build rates for autos clearly provided some (technical difficulty) around that.

I think we had some increases in the construction area that provided some pull as well. So a good part of that was real demand.

I think the question is sustainability. That's what I was trying to get at earlier with regard to where will this lead to. Our sense is it should be sustainable. The question of how much the rate of growth or the rate of improvement -- growth is the wrong term -- but the rate of improvement going forward is the bigger question. And that really is tied most directly to further economic improvement going forward.

You talked about what you saw in January. Do you have a feel for outside? I mean, further out? Do your customers give you any indications as to what February and March look like?

You know, relatively stable. It's when you get beyond that that I think most manufacturing companies in the US -- again, you are tied to the same variables of increased consumer spending, which will lead to greater demand pull; and that in turn is tied to the (technical difficulty) tied to the rate of unemployment reduction, as well as fundamental spending in support (technical difficulty) that key industries derive in the areas that they derive their demand from.

So, right now I do see -- we do see that there is more planning going on further than businesses were doing before, but still uncertainty as to -- folks aren't overly bullish, but are feeling better than they were. A lot better than they were feeling, because there is firmer ground. There is a more stable place to work from and so that allows, I think, customers companies to plan a little further out more effectively.

Talking about firmer ground, do you feel that the credit problem in Greece and Portugal will affect what is going on in Western Europe, which is still your second-largest market?

It could. Again the interrelationship as we saw with the recession that we are coming out of, the interrelationship of the financial market to industry and liquidity in the market -- it could.

Okay. If I may ask one last question before getting back in queue, the new satellite in Wisconsin, well it is not a satellite actually. It is a plant, and that is my question. Is that a merchant plant? And why is it not a satellite attached to the paper mill?

Well, it actually -- I am going to let D.J. give a little more flavor behind this, a little more detail. It is, in fact, a dedicated plant; and so from our perspective it's really a satellite. D.J. will explain a little further as to why.

Okay.

Rosemarie, the issue that we have at that particular location is availability of low-cost CO2 gas. So there was no CO2 right next to that paper mill, so we just moved a few miles away and tapped into -- they took advantage of a relationship we have with a lime supplier and have a very low cost CO2 source.

So it's a dedicated plant designed specifically for the needs of the NewPage mill in Duluth, Minnesota, that will include some new technology for us. So for all intents and purposes -- and it has a supply contract lined up with it. For all intents and purposes, you need to think of it -- I think of it as a satellite with a mobile pipeline.

Okay. You said that it will include new technology. Are you using some of the fiber fillers there, or is it something different?

It is something different. It would be one of those faucets that Joe had talked about on our pipeline, but part of the reason why we were able to get this plant and part of the reason why we are pretty excited about it is -- besides the fact that it shows that we can still provide value to North American customers -- it shows that our portfolio is starting to deliver. And it was a key differentiator.

So it's just a different pigment. It has a niche application, and right now this customer is quite intrigued by it. So how much they use of it, we won't know until 2011, but I will attest to you that it was a key differentiator for us getting the contract.

And you can't give us some idea as to what it is all about?

I can. It is a new shape of a PCC. So we call it a [clay-D] PCC. So think of it as having the same basic shape as clay with the brightness of calcium carbonate. It's an expensive pigment but it's one that ultimately brings value to the customer.

Okay. Thanks. I get that I'll back in queue.

Steve Schwartz, First Analysis.

Good morning, everybody. John, did you say that the ForEx impact on PCC products was about 2%?

Of sales, yes.

On sales? Okay.

As you probably know, that has a minor impact on the margin.

Okay. Does that mean that there is a ForEx impact to the Processed Minerals products group? I thought that was all US-based product.

It is. That PCC was the Paper PCC side of the business. There is a ForEx implication for performance minerals only on the merchant operations in the UK which sell PCC into the Continents. So you have pound versus euro exposure there.

But in the scope of the Company that is just one unit.

