Minerals Technologies Inc (MTX) 2012 Q1 法說會逐字稿

Good morning. My name is Shanelle, and I will be your conference operator today. At this time I would like to welcome everyone to the Q1, 2012, Minerals Technologies, Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Rick Honey, Vice President of Investor Relations, Corporate Communications.

Good morning. Welcome to our first quarter 2012 earnings conference call, which is taking place right after the Space Shuttle made its lap around Manhattan. The call is being broadcast on the Company's webcast, www.mineralstech.com. Joe Muscari, Chairman and Chief Executive Officer, who will begin today's call by providing some perspective on our first quarter performance. He will be followed by Doug Dietrich, Senior Vice President and Chief Financial Officer, who will review our first quarter financial results.

Before we begin I need to remind you that on page 8 of our 2011 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 started the year on a very positive note by earning $1.01 per share in the first quarter, versus $0.87 a share a year ago, a 16% improvement, and a record first quarter for Minerals Technologies. This solid performance, which included a 10% increase in operating income margin was largely driven by the strong results from the Performance Minerals and Refractories business unit. Our results for the last two quarters now put us on an excellent performance track that is being driven by improved performance in almost every part of the Company.

We continue to see progress in our major growth strategy of developing and commercializing new products, as our FulFilled platform of technologies of higher filler loading gained further momentum. We signed an agreement for our Fulfill E-325 technology, our first in North America. In addition, we announced new product offerings from both the Refractories and Performance Minerals business units. The solid performance from Refractories and Performance Minerals was a result of strengthened operations, bolstered by improved productivity through our Operational Excellence Initiative, as well as product differentiation, pricing, and good expense control. In addition, our cash flow remained strong as we generated $25 million in the quarter.

One area that remains a concern to us is the economic situation in Europe. We've closed one satellite PCC plant in Finland, and production has been reduced at a second satellite in that country. And a satellite in France remains idle at a paper mill that is being divested by Metsa Board Corporation. We're also concerned about the effect the economic conditions in Europe are having on the steel industry there. As you can see from this chart, our earnings are back on a pre-recession performance track, albeit on lower volume levels, recording over $1.00 per share in the last two quarters. We continue to focus on working capital efficiency and making smart investment decisions. Our return on capital, as you can see from this chart, continues to improve. At 8.7% we're above our cost of capital, and 12% above the first quarter of 2011, where our ROC was 7.8%.

Let's take a look at the progress of our organic growth initiatives. As I mentioned, we've obtained a commercial agreement with a paper maker for adoption of our Fulfill E-325 high filling technologies. Flambeau River Papers has adopted the technology at its paper mill in Park Falls, Wisconsin, bringing the number of E-325 agreements to six. Our effort to expand geographically with our satellite PCC business model continues, as we are in discussions with paper makers in Asia and Brazil for the construction of new satellite plants. We also have two satellite plants under construction in India, where we will have five facilities by year-end. And we have another under construction in Thailand which brings the number there to three.

All of our business units are on a strong innovation track. Our Performance Minerals group, which consists of the Processed Minerals and Specialty PCC units, launched three specialty PCC products for titanium dioxide replacement in paints and coatings. And our Refractories business has engineered and installed the first fully automated Scantrol laser Refractory measuring and application system, for basic oxygen steel making furnaces at NTMK in Russia. NTMK is one of the largest, fully-integrated Russian steel production facilities. This chart, which we've shown in the past few quarters, illustrates the significant progress we've made in commercializing our Fulfil technology. Of the 24 paper mills that are currently actively engaged, 21 are evaluating E-325, and three are working with Fulfil V-426 which is, as you know, a Nalco-owned technology we market and distribute.

As you can see, looking from left to right, we have four paper mill customers where we are introducing the value proposition, two that have agreed to trial the technology, and 12 where the equipment is in place, and we are in the process of validating the technology. The driving force for the adoption by the paper maker is fundamentally cost savings. The paper maker reduces costs by replacing expensive pulp with PCC, and these savings can range from $1 million to $5 million per site, depending on the size of the mill. I should also highlight that we have three sites where we expect to have commercial agreements shortly. By the way, these would be first for the European region, which is significant.

