Minerals Technologies Inc (MTX) 2012 Q4 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2012 Minerals Technologies Incorporated earnings conference call. All lines are 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 Rick Honey. Please go ahead, sir.

Good morning. Welcome to our fourth-quarter 2012 earnings conference call. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call by providing some perspective on our 2012 performance. He will be followed by Doug Dietrich, our Chief Financial Officer, who will review our fourth-quarter and full-year 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.

It should also be noted that the earnings per share numbers in this presentation reflect the two-for-one stock split we completed in December.

Now I'll turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. 2012 was Minerals Technologies' third record-breaking year in a row. We recorded operating income of $110 million and earnings per share of $2.09, both all-time highs. EPS was up 11% over the prior year and, operating income increased 9% over 2011. Our Specialty Minerals segment had a record year. Contributing to this performance was the Performance Minerals operating group, consisting of Processed Minerals and our Specialty PCC line, which also performed at record levels.

During 2012 we were able to execute successfully on our strategies of geographic expansion, especially in China and India; and new product innovation, which included advancing our FulFill technology in the worldwide paper industry; as well as new products in Performance Minerals and Refractories. I'll go into a little greater detail about this progress in a moment.

A great deal of our success -- especially in the deployment of business processes, practices and systems -- is the direct result of our operational excellence lean initiatives, which is now integrated and embedded throughout the culture of the Company. Our employees work daily to develop new ways to become more efficient by reducing waste and improving productivity.

Today, because of these efforts, we are strong operating company that is positioned to fully leverage improvement in the general economic environment, and the growth opportunities we are pursuing. Our cash position remained strong, as we generated $140 million in cash flow from operations during the year. And we continue our balanced approach on the use of our cash.

In November we announced a 2-for-1 stock split and a doubling of our dividend. And over the course of the year we repurchased $28 million of shares, all of which provided value to our shareholders.

This slide provides some insight into the improvement we've made in earnings per share and return on capital. As I said, our EPS for the last three years has been record-setting in our 20-year history. And we've seen steady improvement in return on capital, which in 2012 stood at 8.9%. And I should mention that this includes our cash as part of the denominator in that calculation.

Let's look at some of the advancements we made in our key strategies during 2012. China, as you know, is a major area of focus for us in Paper PCC, because the paper industry there, as well as the rest of Asia, continues to grow between 5% and 7% a year. In October, we announced a major contract with Sun Paper to build a 100,000-ton satellite PCC coating facility at their paper mill in Shandong province. In the fourth quarter, we also announced the 22,000-ton satellite PCC plant for paper filling at a mill owned by Jianghe Paper in Henan province. We're continuing to execute this strategy well, and are in discussions with more than a dozen paper makers in China.

During the year, we also started operations at two new satellites -- one in Thailand, the other in India. And we will expand four satellite plants in 2013 -- two in Alabama; one in North Carolina; and another in Minnesota.

On the new product front, our FulFill technology continues to gain momentum. In 2012, six paper mills signed commercial agreements for our FulFill E-325. Our Performance Minerals and Refractories businesses also continued to innovate. Performance Minerals launched new Optibloc talc blends for plastic applications, as well as titanium dioxide expanders for paints and coatings. We now have four commercial accounts for the titanium dioxide expander products.

In Refractories, we sold our first Scantrol, our laser measuring and application system, for a basic oxygen furnace at a Russian steel mill. The Scantrol units had previously been used only in electric arc furnaces. The Refractories also sold and commissioned its first LaCam Torpedo measuring device, which saves steelmakers time and expense in measuring the refractory lining of torpedo transport ladles that carry molten iron.

The business unit also introduced a new fourth-generation major laser measuring device that is the fastest in the world -- 17 times faster than the Company's previous version.

In addition to new products, Minteq, the operating unit of Refractories, signed an agreement with United Steel Company to perform all refractory maintenance at a greenfield steel mill in Bahrain that began operation in the third quarter. Minteq, working with other refractory companies, is responsible for coordinating all refractory maintenance of the steel furnaces and the other steel production vessels. This is a new business model for Minteq, and we are exploring similar opportunities elsewhere.

As I explained earlier, we made progress in the introduction of our FulFill technology. We now have 10 paper mills under commercial agreement and we are seeing movement with the other 25 mills where we are actively engaged. We are also quite close to signing contracts with two other mills, where we are currently running product; and one of these may be signed as early as today or Monday. Our FulFill team has gained invaluable experience in the past two years in rolling out this technology around the world. And we will continue to move forward aggressively to work with paper makers in adopting this cost savings technology.

As I said, 2012 was an excellent year for Minerals Technologies, with record financial performance and strong growth, and profitability in our Performance Minerals business unit. Our operational excellence initiative, which encompasses all employees in every part of the Company, continues to be the cornerstone that contributes to our improved overall performance.

Just to provide you some insight, productivity improved by 6% over 2011. And our employees engaged in 1200 Kaizen events, Company-wide. And as a reminder, these are focused employee group events designed to eliminate waste or improve quality. This year, employees generated 9800 improvement suggestions, ranging from improving efficiency, to new product ideas, to expense control; approximately 3700 more suggestions than were made in 2011. And of these, approximately 65% of the suggestions were implemented.

The new product pipeline is robust. We have more than 16 new product ideas in the pipeline, and we have commercialized more than 30 new products since 2009. Our expense control efforts continue to bear fruit, as you can see in our results. In 2012, we reduced overhead expenses by 3% from 2011. And, as you know, a primary focus at Minerals Technologies has been safety. In 2006, the Company had an average safety performance record for a manufacturing company, while today our safety record is at historical lows, and we are approaching world-class in terms of our workplace safety environment.

