Minerals Technologies Inc (MTX) 2012 Q3 法說會逐字稿

Good morning. My name is Jodi and I will be your conference operator today. At this time, I would like to welcome everyone to the Minerals Technologies Inc. third-quarter 2012 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 conference over to Mr. Rick Honey, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to our third-quarter 2012 earnings conference call. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call by providing some perspective on our third-quarter performance. He will be followed by Doug Dietrich, our Chief Financial Officer, who will review our third-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. Our financial performance for the third quarter continued to be strong, as we locked the fourth consecutive quarter with earnings per share higher than $1.00; as we came in at $1.05, 11% better than in 2011. Our operating income ratio improved 13% over the prior year to over 11% of sales. And our return on capital for the quarter continued to show improvement, increasing 6% over the prior year to 8.8% on an annualized basis.

Our cash flow also remains strong, as we've generated $40 million. Much of the contribution in profit came from a record quarter in our Specialty Minerals segment. Performance Minerals, our operating unit, comprised of the mining operations and specialty PCC, continued to be a strong contributor to this through higher productivity, lower energy costs, good expense control, as well as pricing improvements.

Our Paper PCC business also improved profitability over the prior year through improved performance in North and Latin America. We achieved this high level of performance despite a lower revenue environment because of our intense focus on continuous improvement in all facets of the Company, through our strategic and operational initiatives.

Looking at the longer term, what really stands out is the momentum we are gaining in our two major growth strategies -- geographic expansion and new product development. We just signed a ten-year agreement with Sun Paper to build a 100,000-ton satellite PCC facility at paper mill in Shandong Province, owned by Sun Paper, the largest privately owned paper company in China.

Recently I had the pleasure of meeting Mr. Li Hongxin, Chairman of Sun Paper in China, where we signed a long-term relationship pact focusing on broader technical and process cooperation in addition to the new satellite supply contract. This agreement is integral to our geographic expansion strategy, where China is expected to grow its paper production at a rate of 5% to 7%.

Our FulFill platform of high-filler technologies continue to make progress. During the third quarter, we signed commercial agreements with four paper mills -- two in Europe, one in South Africa, and one in Thailand -- for our E-325 series. I'll go into more detail in a moment.

Also on the new product development front, we launched the new, faster laser measurement system for the global steel industry. However, on a more cautionary note, we remain concerned about the economic conditions in Europe as well as the softening worldwide steel industry, which is putting significant downward pressure on our Refractories business.

As you can see from this chart, our earnings for the last four quarters are on a high performance track of more than $1.00 per share. It should be mentioned that we were actually able to overcome the revenue and income loss from last year's shutdowns through new satellite volume, revenue increases, and other volume increases.

Our return on capital also continues to improve, and at 8.8%, we are at above our cost of capital, and 6% above the third quarter of 2011, when our ROC was 8.3%.

I'd like to take a minute to look at our financial performance so far this year. For the first nine months, the Company has performed at the highest levels in our 20-year history. Our earnings per share went from $2.72, for the first nine months of 2011, to $3.17 today -- a 17% increase. And cash flow increased by 13% over the same period. And on a per-share basis, the cash flow increased by around 16%.

Let's take a moment and look at how we've been executing our organic growth strategies of geographic expansion and new product development. I mentioned the Sun Paper contract earlier. This long-term contract for 100,000 tons of coating-grade PCC is a major accomplishment for our Paper PCC group. And this is noteworthy because it puts our strategy of geographic expansion -- which is focused highly on Asia, especially China -- on a performance track to meet the 2015 revenue targets for Asia that we set in 2010.

It's also a breakthrough for us, in that it's our first non-APP -- Asia Pulp & Paper -- contract in China. As you know, or many of you know, we had prevented from selling PCC in China due to our 10-year contractual requirements with APP. In addition to Sun Paper, our team in Asia is actively engaged with 14 other paper mills in China, where they are demonstrating the PCC value proposition, which delineates the benefits of PCC over other minerals for filling and coating paper.

We're focusing on Asia and China because that fundamentally is where the growth is. Paper production in the region continues to grow at a high rate, and we believe we have the best technology to benefit paper makers there. We also have three satellite facilities under construction in Asia -- two India and one in Thailand. These three satellites will add 150,000 tons of additional capacity, and will be operational in the next two quarters.

During the last call, we announced it three new FulFill commercial agreements that occurred in July. One of these was with a subsidiary of the Mondi Group at a paper mill in Slovakia. The second was also in Europe. And the third was in Thailand, with Double A Paper.

