Minerals Technologies Inc (MTX) 2012 Q2 法說會逐字稿

Good morning, my name is Christie and I will be your conference operator today. At this time, I would ike to welcome everyone to the second quarter 2012 Minerals Technologies Incorporated 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)

It is now my pleasure to the program over to Mr. Rick Honey. Please go ahead

Good morning. I am Rick Honey, Vice President of Investor Relations. Welcome to our second quarter 2012 earnings conference call. Joe Muscari, Chairman and Chief Executive Officer will begin today's call by providing some perspective on our second-quarter performance. He will be followed by D.J. Monagle, head of our paper PCC business who will discuss the advancement of our Fulfil portfolio technologies. Then Doug Dietrich, our Chief Financial Officer will review our second-quarter financial results. Before we begin I need to remind you that on page eight 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.

Thanks, Rick. Good morning everyone. We continued our strong overall operating performance into the second quarter and that is three consecutive $1 plus quarters as we earned $1.11 per share. This was also another record quarter in the Company's history as well as a record first half with an EPS of $2.12. Earnings in the second quarter increased 23% from the $0.90 we achieved in the second quarter of 2011. The solid performance included an 18% increase in operating income to $29.5 million, and a 25% increase in operating income as a percentage of sales to 11.6%. Our return on capital continues to show improvement, increasing 19% to 9.4% for the second quarter on an annualized basis. In addition, our cash flow remained strong as we generated $40 million.

Both the Specialty Minerals and refractory segments recorded improved operating income as a result of higher productivity, lower material and energy cost, good expense control as well as pricing improvements. Specialty Minerals benefited from very strong operating performance from Performance Minerals as well as higher profits in North American paper PCC. It's important to note that we were able to achieve this high level of performance despite a lower revenue base than previous highs, which attests to our strategic and operational initiatives to improve performance on all fronts. Operational excellence, new products, growth, and market position. In fact, if you isolate the European recessionary effects on our sales, as well as the currency impact of the weakening euro, the underlying growth in the Company is 1% to 2%.

Our Fulfilled new products achieved a significant milestone as we recently announced three new contracts. Two of which are in Europe. We now have a total of nine commercial agreements with paper mills around the world and this program continues to gain momentum as we are actively engaged with 26 other paper mills that have a serious interest in the technology. It should be noted that we added 10 new paper sites to our global marketing plan for this product. D.J. Monagle our President of paper PCC will be providing a comprehensive overview and update of where the program stands later in the call.

The economic conditions in Europe obviously remain a major concern. We've closed one satellite PCC plant in Finland, experienced reduced volumes at another satellite there and a satellite in France remains idle at a paper mill that is being held for sale. We're also seeing reduced steel production in Europe that effective us during the quarter, along with a reduction in our specialty PCC sales on the continent. In the US, the recent drop in the steel industry utilization rate is also of concern to us as we look forward.

The key strategic and operational initiatives that I just referenced, what we refer to as our pillars of the foundation for change have been critical to transforming Minerals Technologies into a stronger operating company. Our efforts to revitalize our new product development process is now bearing fruit with the momentum of our Fulfill technologies as well as the new products and performance minerals and refractories. Innovation is an integral part of our DNA and a key aspect of our growth strategy going forward. Our operational excellence lean initiative which is embedded throughout the Company is also paying off. Employees are engaged all over the globe in ways to improve efficiency, productivity, and quality through their relentless efforts to remove waste from our processes in all parts of the Company and to deliver a higher value to our customers.

Continued tight control of our expenses also helps to provide additional leverage as revenues increase. Over the last 3.5 years, the company has reduced its break-even point through these efforts by 25%. We've also made dramatic improvements in safety over the last five years with safety performance levels that are now at the best in the Company's history. And is with our other initiatives we strive for continuous improvement in this area. Our current running loss work day rate of 0.55% by the way, is the lowest it has ever been. A testament to all our employees desire to continue to create a safer place to work.

These pillars that I referenced relate directly to creating business and shareholder value as they tie to the key longer-term objectives that we set for the Company at the beginning of 2011. When we laid out revenue, margin, profit, and returns targets. Let's take a minute and see how we are progressing. We are tracking well to achieve our target to increase operating margin from 10% to 12% as during the second quarter of this year operating income as a percentage of sales was 11.6%. The effort to move EBITDA from 16% to 18% is also on the right track with our EBITDA now at 16.5%.