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

As we look at 2013, we are anticipating continued slow growth in the US, with housing providing some promising potential lift. Europe remains somewhat uncertain, but things do seem to be stabilizing. The steel and paper industries there, however, remain problematic for us, as further curtailments and restructurings are likely as we look forward. The Asia outlook, however, is good. And China is expected to continue to be a very positive environment for us.

Our focus in this environment will be to continue to advance our strategies of geographic expansion and new product development, while maintaining our momentum in operations excellence and expense control. We will also continue to shift and add resources to support these growth areas. Further successful penetration of our FulFill E-325 is paramount, from a priority focus standpoint. And continuing to penetrate China, as we did in 2012 with more new PCC satellites, is also high on our execution priority list. We expect continued success in both these areas.

Overall, we have a positive outlook on 2013, and expect to continue on our performance improvement track.

Now let's turn it over to Doug.

Thanks, Joe. Good morning, everyone. I'll take you through our consolidated and business segment results for the fourth quarter and the full year. I'll highlight the key market and operational elements of our financial results in each major product line, and comment on comparisons to both the fourth quarter of 2011 and sequentially to the third quarter of 2012.

As Joe mentioned, we reported earnings per share of $0.50 versus the $0.52 per share recorded in the fourth quarter of last year, excluding the special items. Our solid performance this quarter was due to better-than-expected earnings from our Refractories segment, offsetting the Specialty Minerals segment performance, which was slightly below our forecast.

In addition, our fourth-quarter tax rate was 26.3%, which was lower than expected, and improved our fourth-quarter earnings by $0.02 per share. Our consolidated sales this quarter decreased 3%, or about $8 million from the prior year. Foreign exchange had an unfavorable impact of $3 million, or about 1%; and the permanent and temporary paper mill shutdowns in Finland and France last year, as well as several steel mill shutdowns this year, account for the remainder of the decrease.

We continue to be affected by the weak market conditions in Europe, where total Company sales and operating income were down 8% and 18%, respectively. The Company's cost of sales this quarter were 4% lower, resulting in a 1% improvement in gross margin. Specialty Minerals segment margins improved significantly over last year due to increased pricing, continued productivity gains, and lower energy costs; but were partially offset by the Refractories segment margins, which contracted from lower equipment profits this year.

In addition, total expenses for the Company are slightly lower than last year. Operating income increased 2% to $25.7 million, and represented 10.5% of sales compared with 10% last year. Our return on capital for the quarter was 8.5% on an annualized basis. In the quarter, we generated $35 million in cash from operations, of which $14 million was used for capital expenditures. We repurchased $19 million of our shares in the quarter, and cash and short-term investments ended at $468 million.

Sequentially, our consolidated sales decreased 2%, and our operating income declined 8%, which was slightly better than our expectations. In total, our fourth-quarter results reflect continued strong financial performance.

As you can see from this chart, our earnings for the last five quarters are on a strong track of more than $0.50 per share. We have successfully managed to overcome the lost income from several steel mill shutdowns this year, and the two paper mill closures in the fourth quarter of last year, through our new satellite PCC volume, new product sales, productivity gains, and overhead expense savings.

Looking at free cash flow and cash flow from operations, you can see the improvement in 2012 over 2011. Free cash flow, at $88 million, is 7% higher than the previous year. And cash flow from operations, at $140 million, is 5% better.

This chart outlines the improvement in our operating margin over the last year. Margins have increased in both Paper PCC and Performance Minerals, but decreased in the Refractories segment. The increase in Paper PCC was primarily due to higher profitability in North America and Europe, as a result of productivity improvements, reduced operating costs and lower overhead expenses, which offset the effects of lower European volumes. Some of the European overhead reductions were the result of shifting R&D resources to Asia to support our growth initiatives there. And the improvement in Performance Minerals was due to higher pricing, continued productivity gains, and lower utility costs.

In Refractories, lower raw material costs were more than offset by the decline in refractory product sales resulting from the weak steel market conditions in both North America and Europe. In addition, as we anticipated, this segment was impacted by significantly lower profits from equipment sales, as several steel mill customers curtailed capital spending for the fourth quarter.

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 0.5% in North America, and around 1.5% in Europe. The construction market in the US, which includes both residential and commercial markets, was up over 6% in the fourth quarter versus the prior year. Automotive unit production in North America also continues to be strong with production rates up nearly 9%, but has leveled off somewhat as the fourth quarter was only 2% higher from third-quarter levels.

Steel production in North America was 2% lower than the fourth quarter of last year, and 3% lower sequentially. In the United States, production decreased 4% both year-over-year and sequentially, as steel capacity utilization rates went from 75% to approximately 72%. In Europe, you can see that the construction, automotive, and steel markets are each down between 5% and 9%.

On this slide, I break out our profitability improvement by region. North America drove about 1.2 percentage points of the margin improvement, due to strong earnings in Performance Minerals and increased profitability in Paper PCC. Europe was affected by lower refractory products and metallurgical wire volumes as well as lower equipment sales. Foreign exchange also affected Europe's profitability. Asia was affected primarily by lower equipment sales, which decreased approximately $1 million from the prior year.

Let's go over the financial results within the Specialty Minerals segment. $19.6 million of operating income is 21% higher than the fourth quarter of 2011, despite a similar level of sales. Foreign exchange had an unfavorable impact on sales of $2 million, or 1%. And the paper mill closures in Europe affected sales by an additional 2%. Excluding foreign exchange and the shutdowns in Europe, the segment's underlying sales grew 3%. Within the segment, Paper PCC sales, excluding the shutdowns and foreign exchange, grew 4%.

The European PCC volume declines experienced last year were offset by the ramp-up of volumes from several new satellite facilities that began operations over the last two years. We will see additional volume growth from two new satellites we commissioned in the fourth quarter -- one in India, and one in Thailand -- and from our fifth Indian satellite, which we expect to start up in March.

