Minerals Technologies Inc (MTX) 2010 Q2 法說會逐字稿

Good morning, my name is Tashia, and I will be your conference operator. At this time I would like to welcome everyone to second quarter Minerals Technologies, Inc. conference call. All lines have been put on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Rick Honey, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to our second quarter 2010 earnings conference call, which is being broadcast on the Company's website. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call with an overview of the second quarter results and provide some insight into the Company's improved performance. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our second quarter financial results. And then we will open it up to questions.

Before we begin, I need to remind you that on page 8 of our 2009 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. We had a good quarter, and this marks our fourth consecutive quarter of improved financial performance, and it brings us back to the levels of profitability we were achieving in the first three quarters of 2008 before the steep recessionary dropoff. This improved performance is the result of the actions we took a year ago to reduce our break-even level, improve economic conditions in our end markets, and to improve productivity across the Company.

Our operating income increased 15% over the first quarter, and we earned $0.98 per share, excluding special items, compared to $0.85 per share in the previous quarter. This also represents more than five fold improvement over the second quarter 2009 on a continuing operations basis.

Our return on capital for the quarter, 9.2% on an annualized basis, is now about our cost of capital, an objective that we set for ourselves in 2007 when the Company was running at the 6% level. Cash flow from operations for the quarter was more than $40 million, and we repurchased more $10 million of our shares during the quarter.

Our improved performance was led by the Refractories and Performance Minerals businesses. Refractories benefited from improved steel product in all regions, resulting in higher volumes, while performed minerals experienced stronger volumes from improving conditions in the construction and automotive sectors, as well as some increased penetration in those markets.

Our Paper PCC business experienced a 6% drop in sales over the first quarter due to the closure of two paper mills in the first quarter, which we discussed with you on the last call. And we also experienced the impact of temporary paper machine maintenance shutdowns from some of our customers in the second quarter. Should also be noted that all three business units continued to improve productivity as our operational excellence initiative becomes more deeply embedded in our operations.

As I mentioned earlier and which you can see on this quarterly EPS chart, we've come back to pre-recession levels of profitability. The major pieces of the restructuring initiated in the second quarter of '09 are essentially complete, and those actions combined with improved economic conditions yielded the strong results of the second quarter. Should be kept in mind, however, that the Company is still operating about 15% below pre-recession levels, which highlights the fact that we've been able to significantly lower our break-even point as a Company. By maintaining a strong focus on productivity, cost control and new business development, we will be able to effectively leverage continued economic recovery. Recognizing, however, that rates are recovering are currently in question globally, and we are actually seeing some signs of a softening in steel, construction and [summon] automotive that will affect us in the third quarter and which will most likely put us closer to the first quarter levels.

In this chart, we can see a trend line similar to our earnings. We experienced a deep drop during the economic downturn, and since then have been able to move the annualized return on capital rate up to 9.2%, which marks the first time in many years the Company's annualized ROC rate has surpassed its cost of capital, expect for the second and third quarters of 2008.

This returned improvement has been driven by not only improved earnings and more effective capital spending, but also because the Company has become more efficient in managing its working capital. Working capital has gone from typically being in the low 80 days range to now in the low mid 50 days, a30% improvement, which means that we can operate with $70 million less capital employed at the current revenue levels.

I'd like to take just a moment to reflect on the progress we've made during the first half of 2010. I believe we now have a very solid foundation on which to grow. Through the focused efforts of all our employees, we've become a strong operating company with a clear strategic view for global growth. We've lowered our break even levels, improved productivity and are more closely aligned with our customers.

The transformation initiatives that we began in 2007 are now beginning to bear fruit. Our product line is revitalized. Operational excellence and lean are become an integral part of how we conduct business throughout the Company, including staff and support functions. Our employees are more engaged and involved in improvement initiatives through Kaizen events. We've maintained our expenses below 2006 levels. And MTI is now a much safer place to work, with more than a 50% drop in the rate of both reportable and lost work day injuries. We also now have an effective business system in place that we can build upon and which also enables us to effectively integrate acquisitions as we make them.

Let's take a few minutes and look at some of the areas where we believe we can grow this Company. As I said, our new product pipeline continues to be replenished with new ideas that come from both our employees and our customers. And we are close to commercialization with a number of new products. We are working with four different chemical companies and others to improve filler levels by 3 to 5 percentage points without major capital investment. These incremental product technology approaches are gaining momentum, and we believe that commercialization is imminent at several paper making locations. Our filler fiber development continues, as we are still in commercial discussions with one European paper maker, andwe all are continuing trial work with an Asian customer.

As we illustrated in the last call, we see excellent potential for organic growth in our Paper PCC business in Asia and the BRIC countries. Our most recent announcement of the new contract to build another PCC satellite plant in India provides further evidence of our commitment to the Asian region, which I will go into greater detail in a moment. We also see good growth possibilities for our Metallurgical Products in China, having signed a major sales agreement with a Chinese distributor. And as most of you know, we're continuing to seek out and pursue possible acquisitions.

