Minerals Technologies Inc (MTX) 2010 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Minerals Technologies Inc. 2010 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A 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 first quarter 2010 earnings conference call which is being broadcast on the company's website, www.MineralsTech.com. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call with an overview of the first quarter results and provide some insight into the company's improved performance.

He will be followed by John Sorel, Senior VP and Chief Financial Officer, who will review our first quarter financial results. After the review of our financial performance Joe will provide some further thoughts on MTI's past forward. Before I begin, I need to remind you on page eight of our 2009 10-K we list the various factors and conditions that may affect future results. Statements made about 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 Joe, and good morning everyone. Last night, we announced earnings of $0.85 per share, a 37% increase over the $0.62 we earned in the fourth quarter. Our sales are up 22% over the first quarter of last year and operating income increased more than 200%. On a sequential basis, operating income increased 38%. We also continued to achieved improved productivity levels through our company-wide efforts to implement lean manufacturing principles and processes. And our cost savings measures have further enabled us to leverage sales.

The restructuring program, we initiated in the second quarter of last year, continues on track to achieve the targeted annualized savings of $16 million to $20 million. And it's helped to reduce the breakeven levels across all of our businesses. Our balance sheet remains strong and we generated $33 million in cash flow from operations, with $25 million in free cash flow.

The refractory segment continued its profit improvement in the first quarter, delivering our most significant operating income increase of $2.6 million, or almost 80% over the fourth quarter. This was driven by the successful execution of the restructuring program and lower raw material costs. The refractories restructuring program, as you recall, has been centered around consolidation and rationalization as well as realigning the business globally. As we move to a more cost-effective business model, we are better aligning and aggregating our key resources around core competencies.

In specialty minerals, the profitability of paper PCC, our most stable product line, increased by 18% due to operating efficiencies and a small volume increase. Our performance minerals business realized the benefits of improvements in the automotive and construction markets, increasing sales by 9% and profitability by 65% on a sequential basis from the fourth quarter. Productivity improvements and cost control continue to play a major part of this business segment's turn around. It should also be noted that of two our businesses, refractories and performance minerals, reflect a turnaround from a loss position in the first quarter of 2009 to the profitability levels you see in the first quarter.

This EPS chart provides a good perspective on the company's performance over the past three years. After we restructured in 2007, we experienced the highest earnings in the company's history, followed by a steep decline as the global recession progressed. As you can see through a combination of quick action to reduce costs through restructuring and workforce adjustments, we were able to return quickly to the solid levels of profitability for the second half of the year. This first quarter further reflects a very solid transition to a higher performance level and we expect our profitability to basically hold at around these levels for the near term.

Our return on capital came in a at 8.1% on an annualized basis in the first quarter and we are back on the higher return track that we were on just prior to the recession. In our last call I said that we continue to see long-term growth in our paper PCC business primarily because of the opportunities in Asia. We thought it would be helpful to provide some additional perspective to you around why we believe that. As you can see from this chart that compares paper consumption per capita for developed and developing countries in relation to their GDP per capita there is significant growth potential for paper consumption.

In Asia, consumption growth typically tracks GDP growth. China has consumption rate of 60 kilograms per person and India has a rate of under 10 kilograms per person. Compared to the US at 260 kilograms and Japan at 240 kilograms as examples. These very large differences provide a clear perspective on the growth opportunities and potential that we see in these two countries as well as southeast Asia.

Printing and writing paper, our major market, has grown at a compound annual rate of around 10% in China and if it continued at this rate the market size will double in seven years. Our PCC volume has grown at a compound annual rate of 23% in China over the last five years and 10% in the overall Asia region. Today we have nine satellite PCC plants there, most recently starting up a satellite in India late last year for Ballarpur Industries.

We've also continued to add both technical and business development personnel to the Asia region over the last three years, and are currently having discussions for new satellite opportunities with over a dozen paper makers there. From a technology standpoint, we've also been more focused and better tuned into the Asian market needs as we are developing product and process variations tailored to their specific market requirements. Overall, our product development pipeline for PCC, as I mentioned in the last call has been rejuvenated.

We continue to advance development of new products and the pipelines actually of each of our business units. And our employees have generated more than 180 ideas since we instituted our new product and process development system in late 2008. These include 150 new ideas in the last year, and 32 in the first quarter of this year. These new ideas for innovation come from not only a broad spectrum of our employees covering a dozen different functions but also from our customers. These ideas are advancing through a stage gate process and now we have 12 in the two final stages of development before commercialization.

The development of our Filler-Fiber material, which would increase fill levels of PCC from around 18% to over 30% in uncoated free sheet paper underwent two trials with a paper company in Asia during the first quarter. At the same time, serious commercialization discussions are progressing, although slower than we would like with the European paper company we trialed the product with in 2009.