I'll go into more detail, and outline further our capacity additions in the minute.

In other segment product lines, Specialty PCC sales were up 5%. Talc sales decreased 4%. And GCC sales were down 3%. Segment operating income in the fourth quarter increased 21% over the prior year, driven by a 25% increase in Paper PCC and a 13% increase in Performance Minerals.

The increase in Paper PCC was primarily due to lower operating costs, a 9% improvement in productivity, and good expense control. In addition, we are generating profit contribution from our new satellite facilities and the FulFill E-325 program. FulFill, for the full, year generated approximately $1.4 million in operating income. The improvement in Performance Minerals was due to higher prices, improved Specialty PCC volumes, continued productivity gains, and lower utility costs.

Overall, segment operating income represented 12.2% of sales in the fourth quarter, compared to 10.1% last year, an increase of 21%. Sequentially, segment sales were 3% below third-quarter levels. Sales in Paper PCC were 1% lower, while sales in Performance Minerals were down 7% due to the typical seasonal decline in the construction market.

Operating income increased 13%, which was more than the 10% decline -- I'm sorry, decreased 13% -- which was more than the 10% decline we had anticipated on our last call, primarily due to lower-than-expected talc and GCC sales.

Looking forward, current indications are that first-quarter sales and profits in our Paper PCC product line will be slightly better than the fourth quarter due to volume growth in Asia. I would also like to mention that, given the continued weakness in the European paper market, as highlighted by the recent announcements by UPM to close or sell several other paper mills, we may need to make further adjustments to our overhead in the region. However, there's been some positive news for us that the Alizay paper mill in France has been purchased by Double A Paper. Our satellite there remains in operating condition, and we expect to begin supplying PCC to the mill when it comes online, most likely sometime in the second half of this year.

In Performance Minerals, we expect profits to be down slightly from the fourth quarter, as the first quarter is normally a seasonally low period of the year, and we are currently seeing an increase in energy costs. Overall, we expect the first-quarter operating income from for Specialty Minerals to be similar to the fourth quarter.

This chart highlights the components of the 21% improvement in the Specialty Minerals operating margin over last year. As I mentioned earlier, segment operating margins increased to 12.2% from 10.1%. Volume declines in Europe associated with the paper mill closures impacted segment margins by approximately 1 percentage point. Currency also had a slight negative impact. Sales from our new satellite facilities; FulFill deployment; improved product mix in Performance Minerals; and price increases improved margins by about 2.5 percentage points.

Productivity improvements in both Paper PCC and Performance Minerals; lower utility costs; and good expense control have also added nearly another 1 percentage point to the margin improvement.

Now let's go through the results within the Refractory segment. Sales in the fourth quarter were lower in both North America and Europe, and in total were 9% lower than the prior year. Foreign exchange accounted for about 1 percentage point of this decline. The decline in North America was driven primarily by the closure of RG Steel's Sparrows Point and Warren mills last June. In Europe, it was driven by lower refractory volumes resulting from a 6% drop in steel production, significantly lower equipment sales, and the impact of foreign exchange.

Operating income for the segment decreased $2.9 million in the quarter to $7.5 million. $2.3 million of this decline was due to significantly lower equipment sales and the RG Steel mill closures. The remainder was due to lower refractory and wire volumes in Europe; the impact of foreign exchange. These factors more than offset the benefits derived from lower magnesium oxide costs. The segment operating income ratio was 9% of sales for the quarter.

Sequentially, Refractory sales were down 4% from the third quarter, but were better than we expected due to higher refractory and wire volumes in North America. Segment operating income increased 4% from the third quarter, which was considerably better than we had expected on the last call.

Our North American (technical difficulty) in better than expected due to favorable refractory product mix; overall higher refractory volumes; and increased profits from our small, non-steel pyrogenics product line, which benefited from one-time sales. In addition, our metallurgical wire product line improved due to favorable product mix in both North America and Europe.

Looking forward, we remain concerned about steel production levels in North America and particularly in Europe, as production in both regions has been inconsistent. The recent announcements by ArcelorMittal regarding production concerns in Belgium reflect the steel market uncertainty in Europe; and, as a result, our refractory volumes will be affected in the region. Also, the current low level of equipment sales continues to carry through into the first quarter, and profits will be lower in our non-steel product lines. As a result, we expect that our first-quarter operating income for the full segment will be slightly lower than the fourth quarter.

This chart shows the changes in the refractory segment operating margin. The fourth quarter ratio was 9%, well below the 11.3% achieved last year. Refractory volume declines, significantly lower equipment sales, and the weaker euro negatively impacted margins by nearly 5 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 2 percentage points to margin growth.

These charts illustrate our working capital and cash flow trends. Total days of working capital increased slightly to 59 days. This increase was mainly due to higher receivables and lower payables in the Refractories segment. Our cash flow from operations was $35 million in the fourth quarter. Capital spending for the quarter was $14 million, and $52 million for the full year.

Let's take a quick look at the full year. We had another strong performance, and our earnings of $2.09 is an 11% increase from the $1.89 per share recorded in 2011. This represents the third consecutive year of record earnings for the Company. Our consolidated sales decreased 4%, or about $40 million from the prior year. Foreign exchange accounted for 3% of this decline. Excluding FX and the various paper mill and steel mill shutdowns we experienced over the past year, our underlying sales grew just over 1%.

Our cost of sales decreased 6%, driven by productivity improvements and good cost control, which resulted in a 3% increase in gross margin. We did a good job, again, managing total overhead expenses this year, which declined 3%. Operating income increased 9% to $110 million, and represented 10.9% of sales compared with 9.6% last year, a 13.5% improvement. Return on capital for the year was 8.9%, higher than the 8.5% achieved last year.

