Minerals Technologies Inc (MTX) 2010 Q3 法說會逐字稿

Good morning. My name is Darla and I'll be your conference operator today. At this time I would like to welcome everyone to the Q3 2010 Minerals Technologies Incorporated earnings call. (Operator Instructions). Thank you. I would like now to hand the call over to Rick Honey. Please go ahead, sir.

Good morning. I'm Rick Honey, Vice President of Investor Relations. Welcome to our third quarter 2010 earnings conference call, which is being broadcast on the Company's website. www.mineralstech.com.

Joseph Muscari, Chairman and Chief Executive Officer will begin today's call, by providing an overview of the third quarter results, and some insight into the Company's performance. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our third quarter financial results. John will then turn it over to DJ Monagle, Senior Vice President and Managing Director of Paper PCC, who will discuss some of the recent progress in the commercialization of our new technologies.

Before we begin, I need to remind you that on page eight 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 solid quarter recording $0.90 per share compared with $0.47 in the third quarter of 2009.

A strong performance that's in line with our 2008 pre-recession levels. This performance is the result of actions we took during the economic downturn to reduce costs and improve productivity, while maintaining focus on new business development. We're also seeing the benefits of our efforts to improve safety and new product development. These efforts have enabled us to triple our operating income in the first nine months of 2010.

Minerals Technologies is now more focused and disciplined with systems and processes in place, to execute our longer term strategies. I believe it's fair to say that we have become a high-performing Company. What is perhaps most important is the momentum we have gained in the Company's growth initiatives.

That momentum is most evident our Paper PCC business, where during the quarter, we announced a new satellite plant in India, the expansion of an existing satellite in Thailand, and a commercial agreement in Asia for one of our new Fulfill technology platform PCC products, which is part of the incremental higher filler strategies we spoke to you about in previous calls.

To provide you with additional insight into this new platform, we've prepared a special review that DJ Monagle, head of our Paper PCC business, will present after John has gone over the financial results.

Let's take a brief look at the quarter. Operating income was $25 million, an increase of 75% over the prior year and around 10% below the previous quarter.

As we indicated in the last call, we expected our third quarter financial results to be about 10% lower than they were in the second quarter. In Paper PCC operating income was relatively flat year-over-year, but improved sequentially from the second quarter on lower sales.

The performance minerals business more than doubled its operating income from the third quarter of 2009 and sequentially maintained its operating income on lower sales from the second quarter of this year. The talc product line achieved a 45% sales growth year-over-year. The refractories business continued its turnaround performance from 2009, when it was in a loss position, sequentially, however, we saw a greater decline on refractories than we had anticipated at the last call, with operating income dropping by around a third. John will provide more detail on a financial performance of the business units.

As we look at our EPS track, you can see that even though our sales volumes remain significantly below pre-recession levels, our financial performance has stabilized around $0.80 to $1 per share. Putting it in historic terms, this is a relatively high performance level for the Company. It is worth noting that the last time the Company made $0.80 per share in a quarter, prior to the peak in 2008, was ten years ago.

Through our strong focus on safety, productivity and cost control, we've been able to significantly lower our break-even point as a Company, and have been able to effectively leverage the economic recovery. Our efforts in operational excellence and lean have resulted in significant improvements throughout the Company with our performance minerals business leading the way.

As you can see on this chart the return on capital levels that we have achieved over the last three quarters, are also reflective of our improved performance at lower sales volumes. Year-to-date we are at 8.4% on an annualized basis, still below our target of 9%, but well within our reach in the near term.

Similar to my comment on historic earnings levels, we've not been at 8% ROC since 2002, except for our performance in 2008, when we had begun to see the full impact of the changes and improvements that had been initiated in the prior year. Here's an overview of some of the progress that has been made recently in moving our Paper PCC growth initiatives forward.

As I've related in previous calls, we are focused on growing our PCC business in Asia, and continue to be successful in winning new satellite contracts. In July, we announced a second new satellite PCC plant with Ballarpur in India and in September we announced an agreement to expand a satellite plant at Double A Paper in Thailand. We are also in serious discussions with a number of other Asian paper makers at the moment.

In addition to the recent announcements, our first satellite with Ballarpur Industries in India is now operational. The expansion of a satellite in Brazil is nearly complete. And our large satellite plant with New Page in the US will be operational in the third quarter of 2011.

Our filler fiber composite program continues to move forward with an Asian paper maker, and we continue commercial discussion on the adoption of this technology with a paper company in Europe. As I mentioned earlier, we've seen our first commercial success in the adoption of our incremental filler technologies.

The specific technology being used with this Asian paper maker is one that we have licensed and which DJ Monagle is going to discuss further with you in a few minutes. We also continue to work with a number of chemical companies using additive technologies that will increase filler levels by more than five points with our PCC products.

Over the last several months, I've had discussions with a number of you who have raised questions around cultural change in the Company and the transformation that has been taking place. It was suggested that we communicate a little more around the fact that we are in many ways a different Company today, from the Company many investors and analysts had come to know.

With that in mind, I'd like to just focus for a minute on the subject and share some thoughts around why I believe we are a different Company and what is really different. Three-plus years ago we set out to transform this organization into a high-performance growth Company, and this path meant change on a lot of fronts, organizational change and cultural. We knew that if we could change into a more focused and disciplined organization, we could achieve the performance we wanted and generate the returns that shareholders expected.

We had a competitive position in the marketplace, but what we needed were more competitive differentiators that focused on meeting customer needs at a high level, and deliver new global growth opportunities. We are today clearly a more focused and disciplined organization. We have a stronger and more closely aligned management team. A team with broader backgrounds and experiences and a team that has brought a strong sense of urgency to improving the Company and moving it to higher levels of performance. We value open communication. There are no longer boundaries between the business units and the resource functions. The silos are basically gone.

We now also have clear alignment on all key Company initiatives, which has enabled significant improvement and execution as you've seen over the last several years throughout the Company. The use of metrics, data and facts have become norms to how we operate. This has allowed us to make better and more informed decisions in a much faster manner.