I see. Okay. Then just on the Refractories product lines, the metallurgical products were up about 16% year-over-year. I think in the release you noted the volume was 22%. It looks like ForEx was positive. So pricing was down on those products?

No, not really. There is a mix component of that that's pretty significant. It depends on the customer demand for our solid core calcium wires versus the composite products that we make.

Okay.

There is a wide variation in price of the different product types that we sell there.

Okay. Then just one last follow-up. John, you went through some statistics for housing and the outlook, and there is possibly a 25-plus-percent year-over-year unit growth if we get to 700,000 units. Then auto builds I think have been forecasted up maybe 10% to 15% in 2010.

Would you expect the demand for your products to move in unison with those growth rates?

Yes, there is a close correlation in the Processed Minerals group between construction and their overall volume. I think construction is around 70% of their demand. Automotive is primarily in talc. There is also a sealant component to it. So those are very important markets and that's where we see the greatest vulnerability, if you will, too.

The forecast is quite positive, but there is a real question about what's really going to happen. The chart I showed shows that the last several months of forecasts have settled out in that 700,000 unit rate for housing. But there is a lot of uncertainty about the sustainability of that, and the market seems to be proving that.

We are still running down in that 550,000 range. But the operations have been well aligned to operate at these lower volumes. And we take advantage of it if it comes, but there is uncertainty about how those markets will develop over the year.

Okay, great. Thanks and again, John, thanks for your detail in your prepared remarks.

Craig Albert, Sheffield Asset Management.

Hi, good morning, everybody. I had a question on that slide 7, the restructuring savings. Could you just clarify how much of the cost savings you got in 2009? And therefore how much is left and therefore incremental in 2010?

Okay. Let me see if I can take you through that, Craig. For the total plan of the second-quarter restructuring, we said there would be a $16 million to 420 million savings when the program was fully implemented. Right now we're at about the $3.5 million mark per quarter for the Refractories side of it. And about another $0.5 million, so a total $4 million for the quarter for the Company as a whole. So at a $16 million rate.

Now since that just started ramping up in the third quarter of this year and accelerating as you saw in that graph on page -- last year, you saw it accelerating into the fourth quarter. I have not turned the calendar page yet to 2010. But that would indicate on a full savings basis there is about $10 million more year over year to achieve.

Okay, great.

And then there was a mention about new contracts and PCC -- or I'm sorry, renewals. Can you give some more color on that? How many of those were there and any more information you can provide on those?

Yes, we will ask D.J. Monagle to give us an overview of that, since he was right in the middle of it and leading it.

So let me give some context on this. As we sit here today, we have probably got 50% of our volume that is wrapped up in contract through 2015. (technical difficulty) we negotiated in the neighborhood of 10 contracts that (technical difficulty) sort of volume that represent about 20% of our business.

And are the contracts -- have the terms changed materially from what you've historically been able to get?

No, I would say that they are pretty consistent in terms of -- we continue the practice of sharing some of the depreciation savings with the customer. So the price goes down, so that continues to be part of the practice that goes on.

There is no set amount. These renewals, most of them were 10 years; there have been some that were 12 years and 15 years. But materially I would say no major changes, meaning that there is some tweaks around the different escalations that bring you into future pricing considerations.

It's still heavily linked to what goes on in the lime world which is heavily linked to what goes on in the energy market. So I would say we just kind of shored up the business a bit and we look to do that same sort of work as we go into 2010.

Great. Then my last question was on the Refractories side. You pretty consistently from 2004 to 2008 earned around $30 million in operating profit. And obviously this past year you lost money in that business. Now in the fourth quarter you are running at a $3.3 million rate.

I just wanted to clarify something that Joe said. Do you expect that with this restructuring plan in place that, were utilization rates to get back up closer to fill, that you would expect to be able to earn more than you've historically earned? Or is this plan designed to get you halfway back to where you used to be, or all the way back where you used to be? I'm just trying to get some context for what this means in the context of your historical performance.