In addition to Filler-Fiber, we are also developing new products with other companies that take a chemical additive approach to incremental increase filler loading between 3 percentage points and 5 percentage points. A number of paper companies are interested in this approach and we are close to commercialization with several of them. We are also actively engaged in broadening our metallurgical product sales in China where we see increased penetratoin potential for our core calcium products as Chinese steel makers move up the value-added and quality spectrum for their products and processes.

On the M&A front, we continue to be very actively engaged as we explore and evaluate various opportunities in the minerals area. 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 first 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 primarily on the sequential comparison from the fourth quarter to the first quarter. However, I will also highlight the areas of significant improvement in our performance from the prior year, where we were experiencing a full impact of recession in all of our product lines. I will then turn the call back to Joe for his closing comments and for questions.

We reported EPS of $0.82 which included charges of $0.03 per share related to the early termination of (inaudible) associated with the previously announced closure of two satellite PCC facilities. Our consolidated earnings excluding special items were therefore $0.85, which represents a 37% increase from the $0.62 per share recorded in the fourth quarter, and more than triple the $0.25 we recorded in the first quarter of 2009. The sequential EPS increase of $0.23 per share was driven by a better than expected performance in our refractories segment due to continued improvement in steel industry conditions, higher than expected volumes in process minerals and operational efficiencies in the contractual recovery of raw material costs in paper PCC.

You will note that we have provided reconciliation tables in footnotes two and three of the press release, which detail the effect on our earnings during the reference period of all special items that are comprised primarily of restructuring charges and asset impairment charges. Consolidated sales decreased 1%, or $2.7 million from the fourth quarter, as the stronger dollar had a negative effect on our sales of approximately $4 million, or 2 percentage points.

Paper PCC shipments were up slightly in the first quarter in North America and Europe as those markets remain stable. Process minerals volumes increased 11% sequentially due to improvements in both the construction-related and automotive industries compared to the fourth quarter. Refractory product volumes were also up slightly from the fourth quarter however these higher volumes were offset by lower equipment sales.

With overall stable sales levels we are able to grow operating income by 38% excluding special charges. As I will explain in the business segment reviews, all three major product lines achieved significant income improvements. Productivity continued to improve company-wide through the ongoing effective execution of the restructuring program and our operations excellence initiatives. This will also achieve these higher income performance levels at lower than historical volumes.

Operating income represented 9.4% of sales as compared with 6.7% of sales in the fourth quarter. Year-over-year sales increased 22% while operating income was up 206% and EPS was up 240%. Our balance sheet remains extremely strong. Within the first quarter we generated another $33 million in cash flow from operations and $25 million in free cash flow. At the end of the first quarter, we had more than $335 million in cash and less than $105 million in debt. In summary, our financial results improved significantly due to the decisive actions Joe just outlined and to modest improvements in the end markets we serve.

MTI's consolidated sales for the first quarter were $253.5 million, a 1% or $2.7 million below the $256 million recorded in the fourth quarter, but reflected an increase of 22% or $45 million from the prior year. However, total sales are still about 15% off the pre-recession peak levels. Specialty Minerals sales increased 1% in the first quarter from $172.1 million from $170.3 million in the fourth quarter, and were 20% or $28.5 million higher than the prior year. Foreign exchange had non-favorable impact of sequential sales of approximately $2 million, or 1 percentage point of growth.

Sales of PCC products declined 1% primarily due to currency. Within the PCC product line, paper PCC volumes were about 1% higher than fourth quarter levels with slight gains recorded in North America and Europe and a 6% increase in Asia. Sales in the process minerals product line grew 13% on an 11% volume growth, primarily due to 10% increase in the residential construction activity and a 7% increase in North American car and truck production compared to fourth quarter levels. We expect to see some decline in paper PCC volume during the second quarter due to the impact of the scheduled Franklin and Plymouth satellite shutdowns and the planned maintenance outages at a number of paper mills. The current sales rate for April is slightly below first quarter levels.

In process minerals, sales volumes are currently tracking about 4% above first quarter levels as a result of seasonal improvement in the construction market. Refractories segment sales were $81.4 million, a decline of $4.5 million or 5% from the fourth quarter levels. The unfavorable effect of foreign currency accounted for $2 million, or about 2 percentage points, of the sequential decrease, with the remainder due primarily to lower equipment sales.

Within this segment, refractory product sales decreased $5.9 million or 9% to $62.6 million from $68.5 million in the fourth quarter, while metallurgical product sales increased $1.4 million or 8% to $18.8 million as compared with $17.4 million in the fourth quarter, as the slab casting production volumes are now very near pre-recession levels. North American refractory product volume was up 7% while steel production in North America increased 10.8%. Although the first quarter refractory segment sales were 26% ahead of the prior year, they remain about 25% below pre-recession levels. The April sales volume for the refractory segment is running slightly above first quarter rate.