We've developed a culture where capital is no longer viewed as the first means of solving a problem and I believe it's fair to say that capital is now viewed as a scarce resource by everyone. This was not the case four years ago. We have a more focused and engaged workforce, where safety, excellence, and manufacturing, continuous improvement and satisfying our customers are our primary goals.

Through our deployment of operational excellence and lean, we've been able to establish a Company wide business system, from which we operate and into which we can integrate acquisitions quickly and effectively, which are as you know a key part of our strategy. There also exists a higher degree of accountability throughout the Company and we are now much more closely aligned with our customers' needs.

And we have in the last two years revitalized our new product pipeline, to the point where we are now beginning to move new products and innovations into the marketplace. Innovation and innovative thinking that is once again emerging as a strong part of the Company's DNA. I hope this overview helps some to get a better picture of who we are today, what really is different, and how we are better positioned to execute our key strategies of organic growth through geographic expansion and new product development, as well as acquisitions in the mineral space.

Now I'll turn it over to John, who will provide some insights into our financial performance for the quarter. John?

Thanks, Joe. And good morning, everyone.

I would now like to review with you our consolidated and business segment results for the third quarter. I will highlight the key market and operational elements of our financial results, before special items in each major product line and comment on comparisons to both the prior year and the second quarter of this year. We reported earnings of $0.90 which represents a 70% increase from the $0.53 per share excluding special items recorded in the third quarter of 2009.

For comparison purposes, you will note that there were no special items recorded in the current quarter. The special items recorded in the previous quarter and then the prior year are further detailed in a reconciliation table and footnote three of the press release. Consolidated sales increased 7% or about $16 million from the prior year, reflecting somewhat improved economic conditions in all of our end markets.

Operating income reached $25 million, an increase of 75% from the prior year. This dramatic improvement in operating income was primarily the result of a turn around railroad in our refractory segment from a loss position in the prior year, and a significant improvement in the processed minerals product line, which was operating near the break-even level last year.

As Joe mentioned, our sequential performance was overall in line with our expectations, with EPS at $0.90, 8% below the second quarter. Our consolidated sales decreased sequentially 2% or $6 million from the second quarter. And operating income dropped by 9% compared to the second quarter, excluding special items.

However, as you will see in the product line reviews, the decrease in operating income occurred entirely in the refractory segment, while financial performance remained at levels stronger than expected in the specialty minerals segment. Operating income represented 10.0% of sales, a significant increase over the 6.1% in the prior year, but slightly below the 10.08% ratio recorded in the second quarter.

Our balance sheet remains solid and in the third quarter we generated $33 million in cash from operations, and $24 million in free cash flow. At the end of the third quarter, we had more than $375 million in cash, and just under $100 million of debt. Although a large portion of our balance sheet is comprised of cash, our year-to-date annualized return on capital is 8.4%, compared to only 3.9% at the end of three quarters in 2009.

As of October 3, we have repurchased 299,220 shares, or $15.5 million under our current $75 million share repurchase authorization.

In summary, our third quarter results reflected continued strong financial performance, despite a weak global economic environment.

Consolidated sales for the third quarter were $249.8 million, and reflected an increase of 7% or $15.5 million from the prior year.

It should be noted, however, that our sales levels are still on average about 17% off the pre-recession peak levels. Sequentially consolidated sales were 2% or $6 million below the $255.8 million recorded in the second quarter. Specialty mineral sales decreased only 1% in the third quarter, to $166.1 million from $168.2 million in the second quarter with volumes down 2%.

Sales of PCC products declined 1%, primarily due to reduced volumes associated with paper mill maintenance outages in Europe. Sales in the processed minerals product line dropped in total only 2%. As expected, volumes decreased 6% due to the seasonal downturn in the construction market and a 4% decline in North American car and truck production compared to second quarter levels. However, the sales dollar affect of the volume decline was largely offset by a more favorable product mix, due to a higher than expected sales demand for talc and other high-value-added products.

Refractory segment sales were $83.7 million, a decrease of $3.8 million or 4% from second quarter levels. Within the segment, refractory product sales decreased $2.9 million or 4% to $65.4 million from $68.3 million in the second quarter, while metallurgical product sales decreased $1 million or 5% to $18.3 million. That's compared with $19.3 million in the second quarter.

This larger than expected decline was in our North American region, where sales were down 9%, while steel production in North America declined 4%. This gap occurred because several major steel customers completed vessel relines, which lowered the consumption of refractory products.

In addition, as we alerted you during the second quarter call, sales of our non steel refractory applications business were down 40% or $1.5 million as a result of lower special project work during this quarter.

On the year-over-year basis, specialty mineral sales of $166.1 million increased $3.6 million or 2% compared to the prior year.

Total PCC sales were down 1% from the prior year, primarily due to the two satellite shutdowns at Plymouth, North Carolina, and Franklin, Virginia, that occurred earlier this year. The sales decline was partially offset by increased sales in Asia, as a result of the ramp up of our new satellite in India and volume increases in China and Indonesia.

In addition, foreign exchange had an unfavorable impact on PCC sales of $2.3 million, or two percentage points. And processed mineral sales increased 17% with a 45% increase in our talc business and a 2% increase in GCC sales.

The increase in talc sales is being driven by improved global demand for automotive ceramics and polymer film and new pitch control applications for our talc in the paper industry.

Refractory segment sales increased 17% to $83.7 million, from $71.8 million in the prior year, an increase of $11.9 million.

Foreign exchange had an unfavorable impact of $1.4 million, or two percentage points. However, as highlighted in this table, refractory segment sales still remain about 24% below pre-recession levels.

Going forward, we expect Paper PCC volumes to remain stable during the fourth quarter, as we are not seeing any significant increase in demand in the uncoated wood-free sector, our primary market. In fact, the current sales rate for October is running slightly below third quarter levels. In processed minerals we expect to see lower seasonal sales levels of approximately 10%, and sales are currently tracking at that rate.

In the refractory segment we expect lower volumes due to the continued softening in steel production in North America, our largest market. But we expect these lower volumes will be partially offset by higher Ferrotron equipment sales. Our greatest forecasting risk is in the steel industry, where global steel industry utilization rates have been tracking downward for almost the last five months, going from 83.4% in April to 80.6% in June and 74.4% in September.

