Minerals Technologies Inc (MTX) 2013 Q3 法說會逐字稿

Welcome, ladies and gentlemen, to the Minerals Technologies Inc. third-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. After our prepared remarks, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Rick Honey, Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to our third-quarter 2013 earnings conference call. Today, Chief Executive Officer Bob Wetherbee will provide some insights into our third-quarter performance and will then turn the call over to our Chief Financial Officer, Doug Dietrich, who will give you a detailed report of our financial results for the quarter. Following Doug, D.J. Monagle, Senior Vice President and Managing Director of our Paper PCC business, will provide an update on our growth initiatives for that business in Asia.

Before we begin, I need to remind you that on page 8 of our 2012 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 Bob Wetherbee. Bob?

Thanks, Rick. Good morning and thanks for joining us today.

Minerals Technologies posted record financial results for the third quarter, with operating income of $32.8 million up 15% over the prior year. Operating income as a percentage of sales reached 12.9%, as we continued to improve over last quarter and exceeded the 2015 goal we established three years ago. Earnings per share for the quarter were $0.63, compared with $0.54 in the same period a year ago, a 17% increase. And underlying sales increased 4% as we continue to grow the topline.

Our specialty minerals segment posted record quarterly operating income of $26 million, a 12% increase over the $23.3 million in the third quarter of 2012. Continued execution of our geographic expansion and new product innovation strategies drove this growth.

Our paper PCC business benefited from the restart of the satellite plant in Alizay, France, and the continued ramp-up of new satellites in India and Thailand. We also increased sales in our processed minerals and North American specialty PCC product lines.

During the quarter, we announced two new contracts for the construction of satellite PCC plants. The first was in China. We signed a joint venture agreement with Nanning Jindaxing Paper for the construction of a 45,000-metric-ton satellite plant. The second was in Europe where we reached agreement for a 14,000-metric-ton satellite plant with an established paper company that wished to remain anonymous for competitive reasons. We expect both plants to be operational in the fourth quarter of 2014.

Fulfill, our high-filler technology for the paper industry, continued to gain momentum. Earlier this week, we announced a commercial agreement with a paper mill in India, who asked to remain anonymous for competitive reasons, that is deploying our Fulfill E-325 technology. This technology allows papermakers to reduce the cost of paper by increasing the use of MTI's PCC to replace higher-cost fiber.

We now have agreements with 14 paper mills around the world that are deploying the technology.

Also during the quarter, our Board of Directors authorized a new two-year $150 million share repurchase program.

Looking at our earnings per share, you will see that we have been at or above $0.50 per share nine consecutive quarters and above $0.60 for the second consecutive quarter. We have achieved these sustained levels despite operating in the challenging paper, steel, construction, and automotive industries. This continues to confirm that our geographic expansion and new product innovation strategies, coupled with our strong operating performance and focus on operational excellence, are continuing to create value.

Our return on capital improved to 10.1%, versus 9.1% a year ago and above our cost of capital.

Geographic expansion in Asia is a key lever in our effort to grow organically. Our sales in that region grew 11%, primarily driven by the continuing ramp-ups of satellite PCC plants in India and Thailand, both of which were constructed in the last year. As I mentioned earlier, we also saw advancement of our Fulfill high-filler technology with the deployment at the paper mill in India. We continue on track to deliver our 2013 Fulfill operating income target.

We delivered sales growth in performance minerals, which consists of our processed minerals operations and the specialty PCC product line. Ground calcium carbonate, or GCC, sales increased 12% over the prior year. We captured modest share gains from product substitution in adjacent markets and saw regional growth in the construction market. Talc product line sales grew 8% as we expanded our positions with global customers in polymer, sealant, and adhesive applications.

North America specialty PCC product sales grew 9%, as we continue to capture the benefits from the expansion at our Adams, Massachusetts, facility that we mentioned in last quarter's call.

In refractories, segment sales on our metallurgical wire product line increased 10% and refractory product sales in Europe and the Middle East region increased 12%.

In addition to our strategies to grow through geographic expansion and new product innovation, we continue our efforts to improve performance through operational excellence and expense control.

New product innovation is an equally important core element of our strategy. As you can see in this chart, our new product development pipeline is healthy and growing, significant for a technology-based company. Today, we have 121 active projects in our pipeline, up from 95 at the end of 2012. 39 of these have been launched and 34 are in active development or trial.

In refractories, we are introducing longer-life product offerings that address the global customer need for furnace up-time, productivity, and lower overall operating costs. Coupled with our product and operational expertise in laser measurement systems, we continue to drive for solutions that optimize material application within a furnace to maximize furnace life. We are expanding our product portfolio for electric arc furnace customers to gain share, building off our core refractories business serving basic oxygen furnaces.