I'd also like to take a moment to quantity the productivity improvement that Joe and I have been referring to. This slide highlights the extent of the success of the productivity initiatives throughout the company. You can see by the progress made by each of our business units during 2008 as we drove toward record profitability and productivity after restructuring in late 2007. Immediate action by the business unit had mitigated the neglect effect of the recession and allowed to us return quickly to the pre-recession efficiency levels at all business units by the end of 2009. (Inaudible) tons per employee have continued to improve in all product lines through the first quarter of 2010 to levels that are now at or above pre-recession levels.

This next chart reflects the financial results within the specialty minerals segment. In total, segment operating income for the first quarter increased 27% from the fourth quarter excluding special items in both periods. This increase in profitability occurred in both product lines. The PCC product line's operating income increased 15% despite a 1% decline in sales. The increase in profit was primarily due to the contractual recovery of raw material costs in paper PCC during the first quarter. Total PCC product line operating income was 11.9% of sales for the quarter.

Process minerals operating income increased from $0.1 million in the fourth quarter to $1.9 million in the first quarter, due to volume increases of 11%. This performance was better than expected as a result of improving business conditions in the construction markets and an increase of 7% in North American auto production. These represent a strong improvement over the prior year with process minerals product line generated an operating loss of over $2 million on sales that were 32% lower.

Overall segment operating income represented 11.1% of net sales in the first quarter, excluding special items, which is well above the 8.9% of sales achieved in the fourth quarter and a significant improvement over the 7.0 ratio to sales achieved in the prior year. Current indications are that our end markets will remain stable for process minerals and continue to improve slowly through the next quarter. However, paper PCC will be affected by the facilities shutdowns I mentioned. In addition to seasonal maintenance outages at several paper mills.

To provide some additional incite into the current market conditions in the paper industry, I've included these two graphs which show the trend and the uncoated free sheet segment in North America and Europe, our largest market. As you can see the production levels remain stable in this economic environment but are still more than 15% below average pre-recession levels in North America and 10% below in Europe. Sequentially production in this segment was up only 1.3% in North America and down 2.3% in Europe. 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 as demand remains at this level, which could cause further industry rationalization and additional PCC shutdowns.

Housing starts are a good indicator of the expected volumes demand and performance in the process minerals product line. US Housing starts increased 10% in the first quarter to an annualized rate of approximately 617,000 units, compared with 559,000 units in the fourth quarter. Forecasts for 2010 now indicate an average around the 700,000 mark which would provide some opportunity for us in the numerous construction-related markets we serve. However, as you can see from this chart, the latest market revision is about 10% below the December forecast and slow points towards a slower recovery. It's also important to note that the current forecast is far below the 2008 levels.

This chart clearly reflects the effect of an extraordinary volatility of the demand cycle in the US and European steel industry has had on the sales and profitability of the refractory segment. Over the past year and a half we have seen sales fall from a peak of $108 million in the quarter to less than $60 million in the second quarter of 2009, and back to $81 million in the first quarter. At the same time, our operating income went from a record high of $11.6 million to a loss of $7 million, and has now returned to a positive $5.9 million.

Looking back we are pleased to report that the decisive actions we undertook in response to the market were executed quickly, and placed us in a position to benefit from an industry rebound that was faster and at a higher level than we expected. Along with the refractory segment the return to profitability sooner than we anticipated. Although steel production remains well below pre-recession levels in our major markets the current performance levels demonstrate the improved profit capability of our business -- of our business model which has become more flexible with significantly lower breakeven levels.

Operating income excluding special charges of $5.9 million compares to $3.3 million in the fourth quarter, and a loss of $1.9 million in the prior year. The contributing factors to the improvement over the fourth quarter were productivity improvements related to the restructuring program, volume increases, particularly in North America, and lower raw material costs which were partially offset by reduced pricing.

Worldwide, our refractory unit volumes increased slightly from the fourth quarter and were 24% above the prior year. In our largest market, North America's weekly steel product increased during the first quarter by nearly 11% from the fourth quarter levels, and were 63% above the first quarter of 2009, but this is still 23% below the pre-recession levels.

In Europe, steel production increased only 1.9% compared to the fourth quarter and was 35% above the prior year, but are still similar to North America, 22% below pre-recession levels. With the continued effective implementation of the restructuring program and volume improvements, our segment operating income performance was 79% above the fourth quarter. Capacity utilization rates in the US steel industry increased sequentially in the first quarter by 5 percentage points to about 68% from 63% in the fourth quarter of 2009. By comparison, in the first quarter of 2009, the capacity utilization rate was only about 42%.

The sales outlook for the refractories business, although improving, remains uncertain as to the sustainability of the improved operating rate to North America and Europe. The latest utilization forecast for the steel industry (inaudible) production level in the second quarter, similar to the first quarter of 2010 in both markets. With the combination of steady volume and continued productivity improvements, this segment is positioned to achieve further improvement in 2010, but the rate will be driven primarily by industry volume increases as restructuring costs benefits have largely been realized.