It's important to note that each of these sites is really quite different, using different pulp sources, producing different kinds of paper, all of which requires a degree of customization to demonstrate technological efficacy. Consequently, the time line toward commercialization for each paper mill ranges widely. We've stated that our Fulfil E series would generate $75 million in additional annual revenue over a five year time frame. Commercialization is gaining good momentum, and we anticipate announcing additional commercial agreements in the coming months.

Both our Performance Minerals and Refractories business units, as I mentioned earlier, have shown remarkable improvement, becoming major contributors to our current levels of profitability. Our Performance Minerals unit recorded strong growth and profitability that resulted in a record first quarter for this business. Sales increased 4% through market expansion and pricing adjustments, operating income increased 26% over the first quarter of 2011, and its return on capital is over 13%, an increase of about 25% from 2011. In addition, Performance Minerals is a leader in our Operational Excellence Initiative, posting a 6% increase in productivity in the first quarter. And this team also has registered the best safety performance in the Company. On the Refractory side, we've seen a 36% improvement in operating income year-over-year, primarily as a result of a stable steel industry in North America, pricing improvements, lower raw material costs, and increased metallurgical wire and equipment sales. In addition, this business unit also has improved productivity by 9% in the first quarter through our lean initiative.

As I have in past calls, I would just like to take a moment to emphasize that these four key initiatives that you see on the slide are the pillars supporting our improved financial performance, and to creating a more valuable company. They're the primary reasons behind the cultural transformation that has taken place at Minerals Technologies in the last four to five years. We are now seeing the fruits of our efforts to revitalize our new product development process with the commercialization of new products and technologies. In addition to the new products we've announced, and those in the pipeline, we're also working on new approaches to production processes that are targeted to improve operations worldwide. Innovation is an integral part of our culture and a key aspect of our growth strategy going forward.

As I pointed out with the reference to Performance Minerals, our operational excellence lean initiative is embedded throughout the Company, and is integral to improving efficiency and continuously eliminating waste in all parts of the Company. We'll continue to keep tight control of our expenses through good value spend decisions, which allows us to be more profitable and will provide additional leverage as revenues increase. Regarding safety, we've made dramatic improvements in the last five years. We're now operating at safety performance levels that are the best in the Company's history, and we remain committed to continuously improving.

We also continue to aggressively seek M&A opportunities. As I said in the past, we are looking for Performance Minerals-based companies in less cyclical end markets that have technological capabilities we can build upon. We have a dedicated team that is vigorously pursuing a number of potential opportunities aimed at creating longer term value for our shareholders. Now I will turn it over to Doug who will provide detail on the financial results for the first quarter. Doug?

I would like to review with you our consolidated and business segment results for the first quarter. I will highlight the key market and operational elements of our financial results in each major product line and comment on comparisons to both the first quarter of 2011 and, sequentially, to the fourth quarter of 2011.

As Joe mentioned we reported record first quarter earnings per share of $1.01. It represents a 16% increase from the $0.87 per share recorded in the first quarter of 2011. Strong performances from our Refractory and Performance Minerals businesses were the primary drivers of the growth over last year. Our consolidated sales of $257 million decreased 2%, or about $5.4 million from the prior year. However, excluding foreign exchange, the permanent and temporary mill shutdowns in Finland and France and the de-consolidation of our Minteq Korea business last year our underlying sales grew 3%.

Our cost of sales decreased 4%, which had a favorable leveraging impact on sales resulting in a 4% increase in gross margin. Again, this occurred primarily in the Performance Minerals and Refractories businesses. Total expenses, including plant overhead costs represented 14.8% of sales in the first quarter, below last year's ratio of 14.9%. This resulted in an operating income of $27 million, an increase of 8% over last year, and represented 10.5% of sales, versus 9.5% in the first quarter of last year.

Our return on capital for the quarter was 8.7% on an annualized basis, which is above our weighted average cost of capital of 8.3% and higher than the 7.8% achieved in the first quarter of 2011. In the first quarter, we generated $25 million in cash from operations, of which $9 million was used for capital expenditures. We have nearly $435 million in cash on hand and continue with just under $100 million of debt. Sequentially, our consolidated sales increased 2% from the fourth quarter and our sequential operating income performance was above expectations, increasing 8%, primarily due to the strong performances in the Refractories and Performance Minerals product lines. Paper PCC also improved from fourth quarter levels as expected due to increased pricing associated with lime costs, which were contractually passed through to customers in the first quarter. In total, our performance resulted in the highest in the Company's history, despite sales 10% to 15% below pre-recession levels.