Since the last call, we have added one more the Mondi Group in South Africa, and we are close to another one in South America, where we have been running successful trials for the past 30 days. Our Performance Minerals group will also continue to make inroads with its new talc antiblock products, as well as our new titanium dioxide extender products.

The Refractory business has also been successful in the new product development area. During the quarter, Minteq, the operating division for Refractories, introduced the new fourth-generation LaCam laser measurement system for use in the worldwide steel industry that is 17 times faster than the previous version. This new technology provides the fastest and most accurate laser scanning for hot surfaces available in the marketplace, and provides the differentiation for us to remain as the technology leader in steel mills.

You're familiar with this slide, which tracks the progress of our FulFill programs marketing and engagement activity with paper mills worldwide in deploying the high-filler technology. As you can see, we now have six agreements with paper mills in Asia; two in Europe; one in South Africa; and one in the US; for a total of 10. Looking at the chart from left to right, we have 14 paper mill customers with whom we are introducing the FulFill value proposition. Three mills have agreed to trial; five are in the process of validating the technology; and two have validated, and are moving closer to commercialization.

Our long-range target is to develop the product with all 35 paper mills that will benefit the most from the FulFill technology. It's important to note that each of these paper mills is different, requiring different degrees of tailoring and trial time to demonstrate product efficacy. But we continue to make progress, but the technology must be validated on various paper grades and paper machines, using different varieties of pulp, so it's difficult to provide a clear timeframe and pathway to acceptance.

In past calls, I've addressed the importance of our four key initiatives that have been the catalyst for change at Minerals Technologies. As we examine our performance so far in 2012, it's clear that each of these have come together in a very integrated way to bring the Company to a higher financial performance track.

We've also become a stronger operating company, with greater focus and discipline; and, most importantly, the active engagement of all employees in continuous improvement. So far this year, employees have generated over 7000 ideas, and we have implemented more than 4000 of these.

Our product development pipeline is healthy, with more than 60 new product ideas in various stages of development. And our operational excellence lean initiative, which is embedded throughout the Company, enabled us to bring our productivity in the quarter to a level 9% higher than 2011. This was brought about through executing over 850 Kaizens, which are focused employee group events designed to eliminate waste and improve quality.

Expense reduction also remains a point of focus, and we continue to find ways to do more with less. Our safety performance, most importantly, is also now at a level never before realized in the Company, as our lost workday rate of 0.4 -- or 0.4 accidents per 100 employees per year -- is at the lowest level on in our history; and reflective, again, of the involvement and commitment of our employees.

On the M&A front, our corporate development team, as I related before, continues to seek out, research and engage numerous opportunities. Our objective, as you know, is to fine minerals-based companies where we can leverage our expertise in crystal engineering, as well as move to end markets such as energy, environmental or consumer products, which would serve to help reduce our cyclicality.

Now I'd like to turn it over to Doug Dietrich, who will provide a detailed look at our financial performance.

Thanks, Joe. Good morning, everyone. I'll take you through our consolidated and business segment results for the third quarter. And 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 third quarter of 2011 and, sequentially, to the second quarter of 2012.

As Joe mentioned, we reported earnings per share of $1.05, which represents an 11% increase from the $0.95 per share recorded in the third quarter of 2011, excluding special items. Our reported earnings last year were $0.87 per share, as the Company recorded a non-cash special currency translation charge related to the sale of our majority ownership in the Company's Refractory operations in Korea.

Our solid performance this quarter was achieved due to record quarterly earnings from our Specialty Minerals segment. The Performance Minerals business continues to operate on a very strong track, and profits also improved in Paper PCC. These strong earnings were accomplished despite weaker-than-expected results in the Refractory segment, and the continued weak market conditions in Europe; where total Company sales and operating income were down 14% and 37%, respectively.

Our consolidated sales decreased 5% to about $12 million from the prior year. This decline was primarily due to foreign exchange, which had an unfavorable impact of $11.6 million. In addition, sales were affected by the permanent and temporary mill shutdowns in Finland and France in the fourth quarter of last year. Excluding foreign exchange and these closures, our underlying sales were up 2%.

Though our sales were down 5%, our cost of sales decreased 7%, resulting in a 4% increase in gross margin. The margin improvement occurred in all business units, but most significantly in Performance Minerals. Expenses were slightly below last year, and represented 10.8% of sales. This resulted in operating income of $27.8 million, an increase of 9%, and represented 11.1% of sales versus the 9.8% last year.