In North America, US steel capacity utilization rates peaked at 74.8% in mid-June, and were 70.9% for the third quarter, versus 73.5% in the second quarter. The rates have fallen further in October, averaging at around 67%.

This next chart reflects the financial results within the specialty minerals segment. In total, segment operating income for the third quarter increased 25% from the prior year, increasing $3.9 million from $15.8 million, excluding special items, to $19.7 million, on a 2% increase in sales.

Although performance improved in all product lines, the increase in profitability was primarily from process minerals, where operating income increased to $3.9 million from $0.7 million in the prior year, on a sales increase of 17%.

The increase is primarily driven by a favorable product mix, related to a 45% increase in higher value talc sales and from operational efficiencies derived from our operational excellence initiatives. Processed minerals achieved a 13.5% operating ratio in the third quarter, compared to 2.9% in the third quarter of 2009. Total PCC product line operating income increased to $15.8 million in the third quarter of 2010, from $15.1 million in the prior year, or 5%.

Operating income represented 11.5% of sales for the quarter, as compared with 11.0% of sales in the third quarter of 2009. Overall segment operating income represented 11.9% of net sales in the third quarter, which is a significant improvement over the 9.8% of sales, excluding special items, achieved in the prior year.

Sequentially, segment operating income for the third quarter increased 4% from the second quarter, excluding special items, despite a 1% decrease in sales. This increase in profitability was driven by the favorable product mix in processed minerals, and lower cost in the Paper PCC product line.

The total PCC product line operating income to sales ratio of 11.5% compares to 11.4% of sales in the second quarter. Processed minerals operating income increased $0.7 million or 23% sequentially to $3.9 million.

The favorable mix in processed minerals was driven by a 10% sequential increase in higher value talc sales, which more than offset the effect of a 9% seasonal sales decline in the GCC product lines. In addition to the sales improvement, the talc operations in Montana achieved an 8% productivity improvement from activities driven by our operational excellence initiatives that effectively leveraged the incremental sales into strong profitability growth.

This performance was better than expected, considering an overall 2% decrease in construction activity, and 4% decrease in North American car and truck production during the third quarter. Processed minerals' 13.5% operating ratio in the third quarter compares to 11.1% in the second quarter. Current indications are that paper production in the US and Western Europe will decrease 1% to 2% in the fourth quarter.

In addition, Paper PCC will incur higher raw material costs in North America, that contractually cannot be passed on until the first quarter of 2011. Paper PCC is also expected to increase trial activity, related to our new product development programs during the fourth quarter, which will also affect short-term profitability.

In processed minerals we expect a continuing seasonal downturn in construction and related activities. Therefore, we expect that our operating income for the full segment could decrease by up to 10% in the fourth quarter, from the third quarter levels. To provide some additional insight into the current market conditions in the paper industry, I've included these two graphs which show the trends in the uncoated free sheet segment in North America and Europe, our largest markets.

As you can see, the production levels remain relatively stable in this economic environment, but are still more than 20% below average pre-recession levels in North America and although there's been some recovery in Europe, the current trend is again downward.

Now let's turn to the quarterly results for the refractory segment. You can clearly see the magnitude of the year-over-year turnaround as this segment's operating income for the third quarter was $6.3 million, compared to an operating loss of $1.1 million last year, an improvement of $7.4 million. This increase in profitability was achieved with a 17% increase in our worldwide refractory product volumes, compared to last year.

Performance in this segment improved dramatically due to volume increases and the benefits from the restructuring programs. In our largest markets, North America and Europe, steel production -- total steel production was 18% above the third quarter of 2009. However, it should be noted that the current North American steel production rate is still 19% below pre-recession levels and European steel production is still about 24% below pre-recession levels. Segment operating income ratio was 7.5% of sales in the third quarter.

Sequentially, this segment's operating income was $6.3 million compared to $9.6 million in the second quarter, a decrease of 34%, excluding special items. This decrease was caused primarily by volume decreases in all product lines, and increasing raw material costs.

Our largest operating income effect was in North America, where steel production decreased 4%, but our refractory product volumes were down about 14% overall. Our BOF product line was down about 20%, due to the large number of furnaces in the early stages of campaign, following recent rebuilds, and the reduced number of special projects in non-ferrous applications, which were in line with our expectations.

For the fourth quarter, we expect volumes in refractory and metallurgical wire product lines to decrease approximately 10% as steel production continues to decline. As I mentioned earlier, global steel utilization rates have been decreasing for the last five months and it is uncertain when they will stabilize.

However, we expect to partially offset these lower volumes with the higher incremental equipment sales of $2 million to $3 million, which are planned for the fourth quarter. With the combination of lower steel production and higher raw material costs, which will be partially offset by higher equipment sales, we expect profitability in this segment to be down slightly from third quarter levels.

This slide provides a view toward the current situation in the US steel industry. After a fairly steady increase in production from the end of 2009 through June of 2010, the industry has experienced a slow but steady downturn during the last several months, resulting in a lower than expected performance in the third quarter.

Steel mills have taken furnace outages and lowered production levels, causing US production to continue to drop with capacity utilization decreasing approximately 3.5 percentage points to a 67% rate during the first three weeks of October, compared with 71% in the third quarter. Some in the steel industry believe the current utilization rates are still running in excess of real demand, particularly in the flat roll market.

Global steel utilization rates have also decreased from 83.4% in April, to 80.6% in June, and are now down to 74.4% in September.

The uncertainty in sustainable steel production levels is a significant factor that creates risk in both our fourth quarter and first quarter 2011 financial performance forecast for the segment. It should be noted that despite the weaker outlook, this segment of our business has done an outstanding job of restructuring the business model to reduce break-even levels and to remain profitable at current volume levels.

The working capital chart here reflects our operating working capital trends as defined by trade accounts receivable, inventories, and trade accounts payables. As you can see, our total working capital increased in the third quarter by approximately $9 million from the second quarter, due to an increase in receivables and inventories, primarily in the refractory segment.