In our last call, we used this chart to outline why we see long-term growth in our Paper PC C business in Asia an the BRIC countries. We compared paper and board per capita for developing countries in relation to their GDP per capita, which shows significant growth potential for paper consumption. We explained that China has a consumption rate of 60 kilograms per capita and India about 9 kilograms per capita compared to the USat 260 and Japan at 240. This provides a perspective on the growth opportunities for paper and potential that we see in these two developing markets as well as Southeast Asia.

Printing and writing paper, our major market, has grown at a compound annual rate of 5% to 7% in China. However, our PCC volume has grown at a compound annual rate of 23% in China over the last five years, and 10% in the Asian region overall. Today we have nine satellite PCC plants there, most recently starting up the satellite in India late last year for Ballarpur Industries, and we will begin construction of the new satellite for Ballarpur in Sewa, which will be over 10. We also have continued to add infrastructure to the region in the form of both technical and business development personnel over the last three years, and today we are in discussions with over a dozen paper makers there for new satellite opportunities.

From a technology standpoint, we've 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. This line basically illustrates the potential for the growth in paper production in Asia and the BRIC countries from a macro standpoint. Now let's take a look inside the box to see why we believe we can further penetrate these markets while increasing the filler rates for PCC.

If we first focus only on the gap between the per capita paper and board consumption in China and India compared with the US, it highlights and frames the potential for paper industry growth and therefore, PCC opportunities in those countries. As you can see, it's an enormous difference.

If we now break that down further into uncoated wood-free paper production along with PCC usage illustrated by this chart, the potential for PCC growth becomes clearer. This chart shows the current baseline of the annual usage of PCC compared to the tons of uncoated wood-free paper produced in India, China and the US. For example, for 2.8 million tons of paper produced in India, 115,000 tons of PCC are used as filler. Only a ratio of 4%. In China, there are 13.7 million tons of paper produced, but PCC is less than 1 million tons, or a ratio of only 7%. Which compares to the US, where 10.7 million tons of paper produced, but where PCC consumption is about 2 million tons, a ratio of 18%.

This depicts another dimension of the opportunity for PCC growth in these markets, where today other filler pigments such as ground calcium carbonate, kaolin clay and chalk are used. These are the types of fillers that MTI has been able to displace with PCC as we grew our business during the '90s, because PCC has proven to have the highest value proposition for modern paper makers.

Here's a closer look at the potential in China. As shown from the previous slide, the baseline of PCC usage per ton of uncoated wood-free paper is 7%. If you estimate the annual growth of the uncoated wood-free paper market using a range of between 4% to 7%, which is in the range of where it's been over the last five years or so, and combined that with an increase of PCC usage per ton of paper produced through greater penetration to between 10% and 14%, you arrive at a potential increase in PCC sales of between 600,000 to 1.9 million tons over the next five years or so. We believe this is a reasonable estimate of the filler PCC opportunity in China for companies like MTI to shoot at,which is why we've been increasing our resources and focus on China over the last three years.

Using the same approach from India, which has a 4% baseline use of PCC, and if we assume a paper growth rate of between 6% and 9%, we estimate potential increase PCC sales of 250,000 to 400,000 tons. This also assumes that PCC usage percentage will increase to the 9% to 11% range.

Organic growth clearly is a key strategy for us, but as I have indicated in earlier calls, we have an active M&A program as well that has been evaluating possible acquisition candidates. I have shared with you some of the screening criteria we use and would like to touch on this subject a little further.

We're basically seeking technology-based minerals businesses that are outside our primary market, such as environmental, energy and consumer products, for example, to balance out some of the cyclicality that we face in paper, steel, construction and automotive. We are -- however, also we are looking at companies that produce value-added products in our core markets. These types of acquisitions would be intended to provide us with a more balanced, higher gross portfolio. Now I'll turn it over to John Sorel who will provide a closer look at our financial performance. John?

Thank you, Joe, and good morning, everyone. I would now like to review with you our consolidated business segment results for the second quarter. I will highlight the key mark and operational elements of our financial results before special items in each major product line, focusing my comments primarily on the sequential comparison from the first quarter to the second quarter of this year. You will recall that the second quarter of last year was the peak of the recession for our customers and a low point of our financial performance. The second quarter of this year represents a return to near record profitability, and therefore, year over year comparisons reflect an extreme swing in financial performance.

We reported earnings per share of $1.01, which include income of $0.03 per share related primarily to settlement of a previously terminated customer contract. Our consolidated earnings, excluding special items, were therefore $0.98, which represents 15% increase from the $0.85 per share recorded in the first quarter, and is more than five times the $0.15 recorded in the second quarter of 2009, when two of our business units were operating at a loss.

The sequential EPS increase of $0.13 was driven by higher than expected demands on all product lines of the Refractory segment, higher than expected sales volumes in the Processed Minerals business and operational efficiencies in all businesses. These gains were partially offset by the expected lower demand in the Paper PCC product line. You will note that we have provided reconciliation tables and footnotes two and three of the press release, which detail the earnings effect of all the special items.