The improvement on operating income was due to increased pricing, which more than offset higher materials costs in Specialty Minerals; continued productivity gains in all business units; lower energy costs; and good expense and cost control.

Our return on capital for the quarter was 8.8% on an annualized basis, which is higher than the 8.3% we achieved last year.

In the quarter, we generated $40 million in cash from operations, of which $14 million was used for capital expenditures. Cash and short-term investments were approximately $462 million, again at the end of the third quarter. Sequentially, our consolidated sales decreased 1% and our operating income performance was better than expected.

As we indicated on the last call, we expected Paper PCC profits to be similar to second-quarter levels. However, profits improved by approximately 10%, due to better-than-expected performance in Europe. Our Performance Minerals business was in line with our expectations, and continues to operate at a high level. The Refractory segment performance was lower than expected, as its operating income declined 17%, which was more than the 10% to 15% decline we had anticipated on our last call.

In total, our third-quarter results were better than expected, and reflect continued strong financial performance, with earnings in excess of $1.00 per share for the fourth consecutive quarter.

This chart shows where the margin improvement is coming from. Margins have increased over last year in both Paper PCC and Performance Minerals. However, they have decreased slightly in the Refractory segment. The increase in Paper PCC was primarily due to higher profitability in North America and Latin America due to productivity improvements, lower operating costs and overhead expenses, which helped offset the effects of lower European volumes.

The improvement in Performance Minerals was due to lower utility costs, higher pricing, and continued productivity gains being driven by our operational excellence program. In Refractories, lower raw material costs and continued cost and expense control programs were more than offset by declines in refractory product, equipment, and metallurgical wire sales, resulting from the weakening steel market conditions in both North America and Europe.

This chart shows the changes in North America and Europe over the prior year in our main market segments. Uncoated wood-free paper production was down about 1.6% in North America and around 2.8% in Europe. The construction market in the US, which includes both residential and commercial markets, was up over 7% in the third quarter versus the prior year. Automotive unit production in North America also continues to be strong, with production rates up nearly 16%, but dropped significantly in September from August levels.

Steel production in North America decreased slightly from last year, as third-quarter average steel capacity utilization rates in the US declined 1% over last year to approximately 75%. Sequentially, however, steel capacity utilization rates declined 5% from the second quarter, with the majority of this decline occurring in September. Rates have declined even further through October and are currently around 68%, which is the lowest level in approximately 2 years.

In Europe, you can see that the construction, automotive and steel markets continued to reflect the soft economic conditions, as each are down between 3% and 9%.

Here's a table of our regional revenue and operating income changes over last year. Let me highlight a few areas. The figures in the lower right corners on this chart are shown excluding the effect of foreign exchange. You can see the impact that Europe and weaker foreign currencies are having on our overall sales and operating income. In North America, we've exhibited strong operating income performance despite flat sales. This improvement is a direct result of our operational excellence program, diligent cost control, price increases, and solid supply-chain sourcing decisions related to raw materials and utility costs.

You can also see the significant underlying growth that's developing in Asia and Latin America. And in total, we've managed to improve our operating income by almost 10%, despite a 37% operating income decline in Europe.

Let me give you some perspective on the specific factors that are affecting our year-over-year revenue. As you can see, the paper mill closures in Europe had a significant impact on our sales over the last year. In addition, several recent steel mill closures and lower equipment sales have also put downward pressure on our top line.

However, we've been able to offset these declines with new satellite startups, price increases, base volume growth and share gain in our specialty PCC and talc product lines, as well as increased volumes from our existing Paper PCC sites.

In total, these initiatives have generated over $9 million in revenue growth this quarter. You can also see the significant impact that currency is having on our top line, and on its own accounts for almost all of the year-over-year sales decline.

I thought I would show this chart to provide some insight into our true underlying sales growth, which may not be readily apparent.

On this slide, I break out our profitability improvements by region. As I mentioned earlier, our operating income ratio remained above 11% this quarter, approaching the 12% operating income target we set for ourselves to achieve by 2015. The Company continues to overcome the weak economic conditions in Europe, and improve operating margins over last year.

North America drove about 2 percentage points of the improvement, due to strong earnings in Performance Minerals and increased profitability in Paper PCC. Europe was affected by lower PCC volumes and wire sales, as well as fewer [MC] equipment installations. In addition, foreign exchange affected Europe's profitability.