We generated approximately $140 million in cash from operations, compared with $134 million last year. And we've repurchased $28 million in our share buyback program, of which $19 million was repurchased in the fourth quarter. In total, we had the strongest performance in the Company's history.

Let me take a minute to review where we are with our Paper PCC geographic growth strategy. We're on track with the projections we communicated to you approximately 2 years ago. And I thought a summary would be helpful to outline the progress we have made, primarily in Asia.

To give you some dimensioning of the volume growth associated with our new Paper PCC facilities, this chart shows the announced PCC capacity that we have been deploying, and will continue to deploy, over the next two years. In total, these new satellites and expansions should add an incremental 525,000 to 625,000 tons of capacity by the end of 2014 and into the beginning of 2015.

In 2012, we began operations at two new facilities -- one in Thailand, and one in India -- with a combined annual capacity of around 100,000 tons. In 2013 we'll begin operations at our fifth facility in India. And we will complete four expansions in the States US, with a combined annual capacity of another 120,000 tons. In 2014, we'll commence operations at three additional satellites, two in China and one in Bangladesh, with a combined annual capacity of 150,000 tons. These two satellites in China are our first new operation there in seven years, and brings our total satellites in China to five.

As Joe mentioned earlier, we are in discussions with a number of paper makers in China and India which, if we're successful securing this business, could add an additional 150,000 to 250,000 tons in the 2014-2015 period. It should be noted that PCC volume in each satellite we build tend to ramp up gradually, as new paper machines come on slowly. We also expect additional volume growth through 2014 from the new satellite opportunities we're pursuing this year, and as well from the FulFill program as it gains traction.

In total, over the next two years we expect 500,000 to 600,000 tons of PCC volume growth from these initiatives, which represents a 15% to 18% increase in volumes from where we stand today.

As I mentioned earlier, our fourth-quarter earnings performance of $0.50 per share was above our expectations, primarily due to better-than-expected performance in the Refractory segment. Looking to the first quarter, we expect the Specialty Minerals segment profits to be similar to the fourth quarter, as improved PCC volumes in Asia will be offset by increased energy costs in Performance Minerals.

In our Refractory segment, we expect profits to be slightly lower than the fourth quarter, as our volumes will be affected by the continued weakness in North America and European steel markets. Overall, we expect the total operating income to be at similar levels to the fourth quarter. However, net income will be slightly lower due to our projected higher effective tax rate.

Now let's go to questions.

(Operator Instructions). Rosemarie Morbelli, Gabelli & Company.

Good morning, all, and congratulations and a good fourth quarter. If I understood properly, you are expecting net income to be lower than last year in the first quarter, Joe? And what kind of growth do you expect for the full year?

Well, we are expecting a growth -- overall income growth that is going to be commensurate with the track that we're on, Rosemarie. As you know, we don't give annual guidance, and try to give you what we can see for a quarter out. So, yes, we expect to be a little bit lower in the first quarter. But, overall for the year, we are targeting to be up on a year-on-year basis. A look at the earnings track we've been on, on an EPS basis for the last three years, I would say we're targeting to be in that kind of range -- from an annual, year-on-year increase standpoint.

Okay. Are what kind of -- are you expecting a similar type of stock repurchase in 2013 versus what you did in 2012?

Yes, it could be -- the potential is there to be more. Every year, every period, is going to be a little bit different depending on where we are; the rate of cash that we're accumulating; but, also, more importantly, how close we may or may not be to a particular deal has an effect on cash. We're going to stay balanced and -- we have another $45 million, $47 million that we could buy shares on the current program. I say, if you look at the last three years, four years, we're going to -- right now, from what I can see, probably on that track, which might suggest that there could be more than 2012.

And, Joe, if I may, you and Doug gave us a lot of details on the Paper PCC, on the Refractory. If we looked -- although I have to go through all of that data -- but if I look at the new products that you have launched, like Optibloc and TiO2 extenders, did they contribute to 2012? And what are your expectations for 2013 or 2014, if you have to go out that far in order to see bottom-line and the topline type of contribution?

Yes, they are actually -- the products are different in terms of the earnings impact, or the sales impact. The titanium dioxide is -- right now, we're still positioning, so I'd say the sales are relatively small. We have four accounts. And we're looking at a -- more towards later 2013, 2014, 2015. We've also seen a softening in titanium dioxide prices, which is reducing some of the pull that the market has had around that. But over the longer term, we think we are going to see nice and steady growth in that, but we're still in the embryonic stages.

The Optibloc is -- we've got a much stronger position. I'm going to ask Doug Mayger, our business unit President for Performance Minerals, to maybe elaborate a little further.

Doug?

Rosemarie, so the value proposition for the Optibloc line is really (technical difficulty) films. And then in addition to that, you have this thing called antiblocking, which is a layer that creates -- you are able to pull the films apart easily, and you see that in polypropylene and polyethylene films. And the sales in 2012, about $3.25 million. And we expect that to increase in 2013.

Okay. And then lastly on the tax rate, why was the tax rate lower in the fourth quarter?

Rosemarie, that tax rate was lower -- it was similar to last year at 26.3%. It's largely due to mix of earnings; also some tax planning strategies. We take dividends toward the end of the year, which provide some tax credits, foreign tax credits. So, it's a mix of things that affect the fourth quarter to get us to our full-year rate. The full-year rate was about 28.75%, a little bit lower than it was last year.

So, is that what we are expecting for 2013? That particular tax rate, the 28.5%?

We are at 28.75%, so probably going to be similar next year.

Okay. Thanks. I'll get back in queue.

Silke Kueck, JP Morgan Chase.

Good morning. I was wondering if I can start with a FulFill question. You said operating income from FulFill related sales were $1.4 million in 2012. And I was wondering whether you can talk about it. Maybe how much tonnage that represents a level of sales; and whether that's related, like the 10 contracts that I think you passed today.