We also outlined a goal of moving our Return on Capital from 8.3% in 2010 to 12% plus in 2015 and today, we are at 9.4%. Keep in mind that the current cash we have on our balance sheet is in the denominator of this calculation. The target for revenue growth from $1 billion a year to $1.4 billion plus however is not quite on track due largely to the economic weakness in Europe and slower economic growth than anticipated in the US. However, the underlying drivers for that growth are things we will talk about further today. New product commercialization, new satellite facilities in Asia, are basically on track. As you can see from this chart, our earnings for the last three quarters are back on a high performance track of more than $1 per share. And our earnings for the last two halves are tracking above the best pre-recession six-month period. Our Return on Capital also continues to improve and at 9.4%, we're above our cost of capital, 19% above the second quarter of 2011 when our ROC was 7.9%.

Let's now take a quick look at how we have been executing our strategies of geographic expansion and new product development. As I mentioned, we recently obtained three commercial agreements with paper mills for our Fulfill E-325 high filling technology. Two of these mills mark our first penetration into Europe where we signed an agreement with the Mondi group for Fulfill at Mondi's paper mill in Ruzomberok, Slovakia. We also announced another new agreement in Europe where the paper maker wished to remain unnamed for competitive reasons we also signed one with another Asian paper company since the last call. On the progress we have made with Fulfill, I would like to provide you with a little perspective on potential operating income.

In the last call I said that they operating income from the six sites we had last quarter would deliver around $750,000 to $1 million of operating income for 2012. Today, the nine sites are estimated to provide between $1.4 million to $1.7 million operating income and on an annualized basis the nine agreements should generate about $2.5 million to $3 million in operating income. Our performance minerals group continues to make inroads with new talc anti-block products and we are now in trials with four paint coating and ink manufacturers in the US for use of new titanium dioxide extender products. Refractory business has also seen success with new products and geographic expansion.

Mintek, the operating division for refractories, recently sold it's first Lacom torpedo laser measurement equipment to a steel mill in Europe. Mintek also assigned a contract to provide all refractory maintenance for a new steel mill owned by United Steel Company in Bahrain that will start up in the third quarter and will provide $30 million in sales over the next three years. This is a new best business venture for refractories team as we will he providing a general contractor lead role to this customer for all of their refractories maintenance including monolithic's and brick. This can serve as a future business model for Mintek to enhance growth in the coming years as part of their adjacency strategy.

I'd now like to spend just a few moments to highlight our performance minerals business unit. This group which is well advanced in our operational excellence lean initiative, improved efficiency and productivity by 8% over the second quarter of 2011. In the second quarter and first half of 2012, performance minerals increased operating income by 27%, which were company records for both time periods. Sales increased 3% and Return on Capital was more than 16%. A 20% increase over the second quarter of 2011. The entire performance minerals team led by Doug Mayger has done an outstanding job on all key business fronts, Improving safety, removing waste, penetrating new markets with innovative products as well as improving pricing.

In past calls, we have discussed our ongoing M&A strategy and our use of cash. Topics that have come up from recent visit with shareholders as well. We continue to maintain a very active approach in searching for appropriate acquisitions and as I have stated before, we are seeking minerals-based companies with technological capabilities that we can leverage with our expertise and crystal engineering and fine particle technology. We're also looking at businesses outside of our highly cyclical end markets of paper, steel, construction and automotive such as energy, environmental and consumer products. As yet, as you all well know, we have not finalized any deals. At the same time, we are also using our cash to buy back shares through our most recent share repurchase program. So far this year, we have repurchased over $8 million of shares and we plan to continue with this balanced use of cash in our shareholders best interest going forward. Now I like to turn it over to D.J. Monagle who will provide you with a special update on Fulfill. D.J.?

Thanks Joe. Let's look at the progress made with the Fulfill ENV-technologies. To provide some perspective, here is the slide we showed you from our fourth-quarter conference call. When we had five signed commercial agreements and were actively engaged with 24 paper mills. Now let's take a look at where we are today in our marketing activity for the Fulfill portfolio of technologies. We now have nine commercial agreements. But more importantly, we are actively engaged with 26 other paper mills around the world that are interested in this cost saving technology. The arrows show the progress we've made since the fourth-quarter.

We now have agreements with six paper mills in Asia where it is customary practice to adopt new technologies quickly. In the first quarter we executed our first agreement in the United States when we began our application at a plant in Wisconsin with Flambeau River paper. More recently we added the two customers Joe referred to in Europe one with Mondi, a premier paper maker at their world-class paper mill in Slovakia and another in Asia. We're also quite close to commercialization with several more paper mills in North America and the fourth from our European region. The Fulfil EMV-Technologies used primarily in uncoated free sheet for office type paper typically allow the paper makers to consume 15% to 25% more filler saving $5 to $20 per paper dot. We see this portfolio as advancing our position as the global leader in paper filling technology.