As a result, our days working capital increased from 54 days in the second quarter, to 57 days in the third quarter. Although days working capital increased by three days sequentially, the 57 days represents a significant improvement compared to historical levels, and are down 11 days from the third quarter of 2009.

Cash flow from operations was approximately $33 million in the third quarter, capital investment for the quarter remained at a relatively low level of $8 million.

In summary, the earnings performance of $0.90 per share was in line with our expectations, although performance in specialty minerals was higher than expected and the volume declines and raw material cost increases in the refractory segment were more severe than anticipated.

Each of the major end markets we supply experienced modest sequential decreases in demand in the quarter as a global economy struggles to gain traction. We have lowered the cost structures in each of our business units, and have become more flexible as a Company, allowing to us react more quickly to market demand.

Strong performance in our processed minerals talc business and lower expenses in our PCC product line helped to partially offset the 34% decline in operating income we experienced in our refractory segment.

Our year-to-date EPS is $2.73 per share compared with $0.93 per share in 2009. We have benefited from improved market conditions, increased productivity levels, and have fully captured the savings from our restructuring programs.

Our year-to-date operating income is $76.4 million, compared with $27.5 million last year, an increase of $45 million.

It is a result of the turnarounds in the refractory segment and processed minerals product lines, which improved $32 million and $11 million respectively. Looking to the fourth quarter, volumes in our Paper PCC product line are expected to increase slightly, however we will -- excuse me. However we will incur higher raw material costs in North America, that cannot be passed through to customers for contractual stipulations until the first quarter of 2011.

Profitability in our processed minerals product line is expected to decline due to the normal seasonal volume decreases, which occur in the fourth quarter. In our refractory segment we expect about a 10% decline in refractory products and metallurgical wire volumes, as global steel production is trending downward.

However, we expect to have higher equipment sales, that will partially offset the effect of the lower volumes and higher raw material costs in this segment. However, there is a potential that steel industry volumes could fall substantially lower than our forecast.

Overall, we expect income could be down by up to 10% from the third quarter levels as the fourth quarter is traditionally the weakest quarter in our end markets. Looking to the first quarter of 2011, we do not expect any significant improvements in our end markets, and although we will benefit from raw material costs pass throughs in our PCC business, they'll be largely offset by price concessions from contract renewals.

The first quarter in processed minerals is normally a seasonally weak period, and the outlook for our refractory segment remains uncertain and under downward pressure. Now I'll turn it over to DJ.

Thank you, John. I will now review with you our new product commercialization efforts in the Paper PCC business. Earlier this week, we launched our Fulfill technology platform of high filler products and announced the first commercial agreement for one of the products under the Fulfill platform.

I'd like to take a few minutes to explain the significance of these developments to minerals technologies. As many of you know, one of our primary objectives is to increase the amount of PCC used as a filler in paper, especially uncoated free sheet paper. The value equation is straightforward. Paper companies can reduce their costs while producing a brighter, higher quality of paper by increasing the filler rates of PCC, which displaces high-cost fiber.

The Fulfill platform consists of a series of products and technologies, that includes our filler fiber composite, alterations to our standard PCC and also includes chemical additive approaches we've been developing with a number of chemical companies and research consortiums. We have for many years been working on our filler fiber composite product, a disruptive technology, that could nearly double the amount of PCC in paper.

As Joe indicated earlier, we continue development of that product and are now in a commercial discussion with a European paper maker and in trials with a customer in Asia. But it has been in the last two years that we also adopted a more incremental approach to increased filler levels. What we call our single and doubles approach. These technologies can increase filler levels from three to nine points, depending on the technology.

The Fulfill platform consists of several solutions that can be customized to meet the needs of each paper maker in reducing their dependency on high-cost pulp. The primary benefit of the Fulfill brand is choice and flexibility, the ability to choose the right approach, the best approach to increase filler levels based upon the needs of specific customers and specific grades. The benefit to customers is lower cost.

The increase in PCC decreases their reliance on high-cost pulp, while allowing them to manufacture paper without compromising paper quality or the runability of their paper machines.

Depending on the specific technology applied under the platform, filler levels can be increased by up to 15 points. These 15 points effectively increase the paper maker's consumption of PCC by approximately 75%, depending on the specific grade and starting current consumption level. The product we have commercialized with our Asian paper making customer is a licensed technology we call Fulfill E325

This particular approach is increasing the amount of PCC in that customer's paper by three to five points, which results in a 15% to 25% increase of PCC in their sheet. We are currently in the process of expanding the Fulfill portfolio with other technologies that are in our new product pipeline.

Right now we are conducting trials with several paper companies in all regions of the world with a variety of these technologies. This slide illustrates why this new platform is important for both Minerals Technologies and our customers.

It also gives insight into the breadth of the high filler technology options that are either commercialized or in development. Fulfill A is commercially available today, and represents modifications in size, shape, and/or application methods to the current PCC product. By applying this approach, we've been able to deliver one to two points of additional filler, maintaining or improving paper quality.

The Fulfill E series is what we've highlighted in our recent press release. The Fulfill E325 technology includes an additive and applications expertise as part of our technology package.

This technology was developed in conjunction with a research consortium and SMI holds the exclusive license to apply that technology globally. As previously mentioned, Fulfill E325 is running commercially at a key Asian customer, and we expect it will be trialed at several locations in the coming months.

With this technology, we anticipate delivering the same paper quality at three to five points higher PCC, and we improve revenues through both increased PCC sales and the technology fee associated with the use of E325. Accomplishing this we estimate that we can increase revenue by up to $75 million and save paper makers up to $20 per ton.

Also in the coming months, we anticipate trialing the new Fulfill V series of products. Included in this series are a few different approaches in development and under consideration for commercialization.

The Fulfill V series includes organic additives as part of the technology and on occasion has demonstrated the ability to produce acceptable paper at up to nine points higher PCC levels. We see the Fulfill V series as a technology that competes with the E series. And we envision that there's a spot for both of them in the marketplace. Put differently, there are some places where Fulfill E325 will be the best alternative for the customer and other processes where Fulfill V series will be the best inadvertent. The combined effect of the Fulfill E series and V series could yield an additional $125 million in revenue. Fulfill F is the brand that we plan to use when we commercialize our filler fiber technology.