We expect the total savings from the refractory segment restructuring to be between $14 million and $16 million on an annualized basis, we are currently at about a $15 million annual rate. The overall head reductions provided about $5 million in annualized savings, while efficiencies in manufacturing and logistics generate another $5 million with the remainder of the improvement derived from the asset write downs in 2009.

We expect to complete the realignment with the North American production operations in the second quarter which will complete this program. The restructuring and refractory business will now allow us effectively compete at lower levels of demand and puts us in a better position to obtain higher levels of profitability as the economy improves. Through this restructuring initiatives along with increased demands, lower material costs, productivity improvement and improved product mix. We have been able to move back to a profitable position on lower volumes and create a stable base for future growth.

The working capital chart reflects our working, or operating working capital trends, as defined by trade accounts receivable, inventories and trade accounts payables. The working capital decreased in the first quarter by approximately $4 million for fourth quarter levels, and since the first quarter 2009 total working capital has been reduced by $45 million, representing a 33% improvement in efficiency as total days of working capital dropped from 86 to 58. The 58 days of working capital represents the lowest point in more than ten years. Compared to the first quarter, 2006, when total sales dollars were at a similar level, working capital has dropped by over $80 million.

Our cash flow from operations was approximately $33 million in the first quarter. Capital (inaudible) for the quarter remains at a relatively low level of $8 million. As Joe pointed out earlier our balance sheet remains very strong, cash position of approximately $336 million, even though the stronger US Dollar reduced translation of (inaudible) by approximately $8 million. You will note that since 2006 we have been able increase our cash by nearly $260 million and reduce our debt by about $100 million.

The strong performance, earnings performance of $0.85 per share is a result of the underlying improvement in our [end] markets combined with continuing execution of the restructuring program. And implementation of a major initiative to improve productivity through our operations excellence program. We have lowered the breakeven levels of each of our business units and have become more flexible as a company, allowing to us react more quickly to market volatility.

During the second quarter we expect our profit levels to be at similar levels to the first quarter. Our paper PCC product line will be affected by the impact of the two announced paper mill closures in North America as well as from temporary maintenance shutdowns that have been planned at several other customer facilities. This is expected to reduce paper PCC sales by as much as 5%.

The process minerals product line should improve slightly from the first quarter levels as current market intelligence indicate a modest seasonal uptick. In our refractories segment we expect some continued improvement in profitability from first quarter levels as steel industry demand continues to improve modestly. But keeping in mind that the major benefits from the restructuring program are essentially realized.

As we look out further we see upward cost pressure on energy, [MGO] and chemical cost as well as uncertainty in the volume forecasts for our primary markets. Now I will turn the call back to Joe for his closing comments and questions.

Thanks John. Before we open it up to questions, I'd like to share additional thoughts on what we've been able to accomplish since the major downturn that occurred in late 2008. In the first quarter of 2009, our performance minerals and refractories business went into loss positions. Both were hard hit by the drop in demand in the steel, construction and automotive sectors, their major end markets. Steel production in the US, for example, dropped by 50%.

In the second quarter we took steps to reduce our breakeven levels to regain our profitability. As John pointed out, the restructuring program which was well executed and done quickly, resulted in savings of nearly $20 million. We initiated a major reduction in our workforce, rapidly streamlined our operations, strategically realigned our resources, and throughout that period worked with our customer base to help them work through the crisis. These efforts have brought us back to a level of performance we had not seen since before the recession. Our return on capital is now tracking at an annualized rate of 8% and we are working to improve that to over 9%.

But what is more important is that while we were dealing with recession crisis issues, and engaged in turning the company around, we also continued to advance the key aspects of our strategy that we articulated and shared with you in 2007 -- technology and innovation, operations excellence, expense reduction and safety. We fully maintained our R&D efforts through the recession and, as I mentioned earlier, as we improved our product development pipeline in all of our businesses, we also added resources to our value-added growth initiatives, particularly in Asia. We also maintained our focus on M&A.

As John discussed, our operations excellence initiative has begun to result in improved productivity throughout the company as we continue to push forward with our continuous improvement deployment initiative and further advance the higher performance culture we are building. Our longer term expense reduction initiatives continue today through the guidance of our expense reduction lead team that has helped to us keep expenses below 2006 levels while we deploy our Oracle ERP in Europe, a key initiative begun last year. Safety continues as the highest priority in the company for our employees and although our first quarter performance was not where we wanted it to be, we are still operating at a much safer level than three year ago.

I share this with to you put both this first quarter and last year into perspective. We are today a stronger company. And even better positioned to capitalize on our growth opportunities and to perform at higher levels as we go forward. Now let's go to questions.