Silke, for competitive reasons -- as we've indicated before, we really prefer not to disclose. And we haven't been disclosing what the tonnage and the actual sales number is, because the technology fee is a very important part or important component of the total pricing for the product.

Okay. The satellite mill expansions in the US in 2013 -- when are those supposed to come online?

Yes, I'm going to ask D.J. Monagle, our [BU] President, to talk about that a little bit.

D.J.?

Certainly. Silke, most of those will come online more towards the fourth quarter. Got some issues just making sure that we go through all the permitting processes and everything else. But fourth quarter, they would come online and we would expect them to ramp up relatively quickly, given the familiarity that those customers have with our products.

And are those customers rolling over to the FulFill product line? Or this is just an expansion of the same product, of the existing PCC product?

So, we've only announced, to date, one North American FulFill customer, Silke. And these are for expansions that are in the US. So the best way that I can put it is that these expansions enable us to do some things for the customer that include application of the FulFill product line. So, FulFill is a factor in this, for sure.

In terms of the TiO2 product that you commercialize, do you work with all of the major paint producers? And is it a product that had some incremental sales this year or can you quantify what you made compared to 2013, in any form?

We do work, and have been working with, many of the majors, running trials. The sales are relatively small -- were small in 2012. But I want to ask Doug Mayger again just to share a little more around that.

Doug?

Right. Silke, we have really two products -- the ALBAFIL T10 and the ALBACAR T10, and it is -- like Joe said, it's been relatively small. We do anticipate incremental sales in 2013. And we have been working with most of the major paint companies; also with non-paint companies, where we have since received some traction, such as the grout industry. That is also looking to displace TiO2. In the paint side, we can get upwards of 10%, maybe 12% replacement on the high end. And then on the low end, maybe around 5%, depending on the paint formulation.

Are you allowed to divulge which paying companies have tested this?

I cannot do that.

Okay. And lastly, I was wondering whether you could discuss the current business trends? When I look at North American paper shipments, look at steel utilization rates, everything seems to have slowed quite significantly in the month of December. And I was wondering whether you can talk about how things look in January, and maybe how important the individual months are in the first quarter. Do you do most of your business in March? Or is it more in January, less in February? Do you have any guidance on that?

Yes, I'll maybe start, and then ask others to chime in as well. A way to think about the Company -- sometimes in a simple way, but it repeats the pattern. The fourth and first quarters are the shoulders. And the peak period for us, because of the seasonal nature of some of our product lines and our businesses, are going to be in that second and third quarter. And particularly the second quarter will tend to be a little higher.

So we'll see, subject to differences quarter to quarter -- like the fourth quarter, we've seen over the years, because of equipment sales, due to how budgets are affected in the steel companies, we might see a ramp up in the fourth quarter. Or like this past year, we saw a significant cutback. So that the affected what the fourth quarter looked like because of the equipment sales.

What we're seeing is the equipment sales appear to be slow, for instance, in steel, going in that -- that slowness in the -- or, really nonexistence of sales in the fourth quarter equipment -- that slowness is carrying over. So we're seeing that. We're seeing, however, steadiness in paper. Paper is positive right now, so that is kind of solidifying. It held up, I think, well last year, in general. But, from time to time, I think you see some shakiness. You run into periods of mill maintenance or some cutbacks in production in periods of time. But by and large, I would describe it as steady.

The Performance Minerals business -- what we have been seeing is, now for over two years, is although it is subject to the seasonality moreso than the other two businesses that I described, it has been on a continuous improvement trend, upward trend. So we've seen sales improvement and profitability improvement.

Doug, do you want to add something to that?

I was going to say that we've seen, also, the construction markets have improved this year. So as Joe mentioned, though the seasonally low period in the fourth and first quarter, we're starting to see some pickup over last year in the construction market. So that's a positive for us.

And in terms of differences in months, Silke, March can be sort of a swing month. It's a good month to look at coming out of spring. East Coast, depending on the weather, will have an effect on us because of our plants. We have two plants in Performance Minerals on the East Coast. And obviously during the winter, weather has somewhat of an effect. It hasn't been too bad; we had a cold spell, beginning of January, that had some effect on us. But by and large -- and last year, if you recall, it was a very -- on the East Coast, it was quite warm.

That's very helpful. I'll get back in the queue. Thank you.

Andrew Gadlin, CJS Securities.

Morning. I wonder if you could comment on -- or approaching the question about this a little differently -- with about $1.4 million in of EBIT in 2012, what was the run rate exiting the year?

Exiting the year, we were pushing -- I'm trying to remember the number. We were probably at a run rate of approaching $1.6 million to $1.9 million. We had indicated on the last call, we expected -- and the call before that -- expected to come in at, for the whole year, of $1.4 million to $1.7 million. We came in at $1.4 million. And we also, in the call, indicated that for 2013, what we were seeing is an op income based on the run rates we were seeing of $2.5 million to $3 million. That is still holding for us.

And that is for next year?

For next year, yes.

That was 2013.

Okay, thanks. And as you look at some of these other plants that Doug went through, what kind of run rate do you think you could have coming out next year?

Coming out of next year? First of all. I think the mills that we have up there, and D.J. mentioned the expansions in the fourth quarter. There's some applicability there. But we'll see, as we put these mills in those regions, they are -- some of them are free-sheet. Now let me mention that Sun Paper is a coated paper application, so it's not necessarily one that you could look at it as a FulFill opportunity. But those are uncoated free-sheets, and there is opportunities in each of those four additional FulFill up-income generation.

Yes, but is there a round number that we could put on that?