Asia increased primarily due to improved profits in our Japan Refractories business, as a result of lower raw material costs in the region. These increases were offset by startup costs associated with our new PCC satellite operation in India.

Let's go over the financial results within the Specialty Minerals segment. The $22.6 million of operating income is the highest level in the segment's history, exceeding the previous record set last quarter. Segment sales decreased $5.5 million, about 3% from the prior year, to approximately $166 million. Foreign exchange had a $7.4 million unfavorable impact on sales, or 4%. And the paper mill closures in Europe affected sales by an additional 4%. Excluding foreign exchange and the shutdowns in Europe, the segment's underlying sales grew 5%.

Within the segment, Paper PCC sales, excluding the shutdowns and foreign exchange, grew 7%. Volume declines in Europe were partially offset by new volumes from three satellite facilities that came online over the past year -- one in Superior, Wisconsin, and two in India -- and we expect to have three additional satellites operational -- two in India, and one in Thailand -- by the first quarter of next year.

In other segment product lines, specialty PCC sales were up 2%. Talc sales increased 5%. And GCC sales were down 3%. Segment operating income in the third quarter increased 17% over the prior year, driven by a 27% increase in Performance Minerals, and a 10% increase in paper. As I mentioned earlier, the improvement in Performance Minerals was due to lower utility costs, higher prices, improved talc volumes, and continued productivity gains.

The increase in Paper PCC was primarily due to lower operating costs and a 15% improvement in productivity and good expense control. In addition, we're generating profit contribution from our new satellite facilities and the FulFill E-325 program.

Overall, segment operating income represented 13.6% of sales in the third quarter, compared to 11.3% last year. Sequentially, segment sales were 1% below second-quarter levels. Despite the decline in sales, operating income increased to 2%, and was higher than we had anticipated on the last call. Paper PCC profits increased approximately 10%, while we anticipated similar performance levels through the second quarter. This was driven primarily by better-than-expected performance in Europe. The Performance Minerals business results were in line with our expectations.

Looking forward, fourth-quarter North America paper production is projected to be down 4% compared to the third quarter. And European paper demand is expected to be down about 2%. Current indications are that fourth-quarter volumes and profits in our Paper PCC product line will be down from the third quarter levels in both regions. In addition, lime cost increases that we will absorb in North America in the fourth quarter, will not be recovered until the first quarter of next year.

In Performance Minerals, we expect profits to decrease from the third quarter, as the normal seasonal drop in construction activity will reduce volumes in all product lines. Overall, we expect that fourth-quarter operating income for Specialty Minerals to be about 10% lower than the third quarter. This decrease is consistent with a typical drop we see given the seasonality of our end markets going into the fourth quarter.

Here are the components of the improvement in the Specialty Minerals operating margin over last year. As I mentioned earlier, segment operating margins increased to 13.6% from 11.3% last year. Volume declines in Europe, associated with paper mill and machine closures, impacted segment margins by slightly more than 1 percentage point. Currency also had a negative impact of more than 0.5 percentage point. Sales from our new satellite facilities, FulFill deployment, improved product mix in Performance Minerals, and price increases improved margins by 2 percentage points.

Finally, productivity improvements in both Paper PCC and Performance Minerals, and lower utility costs and good expense control, have also added another 2 percentage points to the margin improvement.

Now let's go through the results within the Refractory segment. Sales in the third quarter were 7% lower than the prior year. Foreign exchange accounted for about 5 percentage points of this decline. Refractory product sales were down 9% in North America due to the closure of RG Steel's Sparrows Point and Warren Mills in early June, and to lower volumes from our non-steel refractory product line.

Europe Refractory sales declined 10% from last year as a result of three steel mill shutdowns -- two at ArcelorMittal and one at [Sen Steel], significantly lower equipment sales, and the impact of foreign exchange. Metallurgical wire sales decreased 7%, primarily in North America, due to product mix.

Operating income for the segment decreased 6% in the quarter to $7.2 million, and $7.7 million in the prior year. The profit decline was due to the combined effect of lower refractory, equipment and metallurgical wire sales; and to the impact of foreign exchange, which more than offset the benefits arrived from our lower MgO costs and improved productivity.

The segment operating income ratio was 8.5% of sales, which was the same as last year. Sequentially, the Refractory segment was impacted by the weakening of the global steel market. Steel production in the third quarter was down 4% in North America, and 11% in Europe from second-quarter levels.