The improvement in operating margin from 9.5% of sales in the first quarter of 2011 to 10.5% this quarter, was attributable to the improved results in the Performance Minerals and Refractories businesses which more than offset the margin decline in PCC. The decrease in paper PCC was due primarily to lower volumes associated with the permanent and temporary paper mill shutdowns in Europe, as well as the general lower paper demand in that region. The improvement in Performance Minerals was due to higher pricing, improved volumes, and lower costs from the favorable weather conditions in the northeast, and continued productivity gains offset by higher energy costs. In Refractories, lower raw material costs, higher metallurgical wire volumes, and continued costs and expense control programs contributed to this increase.

Base volume growth in our business is primarily driven by the economic conditions in the uncoated wood-free paper, construction, automotive, and steel markets. This chart shows the change in these markets over the prior year in our two main regions, North America and Europe. As you can see, uncoated wood-free paper production was down 3.3% in North America and 6.3% in Europe. As I mentioned in previous calls, Metsa Board Corporation announced plans last year to divest its Alizay paper mill in France. Although the paper mill is presently not operating, we believe discussions for the sale of the mill continue. In addition, the Myllykoski paper facility and our associated satellite operation has been closed, and our production at the Aanekoski mill has been substantially reduced due to lower demand by both Metsa board and UPM. The combined effect of these items reduced European PCC volumes by 45,000 tons this quarter compared to last year.

For the full year, the uncoated wood-free paper production forecast for 2012 for North America is a decline of 3%, and in Europe a decline of over 5%. The construction market in the US, as measured by residential fixed investment, was up nearly 11% in the first quarter versus the prior year. Automotive unit production in North America also continues to be strong, with production rates up 18% and steel production in North America has improved by almost 7%. Steel capacity utilization rates in the US have increased to 78%, in the first quarter from 74% last year. However, in Europe our end markets reflect the current soft economic conditions there. Construction output was down over 7% versus the prior year. Automotive production rates have declined almost 5%, and steel production has also declined almost 4%.

This slide illustrates the financial results within the Specialty Minerals segment. In total, sales in Specialty Minerals decreased 3% from the prior year. However, excluding foreign exchange and the permanent and temporary paper mill shutdowns in Europe, the segment's underlying sales grew 4%. Paper PCC sales excluding the shutdown grew 3%. The volume declines in Europe were partially offset by new volumes from the three satellite facilities that came on-line over the past year. One in superior, Wisconsin, and two in India. As we indicated on the fourth quarter call, we expected that the volume declines in Europe would exceed the volume increases from our new satellites until they fully ramp up and until the other three satellites currently under construction, two in India and one in Thailand, come on-line later this year.

In other segment product lines, specialty PCC sales were up 5%. Talc sales increased 6%, and GCC sales were up 2%. Segment operating income for the first quarter increased 1% over the prior year to $19.9 million, due to a 26% increase in Performance Minerals operating income, which more than offset the lower volumes in PCC. It's worth highlighting that Performance Minerals operating income margin have increased 20% over the prior year. This improvement in Performance Minerals was due to higher prices, improved specialty PCC and talc volumes, and overhead cost reductions. In addition, each of the Performance Minerals facilities made gains in productivity over the last year. The decline in PCC was primarily due to the lower paper PCC volume in Europe associated with the mill closures I mentioned earlier. Overall, segment operating income represented 11.9% of sales in the first quarter, compared to 11.4% in the prior year. Sequentially, first quarter segment sales increased 5%.

Operating income increased 23%, and was higher than we had anticipated on our last call. Performance Minerals benefited from lower operating costs due to the unexpectedly mild winter weather and a favorable mix in the talc product line. Paper PCC profits increased in line with our expectations as we recovered the higher lime costs that were absorbed in the fourth quarter. Looking forward, second quarter North America paper production is projected to be down about 3% compared to the first quarter as a number of paper mills will perform their annual maintenance outages. If you recall, this occurred last year as North America PCC volumes were down 7% in the second quarter, versus the first quarter of 2011. European paper demand is also expected to be down sequentially, about 2%, in the second quarter. Current indications are that the second quarter profits in our PCC product line will decrease by approximately 7% to 10% from first quarter levels. In Performance Minerals we expect profits to increase from first quarter, as the second quarter is typically the strongest period for that business, as construction activity ramps up. Overall, we expect the second quarter operating income for the segment to be similar to first quarter levels.