I think, Andrew, it really depends on the traction that we get through this year. As Joe mentioned, it's really hard to predict 2014 at the moment. We look at 2013, where we are coming off of the run rate this quarter, as Joe mentioned, around $1.7 million. We think we can double that. We're still on to $2.5 million to $3 million for 2013. So we'll see, as we gain traction here in North America, and if these mills when they start up, what 2014 looks like.

And looking at the new mills that are coming on for 2014, meaning 152,000 tons capacity. Would I think that the EBIT associated with that could be similar -- I mean are proportional to the EBIT, let's say, from the 105,000 tons this year -- in 2012 -- and 120,000 tons in 2013?

Yes, they're similar. Again, the Sun Paper is a coating facility. And so prices are different there; different processes, different cost structure with that one, though. The other ones also --

Is it higher or lower?

The pricing is higher. The margins are similar; probably a little bit lower on that one. Coating is expensive from a cost standpoint. I think the other uncoated free-sheet mills that we are putting in there will be slightly lower than what you see in North America and Europe. Prices are a little bit lower in the Asia region.

Okay. On the refractory side, could you talk a little bit about the pyrogenics product that was a source of strength this past quarter?

Sure. Pyrogenics is a very small, non-steel -- actually graphite -- product line we have in the Refractory segment. I only highlight it this year because we had a number of -- actually, a much higher than any other period -- one-time sales that came through in the quarter. So it generated some benefit, which we weren't expecting those sales to come through in the fourth quarter. We had projected to be down from the third quarter and we were actually up, and that was just one small piece of the contribution to it.

Got it. You don't expect that to trend into Q1 or Q2?

No. I mentioned that that's one of the reasons we see the Refractory seem slightly lower, not just refractory volumes and the market conditions were seeing, but also we won't have those one-time sales.

And can you talk about the Bahrain refractory management agreement? How that came to pass and -- you'd mentioned that you'd like to grow that relationship -- or, that business model. Can you talk about some of the things you're doing there?

Yes. That started with some basic development work, from a business development standpoint, on looking at opportunities around the world, and looking at what we could bring from an added value standpoint. And it's actually quite an interesting story. I'm going to ask Han Schut to elaborate a little further, and give you a little more sense of what was involved and where we may be going with that as well.

Han?

Yes, thank you, Andrew, for your question. First of all, if you look to this greenfield facility that they're putting in, it's an investment by the customer of $1.2 billion. And they're going to produce approximately 1 million tons of steel a year in their electric arc furnace. So it's a completely greenfield. And it's the first time that we have entered into the cost per ton contract where we are responsible for full refractory maintenance from start to finish.

So, this includes the bricks and the flow control; refractories also. This is a three-year contract, with a total value between $25 million and $30 million. And we started, together with the customer, in 2012 in the third quarter. So we expect that for next year, our revenue will increase just on this concept alone, by approximately $8 million.

And it's, of course, a completely new business model, so normally we do -- we're very strong in [BUF] for management and electric arc furnace environments. But for us this is, you could say a new business model that we also want to expand to other customers. I think in this partnership what is special is that we have very strong technical salespeople on the ground in Bahrain. And we are working close in cooperation with the customer. If operating conditions change, we also adjust the contract accordingly. And we're looking of course to extend this also to other regions and also further into the Middle East.

Excellent. Would you imagine that this type of agreement would be most appropriate, or only appropriate even for new facilities?

No, not necessarily. I think the main issue is the cooperation with the customer, and whether you can come to an agreement where you drive improved productivity in the steel mill; and that in combination with total or refractory cost. And if you can get to such a partnership, it can be applied to any region, and also for existing steel mills.

You said a three-year contract, $25 million to $30 million. When would the contract start, or when would revenues associated with the contract start?

It started at the end of the third quarter.

Okay. And it's ramping by -- I think you said $8 million?

Approximately $8 million in 2013.

Yes, Andrew, that contract started at the end of the third quarter. But that mill is just now ramping up. So I think it's even a little bit behind from where they had predicted at the end of the year. It's probably 50% in terms of their production.

And when did production start?

They started the mill at the end of the third quarter.

Yes.

All right. And profitability on this contract is in line with your existing business?

Yes. It's in line with our existing business.

Thank you very much.

(Operator Instructions). Steve Schwartz, First Analysis.

Nice quarter, all things considered. A seemingly simple question, I think -- on FulFill, is that run rate generally consistent from quarter to quarter?

Not necessarily. You have some starts and stops. And I guess the best way to describe it, it can be a little herky-jerky. And in terms of running -- when I mentioned in my remarks that it's been -- the team has learned a lot the past two years. Part of that learning is adjusting to changes in things, simple things like -- which are not that simple -- grades of paper that are being made, types of paper. Those can cause -- let's say you've been running for two or three months with FulFill -- that brings in a new type of paper that we have to make adjustments to in the product and try to ramp up.

So this is not a smooth, straight line. It requires a period of stability; and, in some cases, even with some of those 10, we're still going through that process right now. (Multiple speakers).

Okay, so as it becomes a bigger part of your profit, we need to be prepared for maybe a little bit more volatility?

Yes, I think that's a fair way to look at it. And that's why I try to give you numbers in ranges, and it gets a little difficult to pinpoint exactly because of that. But over time, we're continuing to build greater technical fees and (technical difficulty) higher total operating income.

Okay. And the expansion of these for US satellites is surprising news, so I'm wondering if you could give us a little color on what's driving that. Is this a speculative move on your part? Is it a mix change by the paper maker, with their production? Are they doing paper machine expansions? What's driving it?

Let me ask D.J. Monagle to walk you through that. D.J.?

Steve, as I said before, we've only announced one North American FulFill customer. We expect to be announcing more in time. So what I would say is, for these particular mills, we've hooked up with some world-class performers. They're going to be around for a while. They have -- we have helped them improve the utilization of our products. And we've got several pathways for them to use more of our product; and including in those pathways is FulFill. I'm not announcing that these are FulFill customers, but I'm just saying that FulFill is a part of our consideration here.