Yes, in context of historical performance, because we have been able to lower the breakeven and it's going to be lowered even further once we complete the restructuring program, that we would be able to earn more than we did in the past if the steel industry in Europe and the US come back to those prerecession levels, which would put you in the second, third quarter of 2008, which were sort of peak levels.

Yes, so would you expect that that sort of $30 million average that you average over five years, would the $16 million to $20 million of restructuring -- I recognize it's not all in Refractories -- be additive to that $30 million number? Or isn't that (technical difficulty) way to look at it?

Well, not necessarily (technical difficulty) because we have other things. I mean, the biggest impact is going to be there, and we did it in a way that it should be sustainable. But as you recall, as part of this restructuring there are parts of the business, particularly in Asia, that we're looking for partners for. There are parts that we are part of a rationalization approach and scheme.

So we're also -- we're going to have mix changes that are going on that will occur. So it's not going to equate out exactly that way. But we should be able to bring a good part of it or keep a good part of it with us as we go forward.

Great, and my last question is, what percent of the restructuring savings is in Refractories?

I'm going to let John give you the exact number, but I would say a good part of it. The restructuring was centered around Refractories; but each of the other two businesses and corporate participated in the process. John, do you have --

It's about 80% of that is in the Refractories side. And the components of it were about half in the reductions we made in the RIF; about a quarter in lower depreciation; and about a quarter in the other efficiency improvements they made throughout the business.

So is it fair to say that of the $16 million to $20 million that 75% of it or maybe $16 million is cash, of the $16 million to $20 million?

Yes, that is why I gave you the breakdown. About 25% of it was depreciation, the rest (multiple speakers).

Okay, great. Thank you, guys. Appreciate it.

Craig, if I could just reinforce, and this came up on the last call and it's implied in my answer. But we've restructured the business in a way that we not only can get back to prerecession levels, but we can go quite beyond it from a manufacturing facility capability standpoint.

Okay. Thank you very much.

Jeff Zekauskas, JPMorgan.

Yes, hi. It's Silke Kueck again, just with some short follow-ups. I think in 2008, total PCC production was something like 3.8 million tons. How much was it in 2009 in terms of tonnage production?

Think it's around 3.4 million, but John will give you the exact number.

Yes, for 2008 was almost 3.9 million -- 3.887 million; '09 was 3.448 million.

And in terms of the five new products that are in stages four or five, does that include a filler fiber product?

Yes, and we had filler fiber -- I know we went through those fast, but yes. Filler fiber is called out on the chart.

Okay.

That is stage five.

Okay. In Asia, the paper companies looking at filler fiber in the Asia region, are those existing customers that you are currently working with? Or those would be new customers?

For filler fiber?

Yes.

Currently the company that I referenced is a current customer.

Okay. The last question I had, in terms of the $16 million to $20 million in savings, since some of those are generated through temporary layoffs, what is the percentage of savings that you will be able to hold onto if you go back to prerecessionary conditions and demand levels return to more normalized levels?

The savings that we quoted really were -- we developed those in a way that they would be sustainable. So they are intended to be permanent reductions.

Okay. Thank you very much.

Rosemarie Morbelli, Ingalls & Snyder.

Could you update us on the calcium carbonate and talc that you are dedicating for biopolymers applications? Getting momentum? What are you seeing in that area?

Sure. I have Doug Mayger here, and Doug will give us an update on that. Please, Doug.

Good morning. So the [in-force file] is about a $5 billion to $10 billion market. We currently have two commercial customers, and we have a number of trials that are currently in process.

Can you give us a feel -- I am assuming that it is (inaudible) $2 million of revenues at this stage. But what do you expect? Which share of that $5 billion to $10 billion market do you think your products could fit into, and what would be your share versus that whole piece? I am assuming that you are not going after the $5 billion to $10 billion market.

Well, it's a small part right now. The customers that we tend to work with right now are small. But I will tell you that the trials that are currently taking place are with some more established companies.

Rosemarie, if I could add, I think you may have touched on this at one point in time. What Doug is and what we have been focused on over the last couple of years, two or three years, is the nonautomotive market.