(Operator Instructions) Your first question comes from the line of Rosemarie Morbelli.

Congratulations on the good quarter.

Thank you, Rosemarie.

The interesting thing you have done, and the potential we hope of an economic recovery. I was looking at your profitability and went back to 1998. And I realized that we live in a different world today than it was then. But the paper business had a margin of about 17% to 18% on revenues lower than they are today.

And then on the specialty minerals, it was pretty close to 17% on, given during the several quarters. I was wondering if two years out you think you can go back to these particular levels or the world is such that it would be unrealistic to think so.

Well, Rosemarie, I'd like to -- I think the question is well framed. I'd like to think of it as going forward. The environments for companies today -- the environment is different. And if we, for instance, take paper PCC. There is more competition for us today than we had then.

However, we are -- I'd say as you look at where we are from a competitive standpoint, it's still a very, very strong position. We are still the leader in the industry. But we don't have it to ourselves. And, but what we do have is what I touched on in the call. That we got a bit off track I'd say post the period that you mentioned with regard to product development.

The key to the higher margin levels -- the higher returns levels is going to be through product development, through innovation, through the things that I believe enable those higher percentages back then. Because the offerings of the company in those areas were things that competitors could perhaps not do as well. And so that's part of the challenge we have.

And I think that's part of the challenge that the company, the employees of the company have been stepping up to. And time will tell but that's what we are trying to do. We are focused very hard at differentiating ourselves going forward.

And does that apply to the refractories as well, too?

Well, refractories, I think from a competitive landscape standpoint, I don't know if they have more competitors. They have larger competitors than they had back then because of consolidation with refractories. So it's, again, a different landscape.

Refractories has been able to, I think through the years maintain good competitive footing, particularly in the US through what I call very short cycle product development, being able to respond quickly to customer changes and their needs. And that has been a key differentiator for us. And so, based on where we are today financially, they are healthier and the core product development engine or application, application engine, if -- if you will, is still very strong.

So that arena, the basis for competition has changed and it's a little different in terms of larger competitors and their leveraging capability against us and the fact that we are relatively smaller. But it also allows us sometimes to be faster, more flexible in meeting customer needs. So I say position-wise refractories, I think is in a good position to get back to higher profitability levels with the restructuring, Because what we also did is address the overhead structure for that business which was much too high, which is going to help it.

And if I may ask, that was very helpful, thank you. If I may ask another general question. Given the credit problems in the (inaudible) countries in Europe, are you already seen some sign of weakness or do you think that it will not really affect you that much?

It's a little early to be seeing -- we are not seeing any signs of weakness but I'm looking around the table at the folks here to see if anybody else has seen any. I'm getting shaking of heads. So, no, we are not seeing it yet.

Okay. Thanks, I'll get back in line.

Okay.

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

Good morning, everyone.

Hi, Steve.

John, when you gave an outlook for the various businesses in process minerals you noted that you expected a seasonal uptick first quarter to second quarter. And I'm wondering if it would just, if it's just that or if you also expect some recovery growth in there as well.

It appears to be just seasonal at this time based on the sales reports we are getting and the feedback we are getting from our customers. In each of our markets, we traditionally have an uptick in the second quarter as more paint is produced and the construction-related industries take a bit of a bounce. But we are not seeing anything longer term than that. In fact, there's some question about the sustainability of those levels.

Right. Steve, this is Doug Mayger So it's a seasonal uptick, but as John talks about it. It's hard to get visibility beyond next quarter.

Okay. Okay. And do you get the feeling within construction the demand from that end market is partly restocking or is that, or are they keeping their inventories low and just buying to meet production?

We saw summary stocking activity during the first quarter. The question will be season uptick, some restocking activity during the first quarter. We are cautiously optimistic.

Okay. And then if I could, as my follow up, refer to the refractories segment. You noted in the release shipment of equipment. I'm wondering, and then just based on your commentary this morning. Can you just clarify -- were there missed shipments? Will there be make-up business? Or was that business just soft in the first quarter?

Yes, traditionally, Steve. What we sell a number of units a year maybe in the range of 15 of these units a year, 15 to 20. They never come at an even pace. They tend to be more heavily concentrated in the fourth quarter and I guess that's related to the CapEx of the steel mills. But we typically have a couple in every quarter. In the first quarter we really had none, so that had an impact of several million dollars on the sequential sales rate.

Okay. Just with respect to the Metwire business versus refractory products, would you guys characterize the Metwire business as being more early cycle than the refractory products business?

Yes, Steve, it is. We did see that in terms of the fact that a good part of the wire goes into thin slab casters, thin slab casters recovered earlier than the BOFs. So, yes, that has occurred. Bill, would you like to add anything to that?

Yes, it's just the what we've seen is clearly thin slabs have led BOF and it's predominantly strength in flat role compared to long role, for example. It is pretty much a leader in that respect.