(Multiple speakers) I have to admit, D.J., it is exactly that earlier comment you made that made me mention the word speculative, in a sense. And I don't mean that negatively, but it sounds like you're preparing for potential new business.

That is a proper way to think of it, Steve.

Okay, very good. And then in the Refractories business, gentlemen, you showed steel beam down from 2% to 5% year-over-year. The business itself was down -- revenue was down about 8%. What was the reason for that? Was it all the equipment? Was it lower pricing? Did you lose some share?

If you recall, Steve, RG Steel was a large customer of ours, and they filed for bankruptcy. So we took a higher than trendline hit, or change hit, year-on-year from the steel industry. So, we had more exposure on average to RG Steel, and that's what it affected us.

Doug, do you want to elaborate a little further on that?

I think the majority of the decline, as Joe mentioned, was RG Steel and sales. Also lower equipment but that contributed a piece of it. I think you're the reason that you're getting to it, why didn't operating income was better, it was a much better mix as I mentioned. We had better mix in refractory products, more BOF sales in other mills than GAF. We had better mix in wire as well. So, really, the sales decline moreso than the market was RG, and really had its full impact the second half of the year.

You had been talking about two mill closures in the second and third quarter. Now you are talking four. Are the additional two part of RG?

There are two mills from RG. There were actually two others. They were in Europe. They affected mostly this full year over last. There was some sales to those in the fourth quarter of last year, which was why I called them out. Those were European mills. They were ArcelorMittal and a [10] steel mill.

Okay. You've been generous with time; if you have time, and can answer what the 2013 raw material outlook is like, I'd appreciate it. If you need to move, on I certainly understand. Thank you.

Not at all. So we're seeing some increases in magnesium oxide prices over where they were at their lows last year. A little bit of stability recently in magnesium oxide. That's one big cost. We've seen some line lime cost increases. That's largely due to increased energy prices, so we'll expect to see some of that this year. I think the major impact that we're seeing is what I mentioned in my comments, is energy. And specifically electricity costs on both coasts are affecting us in the Performance Minerals business. I think probably the majority of the impact on our raw materials would be utilities this year.

Great. Thank you again.

Daniel Rizzo, Sidoti & Company.

Just a quick question -- you've done a good job cutting costs. It most of what you can do, done already at this point because of what you've done over the last two years?

Well, I was asked that question four years ago. And just to put it into perspective, part of what we're doing that I think differentiate us from other companies, from a cost reductions standpoint, is that we've taken a continuous improvement approach. And it really -- the philosophy and the principles behind that is that small, incremental improvements across the globe, throughout all parts of the Company, add up over time.

And so we're constantly finding ways to save money. And as we bring new business in, one of the things it's doing, it's -- we're able to produce that new business in a more efficient way. But we've extended operational excellence to all departments in the Company, all resource units. So, whether it is our finance department, our legal department, they are basically employing the principles of lean in how we operate.

So, there is a constant, positive pressure to make smart decisions on cost, find alternatives, find better ways to do it. We expect to continue to have savings from that over time. And that's what the suggestions that employees make -- many of those are around ways to save money, and you just don't run out of ways to save money.

At the same time, as I said, you combine that with the strong emphasis we have on growth through the geographic expansion, FulFill, we can get extremely good leverage on new sales that were bringing into the Company.

Okay. And then you mentioned before about something not being a FulFill opportunity because it's coated paper, or FulFill doesn't really apply. Is that something you're working on that could be down the road, whereas you could use FulFill for coated paper as well?

Yes. This is D.J. Our target market right now (technical difficulty) is in the uncoated grades. We do see applicability to the coated paper grades, but it's not a focus for us right now. The biggest bang for the buck is getting everything proliferated in uncoated free-sheet. So, over time, will we be getting into the coated business? We believe so. Early indications are that there is a value equation? And one of those dots that was on the graph that Joe had shown earlier is, in fact, a coated location. So we're moving forward in that area, just not with the same level of progress in the uncoated space.

Okay. Thank you.

Jay Harris, Goldsmith.

Two questions, basically -- one of the steel industry, and one on cost reductions. The model that you are implementing in Bahrain -- does that has have to be up and working for some time before you'll be able to sign up additional customers? And does the model work in all areas of the world where you are serving the steel industry?

I'll start off, Jay, and let Han complete it. We haven't -- we are looking at other opportunities to apply the model. And we are in discussions with at least one company right now. But we also want to make sure that the model works. We believe it will, so we want a little more experience with it. Based on what we've seen so far, and the experience with the Bahrain mill, it was very positive. So that keeps looking very good for us.

And I'm going to let Han add to that, if you would, please, Han.

Yes. And you asked, Jay, specifically about the applicability on a global basis. I think it very much depends on the customer environment and the customer relationship. If you are in a relationship with a customer where you can drive improved steel productivity and lower total refractory costs together, and there is a fair contract when operating conditions change that you can also adjust the total refractory costs, and then you can apply it in that environment.

In the case that you are there as a refractory supplier alone, and the steelmaker will just drive for productivity only, then you take the risk that we don't want to take. So it very much depends on your cooperation with the customer.

The key point that I would emphasize here, or the key take-away is changes in operating conditions. One of the things that basically kills the cost per ton model is when conditions change. And that causes, one, either the customer or the supplier to either have unusually high gains or usually high losses. What's different about this contract, we have a customer who has set parameters with us that allow for change over that period. And it requires total openness and total trust between the customer and the supplier. That is what's different about this model.

Do you have candidates in other geographies at this point?

Yes, we have candidates in other geographies as we speak, yes.