Segment operating income decreased 17% in the second quarter, which was more than the 10% to 15% we had expected on the last call. The decline from the second quarter occurred primarily in our North America refractories operations due to reduced volumes and an unfavorable product mix. In addition, our metallurgical wire product line had reduced profitability in both North America and Europe.

Looking forward, we anticipate continued lower refractory volumes in North America due to the continued decline in US steel utilization rates through October. In addition, a number of customers have delayed equipment orders, as their capital spending has been severely curtailed.

Equipment products are some of our highest-margin sales. And the fourth quarter is usually the strongest sales period for this product line. Given the lack of orders from our customers this year, profits from equipment sales will be over $2 million lower than the fourth quarter of last year. As a result, we expect that our fourth-quarter operating income for the full segment to be 15% lower than the third quarter, and 40% lower than last year.

This chart shows the changes in the Refractory segment operating margin. The third-quarter ratio, as I mentioned, was 8.5%, which is the same as last year. Refractory volume declines, significantly lower equipment sales, and a weaker euro negatively impacted margins by over 3 percentage points. These factors were offset by lower raw material costs, primarily magnesium oxide; improved productivity levels; and cost and expense control programs. These items contributed over 3 percentage points to the margin growth.

These charts illustrate our working capital and cash flow trends. Total days of working capital increased slightly to 58 days. This increase was mainly due to higher inventory levels in the Refractory segment. Our cash flows from operations is approximately $40 million in the third quarter as compared to $36 million last year. Our capital investment for the quarter was $14 million.

Let's take a look at where we are so far this year compared to 2011. Sales were off about 4% from last year, primarily due to foreign exchange. But we have also faced a weak market conditions in Europe, which has reduced sales volumes, and resulted in various paper mill and steel mill closures that have put pressure on our top line.

Despite these challenges to our topline growth, we have continued our focus on executing our major strategic initiatives and have improved the performance of all of our businesses. New satellite contracts, new product launches, productivity improvements, cost control, solid supply-chain sourcing decisions around raw materials and energy, have led to this improvement.

We continue to treat capital as a scarce resource, and we remain focused on improving working capital efficiency. As a result thus far, we have generated record operating income and earnings per share, and also improved our return on capital and cash flow from operations. In total, our performance resulted in the strongest nine months in the Company's history.

As I mentioned earlier, we had a strong financial performance in the third quarter, with earnings of $1.05 per share. This represented the fourth consecutive quarter of earnings in excess of $1.00 per share, and is highlighted by the record earnings in the Specialty Minerals segment.

Looking to the fourth quarter, we expect Specialty Minerals segment operating income to be about 10% lower than the third-quarter levels, which is a typical seasonal drop.

Profits in our Paper PCC product line will be down from third quarter, due to lower product demand in North America and Europe; and will also absorb higher line costs in North America in the fourth quarter which cannot be passed through to customers until the first quarter, due to contractual limitations.

In Performance Minerals, we expect the typical seasonal volume decrease as the fourth quarter is the low point of demand in the year for our end markets. In our Refractory segment, we expect profits to be 15% lower than the third quarter, and 40% below last year, due primarily to the significant drop in our high-margin equipment sales.

We also anticipate a decline in both refractory volumes and metallurgical wire sales, given the recent drop in the US steel capacity utilization rate to below 70%. In Europe, the steel market remains soft, which will continue to impact our Refractory business there.

Further deterioration in global steel market conditions remains a concern through the fourth quarter, and could add further downward pressure on our Refractory segment sales.

Overall, we expect total Company earnings for the fourth quarter to be 10% to 15% lower than the third, between $0.90 and $0.95 per share.

Now let's open it to questions.

(Operator Instructions). Andrew Gadlin, CJS Securities.

Thank you for taking my question. I was wondering if you could talk about some of the consolidation that is happening in the paper market, the potential for seeing some of that in the steel market as well, and how that could impact you?

Okay. I'm going to -- D.J. Monagle is with us. I'm going to ask D.J. to give us an overview of the paper industry, both here and in Europe.

D.J.?

Yes, so, Andrew, we see that trend continuing, but we don't see anything imminent in both North America and Europe. Our bigger concern right now is with the North American companies that have been in bankruptcy and are developing plans to come out of bankruptcy. So I don't think that there is going to be a lot of shifting around that is not associated with those bankruptcies.