While still in development, indications are that we can deliver appropriate quality paper at ten points higher filler levels in uncoated free sheet papers. Our challenge continues to be finding appropriate trial conditions to test this technology for extended periods of time, evaluating machine runability and long-term acceptance of the paper in the market.

The pursuit of those trial objectives is the focal point of our discussions with the European paper maker previously mentioned. More importantly, as we evaluate the market with our broader understanding of what all these technologies can deliver, we see our application of Fulfill F technology as separate and distinct from the Fulfill E and V series.

Assuming our long-term trials validate the performance we've seen to date, we expect that Fulfill F, the filler fiber technology as currently trialed, has the potential to yield up to $250 million of annualized revenue over time. Finally, we are anticipating success of filler fiber technology, and have identified ways to extend the performance of Fulfill F even further.

By applying some of the techniques and additives discussed previously, as well as other new technologies in development, we hope to deliver a combination of technologies that can increase filler levels beyond 15 points in a sheet of uncoated free sheet paper. Depending on the rate of acceptance in the market, these products and technologies represent substantial step change increases in both the sales of our PCC and savings to paper companies. As such, the Paper PCC organization is excited to deploy this technology as quickly as possible into the marketplace.

It is also important to note that these technologies are key elements of differentiation, especially as we pursue growth in Asia. In fact, the Fulfill platform is front and center in our discussions with potential customers as we finalize agreements to build new satellites that we expect to announce in the coming months.

Now we'll go to questions, operator.

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Torin Eastburn with CJS Securities.

Good morning.

Good morning, Torin.

Our Internet is down here. So I can't see the slide presentation that you're going through. Can you talk about -- first of all, the time frame assumed and the revenue targets you're giving for the new chemical additive products. And second, maybe help us understand how the market is segmented in terms of which paper makers can use the products that are going to be on the lower end of the three to nine point scale and which paper makers are in the other parts.

Torin, let me start off. This is Joe. And then I'll turn it over to DJ The $75 million that DJ referenced for -- that we see as revenue potential from the series E is anticipated to occur over a 25 -- over a five year period. And what we're doing right now is preparing and we're in the middle of trials, as DJ mentioned, at a number of sites but we're also preparing a pretty aggressive marketing plan for next year. So you can anticipate 2011 as being what I would call a ramp-up year. But that series E is the cornerstone for the platform, at least for the incremental adding of this 1% to 9% range. But with that, let me turn it over to DJ, who can get a little deeper into the other parts of your question.

Thanks, Joe. So if we take a look at these steps here, or these different levels, again the Fulfill E series and this E325, we're working on that now. And that's the one that we feel very good about will deliver that $75 million of growth over that -- by the five year mark is where that will be contributing in, that level on an annualized basis. The Fulfill V series, as we are trialing it now, it delivers some different characteristics. And I don't want to get too technical on you.

But it comes down to some in part better bulk, some in part better strength, and so we're working to figure out exactly what that looks like. But we believe that there's a space for both of these in the markets. So the combination of both of those could be as much as $125 million. The Fulfill F series, the filler fiber technology, you've got to think of that a little bit differently. It's -- 325 we're going out with today and trialing in many locations. The Fulfill F we still have great hope for and we're pretty excited about what we keep seeing in these trials.

And the way that the market breaks down is, what are you doing with all that pulp that you free up? So if you're putting in that much filler, so 10 to 15 points, which might be 50% to 75% increase, versus what you're currently using. If you're buying market pulp or you can sell market pulp, it has a very high value for you. And so that's the step change that is there. I hope that addressed your question.

Yes. Thank you. And second, what can you say about -- I guess both the qualitative differences between the chemical additive products that you're producing versus competitor's and also how the financials might be different for you selling your own product versus receiving additional PCC through competitor products.

For the E325 technology, there is a technology fee that's associated with that, which -- so there is a profit improvement that comes from us distributing that. The Fulfill V series we are still in some discussions with different chemical companies regarding what technology fees may be available to us in that area. But the economics breakdown, if you're at 3% to 5% on Fulfill E with the technology fee, that gives us a pretty good profitability bump. If you're at 7% of just increased PCC sales, with the Fulfill V series, we do pretty well there. So I wish I could be more specific with you on that. But we're literally in negotiations to work some of these items out.

Okay. And last question. Are you willing to disclose what kind of tonnage assumptions you're making for these revenue estimates?

Not at this time. If it's okay. Because if I start giving tonnage estimates, some of the fees start shaking out. So if it's okay, I'd like to -- we'll be revealing that more over time as this gets out into the marketplace.

Yes. That's fine. Thank you.

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

Hello. Good morning, all.

Good morning.

What do you see going on in the markets served by specialty minerals? And in particular talc, what was the reason for the 45% increase? Was it inventory building at customer sites? Was it real demand? Could you give us a better feel for that.

Rosemarie, I'll start off. I think it's a number of things. There's been good recovery in some of the end markets that we serve with our talc products. Particularly the automotive sector. There were also -- we have additional new sales, where we've been able to gain some market share. There's also been some pricing improvement. So that contributed to the overall 45% gain. But I think fundamentally it's been good market positioning by the business unit, that has really -- as the tide has lifted, they've actually come out better than some of the averages. But I'll let Doug Mayger kind of address that further.

Hi, Rosemarie. So it's probably in three areas. It's in automotive, it's in polyethylene film and pitch control and those are all real demand. That's not inventory building from the way we see it in what our customers are saying.

Okay. And the R&D, which you expected to be higher in Q3 versus Q2, is actually lower. So is that because you have fewer trials? Is that a new level? Is it a question of timing? Could you give us a better feel for what is going on there.

Yes, I'd say that it's primarily trials. We had a little less trial activity in the quarter. And that is something as we've indicated in the past it can move up and down. We don't limit trial activity. It's very much driven between planning, between customers and ourselves. And we're likely to see that fluctuate around the range that you've seen for the last two to three quarters. So, no, we have not lowered our level of R&D. If anything, we're putting more into R&D today.

So it is not that you have done the major work on those new products and that now you don't need to spend as much to move them over to the next step?