All right. And a little further on steel -- it's my perception that you have not followed the steel industry as the center of -- geographic center of manufacturing has moved into Asia. Is that going to change?

Well, Asia is of course, very broad. If you talk to China and if you look at just specifically to Minteq, we are a value sales company where we sell productivity. And we sell total lower refractory costs, like I just mentioned. In China we are also involved with major steel companies where we can, and where we find customers that are looking for this kind of relationship.

We have been very successful with that in India, which has been a major growth market for us. And there we find our acceptance of our -- you could say our value equation. In China it has been limited so far, so it depends a bit on the country.

All right. Switching to what I think has been an exceptional record of getting costs out of the business -- if we get into a more robust business environment, are any of these reductions going to have to be reversed?

Reversed?

Reversed.

The cost savings.

No, I'd say -- nothing comes to mind. What we've been driving is sustainable reductions over time, so it's a sustainability model. Our focus was -- I don't know if you recall, but the first two years of developing lean, or my first two years at the Company -- I said, please don't expect any savings to come out of what we're doing in operational excellence. It takes 3 to 4 years to really build this into a company and bring about the culture changes.

And it is because this is sustainable, it is for the long-term, that -- this isn't something that goes away when you have a recession. It's not a high overhead process. It's involvement of all employees in operating differently, operating in a way where -- we asked folks to bring their hearts and minds to work every day, and help us figure out how to do things better. And that really is at the core of it.

All right, thank you.

And, Jay, I'd just add to it, that over the past five or six years, we have really changed the structure of that overhead. We have a shared service model in the Company that we've been adding to and expanding to other regions. And that efficient back-office model can be scaled with new sales. We won't have to add those expenses, we can leverage that overhead.

Jay, if I can ask you a question, are you concerned about the ability to swing up in terms of sales?

Well, it just occurs to me that (technical difficulty) some of the efficiencies that you've installed are a reflection of static or declining volume.

No, it's quite the opposite. For instance, we have, for a $1 billion company, this is a little unusual. We have a complete and total shared service -- business shared service system. So, every function that you can think of that should be in a shared services model we basically have. And, if anything, we are not fully utilizing it.

And that's why as we talk about leveraging acquisitions that come into the Company, we're extremely well-positioned to bring in and get efficiencies or inefficiencies from other companies and capture them. In terms of where we are today, the ability to step up is we've got a lot of leverage capability in that.

Well, where do you think your operating expense ratio -- let's take three, four years from now, when the business climate is, let's say, robust. You're suggesting that your operating expense ratio will be significantly lower.

If you recall, in 2010, when we set our five-year targets, we were targeting to have an operating income margin improvement of -- going from 10% to 12%. So we're looking at a 20% improvement. Part of that improvement comes from leveraging the overhead. Another part comes from having higher value-added products, through the new products that we're out there selling today. So it's going to be a combination of both.

Depending on companies that we bring in to the Company, that we integrate, will have an effect on that particular ratio. But if you look at where we've been tracking, that also is also now in a continuous improvement mode. So we're making year-on-year improvements that range from 5% to 10% from a productivity standpoint. From an overhead standpoint, we're probably running in that 2% to 4% range.

I just heard one of you say that you have access on a shared -- I've forgotten the terminology. But on a shared services basis, you have excess capacity.

We do. We have a capability that has both -- is inside the Company and outside. So we have business services that support us in places like Romania; India. We have a very robust model that can flex up very easily, and also flex down.

So there should be a substantial improvement, then, when you start to grow your revenues more aggressively?

Yes.

Okay, thank you.

Rosemarie Morbelli, Gabelli & Company.

Thanks for taking it. A lot of the additional questions I had were answered. But I was wondering, Joe, if you could give us a feel for the progress you are making on the M&A front? And whether we will see something in 2013?

Rosemarie, I would love to do that. I would love to give you more granularity of what we are doing. But, unfortunately, we really can't, other than to say that we are active, as I've said before. And active means, look, we are in discussions with companies. We've continued to identify new targets. And we are at various stages, so I really can't tell you anything more than that right now, other than this is a very serious effort for us.

Okay. And on the expansion of the satellites in the US, I understand you are preparing to maybe do some trials on full-scale. But are those expansions on the paper mill side due to the fact that some of the capacity from the shut-down mills has been transferred into those three or four entities, and therefore require more PCC? Or is it just brand-new capacity?

Yes, I'm going to ask the D.J. to cover that.

Rosemarie, there is incremental gains in capacity at the mill. What you are mostly seeing is our ability to put more PCC in this sheet.

Okay, so not the mill making more paper?

They may be making incrementally more, consistent with the normal progress of a world-class mill. They figure out over time how to improve their productivity. But the major increase in those tons is really about us putting more PCC into their sheets.

Okay, great. And very quickly on the Bahrain model, when you say that the profitability of that particular model is similar to that of the Refractory business, are we talking about that, let's call, it 9.5% operating margin for your 2012 year? Is that a level that you are referring to?

Similar, Rosemarie, yes -- it's in a similar profitability to the refractory product that we sell. Remember, we also partner with other suppliers as the general contractor. So we're buying and providing the service. We have the steel mill service on-site. And then we also sell our own products, our own refractory products, which are sold at similar margins.

And is the model mostly adaptable for greenfield steel mills? Or can old mills be retrofitted to that particular model?

No, it's not only for greenfield mills. As Han mentioned earlier, it's applicable to other mills, as well. But it's the type of contract, the type of model, that's different than other [coster tons] that are out there in the market today.

Right, and then you have to kick out everybody who is working at the mill at the moment, right?

I think so, yes. (Laughter)

Okay. Thank you very much for your help.

I think we're done. Thank you for your interest in Minerals Technologies, and everybody have a good day.

Thank you.

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