As I mentioned, Specialty Minerals operating income margin ratio increased from 11.4% of sales in 2011, to 11.9% in the first quarter of this year. As you can see from the chart, the segment overcame some significant factors and was able to improve profitability. Volume declines in Europe associated with the closure of Myllykoski, paper machine curtailments at Aanekoski and the temporary closure of the Alizay paper mill, impacted segment margins by over two percentage points. Paper PCC contractual price increases and lime recovery improved margins by 1.5%. Energy costs continue to be higher relative to last year as the price of fuel oil, used in the Performance Minerals business, escalated over last year. Price increases in specialty PCC and talc, productivity improvements, and expense control have also contributed almost two percentage points of margin improvement.

This slide shows the financial results within the Refractories segment. In total, sales in the first quarter were flat with the prior year. However, excluding foreign exchange and the de-consolidation of our career Refractories business, which occurred in the third quarter of last year, underlying sales grew 3%. Refractory product sales were down 1% to 69.1 million, but increased 2% excluding Korea. In North America, Refractory product sales increased 5%, benefiting from the higher capacity utilization rates in the US. Europe Refractory sales declined 7% as a result of steel mill shutdowns and general weakness in the European steel market. Metallurgical wire sales grew 4% to $20.3 million. North American wire sales grew 7% as a result of both market share gains and improved steel industry conditions. In Europe wire sales declined 6%.

Expense levels including plant fixed costs were 15.4% of sales, as compared to 16.5% last year. Operating income increased 36% in the first quarter to $9.1 million from $6.7 million in the prior year. The improvement was due to a number of factors including pricing improvements, lower raw material costs, higher productivity, and reduced overhead expenses. Profit improvements were most notable in our Japan and Turkey operations. The segment operating income ratio improved significantly to 10.2% of sales compared, to 7.5% in the prior year.

Sequentially, Refractories segment sales decreased 3% and operating income decreased 13% from the fourth quarter. As expected, the decline in both sales and operating income was due to lower high-margin equipment sales. Segment results were slightly better than forecast, as steel production in the US was stronger than we anticipated, growing almost 7% sequentially, resulting in higher Refractory and metallurgical wire volumes. In addition, two steel furnace relines were postponed to the second quarter which helped Refractory volumes.

Looking forward, we expect that our second quarter operating income for the full segment to be similar to the first quarter. We remain concerned that steel production levels in Europe will continue to soften, and there are some indications that magnesium oxide prices have begun to rise. In addition, two vessel relines that were moved to the second quarter will lower Refractory product demand. As I mentioned on the previous slide, the Refractory segment operating margin ratio increased significantly to 10.2% of sales in this quarter, from 7.5% in the first quarter of last year.

As you can see from the chart, Refractory and metallurgical wire volume declines in Europe, net of the increases we saw in North America, impacted operating margins by over two percentage points. This is fully offset by improved Refractory and wire pricing and product mix over the first quarter of last year. We began to realize the benefits of lower magnesium oxide costs in the quarter, compared to last year. However, magnesium oxide prices are beginning to increase, which could have a dampening effect on this segment's margins going forward. In addition, this business has improved productivity levels and has continued with it's cost and expense control programs. These items contributed almost one percentage point to the margin growth.

These charts illustrate our working capital and cash flow trends. As you can see, total days of working capital increased slight to 57 days, but were three days below the first quarter of 2011. Working capital management remained a key area of focus for the company, and we're constant looking for ways to improve our efficiency further. Our cash flow from operations was approximately $25 million in the first quarter, as compared to $19 million in the first quarter of 2011, and our capital investment for the quarter was $9 million. As I mentioned earlier, our earnings of $1.01 per share was a record first quarter performance for the Company, and was above our expectations primarily due to stronger than expected performance in the Refractories and Performance Minerals businesses. Looking to the second quarter, we expect the Specialty Minerals segment operating income to be similar to the first quarter.