No. Actually you'll be seeing increased activity for the series E. Because the series E will all require some degree of trialing with customers to penetrate. We have something like, right now the market plan that we're looking at for next year has us targeting 25 locations for series E. DJ, you want to add anything to that?

Rosemarie, Joe said is absolutely right. We're thinking that it's increased trial activity. There's a couple of things. One, the filler fiber trial had just been delayed a little bit. So that's an element. So we're -- you'll be seeing that showing up in the next quarters. And then also our series E program, it is 25 locations and to give you a sense of the timing of that --now before we get commercial and before we're really fully running and capturing the revenue stream associated with series E, you're looking at a couple of months of trial setup and then a couple of months of trialing, so it's not just a flick the switch and it goes.

How comfortable are you that -- about that $125 million of potential revenues by five years out, by 2015? How comfortable are you that it is going to happen by then? I mean, is it still a question of not only every paper manufacturer has to do the trials, but also every paper mill and every piece of equipment within one paper mill. Could you give us a better feel as to how comfortable you are with what you are talking about?

Sure. That's a fair question. I'm comfortable in and committed to that $75 million. And I think over the next couple of months, I'll get more comfortable regarding that incremental $50 million on top of that. And that's because the E325, we're pretty darn sure how it's going to perform and now it's a matter of testing that -- these other Fulfill V series against that. So I feel really good about the $75 million. What we've seen so far, that $125 million is a very appropriate target for us. So I would differentiate between those two numbers.

Okay. Thanks. That is helpful.

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

I guess my first question, can you just give us an update on this MGO situation, as far as the supply out of China. I mean, we certainly heard about the rare earths. Is it that same type of situation? And then what does your current inventory look like, since you saw a bigger than expected downturn in demand? Are you now caught with more inventory than you'd like to have?

Steve, it's John. I'll start off here. Then perhaps Bill Wilkins can help us as well. But we're seeing the price increase. It's not like, though, the rare earth issue.

But you have to remember that in the bigger picture of things, there are a limited number of export licenses that are distributed within China and it's held essentially by a cartel. So it's not exactly market forces driving the price. And so what we've seen here is the fact that the prices have increased about 30% since the beginning of the year. We do have, because of the downturn, we have more on hand than we'd like to have. Our targets are -- you see the days of inventory we're carrying. Our targets are more in the two month area, and we're running more than that because of the downturn and what we had scheduled coming. It's a fairly long supply chain.

Having said that, right now there seems to be stability in it, but there's also uncertainty as to where this market goes. As long as the steel industry is soft, I think there's less pressure on the pricing side of this, but as you know it takes us some time to recover price increases in the marketplace. So there are a number of programs within the business that Bill may want to comment on to offset this price factor, but that's sort of the approach we have to take is to manage the price of the material with other programs in the business.

Okay. And so John, would you expect, then that this might carry over into 1Q as well?

Right now that's our expectation. We have a couple of months on hand, and the pricing levels we see for the purchases now will carry over to the first quarter are going to be at these levels.

Okay.

Yes. Just to mention in terms of purchasing practices, compared to where we were in 2008, as a matter of policy, we have purchased perhaps more frequently and at lower volumes, so we have materials coming in, perhaps more frequently than in 2008 at lower volumes. But to look at where we are relative to addressing the cost increases that we have been seeing, we have focused proactively on mitigating these increases through continued product reformulation, alternative materials sourcing, for example, and also price increases with our customers. And while all of these actions have helped soften the impact, we have not been able to completely recover increases in mag costs right yet, so we will experience some margin contraction as we continue to close that gap.

Okay. Understandable. My second question, and there are actually of series of them here, but they all tie in to one, I guess, concept. In the press release, year-over-year comparisons, you noted volume was positive in specialty minerals, and that would include PCC products. But volume -- or I should say sales in PCC were down about 0.5%. So if volume was positive but revenue was down, does that mean your pricing was negative?

Yes.

On Paper PCC

Yes. There were a couple of factors. One that was mentioned in the press release was the currency cost a couple of points there, but we have had -- remember last year, we did a lot during the year to secure our base of contracts, as we're working on rolling out these new products, and some of that us some price concessions, so our approach there was to secure our base plants for a long period of time, so that we have a secure profitable base, high cash flow base from which to launch our new programs, but that is affecting us in terms of price adjustments that were made to secure those contracts, and that's what I mentioned will also carry in to 2011.

Right, John, and that is the last question in this series. So you have contract escalators kicking in the first quarter, but you have these price concessions, do you net out positive, or do we see some more net declines?

Right now, we're projecting it's going to be close but probably down a little bit.

Down a little bit. Okay.

What happens is the price adjustments from the cost pass through affect primarily North America. They still will affect us later throughout the year in Europe.

Okay. And just one last -- as we're running out of time, you guys can choose to answer this now or maybe later, but it would be helpful, at least for me, to try to understand how filler fiber -- because you are still talking about that program -- overlaps or is separate from the Fulfill program and how that overlaps or is separate from what you have talked about in working with these various chemical suppliers. I don't know if I have a clear distinction between the three programs.

Steve, that's a good question. And DJ is going to try to cover that for you. Okay? DJ?

Steve, the words that I use, so thanks for bringing that up, is separate and distinct. And so what we're seeing is the -- we're not -- we're seeing that filler fiber, or what we're calling Fulfill F as being additive to those numbers that I was discussing. Our challenge with Fulfill F is to see if we can replicate the performance we're getting on these short-term trials, and get that to run in day in, day out, and improve its value over time. Assuming we can replicate what we have seen in our trials. That number, up to $250 million would be something that is above what these additives do, and then also, just so you know, I think some time ago, Rosemarie had asked a question that was along the lines of could these things work together?

We have run some trials in the last couple of months and indications are that there is some synergy between the approaches, and that's what I was alluding to in that very top, where we get some insight that these are different mechanisms, and it could add. But I guess what my caution is, is this, we feel great about what we have done with Fulfill E and we're going to get that money out there in the marketplace. I've got a key question to answer with Fulfill F -- how does it perform long term, and then I'll start worrying about how to make that better. If that makes sense?