Consolidated sales increased 1% to $2.3 million from the first quarter. The stronger dollar had a negative effect on total sales of approximately $4 million or 2 percentage points. Refractory segment sales were up 8% as volumes increased 6% and Processed Mineral sales increased 10% as volumes there also increased 6% sequentially. PCC sales, however, were down 5% with volumes decreasing 3%, primarily related to the full quarter effect of the announced shutdown two of our satellite facilities earlier in the year and another planned paper mill shutdowns that I mentioned to you during the first quarter call.

With the overall slight increase in sales, we're able to increase operating income by 15%, excluding special items. Profitability improved significantly Company-wide due to the continued success of the Operational Excellence and Expense Control initiatives. When combined with completion of the restructuring program, these initiatives enabled us to achieve higher income performance levels at lower than historical volumes. Operating income represented 10.8% of sales as compared with 9.4% of sales in the first quarter.

As Joe already mentioned, the annualized return on capital for the quarter was 9.2%, which is above our current cost of capital. Year over year sales increased 23% and operating increased 400% to $27.5 million from $5.5 million in 2009.

On February 22nd of this year, the Company's Board of Directors authorized the Company's management to repurchase at its discretion up to $75 million of additional shares over a two-year period. As of July 4th, 204,620 shares have been purchased under this program at an average price of $53.03 per share.

Our balance sheet remains extremely strong, and in the second quarter we generated $42 million in cash flow from operations and $34 million in free cash flow. At the end of the second quarter, we had more than $347 million in cash and approximately $100 million of debt.

In summary, our second quarter results represent a return to near record financial performance, even though sales volumes remain below pre-recession levels on all product lines, and are a clear reflection of management's response to the unprecedented decline in economic activity that we experienced a year ago.

MTI's consolidated sales for the second quarter were $255.8 million, 1% or $2.3 million above the $253.5 million recorded in the first quarter, andreflected an increase of 23% or $47.2 million from the prior year. Should be noted, however, that our total sales are still about 15% off pre-recession peak levels.

Specialty Minerals segment sales decreased 2% in the second quarter to $168.2 million from $172.1 million in the first quarter, and 11% or $16.2 million higher than the prior year. Foreign exchange had an unfavorable impact on sequential sales in this segment of approximately $2 million or two percentage points.

Sales of PCC products declined 5%, primarily due to the planned annual mill maintenance outages, the shutdown of two satellite plants in Franklin, Virginia, and Plymouth, North Carolina, and to impact of foreign exchanged that I mentioned.

Sales in the Processed Minerals product line grew 10% on a 6% volume increase, primarily due to a strong seasonal uptick in the construction market and a 7% increase in North American car an truck production compared to first quarter levels.

Refractory segment sales were $87.6 million an increase of $6.2 million or 8% from first quarter levels. The unfavorable affect of foreign currency accounted for $1.7 million in the segment, or also about 2 percentage points. The overall increase was driven by higher Refractory Product volumes due to improved conditions in the global steel industry, special project work in our non-steel refractory applications business, sales penetration into China in the Metallurgical wire product line, and higher sales of equipment to support our steel mill services.

Within this segment, Refractory product sales increased $5.7 million or 9% to $68.3 million from $62.6 million in the first quarter, while Metallurgical Product sales increased $0.5 million or 3% to $19.3 million, as compared with $18.8 million in the first quarter. North America Refractory Product volume was up 10%, while steel production in North America increased 7%. Although second quarter Refractory segment sales were 55% ahead of the prior year, they still remained about 21% below pre-recession levels.

Although we expect to see some modest increase in Paper PCC volumes than the third quarter, due to fewer planned maintenance outages, we're not seeing any significant increase in demand in the uncoated wood sector, our primary market. In fact, the current sales rate for July is running slightly below second quarter levels. We have some -- seen some increased demand in the coated and groundwood sectors, which is a positive, but not significant to our performance outlook.

And Processed Minerals, we would normally expect to see slightly lower seasonal sales volumes, as indicated by this chart, and sales are currently tracking 5% below second quarter levels. The major third quarter difference we see at this time is in Refractory segment, where we also expect sales for the third quarter to be below second quarter levels. Global steel utilization rates have been tracking downward for the past few months, going from 83.4% in April to 80.6% in June.

In North America, our largest market, US steel capacity utilization rates peaked at 74.8% in mid-June and are running approximately 4.5% lower at approximately 71% opinion utilization in late July. In addition, we will now realize the same level of special project work in our non-steel application business in the third quarter as we did in the second quarter. The July sales rate for Refractory segment is now running approximately 7% below the second quarter rate.

I'd like to take a moment here to quantify the productivity improvements that Joe and I have been referring to. This slide highlights the extent of the success of the productivity initiatives throughout the Company on a sales dollar per employee basis. You can see the progress made by the Company during 2008 as we drove to a record profitability and productivity after restructuring in late 2007. Immediate action by the business unit has mitigated the negative effect of the recession and allowed us to return quickly to the pre-recession efficiency levels and in business units by the end of 2009. Although sales per employee leveled off in the second quarter due to the shutdown of two satellite plants and other planned paper mill shutdowns, sales per employee continue to run at historical high levels and remain above pre-recession levels.