In addition to these commercial accomplishments, we continue to make technical progress across the Fulfil portfolio. Fulfil E-325 remains the work force technology and we're running numerous trials across the globe. As this program gains further momentum, our objective is to work with paper makers to expand the technology across all their uncoated free sheet paper grades which will increase our revenue stream. As I've explained in the past, our approach begins with demonstrating to the customer that trialing that technology is worth the effort and should merit urgency in terms of developing the application techniques that will save them money. To do this, we undertake a very specific technical cost-benefit analysis. Taking into account the customer cost structure and paper machine configuration.

With agreement to trial we then tailor engineer specifically designed equipment to enable integration of the Fulfil technology. In essence, we collaborate with the customer to determine the optimal Fulfil recipe. A combination of RBCC, the chemical additive and the specific machine operating conditions in every grade before agreeing that the technology is indeed worth it for them to convert to this new system. As I stated on previous occasions, the Asian paper makers are quick to adopt the new technology into their system, then they slowly proliferate across the grade structure. We see North American and European paper makers as lower to accept and validate the technology but we expect them to integrate it into their manufacturing plants across all of their product mix quicker.

In summary, regardless of the region, the nature of this technology is a grade by grade, machine by machine proliferation. Once a concept has been validated. In either case however it's important note the paper industry is extremely risk-averse. Now let's turn over to Doug Dietrich for an in-depth look at our second-quarter financial performance.

Thanks DJ. Good morning everyone. I'll now take you through our consolidated and business segment results for the second quarter. I'll highlight a key market and operational elements of our financial results in each major product line and comment on comparisons to the second quarter of 2011 and sequentially the first quarter of this year.

As Joe mentioned, we reported record quarter earnings per share of $1.11 which represented 23% increase from the $0.90 per share recorded in the second quarter of 2011. Another quarter of record earnings from our performance minerals business, a solid performance from our refractory segment, higher profitability in our paper PCC business and continued productivity improvements were the primary drivers of the earnings growth. We were able to achieve this level of income despite the continued weakening of our European end markets where sales and operating income were down 17% and 27% respectively. Our consolidated sales decreased 5% or about $14.4 million from the prior year. However, excluding foreign exchange, the permanent and temporary paper mill shutdowns in Finland and France and the deconsolidation of our career refractory business last year our underlying sales were up slightly at 1%.

Our cost of sales decreased 8% which had a favorable leveraging impact on sales resulting in a 5% increase in gross margin. The favorable leveraging occurred in all business units but most significantly in performance minerals. Expenses declined 6% from last year and represented 10.6% of sales in the second quarter versus 10.7% last year. This resulted in operating income of $29.5 million, an increase of 18% over last year and represented 11.6% of sales versus 9.3% in the second quarter of last year, a 25% improvement. A return on capital for the quarter was 9.4% on an annualized basis which is above our weighted average cost of capital of 8.3%, and higher than the 7.9% achieved last year.

In the quarter, we generated $40 million in cash from operations of which $15 million was used for capital expenditures. Sequentially, our consolidated sales decreased 1% and our sequential operating income performance was above expectation, increasing 9%. This is primarily due to stronger results in the performance minerals product line due to lower utility cost, good cost control and higher volumes in our talc business. As we indicated on the last call, we expected paper PCC process to decline in the range of 7% to 10% from the first quarter level due to annual paper mill maintenance shutdown. Paper actually came in slightly better at 6%. The refractory segment was lower-than-expected as this operating income declined 4% however this was more than offset by strong results in our performance minerals business.

In total, our performance resulted in the highest quarterly earnings per share in the Company's history. Each of the three product lines contributed to the increase in operating margin. The improvement in paper PCC was primarily due to higher volumes in all regions with the exception of Europe and price recovery of higher raw material cost. In addition, productivity improvement, lower operating costs and overhead expenses helped to offset the effect of lower European volumes. The improvement in performance minerals was due to lower utility cost, higher pricing, improved volumes and most product lines and continued productivity gains in driven by our operational excellence program. In refractories, lower raw material cost, higher metallurgical wire volumes and continued cost and expense control programs drove this improvement.

Base volume growth in our business is primary driven by the economic conditions in the uncoated wood free paper, construction, automotive and steel markets. This chart shows the changes in these markets over the prior-year in our two main regions, North America and Europe. Uncoated wood free paper production was down about 3% in North America and about 5% in Europe. For the full-year, North America uncoated wood free paper production is forecast to decline 2% and in Europe it is forecasted to decline over 5%. I would like to note that as of today, there's still no information regarding the status of the Metsa board Corporation, Alizay Mill in France special for the sale of the mill continue.

The construction market in the US which includes both residential and commercial markets was up nearly 7% in the second quarter versus the prior year. Automotive unit production in North America also continues to be strong with production rates up 26% and steel production in North America has improved by more than 6%. Average steel capacity utilization rates in the US increased to 78% in the second quarter and 75% last year. However, rates dropped approximately 6% in June to 76% from a high of around 81% in April. This raises some concern for us as operating rates have declined further in July. In Europe, you can see that the construction, automotive and steel markets reflect current soft economic conditions as each are down more than 6%.