Okay. No, that's very helpful. Thank you all.

Your next question comes from Jeff Zekauskas with JPMorgan.

Good morning, this is [Silka Cook] for Jeff. Can you point out how much of the sequential decrease in refractory's profits this quarter were due to lower volumes versus higher magnesia costs?

Are you talking -- do you want me to take that, Joe?

Go ahead.

Would you just clarify that a bit -- are you talking sequentially?

Yes, sequentially, so profits fell by a third sequentially, and I was wondering how much of that was attributable to steel utilization rates being lower, and how much was attributable to higher magnesia, higher raw material costs in general?

Yeah, they were fairly close but the volume was the bigger factor of the two, but the decrease of $3 million was roughly in the big picture, split between those two major items.

And going forward, when I look at the outlook, will the sequential headwind from magnesia costs be similar 3Q to 4Q? Would it happen at a similar order of magnitude? Going from 3Q to 4Q?

Yes, I mean the question is around the volume. There is a lot of uncertainty around what the volume is going to do. And for the fourth quarter, the inventory levels we have in MgO are similar to what we experienced in the third quarter, but the trend is upward cost pressure on the MgO.

Okay. Okay. That's helpful. And on PCC, I also have a question on the Fulfill product, the -- so can you explain what product you exactly end licensed, and who -- like who makes it? So is there a product made that you have to purchase that you have to blend with PCC or what do you mean when you said you end license technology, and what did you pay for it?

Good questions that I'm not going to answer all of them at this time, if that's okay, because there's some competitive reasons, and marketplace reasons. But I'll tell you this -- the product is as we said before, it was developed with a research consortium. We were a contributing member to that research consortium, both our lending our PCC synthesis expertise with our paper applications expertise, and in exchange for some both financial contribution to that research and our sweat equity into the development of this product we got the global exclusive license. The rest of that question, if you don't mind will be unfolding over time, because we're still working through some things in the marketplace. It's -- right now -- keeping it at Fulfill E325 gives us an advantage. I hope that's enough of an answer for you, Silka.

Yeah, I was just trying to understand whether you end license technology, or your end license the product, meaning are you blending anything in that you have to purchase? I was just trying to understand what it is that you licensed. Is it manufacturing technology or are you actually buying a product or like an additive that gets somehow used up, blended in with PCC?

There is an additive that is involved, and it is blended in with PCC and it creates a unique material.

Okay. And so the paper mill will only receive one product. They don't have to purchase two. They will get a blended product from Minerals Technologies?

I'm not going to go in to that detail. What I will tell you is that they'll make a lot more money, and we'll make more money by applying this product -- this technology.

Okay. And I have one follow-up question to understand the revenue ramp up, from the -- tied to the various products. So when I look at the E series, and potential filler levels of 5%, did you derive your revenue number by assuming that a portion of your current customers will substitute their current product with E series or are these new customers that you plan to sell this to?

If we look at that $75 million, it's broken down -- we break it down in to three waves. Joe had mentioned some 25 opportunities that we are pursuing immediately. Those are areas where we see an immediate economic benefit for the customer, and where we have got reasonable capacity to let them take advantage of the technology. Then we have got a second wave where we're going to have to put in some expansions, and then we have got a third group that is some new customers as well. What I also had mentioned and just want to spotlight, as we grow in Asia, and we continue to be excited about bringing forward soon some announcements in Asia, Fulfill is part and parcel of the deployment of those new satellites that are associated with uncoated free sheet manufacturers.

And a last question, and I'll get back in to queue, it's again on Fulfill, do you pay an annual license fee? Will you pay a -- I don't know, a per-pound product fee or both?

There are fees that go back and forth, and in the net we come out very well as does the customer.

Thanks, I'll get back in to queue.

(Operator instructions). Your next question is a follow-up from the line of Torin Eastburn with CJS Securities.

Just two quick follow-ups. First, how many tons of PCC did you deliver in the quarter?

Torin, it's John. I have got to look here. 900,000, so we're just -- still running below that 4 million peak rate that we had.

Okay. And the other question, can you provide any update on what you expect for capital expenditures for the rest of this year, and for next year?

Yes, we're about -- we're projecting now a little over $40 million in total.

And how about for next year?

Next year we're saying the same range, but what we're going to do is give you updates as we rollout some of these technologies. The filler fiber one is a very substantial investment, and it's better to announce those as we get a commitment.

Yes, I think, Torin, I can add a little bit to that. As I touched on in the review, we're in discussions right now with a number of paper makers on potential satellites for next year. That will have a direct impact on the capital number, and so as this plays out over the next three to four months, which is still the window we have for actually starting and completing a satellite in 2011, it will make more sense for us to try to give you a better sense of what it is going to be in the fourth quarter call, which will be beginning of February.

Understood. Thank you.

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

Afternoon, gentlemen. Near the end of John's comments, he talked about equipment sales, and I think he used a number. But this is more lack of information on my part. How big is the equipment section of the refractories? I get -- the number just doesn't mean anything to me.

Okay. The -- we don't explain equipment that often, so it -- I'm sure that it is not on the forefront. The reason we brought it out this time is because it is a significant quarter-to-quarter change, but typically it represents about $3 million a quarter in sales. But there is a cycle to these equipment sales that can be a little bit erratic, and that's one of the things that's occurring right now with the downturn in the steel industry. So for example in Q3, they were in that $3 million range. And they will be double that is our expectation in the fourth quarter.

Okay. Fine. Okay. Thanks a lot. Bye-bye.

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

Thanks for taking the follow-up, I -- just back on the CapEx question, Joe and John, I think you kind of answered this, but I think at the second quarter call you were looking for -- guiding us to $45 million to $60 million for the year, and if that's right then, we're down significantly, and is that again just because you were accounting for potential satellites that might start up?

Yes, Steve, it is strictly satellite timing and as we just talked about from time to time, that is very much driven by when we actually conclude a contract, and the paper makers schedule, what they target towards. So what we shared at that point in time is what we were seeing as potential hits. Those potential hits are actually still there, they just moved it a little bit from a timing stand point.