This slide highlights the extent of the success of the productivity initiatives throughout the Company on a sales per ton -- sales-ton per employee basis. You can see the progress made by each of our business units in 2009 as our Operational Excellence program and lean culture are achieving considerable results. Most notably is the improvement of Performance Minerals, where productivity rates improved 40% from the 2007 levels. All product lines have continued to improve to the second quarter of 2010 to levels that are now at or above pre-recession levels.

Next chart reflects the financial results within the Specialty Minerals segment. In total, segment operating income for the second quarter decreased 1% from the first quarter, excluding special items in both periods. This decrease in profitability was driven by a decline in PCC product line volumes due to the full quarter impact of the shutdown of two satellites and the planned maintenance shutdowns of various paper mills during the quarter. The PCC product lines operating income decreased $1.6 million, or 9%, on a 5% decline in sales. Total PCC product line operating income was 11.4% of sales for the quarter, as compared with 11.9% of sales in the first quarter.

On the positive side, Processed Minerals operating income increased $1.4 million sequentially, or 72%, on a 10% increase in revenue and a 6% increase in unit volumes. This performance was better than expected as a result of improved business conditions and a stronger than expected seasonal uptick in the North American construction and automotive industries. Operating income in the Processed Minerals product line was $3.3 million in the second quarter compared to a slight loss last year on incremental sales of $5.5 million. The strong income contribution from the incremental sales line was bolstered by the productivity gains I mentioned earlier. Processed Minerals achieved an 11.1% operating ratio for the second quarter.

Overall segment operating income represented 11.3% of net sales in the second quarter, excluding special items, which is slightly above the 11.1% achieved in the first quarter and a significant improvement over the 8.7% ratio to sales achieved in the prior year.

Current indications are that our end markets will be stable through the next quarter. However, new housing starts, which are a good indicator of how the Processed Minerals business will trend, have been slowing somewhat, as June was 5% lower than May and the second quarter was 2% lower than the first quarter. In addition, our sales for the construction industry are highly seasonal, andas you saw on the earlier sales chart, the second quarter is historically the high point for our sales volume. And severalof our customers are now planning outages to adjust inventory levels.

Paper PCC should see a modest increase in volumes with fewer maintenance outages than the second quarter, but profitability will be affected by planned trials related to new product development with customers in both Asia and Europe. Therefore, we expect that our income for the full segment could decrease up to 10% from current levels during the third quarter.

To provide some additional insight into the current market conditions in the paper industry, I have included these two graphs which show the uncoated freesheet segment in North America and Europe, our largest markets. As you can see, production levels remain stable in this economic environment, but are still more than 15% below average pre-recession levels in north America and about 10% below in Europe.

This chart reflects the turnaround story in the Refractory segments over the last four quarters. The segment has gone from operating loss of over $7 million last year to a positive $9.6 million, and operating ratio of 11%. This performance is a result of the restructuring program and new management structure implemented in the second quarter of 2009, combined with steady improvements in global steel production, especially in North America and Europe, which allowed us to record each improvement in each sequential quarter.

Over the past year we have seen sales increase from a low point of $57 million in the second quarter of 2009 to $87 million in the second quarter of 2010 or 55%. Although steel production remain more than 15% below pre-recession levels in our major markets, the current performance levels demonstrate the improved profit capability of our business model, which has become more flexible with a significantly lowered cost structure.

Operating income, excluding special charges, of $9.6 million compares to $5.9 million in the first quarter, or an increase of 63%. The contributing factors to the improvement over the first quarter were volume increases in our Refractory products with steel applications, some project work in our Refractory products for non-steel applications, and some initial penetration into China with our Metallurgical wire business, which more than offset higher raw material costs in North America and Asia.

Worldwide, our Refractory product unit volumes increased 06% from the first quarter and were 44% above the second quarter of 2009. Our largest markets, US steel production improved 8% sequentially and were 65% in the second quarter of 2009. However, this production level is still 16% below pre-recession levels. In Europe, steel production increased 10.8% compared to the first quarter and was 46% above the prior year, but is -- still similar to the US -- 13% below pre-recession levels. Capacity utilization rates in the United States steel industry increased sequentially in the second quarter by 5 percentage points to about 73% from 68% in the first quarter of 2010. By comparison, in the second quarter of 2009, the capacity utilization rate was only about 45%.

The sales outlook for the Refractories business remains uncertain as to the sustainability of the improved operating rates of North America and Europe that were attained in the second quarter. In the last couple of months steel prices have decreased, demand has stalled and raw material costs are beginning to increase. As a result, the short-term prospects for steel are not positive. With the combination of an expected slowdown in global steel production, reduced contribution from the special project work and non-steel applications and higher raw material costs, we expect profitability in this segment to be down around 10% in the third quarter.

This slide reflects the current situation in the US steel industry. After a thoroughly steady increase in production from May of 2009 through May of 2010, the industry is experiencing a slight decline during the last several weeks, and a number of extended mill outages are now planned. This contributes to the uncertainty in our forecast for the rest of the year. Global steel utilization rates have decreased from 83.4% in April to 82% in May, and down to 80.6% in June. In the first three weeks of July, US steel production dropped approximately 3% from June production levels.