I would like to highlight our regional sales and operating income changes over the last year. I think this will give you a perspective of the impact that Europe and weaker foreign-exchange rates are having on us. Figures in the lower right corners of this chart are shown excluding effect of currency and for Asia also reflect the deconsolidation of the career refractories business. Excluding foreign exchange, sales in all regions are higher than 2011 levels, except for Europe, which has been affected by the weak economic conditions and the closure or idling of several paper and steel mills. You can see the impact that Europe and the weaker euro is having on our overall sales and operating income.

We have been able to overcome this with strong performances in all other regions which has helped improve our operating income by almost 20%. This improvement is a direct result of our operational excellence program, diligent cost control a price increases, and solid supply chain sourcing decisions related to raw materials and utility cost. This gives you a view of our profitability improvement by region. As I mentioned earlier, our operating income ratio increased to 11.6% this quarter approaching the 12% operating income target we set for ourselves in 2010. The Company was able to overcome the weak conditions in Europe and improve operating margins over last year.

North America drove 2 percentage points of improvement due to record earnings and performance minerals and increased profitability in both paper PCC and refractories. Europe was affected by lower paper PCC volume including the temporary and permanent paper mill shutdowns and lower volumes across the refractory product lines. Asia increased primarily due to improved profits in our Japan refractories business. Our raw material costs are lower in the region and if you recall our Japan refractory business was affected by the tsunami that occurred in March of last year. These increases were offset by start up costs associated with our new PCC satellite operations in India. Latin America also demonstrated an improvement.

This slide illustrates the financial results within the Specialty Minerals segment. $22.1 million of operating income is an all-time best for the segment. In total, segment sales decreased 2% from the prior year to $168 million. However excluding foreign exchange and the permanent and temporary paper mill shutdowns in Europe, the segment's underlying sales grew 5%. Paper PCC sales excluding the shutdowns with foreign-exchange grew 6%.

The volume declines in Europe were partially offset by new volumes in the three satellite facilities that came online over the past year, one in Superior, Wisconsin and two in India. In the other segment product lines, specialty PCC sales were up 2%, talc sales increased 3% and GCC sales were down slightly at 1%. Segment operating income in the second quarter increased 19% to the prior year driven by a 27% increase in performance minerals operating income and an 11% increase in paper PCC. As I mentioned earlier, the improvement in performance minerals was due to lower utility cost, higher prices, improved specialty PCC and talc volumes and continued productivity gains. The increase in paper PCC was primarily due to higher pricing in North America and Latin America, lower operating costs and an 8% improvement in productivity. In addition, we are starting to see profit contribution from our growth initiatives related to our new satellite facilities and the Fulfil E325 program.

Overall, segment operating income represented 13.1% of sales in the second quarter compared to 10.8% in the prior-year. This operating income level is the highest for the segment since the third quarter of 2002 for nearly 10 years. Sequentially, segment sales were the same as the first quarter levels. Despite the flat sales, operating income increased 11% and was higher than we had anticipated on our last call. Performance minerals benefited from lower utility and operating cost, slightly higher volumes in the talc product line and a favorable mix in the GCC East product line. Paper PCC profits decrease 6% which is slightly better than the 7% to 10% decline we had indicated on our last call.

Looking forward, third quarter North America paper production is projected to be up slightly at 1.5% compared to the second quarter. However, European paper demand is expected to be down about 5%. Current indications in the third quarter profits in our paper PCC product line will be similar to the second quarter levels as the expected volume increases in North America which will be offset by lower volumes in Europe. In performance minerals, we expect profits to decrease between 5% and 10% in the second quarter as the construction sector will seasonally drop-off late in the third quarter. Overall we expect the third quarter operating income for the segment to be down 5%.

As I mentioned on the last chart, Specialty Minerals operating margin increased to 13.1% from 10.8% last year as the segment overcame some significant factors 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 slightly more than 1 percentage point. Currency had a negative impact of 0.5 percentage point, and PCC price increases including contractual pass-through of higher lime and raw material cost increased our rate by 1.5 percentage points. Price increases in favorable mix in the performance minerals improved margins by over 1%. Finally, productivity improvements in both paper PCC and performance minerals and good expense control have also added another percent to the margin improvement.

This slide shows the financial results within the refractory segment. In total, sales in the second quarter were 11% lower than the prior-year. Excluding foreign exchange, the deconsolidation of our career refractories business which occurred in the third quarter of last year, underlying sales declined 6%. Refractory product sales were down 13% to $65.4 million. In North America, refractory product sales decreased 9% due to the closure of our RG Steel, Sparrows Point and Warren mills in early June and to lower volumes from our non- steel refractories product line. Europe refractory sales declined 14% as a result of three steel mill shutdowns. Two at our (inaudible) and one at Ten Steel.