Profits in our PCC product line will decrease by approximately 7% to 10% from first quarter levels due to the annual maintenance outages in North America. In Performance Minerals we expect profits to increase from the first quarter, as the second quarter is typically the strongest period for that business. In our Refractories segment we expect that our second quarter operating income for the full segment will also be similar to the first quarter. We should continue to benefit from the higher capacity utilization rates in the US. However, we remain concerned that steel production levels in Europe will continue to soften. As I mentioned earlier, two vessel relines in the US were postponed to the second quarter, which will lower Refractory demand. Overall, we expect total Company profits for the second quarter to be similar to the first.

Let's go to questions.

(Operator Instructions) Silke Kueck, JP Morgan.

My first question is on the Refractories side. You did a really nice job outlining how all the productivity improvements, how the margin improvement came about, even though the sales year over year were flat, and the -- I was wondering if could you discuss some of the productivity improvements that are still taking place. My recollection is that a lot was done from 2007 to 2010 already to lower the break-even levels. So I was wondering like what the ongoing initiatives are. Like how are you achieving those really nice margin improvements and productivity gains?

Well, Silke, what I'm about to say really applies to all of the businesses and all of the functions in the company. The continued improvements that we're seeing come about through the application of operational excellence principles. Today we have standard work, daily management control.

The things that you've heard me talk about over the past several years have been reaching much higher levels of deployment throughout the Company. There are very high levels of participation throughout the Company by operators, by all employees, in finding ways to save money, improve processes, improve quality of our product, improve delivery.

So, a good part of what you're seeing is that continuous improvement effort, and, you know, A kaizen is an event where employees come together for anywhere from one day to three days or four days and examine a process, and out of that come out with ideas on how to improve it.

Last year we had roughly 700 kaizens, which is a fairly large number for a company this size. This year we're running in the first quarter at a rate that's probably 20% higher than that level. So it's a strong indicator of continued high level of employee engagement.

Also, another indicator that contributes to ongoing savings is our suggestion system. We are now averaging roughly five to six suggestions per employee around the world, which is a fairly high number, when you consider that we were at a very low level three years ago, something somewhere between.1 and 1. But it's another aspect of operational excellence that builds in a high level of employee involvement.

I'd say employee engagement, plus focused areas for improvement combine, for not only Refractories but other parts of the Company, to the improved performance levels. But I'm also going to ask Han Schut, who is with us on the call, to share about some of the specific initiatives that Han and his team are focused on. Han?

Thank you, Joe. Yes, Silke, thank you for the question. I think when you look at the transformation of Minteq, specifically through the first quarter of 2012, what we have seen is specifically higher productivity in our Bryan facility in Ohio. Last year we consolidated the Old Bridge facility into the Bryan facility, and that has started to pay off.

And in general, also, there was a lot of concentration on stabilizing the supply chain. And that has led to increased magnesium oxide yields and lower waste on the MgO side, less expediting, So in general you could say that on the supply chain side there is much more stability, and that's starting to pay off also in operations. So when it comes to MgO yields, when it comes to changeovers, and just in general the productivity in our operations.

That's helpful. So it's like a general level of expense reduction rather than just employee reduction.

Yes, definitely.

That's correct.

And if I could ask one question on raw materials, so in general, and I understand there are different -- This is on Refractories again. There are probably different grades of Refractories that you produce. But if you make a ton of Refractories material, how much magnesia goes into a ton of Refractory materials? Similarly, I'm interested to know how much energy is needed, when you make minerals to make a ton of ground calcium carbonate or talc. If you could give us any metrics, it would be helpful.

Yes, first of all, we have to distinguish between two main product lines, which is aluminum-based and magnesium oxide-based. When you look at magnesium oxide-based, typically the content is between 70% and 90%.

Okay.

(multiple speakers) I think, to your question of energy per ton, it varies quite a bit, depending on the product line of the company. Probably the highest energy usage embedded in our product comes in our PCC business through lime and the purchase of lime.

And that carries over to, for instance, a facility like we have in Adams, which is a GCC, and a specialty PCC business where in a year we use number 6 fuel oil. In the year, we'll spend out, say, 5 million gallons times $3.00 a gallon today. A little bit less than that. So it varies quite a bit, Silke, depending on where in the Company the facility is but the product line as well.