It is worth repeating here that this segment of our business has done an outstanding job of restructuring the business model to reduce its break-even levels and remain profitable at lower levels, and is well positioned to achieve a higher level of profitability as volumes increase over time.

The working capital chart reflects our operating working capital trends, as defined by trade accounts receivable, inventories and trade accounts payable. Total working capital increased the second quarter by approximately $2 million from first quarter levels. But since the fourth quarter of 2008 total working capital has been reduced by $65 million, representing a 39% improvement in efficiency, as total days of working capital dropped from 88 to 54. 54 days of working capital represents the lowest point many more than ten years. You can also see from this chart that the continued reduction of inventory has driven the overall improvement in working capital. Total inventory peaked at $141 million in the fourth quarter of 2008 and is now at $81 million, for an improvement of 43%.

Our cash flow from operations was approximately $42 million in the second quarter. Capital investment for the quarter remained at a relatively low level of $8 million. As Joe pointed out earlier, our balance sheet remains very strong with the cash position of approximately $347 million, even though the stronger US dollar reduced translation of our international cash holdings by approximately $18 million, and we repurchased $10 million of our shares. You will note that since 2006 we've been able to increase our cash by over $270 million and reduce our debt by about $100 million.

The strong earnings performance of $0.98 is a result in the underlying improvement in our end markets, especially steel, construction and automotive, combined with the completion a restructuring program and successful execution of our major initiatives to improve productivity and reduce expenses. We are lowered the cost structures of each of our business units and have become more flexible as a Company, allowing us to react more quickly to market demand. Strong performances in our Refractories and Processed Minerals businesses more than offset the decline we experience in our PCC product line due to the paper mill shutdowns.

Our Paper PCC product line is expected to increase volumes slightly, with fewer maintenance shutdowns incurred in the second quarter. However, we expect to incur higher R&D and file costs related to newer product development that will offset the benefit of the higher volumes. The Processed Minerals product line is expected to decline due to the normal seasonalization from the second quarterto the third quarter, andbecause of temporary outages at several customers.

In our Refractory segment we expect about a 10% income decline, as global steel production is trending downward. In addition we do not expect to have the special project work on our non-steel applications that we experience in the second quarter. We're beginning to see some cost pressure on MgO.

The current results show that we are now a more stable, high-performing Company, capable of achieving strong results in this economic environment, even though our end markets remain reduced. I have describe the market trends as we see them for the third quarter, but you should all keep in mind that the fourth quarter is traditionally the weakest in our end markets. Now let's open it up for questions.

(Operator Instructions). Your first question comes from the Torin Eastburn with CJS Securities.

Good morning.

Good morning.

My first question is about cost reductions you achieved this quarter. Your revenues were basically the same as they were in the first quarter, but your margin improvement was pretty meaningful. Can you quantify or give us any detail on how much of the margin improvement was due to cost reductions that were under your control as to maybe changes in mix or changes in raw material costs, et cetera?

This is John. I'll start off here. The mixed changes, the volumes of the mix were the major contributor to the overall increase. We were able to leverage that out. The fact that all of our business units have increased their production margin and we've been able to hold expenses means we've been able to move all of that incremental income directly to the operating income line. So it's a control -- continued control of expenses as volumes increase, allowing us to move all the margin right down to the income level.

The restructuring was essentially done in the prior quarter, sothat made a minor contribution. The rest of the performance came from the efficiency improvements all the business are incurring. By far it's a combination of the volume drivers and somewhat the mix.

Okay. All in your 10-Q you usually provide the change in production margin by segment. Is that something you have in front of you now and can provide?

I don't have it in front of me, but it will be in the Q. Yes.

Okay. And when do you expect to --

And I tried in the percentages I gave you here to give you a sense of that by product line. So you see thePCC was down slightly. I think I said $1.3 million. Processed Minerals was up strongly, offset -- essentially offsetting that decline.

Okay The R&D spending -- sorry, go ahead?

[Sorry, most] -- the largest part, of course, was in the Refractory. Most of the growth you will see in the Refractory segment.

Okay.

That's essentially how it breaks down.

And the R&D and planned trial spending that will increase in Q3, can you quantify that?

You'll see that in the press release table, we show that research and development was up over the prior year about $600,000 and essentially level, within $100,000 of the first quarter. And so we're expecting it will be slightly higher than that going into the third quarter. Not a major impact, but in the $100,000 range.

Okay. And I guess last question, is there any update you can provide on how your negotiations are going with Filler Fiber?

There really hasn't been that much change since the last call. There has been some further discussion, but nothing significant that we can report on at this point and time.

Okay. Thank you.

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

Good morning, all and congratulations on a great quarter.

Good morning, Rosemarie, and thank you.

Following up on the filler fiber, can you fill us up to date on what is happening with the chemical process PCC that is going to make it easier than the filler fiber, if I understood properly, in order to increase the content on the paper?