Weak refractory demand from other steel customers and the impact of foreign exchange. Metallurgical wire sales decreased 4% to $20.5 million as sales in Europe were down 13%. Operating income for the segment increased 12% in the second quarter to $8.7 million from $7.8 million in the prior-year. The improvement was due to a number of factors including lower raw material cost, slightly higher pricing, higher margins in our metallurgical wire business, productivity gains, and reduced overhead expenses. The segment operating income ratio improved significantly to 10.1% of sales compared with 8.1% in the prior-year.

Sequentially, both refractories segment sales and operating income decreased 4% from the first quarter, both larger decreases than we had indicated in our last call. Steel capacity utilization in the US reached 81% in April but then dropped to around 76% in June, a 6% decline. Two steel furnace relines that were postponed from the first to the second quarter combined with four other vessel relines and the closure of the two steel mills in June drove lower demand for our refractory products. Overall, our volumes in North America were down 6%. The region was able to offset most of the impact from the lower volumes with good cost and expense control. Looking forward, we anticipate lower refractory volumes in North America as the decline in US steel utilization rates through June is continued further through the first few weeks of July. We'll also see a full quarter of sales and income impact from the closure of the Sparrows Point and Warren mills.

In Europe, steel production levels continue to soften. We expect that a number of European steel customers will delay equipment orders if they curtail their capitals spending. Equipment products are some of our higher margin sales. Therefore, we expect that our third-quarter operating income for the full segment to be 10% to 15% lower than the second. The refractory segment operating margin ratio increased significantly to 10.1% of sales this quarter. Refractory volume declines, lower equipment sales and a weaker euro impacted margins by about 2.5 percentage points. This was offset by lower raw material cost primarily magnesium oxide and higher margins in our North America metallurgical wire business. In addition, the business has improved productivity levels and has continued with it's cost and expense control programs. These items contributed over 2 percentage points to the margin growth.

This chart illustrates our working capital and cash flow trends. Total days of working capital decreased slightly to 56 days which is one day lower than both the first quarter of 2012 and the second quarter of last year. Our cash flow from operations was approximately $40 million in the second quarter as compared to $38 million in the second quarter of 2011 and our capital investment for the quarter was $15 million. As Joe mentioned, we reported record first half earnings-per-share of $2.12 which represents a 20% increase from the $1.76 per share reported in the first half of 2011.

Our consolidated sales decreased 4% or about $20 million from the prior year. However, excluding foreign exchange, the paper mill shutdowns in Europe and the deconsolidation of Korea, our underlying sales grew 2%. Our cost of sales decreased 6% which had a favorable leveraging impact on sales resulting in a 4% increase in gross margin. Expenses declined 3% and represented 10.7% of sales in the first half. About the same ratio as last year. This resulted in an operating income of $56.5 million, an increase of 13% and represented 11.1% of sales versus 9.4% last year.

Our return on capital for the half was 9.1% on an annualized basis, higher than the 7.8% achieved last year. We generated $65 million in cash from operations this half versus the $57 million last year. In total, our performance resulted in a strongest first half performance in the Company's history. As I mentioned earlier, our earnings of $1.11 per share was a record second-quarter performance for the Company and was above our expectations primarily due to stronger than expected results in the performance minerals business. Looking forward, weaker foreign exchange rates both sequentially and year over year will have a negative impact on both segment results. In Specialty Minerals we expect segment operating income to decline 5% in the second quarter.

Profits in our paper PCC product line will be similar to second quarter levels. In performance minerals we expect profits to decrease as sales to the construction sector will begin the normal seasonal decline in late the third quarter. In our refractory segment we expect that our third-quarter operating income will be 10% to 15% lower than the second quarter. The drop in the US steel capacity utilization rate is a concern and we anticipate a decline in refractory volumes as a result. In addition, we will see the impact of the closure of the Sparrows Point and Warren mills for the full third quarter.

In Europe the steel market continues to soften which will impact our refractory volumes and equipment sales. Overall we expect total Company profits for the third quarter to be around 10% lower than the second. However further deterioration in the market conditions in Europe remains a concern and could have an additional negative impact on us. Even though we face these market challenges in Europe, we will build upon our strong first-half performance and continue to focus on driving the growth initiatives in each of our businesses. Now let's open it to questions.

(Operator Instructions)

Your first question comes from the line of Rosemarie Morbelli with Gabelli & Co.

Congratulations on a great quarter.

Thank you Rosemary.