That's great. Thanks for all the color.

Next question, Jeff Zekauskas with JPMorgan.

Good morning, this is Silke Kueck for Jeff, how are you? A couple of questions. On the refractory side, I understand that the restructuring is coming to an end. But given where utilization rates are in the stage which are still in the low 70s , if those utilization rates improve. Could you maintain current margin levels or would that mean that you also have to bring your fixed costs back up and you couldn't sustain the current

No, Silke, basically the restructuring efforts that we are focused on re-alignment and aggregation of resources were done in a way that we expect the changes to be sustainable. That's what we are targeting. That's what we are planning on. So the fixed costs in the business as relates to being able to move to higher levels is not going to change. However, where there are opportunities for growth and higher value-added, such as I described in China, India, we will certainly add resources as we have see chances to improve sales and improve our profitability.

Okay. I guess really what you just said if it turns out that utilization rates stay at current levels or get better. [Despite some] expansion in [offshore] regions, it seems that current levels -- your current margin levels of refractories are sustainable?

Yes, I'd say definitely as volumes are expected to increase slowly we really don't know, no one knows how fast they are going to go up. But at least what we are seeing right now the rate of increase will be slower. But as those volumes do improve then we expect to see some margin improvement as well. Basically leverage those additional sales.

Okay. That's very helpful. Thank you. On the specialty minerals side, and I know a bunch of data was given on the call but maybe I can ask it another way. If I look at special minerals profits which went from approximately $10 million in the first quarter of 2009 to $19 million in the first quarter of 2010, how much of that improvement came from the PCC side versus the process minerals side?

Silke, this is John. They both improved and I'm looking for my data sheet here. You said year-over-year?

Yes.

The total improvement in SMI was $9.2 million of which paper was about -- a third of that. So a big piece came from both the specialty PCC as well as the process minerals had a very large change from that loss position they had at that time. They went from a loss to a positive.

Okay. That's helpful. So on that basis, I understand that may be shorter term there that maybe some challenges on the paper PCC side because there may be some shutdowns, some announced shutdowns and some turnaround. But longer term there are also planned expansions, right? So there is planned expansion Brazil, there are some planned in India, there is a plant that is coming in in 2011 in Wisconsin.

When I look at the profitability of the specialty minerals segment over time, I would think these margins should also improve given that really printing and writing demand is trending upwards and the PCC business really hasn't seen a lot of improvement at this point -- the paper PCC business.

Silke, I think -- as you indicated I think we can expect some discontinuities as we go forward with shutdowns. But from a trend line standpoint for us there should be improvement over time as the growth opportunities come to fruition for us in places like China, India as you mentioned, Brazil. So the longer term revenue and profitability trend line is good. And I would describe it as healthy.

We can enhance that health from the underlying growth that's available in paper albeit as you see -- saw in North America, North America is still down, still relatively flat. But outside of North America and Europe the paper industry is growing very, very strongly on a relative basis. So it's that overall strength combined with what we can do on the product development side that I think is going to, going back to Rosemarie -- Rosemarie's question earlier to help us improve our margins and total profitability over time. DJ, would you like to add something to that?

The only thing that I would add, Joe, is that, Silke, you mentioned an uptick in printing and writing demand. And we are really not seeing that within our customer base right now especially on the uncoated woodfree side. So things are, we would expect -- we would expect that, the short term John had indicated that we've got some satellites that will shut down. And we still see some maintenance elements that are going on. But we would hope that that picks up sometime. But right now we are just not seeing that uptick. And so that's my only bit of caution.

Silke, a question for you. When you said uptick, were you referring to total global?

I was really looking more like North American printing and --

We haven't seen it in North America. That's what John's chart was trying to depict. That it's been relative -- it's down from the pre-recession periods. It's been relatively flat.

Right, especially on the uncoated woodfree side.

It seems like everything is delayed. So can things begin to improve in the third quarter or is that too early?

It's really hard to tell. Really hard to tell. We are, I think we are just going to have to work through this quarter and see how things progress from a going forward standpoint. See if paper starts to turn up a little bit. It's hard to say what's going to happen in the third quarter right now -- for paper.

Okay. If I ,may ask two more questions, maybe to John, what is your free cash flow target for 2010?

Well, we have a cash flow from ops projection around the $ 150 million mark -- $130 million mark. And we are looking at, depending on the number of satellite commitments, opportunities we have, we are looking for capital to be in a range of $50 million to $75 million.

$50 million to $75 million in CapEx and operating cash flow of $130 million?

Right.

Okay. In terms of share repurchases, there's a $75 million, I guess a $75 million share repurchase authorization in place. Have any shares been bought back in the first quarter and if yes, how much? And how quickly do you expect us to conclude given that there's a lot of cash sitting on the balance sheet?