Sure. It's tracking very well. DJ Monagle is here. I'll ask him to comment on that, please, DJ?

Rosemarie, we continue to pursue several different avenues of these approaches. I would say that commercialization of at least one of these approaches is imminent. So -- and we're running several trials. So I would say that over the next quarter we're trialing this -- these different processes at probably four-plus locations. And I am sure that one of them will be commercialized.

Do you have a feel as to whether you would, by the end of this year, you actually would have -- I don't know, I am pulling a number out of a hat here, but -- $10 million, $20 million revenues, or is that -- from that chemical process, are you that wildly optimistic?

I would think that that is wildly optimistic. I don't know how to quantify wildly, but I would say that is an optimistic number. We will be able to recognize a revenue and profit contribution this year, and then -- but honing in on exactly how much you would see is something I'm just not prepared to do at this time.

Okay. When you say this year, you between now an the end of 2010?

Yes.

Okay. And on the Refractory side, MgO costs are going up while demand is coming down and production rates are coming down. Could you give us a feel as to what is behind that?

Yes. Fundamentally, where it has tightened up is China, and China has tightened up on its export licenses for MgO, so it's made less available, which has the effect of driving prices up. We've obviously been working at, over the last year an a half, on developing alternative sources to China, but we still buy material from China. And you also have, Rosemarie, a tendency of suppliers outside of China to follow to a certain degree the pricing lead that comes out of China. So there's been tightening in the market. I would describe it as probably more synthetic tightening than normal supply and demand tighteningBill Wilkins would you like to comment on some of the things you're doing develop alternative sources?

Yes. Thanks, Joe. Working our supply chain disciplines is an everyday occurrence across the business. Clearly the Refractory business over the years really used China as a single source for max supply, and ultimately over the last two to three years we've been working towards diversifying across multiple country sources. And that is our aim. It's part of our charge to do that. I think it is fair to say that the price increases coming out of China are, for the most part, synthetically driven. I think that the pricing will likely come down if there's a continuation of depressed demand out there. Question is on timing. It's difficult to say as to when pricing is likely to come down. But we're trying to mitigate as much as we can through alternate sourcing, particularly our Turkish operation as well.

Right. I was going to ask you if -- I seem to recall that you had acquired a company in Turkey in order to get some MgO from there. Are things improving there? Are you satisfied with volume coming out of that facility?

Well, from a continuous improvement perspective, I think it's fair to say that we should never be satisfied with our level of performance. We're driving forward with a lot of different lean activities. But this year in particular, the Turkish operation has been supplying more and more [mag] to our EU 27 operation, in addition to sustaining domestic markets in Turkey. So we are seeing success in that particular strategy that we've deployed.

What is a percentage of your total use that you are getting out of Turkey?

As a global percentage?

Yes. Just getting a feel as to -- or we can look at the Chinese percentage, the percentage of what is coming out of China, just to get a feel of the impact of both.

What I would say to you is this, Rosemarie. Is that if we looked at the contribution that our Turkish operation brings to our overall supply chain, we're about 20% vertically integrated through our Turkish operation.

All right. And if I may ask one last follow-up question. As MgO is going up and demand is coming down, what is happening to your selling prices? Are you under pressure to lower your prices, or are you able to maintain them?

Well, I think we would need to look at customer contract by contract, because terms and conditions are going to vary globally. But where we have opportunity to increase price we do so. But clearly there are some contracts where we have obligations to maintain pricing at current levels. So again, we'll need to look at that key customer by key customer.

I'd say if I could add, Rosemarie, that basically what we're seeing is stability in the pricing right now. As Bill indicates, that could change. But it is relatively stable. Agree, Bill?

Yes. Very much so.

Okay. Thanks.

Thank you. Your next question comes from the line of Jeff Zekauskas with JP Morgan.

Hi, good morning.

Good morning, Jeff.

The improvement in the gross margin was pretty remarkable, in that cost of goods sold was up about 14% and your revenues were up about 23%. So I would imagine that there must be some raw material drop of some magnitude in those numbers. So how did you do that? How did you get the revenues to go up $50 million and costs of goods sold $25 million?

Well, Jeff, I'm glad you noticed. Let me start this off, and then I'm gonna give it to John. He can give a little more granularity to my comments. It's part of what I was trying to convey in my opening comments. This quarter was very much a coming together of all the things we've been working on. It was the restructuring we did, but it's a lot more than that. The restructuring was to get ourselves set right from the foundation standpoint. But we have continued through the depths of the recession to maintain our focus on continuous improvement, on deploying our Operational Excellence initiatives and maintaining our expense control, making good value decisions. And what you're seeing is all of these things come together and reflective of a more disciplined organization, and moving to a higher performance level. So it really was a coming together of many of the things that we've been focused on. John, you want to add to that?

Yes. Getting into the numbers a little deeper, Jeff, you see that what also helped bring this to the bottom line was the fact that our expenses last year were about 13% of sales, and now they're 10.8%. Sequentially we've made improvements. Year over year it's a strong improvement. A lot of that came from the restructuring effort that we did beginning at the end of 2008. Now that phased in over the first half of last year, but now they have essentially completed that. And so you're seeing -- on the year over year basis you're seeing the benefit of a substantial portion of that. Even though they're still doing some final work to consolidate the facility's Refractories systems.