So I would say that general -- we think it's pretty stable right now, and the caveat is how these companies emerge. In particular, NewPage; Catalyst is another one. There's a couple of other smaller ones that are out there. How they emerge and the impact of that on the industry will be the biggest bellwether.

I'm going to ask Han Schut, our Head of the Refractories group, to comment on the steel industry as he sees it today.

Yes. Thank you, Andrew. If we look to the steel industry in general, we see overcapacity. And of course we've seen unbalance between demand and supply, and that's primarily driven by China. So we see the major players are working on their asset optimization. For instance, Thyssen has put their assets in Brazil and in North America up for sale. And we've seen also, of course, some customers going bankrupt, like we have seen with RG Steel, which was a major account for us.

So, overall, we see a reshuffling between the players; and the major players cutting back on their supply, as part of their supply discipline to bring demand and supply in balance again.

Thank you. As you -- and this, I guess, is more in relation to the paper segment -- what's the ability for some of these new contracts to replace some of the volume you're losing from plants that are going out of business or consolidating away?

So, Andrew, between those new contracts that are coming online and the growth that we see coming from our FulFill technology, we think that it will be a net growth proposition for our business.

And, Andrew, as Doug pointed out on his slide, you get a sense of it, in terms if you exclude the exchange impact on us, we actually were able to hold ourselves to the same level of last year, in spite of the shutdowns that were effected both in steel and paper, but particularly on the paper side.

And keeping in mind what I mentioned in my remarks, we've got new satellites coming on over the next several quarters that are going to, again, contribute to higher volumes for us.

All right. Thank you very much.

Jeff Zekauskas, JPMorgan.

(Technical difficulty) for Jeff. How are you?

Good.

A couple of questions. On the refractories side, when I look at Refractory business on a sequential basis, it looks as sales were about flat and the EBIT was about $1.5 million lower. Is that a function of raw materials being up sequentially? Or is it a function of a different ratio of high-margin equipment sales? Or what's behind that?

Yes that's a -- Silke, it's the lower equipment sales that we saw in the third quarter versus the second. But it's also some of the product mix. I mentioned the Refractory product mix was a little bit different in the third quarter. Some of our lower-margin products and some of our non-steel refractory volumes were down compared to the second quarter, so it's more of a mix issue.

Okay. Secondly, I was wondering whether you could quantify the benefit of -- or, the energy benefit in the processed minerals division.

Sure. Two parts to that -- one is just, in general, lower energy compared to last year. But I think a bigger part of that is a kiln conversion that we've made in the Performance Minerals business, from a number 6 oil to natural gas. We generated some savings this year from the that. At about -- let me give you an idea -- at today's oil prices, we expect probably $2.5 million to $3 million per year of savings just from that one conversion.

And how many -- from one conversion. And how many kilns could you convert? Like, what's the absolute opportunity?

Well, for now, that's the current opportunity. And we've done that one kiln. That is that capacity that we need to both sell lime and for our specialty PCC production. As volume grows, there could be other opportunities.

Could I -- we have Doug Mayger with us here, and maybe Doug could comment on this a little bit as well, Silke; because we're also looking at -- we have three or four -- we have four kilns at the Adams site. And we're actually looking at some new market opportunities, as one of the aspects of converting some of these kilns over that could get us into markets, where today we may not be as competitive.

Doug, could you comment on that a little bit?

Yes, so, Silke, some of the -- certainly some of the market opportunities we have are excellent. We're in the process of doing an expansion today that should come online March of next year. It may, at some point, require us to do some more kiln conversions later on. But as Joe does mention, we have four kilns in total. One of them is converted today.

Okay, that's helpful. Lastly, if there was another quarter of very nice operating cash flow and free cash flow generation -- and maybe by now, there is about $21 a share net cash in your balance sheet. So various companies have decided to do something about it; [Lyon Dallas] doing yet another special dividend, and [CF] is buying back a lot of shares. I was wondering whether, over time, if there are no acquisition benefits, whether any of that cash will be given back to shareholders.

It is something that, as I have mentioned in previous calls, we closely take a look at, Silke, from the standpoint of shareholder return. Particularly, as we look at the acquisition side, if that's not coming on fast enough, and our ability to continue to generate good cash flow; which, as we look forward, is still very, very strong. So that is something we're going to look at further. I can't go into any specifics right now, other than to say it clearly is on our radar screen.

Okay. That's helpful. Thanks very much. I'll get back into queue.

Rosemarie Morbelli, Gabelli & Company.