Automotive offers a whole nother opportunity area, but due to the nature of just where the industry has been for the few last years it has not been conducive to new -- for working this new product development.

But at some point in time, we're going to reopen and begin to engage and dialogue again with some of the automobile manufacturers about applications in that industry. And there the potential is a lot larger.

In all of those categories, you are working with plastic manufacturers?

Yes. That's correct.

And does that imply -- that may be totally off the wall -- but does that apply to coatings as well, or not?

No.

Okay. I was kind of surprised by the gross margin decline Q4 versus Q3. What was behind it? Given the strong volume and so on I would have expected at least a similar margin, as opposed to a sequentially lower one.

Yes, Rosemarie. It's John. If you look at the Specialty Minerals is where you had a decrease, I think about 4%, even though the volumes were up in paper. The reason was that you have that issue where our costs go up for our raw materials in the fourth quarter; and we can't pass that through until the first quarter.

So the seasonal effect of that contract that affects the Specialty Minerals side more than you might expect.

And do you feel that you have the pricing flexibility and you will recover those cost increases fully in Q1? Or should we wait until Q2 to actually see it?

Yes, there is a strong pass-through effect that happens with those. There is a time lag in some of the contracts, but a significant part of it does come back to us in the first quarter.

All right. And another quick question on S&A. 9% of sales, that is a very low level. Is that sustainable?

I would say that -- you are talking about SG&A?

Yes.

Yes, no research in it.

Right, right.

I believe it is. I mean we have -- as you are aware, we have been focusing on overhead reductions now for going on three years. And I believe we will be able to -- now we may have some ups and downs depending on what we do from an acquisition standpoint, but that is our target, that we're going to continue to work towards trying to lower that even further over time. But our target (technical difficulty) that it will be sustainable.

And you are not expecting pension expenses, for example, next year to be a headwind?

No, Rosemarie, we are in very good shape, as you know, with our pension. There is no funding requirement. We are very highly funded in the plan. With the changes we made in the organization with this RIF, we did have the pension settlement, partial settlement; but it is not a headwind for us in that program right now.

Okay. That will do it for me. Thanks very much.

(Operator Instructions)

Maybe one more and that's it. I think we're ready to close the call.

Rick, can I interrupt for a second? Just one of the things while we have everyone on the call, we would like to or I would like to make you aware of. We recently put a brochure together on operations excellence. If you haven't received a copy you could go to our website. It's available to you there, and it would help give a little better perspective of what that really means to us and where we put together a brochure. And yes, the (technical difficulty) walk you through it, and give you an idea of the tools and processes and the things we have been doing over the past two years.

So for those of you who haven't seen it, I would encourage you to take a look at it when you get a chance.

Are there any more questions? Is there one more?

Michael Ellmann, Mayo Capital Partners.

Thanks very much. Could you just update us about your current priorities for cash, since the cash flow has been so impressive this past year?

Appreciate the question, because it gives us an opportunity to talk a little bit about things I touched on as it relates to our strategic growth initiatives. One area of our cash usage will be in our Paper PCC business unit, where we do see good growth opportunities that will have requirements for additional capital.

We recently announced Duluth. We are focused on Asia and other parts of the world heavily. And we expect over the next year or two to get additional contracts that will require additional capital. So part of it is going to go into growth for the Paper PCC business.

Another part of it is going to be available for M&A. I think as we tried to make everyone aware for the last year, we are heavily focused on looking at companies that can help us better position ourselves as a Company by moving into other areas that could perhaps support greater growth but are also (technical difficulty) minerals based and have a technology base to them.

So in terms of cash usage, we are going to continue to take a balanced approach to how we use our cash. We're going to be taking a look at our stock repurchase program again in the coming months and I think continue to stay on the track that we were on historically before the recession hit and try to take a balanced approach to try to maximize return to shareholders.

Thank you.

You're welcome.

That concludes today's call. Thank you for your interest in Minerals Technologies.

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