In our performance minerals business, we are focused on improving particle size distributions and surface properties that can grow our business in sealants, polymers, packaging, and food/pharma applications. In addition to the Fulfill high-filler technology portfolio that we continue to develop and deploy in our paper PCC business, we are pursuing new offerings that provide alternate uses for the industry's waste streams and process residues. We have asked D.J. Monagle to expand on the paper PCC new product pipeline and the growth potential in this business later in today's presentation.

Our team is excited about the new product pipeline and growth potential and passionate about capturing it.

Before I turn it over to Doug Dietrich, who will provide the financial details of the third quarter, I want to give you a quick recap of the quarter and where we are as a Company. Once again, we broke Company records of profitability by executing on our key strategies. Our sales are growing and our income from operations for the specialty minerals segment reached all-time high levels.

We continue to seek new opportunities for growth around the world, primarily in Asia. Our portfolio of growth initiatives across all our product lines has us well positioned to more than offset the recently announced reductions in North American paper capacity that we have seen coming for some time.

We continue to maintain a sharp focus on improving efficiency and productivity. The Company is on a high-performance track, led by a solid management team committed to safety, technology development and deployment, continuous improvement, and expense control.

As a strong operating company with market-leading positions in many of our businesses, we're building upon that strength by continuing to grow our existing product lines and seek acquisition opportunities that leverage our minerals and operational expertise to improve bottom-line performance. We are staying the course that has led to improved financial performance and we will continue to focus on developing and capturing opportunities for profitable growth.

Now I will turn it over to Doug Dietrich for a detailed review of our financial results. Doug?

Thanks, Bob. Good morning, everyone. Let's go through our consolidated and business segment results for the quarter. I will highlight the key market and operational elements of our financial results in each major product line, and comment on comparisons to both the third quarter of last year and sequentially to the second quarter of this year.

As Bob mentioned, we achieved record operating income of $32.8 million this quarter and earnings per share were $0.63, which is a 17% increase from the $0.54 recorded last year.

Our strong performance this quarter was led by the specialty minerals segment, which also achieved record quarterly profits of $26 million, a 12% improvement over the prior year, and was 15.5% of sales.

Paper PCC operating income increased over 15% compared to last year, and the performance minerals business continues on its strong track, with operating income growth of 6%. The refractory segment operating income also improved, up 17% from the third quarter of last year.

Our consolidated sales this quarter increased 3%, or about $6 million, over last year. Our underlying sales grew approximately 4%, as foreign exchange had a 1% unfavorable effect. We saw underlying sales growth in both the specialty minerals and refractory segments, and in total, the growth was in line with the expectations that we communicated to you on our last call.

Gross profit was approximately $60 million, 8% above the prior year. Gross margins expanded to 23.6% from 22.4% last year, driven by price increases, sales of higher-margin products like Fulfill, and a 4% improvement in manufacturing productivity. Total fixed overhead costs dropped to 14.3% of sales, as compared to 14.9% last year, a 4% improvement.

As we have discussed on previous calls, we continue to control our overhead expenses tightly, which has helped drive a greater portion of these new sales to the bottom line. The combination of these two improvements leveraged total Company operating income growth to 15%.

Our return on capital for the quarter increased to 10.1% on an annualized basis, compared to 9.1% in the third quarter of last year. We generated close to $34 million in cash from operations, of which $10 million was used for capital expenditures. We repurchased approximately $24 million of shares in the quarter, which completed the $75 million share repurchase program authorized in 2011. In addition, in September the Company's Board of Directors authorized a new two-year $150 million repurchase program, which will essentially return the majority of our free cash flow back to shareholders over the next two years.

Sequentially, consolidated sales decreased 1%. Specialty minerals sales decreased 1%, due to the seasonal decline in the processed minerals product line, and refractories was 2% lower.

Despite the slightly lower sales level, operating income increased 1%, which was higher than anticipated on our last call, as paper PCC came in stronger than expected.

As we have done over the last several quarters, this slide highlights the product-line contribution to the operating-margin improvement over last year. You can see the growth was driven largely by paper PCC; however, the performance minerals business continues to operate at historically high levels and the refractory segment also achieved year-over-year improvement.

The paper PCC margin growth was due to price increases, productivity improvements, contribution from both new satellites and Fulfill, and the restart of our Alizay, France, facility. The improvement in performance minerals was due to strong sales growth from our ground calcium carbonate and talc businesses, volume growth in our North American specialty PCC product line, and price increases. In refractories, margins improved due to volume growth in our metallurgical wire business and contributions from refractory sales in Bahrain.

Going forward, we expect the Company to continue to operate at a high performance level and we are well positioned to expand margins further as we continue to execute our strategies.

Let's go over the financial results within the specialty minerals segment. As I mentioned earlier, this segment had a record quarter with $26 million in operating income and underlying sales growth of 4%. As you can see from the chart, this segment continues on a very strong track this year.