I think it is still morning. And congratulations on a great quarter.

Thank you, Rosemarie.

So the benefit on the energy, this is from North Adams, right?

Yes.

And when you say that there are another three kilns, still, that could be converted, are they in the same locations? Or are they somewhere else and used for different purposes?

Rosemarie, they are in the same location at North Adams. And what we do is we have to cycle them between each other for rebuilds. But, ultimately, we have operating permits that allow us to run all four at the same time.

Yes, I think it's important to note, not all four are running today.

Okay. So the potential is really for a total of something like $12 million in annual savings. And would you convert those only if, because of expansion? You would not convert them, even if operations remained at today's level?

To utilize all four, we -- and this is why I touched on the fact that we are looking at new markets or expanding our capability in existing markets. The savings comes from a base of two kilns that had been running, so two had been idled. They are maintained in a way that we can turn them on fairly easily. But as Doug was touching on, we're actually -- when he mentioned March -- are actually looking at an investment that will allow us to increase our capacity for specialty PCC, which is a very high-margin product for us that is capacity-constrained; and there's some good opportunities in North America.

So the upside around what we have done on the kiln conversion really manifests itself as new products and new sales, with a commensurate profitability from it. Doug, do you want to add anything to that?

No, I think Joe hit all the points? But there is good opportunity for us, not only in north America, but Asia also.

So when you say new markets, do you mean new geographies? Or do you mean actually new markets outside of pharma, outside of construction?

It's a little bit of both. Certainly, automotive sealants would hit the mark. Certainly, there would be opportunity in consumer markets and in some areas like the construction area, also.

Talking about the construction, have your results been helped -- I know revenues were up 7%, I think, if my memory serves me right. It that from extended market share? Or is it from the fact that you are already seeing some pickup on construction?

It's a little bit of both. It's market share. It's some growth. So certainly we are seeing some growth on the East Coast here. On the West Coast, it's been relatively flat. But we've had good penetration on the market share piece.

And if I may ask one last question -- well, actually, two. What is behind the lime cost increase? And then, since steel production seems to be growing only in China, while it is shaking everywhere else -- at least in Europe and North America -- what is your presence in China? And how quickly can you increase it?

Let me take the first question. The lime cost increases are the typical North American lime cost increases that we get each year. We absorb those lime cost increases in the fourth quarter. And then we're able to pass them through to North American customers beginning of the first quarter. And that's a typical occurrence with our contracts. That's the first piece. Your second question was in terms of --?

Steel in China. Obviously, it is growing there while, it is contracting elsewhere -- in Europe, traditional markets. Do you have a large presence? And is it easy to actually increase your presence in Asia and participate in that growth?

Actually, Rosemarie, we've actually -- we've had a position in China now since -- well, actually, for a number of years; and that we made an investment in 2004. That investment has not really gotten us to where we were targeting from a growth standpoint. So we have good upside in terms of capacity, but we're actually -- we have been looking for a partner to help us with penetration inside of China.

The conditions, actually, in China are not that good right now. I was just in China two weeks ago. I met with the CEO of Meishan Steel, who is also director at Baosteel. And China is in an overcapacity mode. And they are struggling with how to take costs out, and get their capacity and their demand and supply more in balance.

I did come away from the meeting with them -- and since they are a good account for us, is that their -- because of their heavy emphasis, now, on cost reduction, it looks to me like there is some new opportunity potentials for us that we're going to try to follow up on quickly. And then that actually played to the notice that we talked about, our new SULB contract.

But it's really a change in the business model, to be a prime contractor to take care of all of the facilities' refractories. And they expressed a strong interest in exploring that with us. They like the concept, and they indicated they were trying to figure out a way to consolidate their supply base and refractories down to one.

I think, for us, it's much more of a rifle shoot, in terms of some of the key accounts where we can, let's say, increase our share and presence and they know who we are. So, right now, I'm actually seeing some upside in China, but not due to the general overall demand level.

Okay, thank you very much.

(Operator Instructions). Steve Schwartz, First Analysis.

Sorry if you've answered this -- I missed some of the call because of another conference call. In Latin America, I think the majority of your satellites are in Brazil. And I'm just wondering what is specifically driving the improved profitability there.

The improvement in Latin America are a couple of items. One, productivities have certainly increased over last year. The second would be just operational spend, general operational spend, is down versus last year. We had a number of equipment failures last year that did not reoccur. But really through the process of continuous improvement and productivity is what is really driving that in Latin America, Steve.