Yes, Silke, I think it's fair to say that we've gotten off to a slow start with the share repurchase program and so at this point in time we haven't repurchased any shares. However, as you know this is -- we take an opportunistic approach with our program. And if you are looking for a gauge what I've indicated is we will continue to take a pretty balanced approach. And if you look at our two previous programs we will probably track along those lines going forward.

Okay. Thanks very much for the information. I'll get back into queue.

Thank you.

Your next question is a follow-up question from the line of Rosemarie Morbelli.

I had the question about the share repurchase as well. And, Joe, can you remind us, though, what you did in the previous -- was it two previous [authorizations]?

Well, we basically, part of the strategy behind the program has been to provide liquidity, provide stability, minimize dilution, and we look for buying out opportunities over time and we've taken a balanced approach. As we look at the cash we do have, we recognize the position -- a strong position. However, we do have good opportunities in our PCC business looking forward from the standpoint of Greenfield satellites.

We also are heavily focused on acquisitions and so that's going to be a part of the use of the cash in the future. Then the other part deals with buying back shares over time. And what we've basically done in the past, I think the $75 million program if John, we did the first one over two years.

We did a number of them over three years and then we were accelerating that rate. And we were on that track of doing about $75 million over a two-year period when the recession hit, we went to the capital conservation strategy. So that one expired over time. We had only executed about $37 million of that last one. And then we issued this new one to go back on that track of $75 million over a couple of years on a discretionary basis.

Thanks, John.

So it sounds, so mostly, at this stage in the game and given the stock price, we will see mostly repurchase to offset dilution from options.

I think that's fair -- again, we don't, we do have a program. We don't disclose what it is. But as we've described it in the past, it's a opportunistic approach to share buyback. And as market conditions change, we will modify our approach to it.

Okay. That is very helpful. Thank you. You mentioned that you are working with some customers on the paper side using chemical approach to increase the sale. Would that be cannibalizing the fiber fill or the Filler-Fibers, or do you think there is room for both of them or will one take over?

We basically are approaching it as and believe there is room, clearly room for both. In terms of where we are aiming it and really trying to do more tailoring than we've actually done in the past to individual customer needs. But I am going to let DJ talk about that a little more.

Rosemarie, we see room for both. We don't know that they would be additive but we do know that there's a place in our portfolio for both approaches. So there's a couple of things that drive that. The first one would be how quickly the paper maker is in a position to execute. So the chemical additives do allow us to pretty quickly get something into place. The Filler-Fiber additive -- part of our challenge in getting this commercialized is getting the proper long-term commitments with the customer. So it just takes us a year to build a Filler-Fiber location for the chemical additives. It's a relatively good quick hit. Their levels of performance are in entire different areas. With the additives we are looking at taking a sheet of paper from say 18% to 21%. But if for Filler-Fiber, we are doubling that. Now, what I don't know is after you get Filler-Fiber on. Does the chemical additive also further extend that, that's what I mean by we are not sure if it's additive. So does it cannibalize was your question. We don't see a cannibalization -- we don't see a cannibalization, we see just a portfolio segmentation opportunities.

Would it be as, I realize that then the percentage of fillers can be an increase of potentially using the Filler-Fiber versus a chemical. But is there also a difference in the capital that needs to be installed at the paper mill in order to use one versus the other? I would guess that they practically have no capital needed for the chemical additive while they may be some substantial amounts needed for the other one, And, therefore, in the end they may all go with the chemical side. Am I wrong in thinking about it this way? What is the difference between need for capital for both of them?

I think you framed it up properly. I think that the chemical additives, the chemical additives need relatively minor capital. And we may have to do some incremental investments on the PCC side to take advantage of what the chemical additives offer.

The Filler-Fiber investment is a substantial investment and you need to think of it as a --if we have a PCC opportunity there, the capital that is associated with that is very similar to just adding another PCC plant. And so that is part of the challenge, part of the market challenge that we have is that the Filler-Fiber performance must be substantially higher than the additive performance in order to justify that long-term commitment. Right now as we look at the [tea-lease] there is still that value in that technology.

Okay. And then still within the paper business, when you are adding satellites in China, in India, in Brazil, is the profitability similar to that of the satellites in North America or in Europe? Or are the way they used to be?

The -- a tough question to answer. The market condition is a little bit different so I would say that that profitability may be slightly reduced and then we have some many of our operations are JV operations as well. So there is some, some different capital equations that go into these opportunities. But it's not unreasonable to think that what you're seeing as far as new growth in Europe and North America, it should be about similar returns.

Okay. And then the last question, if I may. Can you grow the top line, and this is probably for John. Can you grow the topline and keep the SG&A more or less where it is now in dollar terms? Or will you need to bump it up so that not only does it increase in dollar terms but increases as a percent of revenues as well?

Yes, I touched on this a little bit earlier. Let me try to elaborate further. If we think of it this way -- that we made structural changes to basically require less overhead to achieve the same or higher revenue levels than we have in the past.