Do you buy any natural gas at all, or as opposed to natural gas is it more geared towards fuel oil?

We do buy natural gas. We also have some projects that are focused on converting. In one case, number 6 fuel oil to natural gas.

Most of the energy used in Refractories is electricity. Also some propane use in the wire business.

Thanks. I'll get back into queue.

Rosemarie Morbelli, Gabelli & Company.

Congratulations on a great quarter. You did mention, Joe, that some of the Refractory business in Q1 was really taken for Q2 because of two steel furnaces being relined next quarter. Did anything of the sort happen in your other product line? And if you look at Europe, do you think that you got a little bit of Q2 business into Q1, or was Europe slowing down throughout the quarter?

Rosemarie, we didn't see anything else. I think sequentially from the fourth quarter, one of the major items was the equipment sales in Refractory, which are typically higher in the fourth quarter. As all of those units that we've built in the year are generally sold in contracts consummated in the fourth quarter. So we do see a drop-off there. We had a couple of relines, as I mentioned, in the Refractories business that moved off into the second quarter. So that helped the demand.

I think the remainder of it, especially in Europe, we did see some shutdowns in the quarter, so that wouldn't be pushing volume off. Those were actually steel mill furnace shutdowns from the fourth and the first quarter. And we're going see a couple of those relines, again, be pushed from this quarter into the second quarter in the Refractories. The other product lines, I don't see anything that was pulled in significantly into this quarter.

Okay. If you look at your new contracts in Asia, the five existing contracts, did you get any revenues from them in the first quarter? Is it too early? If you could talk about the potential revenue for 2012, for the year as whole, and 2013. And I was wondering if it is -- if those contracts are only for one paper machine in one paper mill and given one paper company, what would be the potential for that as you move from one machine to another, and then from one mill to another. Can you help us understand how it is going to progress?

Rosemarie, is your question around the FulFill E-325 or the new satellites?

The FulFill E-325.

On the FulFill E-325, just to give you a little bit of dimensioning, because I did indicate on the last call it was a little premature, we needed to have a little more cook time. But I can give you some perspective of the six contracts that we have right now. For commercialization that I mentioned, those six contracts could, and I should say have the potential to, deliver this year around $750,000 to $1 million of operating income.

We have more coming. Each one of these will be a little different because of the size of the sites that we're implementing this in, and as well as the degree of penetration of the new product in each one of those sites. In some cases, the ramp-up is very quick. In other cases it's going to take longer.

So in terms of visibility that we can give you right now, it would be roughly around the number that I -- the numbers that I shared with you. And as we get further in, in the next quarter we foresee more contracts coming on. They're being negotiated right now, and we'll have an opportunity to share even more with you.

Just so I want a little more detail, if you do not mind. When you say that it depends on the degree of penetration, are you talking about how many machines at the mills, at one particular mill, or are you talking about more mills?

It's both.

Within one paper company?

It's both. It's the number of machines that would be in a paper mill, at a paper mill site, as well as the different grades that are made at those sites. And we typically will qualify with on one machine one or two grades, get acceptance, and then move beyond that. In other cases, we go through a longer qualification period for all the grades, so it really varies. I'm going to ask D.J. to give a little more granularity about -- around how that process works, and how different it is from site to site. D.J.?

Sure, Joe. So, Rosemarie, what we had indicated during some of our other conversations and what Joe says is exactly right. It's a combination of getting across the different paper machines, but also within a paper machine, it's getting across the grades. So this step that we call technology validation is, in fact, our longest step in getting this to be commercialized, and it takes into account everything from each grade that a paper machine makes.

We've also been engaged in what I will just call in situ product development for the paper makers as they look at different raw materials and different fiber species that they can do, and then sometimes the paper makers ask us to do specific customer qualifications. So it's a combination of those items and what --

In terms of just looking forward, I think Joe's projections are spot-on with what we've announced so far, and it's -- we've not -- this will be the first time where we are coming out of the gate saying we've got several more coming in the next quarter, but we have several more coming in the next quarter. And our chart showed three European mills that are right on the verge, and we'll hope to be able to embellish more when those cross that finish line.