Within the segment, paper PCC's underlying sales grew 2%, driven by a 9% increase in Europe and an 11% increase in Asia. This growth was partially offset by slightly lower volumes in North America and Latin America. In performance minerals, underlying sales grew 7%, driven by volume growth in our US specialty PCC and ground calcium carbonate product lines and higher pricing. This growth was partially offset by weaker specialty PCC demand in Europe.

Segment gross margins expanded to 24.1% from 22.8% last year. Operating income grew 12%, driven by a 15% increase in paper PCC and a 6% increase in performance minerals. Operating margins in the segment expanded to 15.5%, an improvement of over 8%. This margin growth was primarily due to the contribution from our new satellite facilities in Asia, increased profits from Fulfill, higher pricing, manufacturing productivity improvements, and volume growth in our ground calcium carbonate, talc, and US specialty PCC product lines.

Sequentially, segment sales were 1% below the second quarter, driven by the seasonal market decline in performance minerals that we typically see late in the third quarter and indicated to you on the last call. Sales in processed minerals were 4% lower than the second quarter. Operating income for this segment increased 3%, which was better than our expectations, due to higher profitability in paper PCC, primarily in Europe and Asia.

Also in the quarter, there were announcements by International Paper, Boise, and Georgia-Pacific to close paper machines, removing approximately 970,000 tons of uncoated woodfree paper production capacity. As a result, paper machine operating rates in the US should increase to over 90%, which is a healthy position for the paper industry.

We expect the majority of the displaced uncoated freesheet volume to be absorbed into other paper mills where we currently have satellites. At this point, it is unclear as to the exact timing and direction of the moves, but indications are that this will take place over the next four to six months. We do expect some net volume impact on our satellites over this period, and we are currently working through to what extent as we see how this volume shift takes place.

Looking forward to the fourth quarter, we expect lower profits in paper PCC as we absorb the impact of higher lime costs in North America that contractually cannot be passed through to customers until the first quarter of next year.

In performance minerals, we expect the typical seasonal volume decreases as the fourth quarter is the low point of demand in the year for our end markets. Fourth-quarter sales in performance minerals are typically 7% to 10% lower than the third quarter.

Overall, we expect fourth-quarter operating income for this segment to be between 10% and 12% lower than the third-quarter levels, which is a normal seasonal drop. However, compared to last year, we expect to continue on our strong track, with sales growth of approximately 4% and operating income growth of 10%.

Looking further into next year, despite some of the recent structural changes in North America and European paper markets, we expect to maintain our momentum of sales growth and margin improvement in this segment through the commissioning of three new PCC satellites in China, the expansion of four satellites in the US, and the continued deployment of our new technologies.

In a few minutes, D.J. Monagle will take you through in more detail the broader growth opportunities in paper PCC and our recent progress in capturing them.

As I mentioned on the last chart, segment operating margins increased 8% this quarter to 15.5%, from 14.3% last year. And this chart outlines the components of that improvement. We absorbed higher lime costs in Europe, as well as significantly higher electricity costs, in performance minerals this quarter. These costs were offset by contractual paper PCC price increases and product price increases in our performance minerals business.

We had sales growth in our GCC and talc businesses of 12% and 8%, respectively, which generated close to a full 1% of margin improvement. We continue to achieve productivity and other cost-control improvements in this segment, which contributed 0.3% to the margin growth. And finally, we are seeing solid performance for our new PCC satellites in Asia, along with increased contribution from Fulfill.

Now let's go through the results within the refractory segment. Sales in the third quarter were 2% higher than last year. Underlying sales grew 4% as foreign exchange had an unfavorable impact of approximately $1.3 million. Sales in metallurgical wire increased 10%, due to volume increases in both North America and Europe. Underlying sales of refractory products and systems grew 2%, driven primarily by growth in our Europe, Middle East refractory business where sales increased 12%, due largely to incremental volumes in Bahrain, share gain with customers in Italy, and increased volumes in France and Austria. These higher sales were partially offset by lower sales in North America and Asia refractory products.

Operating income for this segment increased $1.2 million, or 17%, in the quarter to $8.4 million. This increase was driven by the sales growth in metallurgical wire and manufacturing productivity gains in both product lines. Operating margin was 9.7% for the quarter, which represents a 14% improvement over the 8.5% in the third quarter of last year.

Sequentially, refractory segment sales and operating income were slightly lower in the second quarter, which was in line with our expectations and what we communicated on the second-quarter call.

Looking forward to the fourth quarter, we expect our operating income for the full segment, again, to remain similar to third-quarter levels as we do not see any significant near-term improvement in the North America and Europe steel markets. In addition, steel producers continue to curtail capital spending, which impacts the number of refractory equipment units we sell.

Compared to the fourth quarter of last year, however, we expect segment sales to grow by 4% and operating income to increase 10%.

Now here's a summary of the changes in the refractory segment operating margin. The third-quarter ratio of 9.7% compares to 8.5% last year, a 14% improvement. As I mentioned, improved metallurgical wire volumes in both North America and Europe contributed about 0.7 percentage point to margin improvement. Productivity improvements and expense control added another 0.3, and increased sales and profits in refractory products added another 0.2.