When, as we think about reducing, we reduced our breakeven point in the company which that basically says it in a different way that we need less overhead. Although part of the breakeven equation is also reduced our variable cost to manufacture. But the areas that will require additional expense are areas such as China infrastructure, China business development, China technology support, those are areas that could take additional expense spending. And even tri -- areas such as trialing for new products and area that we are going to continue to fund in an effective way to achieve higher sales.

So if you think of it as the base, what does it take to run a company of this size? The base overhead, the support services, it's -- it's our challenge is to hold that to current levels. However, we have to be smart to add in the right places in areas that can bring more revenue to the company and we are doing that today.

And add to the degree that, as a percentage of revenues, it stays around that 8.8% of sales that you had in the first quarter?

Well, our own internal challenge we've had as a company is to continue to reduce the percentage. So I hate to say we are going to hold to that level because we keep trying to -- not keep trying. We've been successful in applying the right positive pressure so that we are always looking for better ways to do things, better ways to change our processes to be more efficient.

An example is the ERP that we are putting in Europe right now. It is really designed to improve efficiency of support services. So we are going to continue those things. And I am going to let John elaborate a little further.

First of all, I am just want to point out so everyone is following you that you are just talking the SG&A without R&D, that's why the --

Yes, yes, that is correct.

Just to make sure everyone understands that. And you see that the last couple of quarters have been running, this quarter was 8.8%, before that I think we were 9.1%. But that's significantly below the historical rate that we operated at, even though we were at higher volume, higher sales rate.

So as Joe said the reductions we made are permanent reductions, permanent changes we made in that structure. Most recently the changes that were made in the way that Minteq operates in certain parts of the world was changed -- we think for the model for the long term. So as the volume comes back we should be able to grow the top, not only grow the topline but improve the profitability while maintaining those levels of expenses so the ratio should continue to trend downward. Certainly below the historical rates you look at when you go back into the early part of the 2000s where we were consistently over 10% on that line.

If I could may be just add a dimension to this. So you've heard us talk about operational excellence quite a bit, continuous improvement, [caseins] in terms of which are events designed to move a process to an improved level. We've begun moving operational excellence. We started last year. It's moving into higher gear this year.

Moving into all of the support functions of the company. So the application of the principles of continuous improvement are really going to affect all parts of the company, become more of a natural act of how the company operates in every part of the world and in every function, whether it's finance, legal or manufacturing.

Okay. That is very helpful. Thank you very much.

We have time for one more.

Your next question is a follow up from the line of Steve Schwartz.

Hi, thanks for squeezing in this follow up. If you guys could just discuss the situation with your pricing versus the expected increase in raw materials, tell me if I've got this right or wrong, it sounds like contract escalators based on increases maybe in the middle of last year finally kicked in Q1.

At the same time the cost of material going through inventory in Q1 was down so you had a nice widening of your spread there. So now you expect raw material costs to come up and your next price increases would come through maybe in the third quarter as the six-month escalators kick in?

It varies a little bit by product line, Steve, but I think you got the basic idea. In the fourth quarter of last year, we incurred cost increases from raw material supplies and cases on PCC side of things. And then in the year-end call, we said that we would that the earnings would be depressed a bit in the fourth quarter, recovered in the first quarter and that's exactly the effect you saw.

Now we are looking at the energy cost affecting our raw material supply on that side later in the year. But the major impact of that will be late in this year and the cost side we recover in the following year if that in fact occurs. So would you see a cycle similar to the cycle we had during this path. MGO on the refractory side is a little differently -- it's acting a little different.

As I said in the prepared notes, we had some effect of reduced pricing related now to the lower cost materials to getting to work through the system. And right now we have some indication that those costs will increase going forward. So far there's been very modest and there's typically a cycle refractories business both upward and downward. It took us some time to take full advantage of the reduced price of raw material. Same thing on the upside, it take awhile to work through the longer supply chain and system to pass that through, through the pricing mechanism.

Okay. And -- More of a (inaudible) type approach.

John, when you refer to energy you are talking primarily natural gas? No, a lot of our suppliers are oil-based. Some are coal-based even for long-term time contracts on the supply of raw material to us. So it varies by region. Typically in the US line is proved more by coal and in Europe more by natural gas. It varies by region.

Okay. And when you refer to the expected increases coming in Q2 2010, possibly in Q4 2010 that tells me you have some hedging. Or are you accounting for inventory pass through delays, what is going on there?

It's the time [track] system. What we are not hedging is our contract with the suppliers that -- he has to notify us of the price change. And he can start -- he can begin renegotiating those supply contracts for effect in the fourth quarter.

That gives us time to settle that down for the contract adjustments to go into the first quarter. That will effect year-end pricing. (inaudible)is probably better.

Okay, thank you, John.

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

Thank you.

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