You have already answered a few of my questions regarding where your surprise was. And the sustainability of the gross margin in the next few quarters I am also guessing it's going to be lower. You won't be able to sustain this particular level based on your comments. Any potential positive on what you actually can control versus what is going on in the marketplace which could improve those margins or just keep them at the same level?

Yes, Rosemarie, This is Doug. I think you're right, I think it will be difficult to sustain these type of margins going forward. Let's take the Specialty Mineral segment. Tabor PCC we see some stability but in performance minerals, you'll see the normal seasonal decline and you'll see that operating income could drop 5% to 10%, last year was 8% as a result. There could be some pressures on those level of margins coming in the third quarter. The refractories, it's two-fold. We have a market conditions in steel both in North America and Europe. The loss of RG Steel will pressure our margins. But also magnesium oxide around the world. The we purchased most of it, it is purchased and dollars so the currency impact of our foreign sales could pressure those margins as well.

Given the lower level of utilization in the steel industry do expect the magnesium oxide price to decline?

We do. It actually has recently come up slightly. Hard to predict where it will go further, but I don't suspect it will go up. This is my personal guess it will go up significantly over the next couple quarters. We purchased because of our long supply chain we purchased most of our magnesium oxide for the year.

If you look at your inventories, are they at a cost higher than where the price is currently and how long will it take before you can actually offset and close the gap?

Slightly higher but again we continue to buy magnesium oxide on a regular basis but it takes us a little over a quarter before -- especially North America to both purchase, deliver, and consume that magnesium oxide. The lower prices would manifest themselves further in the first quarter.

If I may on the SG&A site, the $22 million expense in the second quarter. Is that something that you can reduce some more going forward? Or is this a good level in dollar signs, and dollars that you can expect?

The SG&A?

Yes.

Part of that the client for sequentially and year-over-year was due to currency. Half of the decline was currency related. I think a portion of it we will be able to hold. Again, we could be spending some expense dollars to support our growth in Asia. And again depending on where the currency goes, that's half of the decline so far this year.

Thanks, I will be back in Q.

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

Good morning this is Silke Kueck for Jeff. How are you? A couple questions. I understand your earning guidance, your profits guidance all based on what theoretically should happen to your segments based on the underlying fundamentals. Utilization rates and shipment levels of paper, and then of course the various rationalization programs that you must have in place. And so I think in the past four quarters you have guided your operating performance one way and essentially you beat it. I understand that your guidance is that your profits may be lower by 10%. From the second to the third quarter but if you take a step and factor in what kind of cost savings opportunities there are, do you think your profits may just stay flat?

As a matter of course, we continuously as I touched on in my remarks have cost reductions and so our current quarter reflected the efforts in our lean manufacturing approach and our suggestion system and our increased utilization of [kaisend] as a way to bring employees to solving problems. Those will continue. And those have now become a normal part of our -- I touched on the term waste elimination, but it is about dealing with both opportunities to reduce cost and as new costs and pressures confront any company, as ours, we find ways to overcome those. And in terms of what we're trying to share with you is to give you the best possible insight into what we see as of today. And that is basically what it is based on where the markets moving. It's a little different right now is the European situation is creating even more uncertainty, and for the first time we're seeing some movement in steel that gives us some concern. And both Doug and I shared that with you. So what you're seeing is our best estimate based on current conditions and not having a perfect crystal ball because the planning horizon is somewhat limited right now of what we see happening.

Okay. And then if I can ask a question on PCC. I think you said that PCC sales in fact improved 6% in the second quarter year over year. If you exclude currency and if you exclude the mill shutdowns and idling in Europe, is I correct?

That's correct.

Can you give me an indication if all of that was price or was there any incremental volume?

We have some incremental volume increases in each region except for Europe so, really the major volume decline both year-over-year -- on a year-over-year basis was Europe. It was due to those shutdowns. There was some pricing impact due to currency. That for the most part the only volume declines we saw your of your were in Europe. Sequentially the volume decline was in North America. Which was due to the shutdowns.

And has the shipment of the -- initial volumes for Fulfill made any difference to volume and price if you can quantify in any way?

Very small. In the second quarter, very small amount. I don't think in the total volumes it's not contributing a significant amount yet.

And one more question on Fulfil. If you expect operating income's from the nine contract signed today of $1.4 million to $1.7 million for the year, is that trend of sales of $14 million to $17 million, somewhere in that ballpark?

I think I touched on the last call, is that because we had a mix of technology fees and additional PCC volume sales, that we are very sensitive to competitive disclosure. Of just how we are pricing right now. What we're trying to give you a direct line of sight into as we see it as what they operating income impact is going to be. And that's why I give you a range of 2.5% to 3%. If you do a straight extrapolation of op income as a percentage of sales, that would take you on an annualized basis you have a factor of 10. Our op income percentage is going to be higher for these products then the 10%, 11% that you are seeing. And so I really -- at this point in time based on where we are, it wouldn't be appropriate for us to share anymore detail than that. It will obviously have an impact on sales. But actually pretty significant impact as you can see or hear from the numbers we are sharing with you on the op income.