Thank you. And if I may ask one quick question. Your R&D expenses were $5 million this quarter. Is that a new quarterly level? Is it linked to additional trials? What is behind the higher number?

Nothing specific there, Rosemarie, I think it's pretty much on par. We do have some additional trials expenses going into FulFill, but there's nothing behind that. Typical number.

Okay, thank you.

Steve Schwartz, First Analysis.

Thanks, guys. Let me just start by saying thank you for putting in the profitability bridges. That's very helpful there. Just wondering if you could help disaggregate this weather benefit that you mentioned in the press release.

Sure, Steve. I think as we all -- well, most of us experienced a pretty mild winter in the northeast, and I think it was more mild than expected. And so a lot of what we forecast going into January, February, and March is a lot of extra energy, snow removal. It requires ore that can get wet and pumping out water, et cetera. So in mining operations we saw a little less than -- about $400,000 of the growth sequentially was just due to that weather benefit.

Again, don't know what next year is going to hold, so don't say that's sustainable, but more of the profit improvement you have seen year-over-year is due to the mix, the pricing, the productivity the Performance Minerals business has been able to affect, and also the reduction in overhead costs.

Okay. And, Doug, what roughly was the operating margin in the Process Minerals business?

Give me one second, Steve. Well, the gentlemen next to me is saying we typically don't disclose that number, but I can give you an idea.

Oh, come on now, Rick. (laughter)

It's lower than the 16.3% that we showed. PCC, specialty PCC is a more profitable segment of that product line.

Sure, sure. And then just to touch on a few things that Silke brought up. Just to clarify on the natural gas situation in North America. Do you guys see any great opportunity there now that we have lower-cost nat gas?

We do see some good opportunities. We've been looking out and seeing how the forward prices have been dropping, so we take advantage of some of the lower-cost natural gas.

We have -- we do use quite a bit, as Joe mentioned, in our lime production process, we use fuel oil. And fuel oil has generally increased, significantly actually, over the past couple of years, which is a drag on the margins that I've shown you. We do investigate opportunities to move more of our production to natural gas, and those are things we're going to continue with throughout this year.

Okay. And then just lastly, again, on the raw material front with magnesium oxide. It looks like you were able to work through your high cost inventory in the first quarter. Maybe a little faster than we thought, coming out of the fourth quarter. Would you say, I guess, part A to the question, would you say your pricing now has caught up with your cost?

And then in your commentary, part B, you mentioned that it looks like MgO costs could be going up. What does that then look like, the pricing versus cost profile, as we go into the second half of this year?

Well, you know, again, prices are changing. We're continuously selling our value proposition. You are right, part A, we did move into some of the lower cost inventories faster, especially in North America with the higher consumption rate. So I think you will see a little bit of that benefit continuing in the second quarter.

My comments on the higher MgO prices, it's a timing effect. We are seeing higher MgO prices and I think that will manifest itself, it will manifest itself in the second quarter, but primarily in Asia. Our supply chains in Asia are shorter, so we consume, we buy and consume much more rapidly there. But if they continue to increase, we will see some of that effect the margins that I showed out into the third and fourth quarter where supply chains are longer, like in North America.

Looking back, say a year or two years ago, when we he first had this trouble with getting MgO, it essentially came down to higher costs for you. Has your supply chain changed at all? Have you been able to do anything differently there over the past couple years?

We have. So I think in the past, significant, almost 75% of our magnesium oxide was purchased from China. We've had a real concentrated effort, Han and his team over the past couple of years, to diversify that base to a number of different suppliers around the world. And we've been able to do that. So we've reduced our dependence on specifically Chinese MgO significantly.

We also have increased our production out of our own facility in Turkey, and so we're self-sufficient to some extent, in part of the business. So it's really been a conscious effort to diversify our supply base.

How much is supply out of [Asmis] in Turkey changed over the past couple of years?

We've had some productivity improvements. It's similar. It covers about 25% of our total magnesium oxide needs and the majority of that is into Europe. I would say we've probably had a 5% increase in productivity over the past couple of years.

That's great. Okay. Thank you.

At this time there are no further questions. At this time, Mr. Honey, I will hand the call back over to you for closing remarks.

Thank you very much for your interest in Minerals Technologies and have a good day.

Thank you. This concludes today's earnings call.