So Refractories is a huge turnaround story, andthe volume, the benefits that they've been able to bring to the bottom line Performance Minerals is truly remarkable. So through the whole period of instability, we had the stability of half of our sales from the PCC product line. So that was able to carry it. That contract method basis was able to carry us through that phase. And then with the OE and lean initiatives that we have in the Company, everyone has been able to leverage up their performance. And with a little volume coming back, taking into account the restructuring, it brings all the way to the bottom line.

So if you guys have a raw material index for everything you buy, how much did the index change year over year in the second quarter?

Well, again though, part of the -- what you have to keep in mine is the line, year over year the raw material on half of the business is essentially neutral, because the contracts called for that. As long as you're in a moderate growth rate, you pass them through. The major changes come in North America here in the fourth quarter, and then you pass them through in the first quarter. So if you look year over year, it's not the major difference. In Refractories, they've been able to diversify their sourcing event, and prices from the Chinese material have actually gone down a little bit on the Refractories side year over year.

Okay.

But I would say overall the picture of the story is not about raw material. It's really about the sales and the productivity. And of course the ramp-up of the restructuring.

Jeff, if I could add maybe just a little bit more around. When we talk about Operational Excellence, productivity, to frame this, in 2009 we conducted approximately 70 Kaizens around the globe. And Kaizens are an integral part of the OE initiative, where they're very focused -- targeted attempts that involve groups of employees at improving a specific operation or process.

So if you can picture in '09 we were able to conduct around 70 of these, this year we will be over 170. And -- so we've been able to not on maintain it, but we've increased it. And this is having a two-fold effect. It's increasing the learning and deployment of Operational Excellence while at the same time bring improvements. Because some of the improvements coming from these activities are very, very significant. When you look at Q2 2010 versus Q2 '09, you're looking at an overall improvement that's in the 15% to 18% to 20% range.

Thanks. That's helpful. If I can just continue a little bit. You spend $16 million on CapEx in the first half. What do you expect to spend in the second half, and do you have any view for next year?

Yes. We're expecting to spend approximately for the whole year -- and it's a wide range because we have some things that, from a project standpoint, new business standpoint, potentially could still hit. We're all looking at the possibility of some acceleration. But we could be for the year in the $45 million to potentially $60 million range. But I'd say $45 million to $55 million.

So in order to do that, you'd have to spend $35 million in the second half.

Right.

That seems like a lot.

It is a little on the high side, but like I said, it relates to some things that still may hit for us. That will move us. So that will be a good thing.

Is that -- are these things that might hit on the Paper side?

Yes.

Okay.

And we also -- by the way, we have -- there are a few projects on the equipment side for Minteq that could hit as well.

So I think your employee count is 2173 as of the end of the year.

Yes.

Will that change very much by the end of 2010? And what will happen -- I mean, you held your SG&A costs pretty flat. How might that change over time?

I wouldn't, at least based on what we're seeing right now, I wouldn't expect that to change significantly. We are -- the areas we are adding that we've talked about before, are in the Asian region to support the business development efforts we have there. And so we're in the process of -- we have been adding technical resources. And we're going to continue to do that. That's being planned for the second half as well. So you'll see some additions there.

Okay. Then I guess lastly, you've been buying back shares at a relatively slow rate, given your cash position andgiven the very, very low multiples of enterprise value to EBITDA that you trade at and the high levels of free cash flow. It seems hard to imagine that on a risk adjusted basis any acquisition would be better than buying your own shares back. And so I'm wondering, why are you being so cautious?

Well, again, what we've -- we've been on a track of staying pretty balanced given the economic conditions and opportunities that we see in front of us. And right now we continue to see, probably even more so than last year --and there were different reasons for being conservative last year. But we're seeing even greater opportunities for potential use of that cash. And so we're gonna stay the course, and be very deliberate how we go about using the cash in a way that we believe will maximize return for shareholders.

We shared with you the -- what we see, how we see China and India developing, where we've been very, very active. If you take the high side of that -- and I'm not saying that we're -- but if you look at the high side of that, and even if you look at the low side. Those are going drive some pretty significant capital requirements. And we're pushing pretty aggressively to improve our positions there.

So we have, from an organic growth standpoint in the emerging markets, very good opportunities for the PCC business and also for some areas of the Metallurgical wire business. But we haven't really talked much, and we're hoping to as we go forward, be able to further discuss the new products that we're coming out with, the new product development, and what that can drive in the way of capital requirements, which is a second avenue that will fuel the organic side of our strategy. And the third is acquisitions, wherewe continue to be very active, Jeff.

So what size acquisitions are you looking at? Or if the top three that you're looking at came to fruition, and you could buy them at the price you wanted?