That's helpful. Last question, my recollection was you said that if there aren't any opportunities to deploy the cash that you have in your balance sheet, you would begin to repurchase shares. and it looks like this quarter you began to repurchase shares again. Does that mean your further way from being able to do anything strategic?

Not necessarily and I am not avoiding your question but it is all about timing. In some cases as we have been deep into negotiations, that could require significant cash. We could put a hold or slow down the amount of repurchase. Other times we see as we did this quarter a good opportunity to buy shares back. And it can also be a reflection of the timing around doing something having moved a little further out. So in any one period that buying doesn't necessarily signal anything. It can, but it could be a number of different things. In this particular quarter, the share price did move down and we felt it was a good value, a good opportunity to buy.

Okay. Thank you very much I will get back into que.

Your next question comes from the line of Andrew Gavin was CJS Securities.

Good morning. I wanted to follow-up on slide 17 I think it is that discusses the market conditions in North America as well as Europe. Could you comment on how North American market fared through the quarter meaning did momentum accelerate or decelerate?

I think it depends on the sector. I think the steel market decelerated through the quarter. We saw utilization rates as I mentioned go from 81% high sold April down about 76% through June and we have seen utilization rates continue to decline further. And that is in steel. Automotive I think continues to be strong bill automotive really impacts -- are you talking about the industry market condition -- automotive continues I believe pretty strong. Paper we indicated an increase of about 1.5% and that's largely due to the or past the shutdowns I think if you saw International Paper, their earnings came out early yesterday and they indicated the impact of the shutdowns had, so they're largely through those shutdowns and we should see paper production pick up slightly in North America.

In Asia you have a number of PCG satellites beginning production this quarter and next. Can you comment on conditions there?

We actually have two satellites that are coming online. Three satellites coming online but that is in the fourth quarter of this year. We have three -- two that are online now, one that continues to ramp up. Conditions are stabilizing, I think we have -- they are online, they're producing the PCC (inaudible) that we expected. We are having some start up cost associated with them and some stability around getting some local line sources adjusted in our production process.

Is that typical?

That's typical for a start up. It usually takes at least six to nine months before they ramp up and we get stability in the process with the line source.

You indicated on SG&A that's half, color $2 million improvement was related to the currency. Could you give us a little more granularity on the other half?

I think the other half has just been both in all of our resource units and the business unit just good cost control. Taking a look at as we go through areas of waste we have also removed some cost in Europe but we may probably look to redeploy some of that into Asia. I think its been diligent cost control in areas that we find waste. It's an ongoing thing that we look at in the company quarter over quarter.

I would add the implementation of Oracle in Europe last year had a very positive impact on us that we are seeing the benefits of that. We also just as a matter of info, we have recently upgraded to Oracle R12. Which is a new version. And it also well give us -- allow for doing some additional things to the enhancements that are built into the current version.

Are you expecting that to be a benefit for coming quarters as well?

Yes, is something that we will continue to get benefits from as we go forward. And I would reinforce the ongoing deployment and utilization of lean principles and processes by all resource units and our business units is having an ongoing positive impact on improvements. To where that is a way of how we work in the Company and it's a very positive thing.

I agree. Thank you very much.

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

Good morning. If we could touch back on a comment you guys made and then Silke brought it up regarding the European paper volume. If you take out the mill closures, what was your underlying operating mill volume in the region for the quarter on a year-over-year basis?

It's about an additional 2%, Steve. It is down 2%. If you take out the mill closures there's still an additional 2% decline due to the conditions there.

Okay. And on a consolidated basis, to what extent did pricing contribute? It sounds like it was a positive for revenue growth.

It is a positive. I have broken it out largely by business unit. We'll get you the total consolidated number. We have it by segment. I'd say it's about $1 million in PCC. But that is -- a portion of that is pass-through of lime prices. So when you look at the revenue increases it comes with the past through of that higher lime cost.

Okay when you guys came into this year I think there was a gap. Your cost had run up through last year pricing hadn't yet caught up. At this point, mid- 2012, have -- has sure pricing caught up to where your cost inflation was?

Let's take that into pieces. If you look at Paper PCC, we generally take cost increases due to lime at the beginning of the third quarter of each year. And we get to pass those through at the beginning of the year. So if for North America we are caught up but we will see that increase again beginning in the fourth quarter. In Europe, in general we take lime cost increases twice year at the beginning and middle of the year. And pass them through. Some of our contracts are set up to pass through immediately. So it depends upon which region you are looking at, Steve. In Europe we're largely caught up now. In North America yes but we're going to see another increase come in the third quarter.