Okay. And when you say productivity, those are internal initiatives?

Yes. Internal initiatives focused at improving production levels, tons per employee, tons per man hour, et cetera; those types of efficiencies.

Okay. And then, Joe, if you could help us reconcile the comments you made in the press release about FulFill -- four additional agreements signed. If I look at your second-quarter presentation to third, that FulFill progress chart, I don't see an equivalent number of increases on that chart in terms of revenue generation or what have you. And perhaps that's secondary. Most importantly, can you give us an idea of, at this point, what you are feeling for the annualized contributions from FulFill agreements?

Sure. I think that may be where there is a bit of confusion, in the last call we had included in the chart some of the announcements that had occurred -- already occurred in the third quarter, in that first month of the third quarter. And what we were recapping this time around -- I think we did it in the press release, and I did it here in the remarks -- is, what actually came in during the third quarter.

And so the chart -- I guess I'm saying that, to look at it, the chart itself, that is accurate. And we typically -- we announce when we sign a contract. So it just so happened that a number of the contracts were signed in -- that would have been the July timeframe. And that's where the difference is, Steve. It is four that came in during the quarter itself.

Okay.

In terms of the op income impact, as I recall, on the last call I indicated that, based on what we had, and what we had in hand, and what we could see, we were looking at an op income impact of $2.5 million to $3 million next year on an annual basis.

Let's get to the end of the year; see where we are. There is clearly upside in that. But right now, I'd say that -- what I shared with you last time is pretty much reflective of the companies that we have contracts with. But, clearly, we have more that are going to be coming on. So I think it could actually be a little more than that.

Okay, okay.

As you know, I'm leery of giving out -- as I mentioned in my remarks -- it's not a linear process. And it takes time, even when we have a contract. If a particular mill has three paper machines, that contract could sometimes be only be on one machine. And then we'd work our way to the other machines. And that takes some time to do.

Yes, certainly. We understand, and it is nice to see the progress there. My final question -- in the Sun Paper agreement, can you give us an idea of what the loading might be? Maybe not specific with Sun, but in China and some of these new agreements that you are signing. With respect to Sun, I don't want to bog the call down the technicals, but that Opacarb is coating-grade. Is that different from when it's coated versus -- does that change the concentration within the pulp?

I'm going to let D.J. Monagle, our technical expert in this area, answer that one for you.

So, Steve, a couple of things. Joe mentioned it's 100,000 tons. And Sun is not just an industry leader, but they are a market leader. So this is providing us some great momentum. Opacarb is a coding pigment and, as such, carries a higher price per ton with it. So this will be above our average revenue growth that is associated with 100,000 tons.

And then you mentioned on, what does this mean for China for us, I just want to expand on that a little bit. Both Joe and Doug referred to some targets that we started setting out in 2010. Of course, everyone knows, or we've been talking about our growth in India and the surrounding region. But we've also been getting ready to grow in China, as we have been left out of that market for so long because of other obligations we have with APP.

In the meantime, we have been shifting our resources -- engineering resources, applications resources, marketing resources -- to really take advantage of the opportunity that's in China for us, as we did in India. So Sun Paper sets up a terrific growth for us. We believe in China. We've got everything in position. This is a wholly owned, so this is a 100% SMI venture that's in China. So we have a great opportunity to work with the government and establish our entities there.

We're developing new relationships with lime suppliers. We have got a whole infrastructure that's going into place to be able to fabricate equipment better for China. So we're looking at this as something that's going to open up the door for considerable growth in China. Hope that provides some color for you.

Yes, no. That's fantastic color. Thank you for that, guys.

Steve, I would add to what D.J. said. One of the things that Sun Paper does for us -- we had, from a marketing standpoint, we believe that in -- with that contract, if we're able to get them and which we now have, that other -- that would begin to attract other paper companies who we have been in, doing missionary work with.

Well, we are now getting those other companies -- are calling us. And they want to know more about what we've done. And that is leading to other proposals at the moment.

Okay. That's good to hear. Thank you.

(Operator Instructions). Thank you. I would now like to turn the conference back over to Mr. Rick Honey for closing remarks.

We'd like to -- we really appreciate your interest in Minerals Technologies, and that concludes today's call. And those of you on the East Coast and New York, stay safe.

Thank you.

Thank you. Bye-bye now.

Thank you. That concludes today's conference call. You may now disconnect.