Now let me move on to our working capital and cash flow trends. Total days of working capital increased slightly to 57 days, but remained at the low levels that we have maintained over the past several years.

Our cash flow from operations was $34 million in the third quarter and capital spending for the quarter was $10 million. We used the majority of our free cash flow to repurchase approximately $24 million of our shares.

In addition, we are gaining some clarity with our customers on the timing of new paper mill installations in China and we expect that our capital expenditures associated with the building of these PCC satellites will move into the first part of next year. Our current outlook is that total capital spending for the year will be in the range of $45 million to $55 million.

In summary, our third-quarter earnings of $0.63 per share reflect our strong performance this quarter. The sales growth that we've been projecting over the past several quarters is showing through. This performance is a direct result of the execution of our strategy of geographic expansion and new product innovation. We have leveraged these higher sales to record profits through our lean processes and culture of operational excellence.

Looking to the fourth quarter, we expect a normal 10% to 12% decline in the specialty minerals segment operating income, as performance minerals enters its seasonally slow sales period and paper PCC absorbs higher lime costs in North America. In refractories, we expect segment operating income to remain similar to third-quarter levels as we still do not see any significant near-term improvement in the North America and Europe steel markets.

In total, we expect fourth-quarter Company sales to be lower than the third quarter, due to the normal seasonality of the business. As a result, we expect operating income to be 7% lower than the third quarter, or about $0.05 per share. Compared to last year, however, we see continued strong performance, with 4% sales growth and 10% earnings-per-share growth.

Now I'll turn it over to D.J. Monagle to review our growth opportunities and progress in paper PCC. D.J.?

Thank you, Doug. Good morning, everyone. I'd like to provide you with some insight into the growth opportunities that we are pursuing in Asia, especially China and India, through geographic expansion and the development of new technologies.

Three years ago, we presented our vision of the long-term growth we saw in China and India based on two factors -- tons of uncoated woodfree produced, compared with the tons of PCC used in paper production in these two countries.

We then estimated how the potential PCC tons would grow, based upon the historical annual rate of growth in uncoated woodfree paper production and our ability to differentiate and make a positive impact with our new technologies in this emerging region. This provided us the basis for our strategies and objectives, designed at converting this region to our core technology and delivering significant growth.

Today, I would like to review that potential PCC growth rate and bring you up to date on the advancements we have made through the execution of our strategy of geographic expansion.

This slide is a graphic depiction of potential PCC growth in China and India, compared to the established regions of Europe and the Americas. Today, 12.4 million tons of uncoated freesheet are produced in North and South America, while 11 million tons are produced in Europe. Point of reference, these markets have declined between 1% and 3% per year over the past 10 years.

In comparison, India is producing about 3.5 million tons of uncoated woodfree and is growing by more than 7% per year. China produces 16.5 million tons of uncoated woodfree, more than both North and South America combined, and is growing more than 6% a year.

Now let's look at PCC penetration, which we define as the tons of PCC used in paper production as a percent of paper tons of our primary market. In the Americas, PCC penetration is 20% and in Europe, 17%. By contrast, in China, the tons of PCC produced and sold into paper is about 7%, or 1.2 million tons, and 9%, or a little over 300,000 tons, in India.

I'd like to note here that in 2010, PCC penetration in India was 4% and has grown to 9%, primarily by Minerals Technologies' development efforts in that country, due to the construction of five of the seven PCC plants there in the past four years. Because we have established PCC as the filler of choice for production of world-class quality uncoated freesheet and because these two countries are installing state-of-the-art paper machines, there is significant room to grow and to increase PCC penetration in China and India to 20%.

So what does that mean? We have several fundamental elements supporting our growth. First, we have penetration into the existing market. If you increase PCC penetration rate to 20% in these two countries, PCC consumption increases by 2.6 million tons. Next, we have these growing markets. If you apply the historical growth rate of 6% over a five-year period, the near- to medium-term market potential grows by another 1 million tons.

Finally, and something we consider as additional opportunity to what we have reflected here, we are introducing technologies that allow for penetration beyond 20%, in our portfolio of Fulfill technologies. And to give you a frame of reference, our highest level of PCC used in uncoated paper is actually above 25%.

As a point of comparison, in 2012 MTI sold 3.3 million tons of PCC for paper, so the Asia potential represents nearly a doubling of our current volume sold to the industry.

Our objective is to pursue every possible ton of PCC and to establish a market share commensurate with what we've been able to capture in the Americas and what we have recently demonstrated we can do in India.

Now, much of this you have heard before in various discussions we have had in the past, but we thought we would refresh you on the progress we have made by executing our strategy through the addition of infrastructure and talent into the region in the form of technical and business development. Last year, we signed contracts with three more Chinese papermakers for the construction of satellite PCC plants. This brings our total to six in that country.