Okay. Okay. And, Joe, in your comments, I think you said that the employees, the firm, now views capital as a scarce resource, and if I look at the cash on your balance sheet, we see where that resource sits. You are at 33%. You guys are generating free cash flow of $25 million, maybe $30 million a quarter. Can you give us an idea of how you expect to start to utilize some of this cash?

Yes, Steve. Good observation on your part. What I would reiterate or reinforce what I have shared before, is that we basically have three venues for the use of our cash. One is -- number one for us is areas where we can get good returns through internal organic growth, and we're seeing that in the PCC business. You'll see more of that, I think, as we go in to next year that we can share with you, that is going to require capital for growth, and some of the product developments will have a draw on capital as well.

The second channel is the acquisition front, and we continue to stay very focused, active in looking for companies in the minerals space that have a technology bend to them, but that are also in markets that can give us more balance as a Company, markets such as the environmental, consumer products, the energy arena, and allows us to reposition the Company over time, and I believe return to shareholders a higher return than simply using all of the cash, let's say to buy back stock.

But the third avenue is stock buy back, and we have bought back roughly $15 million this year. We're going to stay focused and continue to buy back shares over time, and right now, we're going to continue to take what I call an balanced approach to how we use the cash.

One of the things that is -- at least for us that we keep in mind and it's worth noting, that that small cap companies, mid cap companies, having cash and having enough cash at times, at the right time when you have opportunities is a real luxury, and a luxury in the sense of that it allows companies to reposition, take advantage of market opportunities. So we're trying to do two things.

One, better identify where those opportunities are, but also position ourselves to actually move and move very quickly by having both cash with which to do an acquisition, but also having a strong balance sheet where we can leverage ourselves and actually move in to a different capital structure. So it's both the borrowing capability we have, as well as the cash that allows us to be well positioned going forward. And we'll moderate that as we continue to go forward in terms of the rate of stock buy back, if we feel that makes the most sense from a shareholder standpoint.

Okay. Joe, that definitely helps, and if I may, then, take your comments and kind of deflect them over to John. John, you are leaving the seat in a couple of months, so feel free to paint Doug in to a corner, but --

I'm doing that every day.

Yes. So what cash level do you feel comfortable drawing down to before the world fell apart. I mean, most companies in our space ran 5% to 10% of total assets. Where do you feel comfortable taking that debt to total cap, the leverage ratio up to?

I'm personally a pretty conservative guy, although I do understand the value of leveraging a balance sheet. I think over the history of this Company, it has served us well to be more conservative than the average, and in this last economic cycle, I think we did the right thing, and I think a lot of people came around to our way of thinking about that. So I think you have to weigh it on the growth potential you see within the Company.

And there are some major programs that DJ just went through here, and I think being a small cap company the way we are and having this capability, just enhances the ability of this Company to not become resource-constrained, and then be able to go ahead and make the Company really grow. The only debt in the history of the Company was $150 million we took on to repurchase shares around 2000. And that methodology has served us well, and we see the opportunity for one fact or another. It can be for growth or share buy back because we have so much growth. When the time is right, then Doug can make his own decision on that, but my outlook would be keep conservative.

Okay.

That's the way to be a growth company and really add shareholder value longer term.

Okay. All right. Well thank you for the color.

And your last question is a follow-up from the line of Rosemarie Morbelli with Ingalls and Snyder.

My question was just asked. I was wondering, Joe, you didn't touch on dividend increase. I suppose that is still part of your use of cash?

Well, it's something we're -- obviously we're maintaining the dividend stream that we pay, and we do deliberate with the Board from time to time on whether that should be increased or not as part of the strategy for cash use, but at this point in time, not anticipating any changes there in the near term, but it is something that we do periodically look at, Rosemarie.

And if I may ask one last question, you talked about the new satellite in India, you are expanding in Thailand, you are in negotiations for additional satellites, if I understood properly. What is going on within the paper industry in Europe and North America? Are you still seeing some mills just shut down or satellite elimination that may affect a good chunk of what is coming in?

Well, the way I guess I described it to a number of you in some of our meetings, what -- the US right now appears to be more stable, has done more in the way of consolidation, we believe, than Europe has. And so that doesn't -- that would suggest that we will still have some shutdowns in North America, but don't necessarily see major ones that are imminent or that we're going to have a series of them, because the US consolidation has fundamentally taken place, that it will be more incremental downward pressures overtime that could force a few more.

Europe on the other hand, I think is more problematic, in the sense that they have not taken as much capacity out as North America has, and they still need to do more, that could certainly have an effect on us. I'll share with you that we believe and we have to prove this by what we actually do in the marketplace, but we believe in North America that in North America alone that if we're successful, and we believe as DJ. said, basically laid out for you, that we believe we can be, that we have the capability through our new products actually to offset a 2% per year decline and come out ahead in North America.

But we need some more running room, we need to actually show the marketplace and ourselves that we can do that, but the series E as well as the series V can play the role for us of allowing us to grow in a declining market, and I think Europe is similar, but I think Europe is potentially subject to more consolidation that over time can have a little deeper effect.

When you talk to your customers, do you find that the US paper makers are more open to your new products than the Europeans are?

I don't know more, but I'm looking at DJ here. DJ, what do you think?

I don't know that I would break it down regionally like that. I would think that as we pursue these -- this first wave, I'll have a better data set to give you, but our next trial is in fact in Europe, and we'll have a couple of trials in the US as well. So I don't know that I break down the paper maker's habits by region, per se. We do see differences in the different grades that's going on right now. Ground wood producers are right now under a little more stress than most folks. The uncoated free sheet market seems to have stabilized, so that's where I see the bigger differences in general behavior, and sense of urgency.

Okay. And then the situation? France, which I guess they are still in the streets. Is that -- do you expect an impact on your business, or is it not running long enough to actually affect your fourth quarter?

Could you ask the question again?

Well, you know, half of France if not all of it is on strike and I was wondering if that was going to affect your fourth quarter, or if it wasn't a long enough event to do something.

We're not seeing it yet, but the - DJ, are you seeing anything right now?

We're not seeing anything, and our customers -- we're not seeing anything right now.

Okay. Great. Thanks.

And at this time, there are no further questions.

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

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.