Well I'd scare you if I told you the top one. No, I'm just kidding. We -- as said before, we are not going to do anything that bets the Company. But we're in a very good position right now with where we are operationally. We're performing very well. And acquisitions, the things we leashing at, number of them are in the $200 million range, $200 million to $300 million. Some, we all have smaller ones that ones that we are looking at that are in the $15 million -- $10 million to $15 million to $30 million up to $50 million range. So we have a mix.

These ranges are sales or what it would cost you?

Sales.

Okay. Thanks very much.

You bet.

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

Good morning, everyone. Nice quarter.

Thank you

I guess the first question I have is on the equipment sales and this special project work you're doing in Refractories. You guys didn't have any equipment sales in the first quarter. Normally you do I think three or four of these units per quarter. What was the count like in the second quarter?

Why don't we asked Bill Wilkins to respond to that. Bill, please?

Yes, Steve, the equipment sales that we had in the first quarter, the first half, we had two to three units. It was a little slower than we normally expect in the year. Outlook for the back half of the year is -- we're expecting three to four times that many, assuming we're able to get the purchase orders that we have into final acceptance of the customers' sites. That's pretty much all I can share with you on the equipment side, Steve.

No, Bill, that's helpful. Certainly those two to three units is a nice improvement sequentially. But year over year it was probably close to flat or maybe down slightly, right? Is that a simple way to frame it?

Yes, Steve, down slightly. And it's certainly not a reflection on the business. Much of it is due to timing. We can have -- we can book a purchase order many months in advance of the actual recognition of the sale. And part of that's due to what we call FAC, which is a Final Acceptance Certificate, which is a field commissioning process that our team under goes with the customer. But the pipeline remains strong.

And then the special project work, can you give us a ballpark of what that added to profit in the quarter?

Yes. Steve, this is John. I can give you some idea on that. The nonferrous, as well call it, or the special applications work, it comes on a job basis, and we normally each quarter have a little bit of work, which would normally run a couple million dollars a quarter. We were up a couple million over that in the second quarter, and that contributed $0.5 million or so bottom sequentially.

And this nonferrous work, is this something, Joe, that you would put under your new product pipeline?Is it that type of thing? Or is this historically something you have worked in?

It's an area that we historically have worked in. It is -- will tend to be more project episodic, as opposed to the normal refractory business. And so I'd say no, we don't put what we're doing right now in the new product development category.

Okay. If I could reference slide 12. Thank you guys for putting that together. This is the growth potential in China and India. You don't have Europe an there, but what would the bar in the percentage of loading for Europe look like? If it were on this chart?

It's going to be in the ballpark. I don't have the number in front of me. Does anybody else around the table have it? I going to say in the 18%, 20% range. I think it's a little higher than the US. Tends to run higher than the US because the waits are higher. DJ, does that sound about right?

That would be right, Joe. It might be just a couple points higher, Steve.

Okay. And then just one last question. A number. What are your Paper PCC volumes running at these days? I remember during the downturn you had hit a low of about I think 800 tons, or 820 tons in one quarter.

Want me to handle that?

Yes, go ahead.

We're running right now almost at the 900,000 ton a quarter rate. So you would project the year to be in the 3.6 million, 3.7 million range.

That's great. I have a bunch more, butI see we're over the hour, so I'll follow up with you later on. Thanks for taking the questions.

We'll take one more question, operator.

Thank you. Your final question comes from the line of Richard O'Reilly with Standard & Poor's.

Good afternoon, gentlemen. I wanted to follow up on John's comments about PCC volumes in the third quarter. I think he said a couple times you thought volumes would be up, but that then also July's rates were below the Q second quarter levels. I just wanted to see how you could rectify those two things. How you see Q3 being up.

I said that the volume -- the second quarter was down a bit sequentially, mostly during the shutdown. We're saying the market is fairly stable. And thatwas in the -- expressed in that table I showed with North American and European uncoated freesheet market. And we're expecting fewer shutdowns. We're saying buying could be up a little bit, but the offsetting driver in the operating performance then was going to be the fact that we have additional trials going on, primarily in Europe and Asia. We see a small amount of increase in the volume as the markets hold steady. The paper industry has been reporting stronger volumes, but primarily in coated and groundwood papers, not in the uncoated freesheet. So we [just] expect to be offsetting the fact that we had so many outages in the second quarter.

Okay,fine. Second question, back on the capital spending. I mean, your forecast is a broad range. And I understand -- when you get a contract, let's say for a paper unit or something in the steel free factories, how fast can you start spending the money, if that makes sense?

Yes. We can spend within 30 days, we can begin spending capital. And maybe -- this is probably a good opportunity to clarify. When I touched on potential new projects or changes in other projects --for instance, we have one right now that we're looking at potentially pulling in, doing sooner, working with the customer. So those things can swing something from an early first quarter to a late fourth quarter. So that's why from a capital side, it's hard to exactly nail down how much your going to -- really talk about how much you're going spend in a month sometimes.

Sure. Okay. Your spending can start pretty quickly after that?

Yes, and if you think about our satellites, we're building -- we can build a satellite in ten months.

Okay. Fine. That's it then, gentlemen. Thank you.

Thank you, everyone, for your interest in Minerals Technologies,and that will conclude today's call

Great. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect your line.