It should be noted, as we have stated in previous calls, that we had been prevented from marketing PCC in China because of a 10-year exclusivity agreement we had with Asia Pulp & Paper, also known as APP, until 2010. We are now convincing the rest of the Chinese papermakers of the PCC value equation.

As you can see from the left-hand side of this chart, in 2009 India produced 30,000 tons of PCC used in paper and Minerals Technologies had zero market share. In China, in 2009, of the 1 million tons of PCC produced for paper, our market share was 35%, which was from the three satellite PCC plants we have had with APP for the past several years.

Right now in India, we have approximately 70% market share through our existing five satellites, and our market projections are that we can maintain that share as we grow our sales in this 350,000-ton market in 2014.

In 2009 in China, much of the non-MTI PCC was from small local producers with older technology than what we have today. Next year, we estimate with the continued growth of state-of-the-art papermaking, we will be able to increase our share to nearly 50% of a larger, 1.4-million-ton market as the high-quality papermakers adopt PCC and our new technologies. This penetration anticipates successful startup of our satellites under construction, as well as delivering on new satellites in our business development pipeline.

To summarize, there is significant and substantial room to grow in these developing regions, and Minerals Technologies will be the leader in this conversion to PCC.

This chart gives you a glimpse of why we believe we can continue to hold the position of world leader in paper PCC. The three Chinese flags on the right represent the papermakers with whom we have signed contracts to build satellite PCC plants in the last 12 months -- Sun Paper, Jindaxing Paper, and [Yongher] Paper. The additional dozen flags denote paper companies in China and other countries in Asia where we are now working with papermakers in various stages to develop the use of our PCC in their papermaking facilities.

In addition to working with the dozen papermakers we saw in the previous slide, we have also identified another dozen papermakers that could benefit by adopting our PCC technology.

And technology is now and will remain the key to our success. For example, the main reason we were able to obtain five of the seven satellite PCC plants in India was that we offered higher filler technologies, such as our Fulfill E-325, that we made available to papermakers as part of the new satellite offering. Earlier, Bob pointed out progress we have made as a Company in revitalizing new product development. This chart shows the progress we have made in paper PCC.

But as you can see here, our development pipeline consists of many technologies aimed at several different objectives, not just the higher filler loading, which saves papermaker enormous cost and expense of fiber and remains our core focus. Some of the areas of technology that we are investigating that you may not have been aware of include products and processes for waste management and recycling, energy, the environment and sustainability, penetration into packaging, and some offerings for mechanical uncoated paper as well.

Let's look at our progress with the Fulfill technology. We recently came to commercial terms with our 14th E-325 customer. We continue to be actively engaged with 21 other paper mills around the world, signing up and conducting trials to validate the technology, which leads to customizing Fulfill to optimize results at specific paper mills across differing pulps. We continue to track well in operating income for the Fulfill technology in 2013.

In closing, I would like to say that we are confident in our ability to grow paper PCC business. The Asian region offers tremendous growth opportunity, and our new products will allow us to continue to penetrate new markets. Our major focus will remain the execution of our growth strategies of geographic expansion and new product innovation.

Now let's open it up to questions.

(Operator Instructions). Jeff Zekauskas, JPMorgan.

This is Silke Kueck for Jeff. The announced shutdown in North America of uncoated freesheet would probably affect, I don't know, order of magnitude, 200,000 tons of PCC? And my reflection is that MTX was a supplier at all of the mills -- like the Courtland, Alabama, mill for IP and the Georgia-Pacific and the Boise plant. And as far as I can tell, the shutdowns will happen in the fourth quarter, and a rollover to new plants will probably not happen until the second half of next year.

So is it the case that the first half next year will be under -- on the PCC side, it will be under significant pressure because of all this North American capacity coming off?

What we see is that the majority of the tons -- so the capacity is coming out, and it is probably about 160,000 tons of total capacity, but what we see is the production off of that capacity being shifted to other mills.

We see it being shifted to other mills within the IP, and in the case of Courtland, there's other IP mills in North America.

So it's unclear exactly how that shift is going to take place, exactly where the paper tons are going to go. We see that shift taking place over the next four to six months, but we see the majority of those tons being absorbed into other mills where we have satellites.

We think there might be some net negative impact as we go through that shift, but that's unclear to us at the moment and we will be seeing how that plays out over the next two quarters.

Okay. Then I also have a couple of questions to clarify some of the recent announcements for Fulfill and the new satellite expansion. The 45,000-ton agreement in China with Nanning, is that a new plant or is that an expansion plant?

That is a new plant and a new customer for us.

Okay, that's what I thought. And the 14,000 tons in Europe, is that an expansion or is that an exist -- is that an expansion of an existing site or is it a completely new plant?

That is a new plant and a new customer for us.

A new plant and a new customer for you, okay. And how come this customer hasn't become a Fulfill customer, then, immediately?