Okay, that is helpful. Thank you

Operator Instructions)

Your final question comes from the line of Rosemarie Morbelli with Gabelli & Co.

Thanks for taking my question. I was wondering if you could quantify the savings from raw materials in energy cost and whether you see them continuing at that particular level and I'm talking dollars over the next two quarters.

If you look at raw materials and refractories business, the majority of the raw materials is about $2 million in savings year-over-year. Majority of that is MGO and I think that is probably sustainable through the third quarter. And into the fourth. But then again we are starting to purchase some raw material. Energy savings for -- was mostly in performance minerals. Most of the energy we buy and consume is in the process minerals and specialty PCC. That's about that about $1.2 million. We've also taken some steps to try to lock in some of that cost savings to conversion to natural gas. We do consume number six and number two fuel oil and with the prices of natural gas we have taken some steps in our specialty PCC business to move over to natural. Looking to make some investments to lock in those lower cost.

When you say you are working towards converting to natural gas does that mean a lot of changes within your facilities or can you already go between the two of them and you have not fully moved over to natural gas?

Rosemarie, primarily making quite a major conversion at one facility up in Adams, Massachusetts. I'm going to ask Doug Mayger to kind of describe that because it is a major project. Doug?

Rosemarie, we converted one of our kilns, large kilns over to natural gas. It was fired before on number six fuel oil. Just to put that in perspective, the natural gas savings for the second half of the year will be in the neighborhood of $1 million.

Okay so this is on top of the $1 million to $2 million that Doug just talked about?

No. We're going to still consume. We've seen some number six oil decreases over prior years. We captured that in this quarter. You're probably going to look at a little but more than that because we are converting gradually. It does have an affect, could have an affect on some of the lime so we're moving over gradually. There could be additional savings of that $1 million but it's not a direct replacement.

The other thing to keep in mind, we just started this up, two weeks ago. So we're in the early stages of it, so far it looks pretty promising. And we will have a better feel in about six to eight weeks in terms of what it's delivering for us.

What is behind the raising cost of lime?

Lime cost increases largely energy driven. And so what you're seeing is really a timing impact. Our lime costs, our lime prices or costs to us are based on energy that is an average over a year or six months prior. So really when you are looking at lime cost in Europe, in terms of increases there, it's based on the lime cost that was the six months prior which really include November through April. Which energy prices were much higher than. They only started to come off late in April or June. That benefit of lower energy prices on the lime cost won't be seen until the adjustments next year.

Okay. And then on the refractory. A lot of the furnaces were realigned to the first quarter. And so that affected you're second quarter if I understood properly. How long does it take before they need some maintenance after having been newly realigned and would you benefit from it in the third quarter, even if the capacity utilization is lower? Could you help me on that?

Yes we are going to ask Han Schut to address that. Han?

Yes Rosemarie, thank you. So we had six re-limes in the second quarter and of course it depends on whether to place in the second quarter will be the effect on the third quarter. But typically it is two to three months before your are back to the consumptions levels that you saw before.

Okay. That's some of the shutdown or of the lower capacity utilization correct?

Yes. And we have built that into what Doug shared with you in that range of 10% to 15%.

Okay. And lastly on the wholesale side, you talked about potential of $2.5 million to $3 million of income from the new Fulfil agreement. Is that a full-year number for 2013?

Yes. It would be as they track, these nine the way we believe they should, then it would be taking their contribution in the forth quarter and basically annualizing them. And something actually your earlier question about sustaining margin levels. There are a number of things that will help to sustaining as we look through some of the downward pressures on the business like steel utilization and lower volumes there. We will have things working to improve above that like our Fulfil 325 going into next year, like the significant savings in natural gas versus lime. And the overall general improvement in the performance minerals business which has done a very good job of raising its margin levels pretty much across the board with an exception or two. Again, you're seeing what's coming up against us is pretty normal in Doug Mayger's business where you have a seasonal decline and I would submit to you that the margin levels on a relative basis for that business are at a good level and we do believe we can sustain those next year.

Okay, I was going to ask you last for your crystal ball for 2013 looking at the bottom line.

We would appreciate your help with that in terms of maybe you have a better crystal ball. And that is part of what I think is confronting many companies today. The ability to translate Europe into economic impact on the US. But really economic impact on all world markets. And what effect that it is going to have. And that is still playing out right now, and what we are sharing with you is the best we are able to see right now.

Okay, I appreciate it. Good luck and thank you.

Thank you

There are no further questions at this time. I hand the program back over for any further comments or closing remarks.

Just want to thank everybody for joining us today, I appreciate it. That concludes the call. Thank you very much.

Thank you everyone for joining. You may now disconnect.