Which one are you referring to?

The European one.

We don't have the plant in place yet, so we will work with them quickly to assess the fit of Fulfill in their grades, but we need to get our plant and our operation in place, and so let's just go through the sequence, like you've seen in India.

We will get our new business. We will offer them a portfolio of technologies, and work with them to optimize conversion to our products, and then the introduction of those new technologies to optimize the efficiency of that transition.

Okay. Okay, and I guess that answers some of my last question. So the new Fulfill customer that you signed is probably one of the customers that -- it is probably one of the new satellite plants in India that you have announced in the past two years?

I will put it out of probably into definitely. It is one of our -- the new plants that we have announced over the previous years.

Okay, and if I can ask a last question, then I will get back into queue, the -- were the ground calcium carbonate results this year, were they supported by the launch of this new -- of the new VICRON product or were these sales unsignificant enough yet to make a difference?

They are. So we have seen both. It is two things, some new products that we've been putting out, so the VICRON products, as well as you mentioned some products that displace other -- niche markets that displace some higher-value minerals.

But at the same time, we have seen some market growth in both the East and West Coast due to the construction industry, and on the West Coast in particular, some of the construction and our sales into the roofing industry has been strong lately.

And so, I guess it means that maybe half of the growth is due to the underlying market growing, and maybe half of the growth is due to the new product introductions?

Yes, I'd probably say a little bit more at this point, since some of those products are new, a little bit more toward the market growth, but yes. The new products are contributing.

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

Daniel Moore, CJS Securities.

Done a, obviously, tremendous job over the last year or so in terms of margin improvements and in efficiency gains. Doug, you mentioned lime specifically. Maybe talk a little bit about input costs and what you're seeing around energy and electricity costs, and any potential impact they may have in your ability to continue to expand margins here in the near term.

So, two things. Energy does affect us directly, primarily in performance minerals at our processing facilities. But energy impacts us indirectly through magnesium oxide and lime, particularly lime.

In paper PCC, that lime cost increase comes to us, we absorb it in certain quarters, and in North America we will absorb it here in the fourth quarter, but we are contractually able to pass that through through pricing in a delayed fashion. In North America, we will pass it through next year.

We have offset some of the energy increases. As you remember, we converted our kilns in our Adams facility from Number 6 oil to natural gas, and we have made some substantial savings this year on the conversion of those two kilns. And as I outlined on my slide, that's been slightly offset by some higher electricity costs, so we have seen pretty big increases in unit electricity costs, both in the East Coast and the West Coast, in our processed minerals business.

So just to clarify, going -- you have obviously been able to offset those, and the expectation would be you continue to be able to do so, barring any further material jump?

Yes, sorry about that. I probably left the answer to your question out.

That's fine.

The answer to your question -- so we work on price increases. Now we pushed some price increases, as I mentioned, in performance minerals to offset that. We work in the refractories business, obviously, with magnesium oxide prices to push our value proposition, and the savings we pass -- we give to steelmakers as we maintain those furnaces. We push that -- those prices. We work to push those prices through in pricing. Price increases.

So largely, we have been able to offset those increases in performance minerals, and contractually we do that in paper.

Got it. Very good. And talk a little bit about refractories. You gave a lot of detail and it is appreciated. Metallurgical wire demand continues to grow. Maybe just remind us of those drivers, and historically, Q4 is a seasonally important quarter for equipment sales in refractories. What are your expectations as we go into the tail end of the year here?

Sure, the first thing, I will take metallurgical wire, and then I can give it to Han to give more color. Largely driven by geographic growth, so we have seen some new sales -- we have been selling into India over the past several years and also into the Middle East and Turkey. Han, you want to give a little color there?

Yes, thank you, Doug. So if you look to metallurgical wire in the third quarter, and our strategy in general, we saw in the third quarter geographical growth, like Doug mentioned, in Turkey and in the Middle East, but also specifically in Russia and also in our home market in the United States. So that is our first pillar of growth.

Then the second pillar of growth for us is new products. So we launched last year lower activity wire, and that has opened up new accounts for us and that product is really going well at the moment.

And finally, if we look to the North American market, historically we have been focused on the thin slab cast as a medium slab cast, and we have made some breakthroughs that we are also selling into conventional slab casters. So we have expanded our market in North America, and specifically in the third quarter, we had some gains in the conventional slab casts.

And I will answer the second part of your question, the equipment sales. Typically, the fourth quarter is higher than other quarters as customers have outages and they generally commission those units that we sell in the fourth quarter.

Unfortunately, similar to last year, we are seeing a bit of a slowdown in capital spending has continued. We have been mentioning that all year, and we haven't seen the general increase in equipment sales that we are going to see in the fourth quarter, and that's why I have indicated that in terms of refractories from the third to fourth, we're going to see similar operating income.

Got it, but that's embedded in the guidance (multiple speakers) before?

Yes, yes.

Last question, if you look back a couple of years ago at your 2015 goals, revenue perhaps trending a little lower, but obviously on the margin side, you have been able to already exceed those. If you were to update those goals, what might they look like, or will you consider doing so going forward?

This is Bob, Dan. We're certainly excited to be at 12.9% in the third quarter, and I think year to date we are at close to 12.2%, in terms of what we've been able to achieve.

As we look forward, we can see sufficient and plenty of room to grow going forward. I think as we get into 2014, we will have a chance to redo our -- reset, revisit our goals over the longer term.

But when you look at the fundamentals, when you look at the Fulfill growth, the geographic expansion, when you talk about metallurgical wire, we do see the opportunity for additional improvement in that area. Doug, any additional flavor you want to add to that?

I will agree with Bob. I think there is definitely room for margin growth, both gross-margin growth and operating-income growth, Dan.

I think the gross margins, as we continue with our productivity improvements, that's an underlying piece of our operational strategy. We look at higher-margin products like Fulfill. D.J. showed you a technology pipeline that has new products in it which are also higher margin, but then we are going to also leverage our cost base to grow margins, to grow the operating margins.

So I think, look, we are sitting at 13%. I think we can push that to 14%. When we set some targets, we will expand that. Can we push it to 15%? Perhaps over time, but there is certainly the levers in there to be able to expand it further.

Very helpful.

Rosemarie Morbelli, Gabelli & Co.

Congratulations. Could you give us, D.J., a little more details on those new applications for some of your Fulfill product lines? (multiple speakers) when you say it will go, for example, in waste management, well, how is it going to play a role there, and if you could give us a feel for what your products will do in the other categories?

Okay, so thanks for asking the question. Here is some thoughts for you. So there is several themes in our product development, and the Fulfill product line is really addressing that higher filler loading. So we introduced that portfolio to you before, and that brand, that portfolio, will continue to focus on those areas.

But let's address some of the waste management streams and those sort of things. We are talking about this expansion into Asia in general, and I think I, by design, tried to show you the concentration in China. If we look at that Chinese papermaker, they are under stress trying to reduce their energy costs, trying to reduce some of the waste streams that come out of their paper mill, and trying to reduce fiber. So Fulfill is addressing the need to reduce their fiber cost by putting in more PCC.

But also, we've got a couple of other technologies that are coming out that in addition to just the standard PCC that cleans up the air by sucking CO2 out of their exhaust stacks, we can also manipulate and change some of their waste products into functional filler products. I hesitate to go much further than that, but it has to do with us having a much better understanding of China now that we have deployed a lot of technical and business development resources there and looking at that region as very fertile for further business development.

So I am hoping I am answering your question, but that's the way that we are looking at that.

And in the other categories, D.J.?

We have identified that energy reduction will be one of the things we are working on, so we've got some products and processes that can help the papermaker reduce their energy.

Just as a point of reference, increased filler in general helps reduce energy because it's easier to dry than the fiber is on paper. But we are talking about introducing new processes that can really change the energy footprint of a papermaker in a different way. That would be one of them.

And then, we also are trying to get into the packaging market in a more aggressive way. So those are two of the other things that I was trying to highlight in that area.

Thank you. That is helpful. And on the packaging side, does that mean that you would use PCC in corrugated cardboard, for example, which you are not doing now, or what would you be doing?

You asked a very specific and technical question. Let me try and give you a general answer.

We are looking at all packaging. The packaging that right now makes the easiest and the most sense for us is the white packaging, the higher-end folded boxboard, and we have had good growth even over the last year in Europe in penetrating some of that market with PCC in those applications.

So our immediate thrust is probably in the whiter packaging, but we do have some development programs, and some of the boxes that were in that pipeline are looking for avenues to penetrate into packaging broader. You mentioned corrugated. That would be one. But I hesitate to go much further into that because they are under development. And then, the exact pigment portfolio or the pigment platform may or may not be PCC. We are looking at several developments.

Okay, thanks. And on Fulfill, if you look at the existing agreements, some of them are probably now anniversarying one year or more -- well, let's say one year. Do you see that the paper mill is expanding its -- a specific paper mill is expanding its use of Fulfill in different machines or a paper company expanding into several of their mills? Could you give us a feel as to what is happening on those existing contracts, older contracts?

Gladly. So for those papermakers that have been running the technology, and we have been able to really expand the use of Fulfill across their grade structure, we are now in the process of deploying some equipment to go into other machines.

Now, as we go into another machine, that does take us to requalify on that machine and do more design work, but yes. We are seeing really over the next couple of months, even, deploying that technology further within existing customers across different machines and grades.

Okay, thank you very much.

(Operator Instructions). Andrew Dunn, KeyBanc Capital Markets.

So just to maybe follow up on Rosemarie's question a little bit, could I get you to give us some idea of how many of these plants now you would say are in the stage where they are using meaningful quantities of Fulfill, so maybe not just like trial runs, but really starting to consume higher amounts of volume of that product?

And then, maybe, also, can you give us an idea of where your royalty payment for the product is at?

This is Bob. Good morning. We have 14 signed agreements and very active across the globe to do that. I think when you look at the trial side, we say we had 21 that are actively being pursued to get that lined up. D.J. may be in the best position to answer the details of that particular question.

Yes, I would say that over half of them, we're well deployed, but when I say well deployed, they are regularly using it, but we've still got quite a bit of opportunity to just get across all their grades.

And so, we see a fair amount of growth just within the 14 contracts that we've signed, and that is a major effort over the next several months to expand our revenues and income associated with those 14 that are signed.

What I also showed is that -- I know the chart isn't up right now, but we had put one across the line this quarter. That one will quickly start delivering some good revenues, and then the two that are in the cusp should also quickly come up to speed. These qualifications have taken longer, but we have done a pretty good job at getting qualified across a lot of the grades prior to finalizing with the commercial contracts.

So we expect to get more contracts soon, and we would expect that we would get relatively quick effect on those. Does that help?

Yes, and I guess, maybe going a little further with that, for some of the other applications that you were talking about, just outside of providing a filler product, but other solutions, would you get technology payments or royalties from implementing those at your customers as well, maybe similar to what you are seeing for -- what you described for Fulfill?

Yes, so without revealing exactly how we would do that, I think the right way of looking at it is that they would improve our margins. So yes, the exact commercialization piece would be different, but yes, they will contribute to the margin growth that Bob and Doug were talking about earlier.

Okay, great. And then, just maybe one more point of clarification, if I could. You mentioned that in Asia, I think, your 11% there, you said, was overwhelmingly from your new satellite facilities. Do you think you could give us some idea of, overall across this segment, what your growth was like in existing facilities versus facilities that had come online in the last year?

Let me see if I can answer that. So segment sales increased about 4%, and there was a couple of factors, as I mentioned, the decline in performance minerals, but then, yes, that 11% growth in Asia paper and 9% growth in Europe. So those two paper PCC growth were two things.

New satellites that came online, we had one come online, JK Paper, late in the second. That's still ramping up. On a year-over-year basis, we had another one that came on late last year in India, and then also one in Thailand. So the growth that you are seeing, that 11%, is really driven around new satellites. And then, also, the ramp up of ones that have been on for a little less than a year.

In Europe, that growth is, as I mentioned, the Alizay mill, which came back online. So it was an existing satellite down for a couple of years and it came back online recently under new ownership, Double A Paper. And the growth, we have had a full quarter of that facility's volume contributing to that growth.

So we have also had some outages in North America paper that -- temporary maintenance outages in the third quarter, which took away from some of that, and I mentioned that also in my comments. Does that help?

It does, thanks. And then, just last question and I will hop back in queue. Previously, I think you have talked a little bit about even some acquisition opportunities to expand maybe more along the lines of your specialty business. Clearly focus more on this call, I think, on new opportunities within the business. Does that mean, maybe, you are focusing a little less now on opportunities for external expansion or is it still -- what does the pipeline look like there itself?

No, this is Bob, we are very active across all of our products, specifically in the performance minerals space; the specialty PCC business, in terms of what we are seeing in the US, following our global customers around the world. We haven't backed off that at all. In fact, we are aggressively pursuing opportunities in Asia and expect to move in that area early next year.

But whether it's talc, specialty PCC, the customer base is giving us a strong pull to take our products globally. So we feel that's still very much the center of what we are doing.

Great. Thanks again, guys.

Rosemarie Morbelli, Gabelli & Co.

Following up on this last question, if your main focus is on those areas, does that mean that you are giving up the idea of adding a third leg, or it is just that you have yet to find what you want?

No, we haven't given up on any aspect of it. I think in my comments I talked about finding opportunities that leverage our minerals expertise, our operating expertise, our global presence, and continuing to expand in that particular area.

Actually, joining us today on the call is Jon Hastings, who handles our corporate development function, and Jon, can you share some insights into where you see us going?

Thanks for your question, and, Bob, thanks. We do have a very robust portfolio of targets and opportunities that complements what we are doing, from geographic growth and also focusing on other technologies and new products.

During the past year, we have -- we refreshed our portfolio screening, and the portfolio now cuts across all our businesses and all geographies. There are lots of different opportunities that we continue to focus on, and of course, I can't go into a whole lot of details about that, but we do have a very rich portfolio across the business. Joe, do you want to say anything?

No, just as a quick reminder, that is the area, with Bob on now as CEO, that I'm able to spend more time with Jon in the acquisition area, and that is something I have been spending a lot of time in, as has Jon and his entire team. So the energy and the opportunity levels are still extremely high in the space.

Glad to see you have not fully retired, Joe.

(laughter). No. I am working on it.

If I could go -- I was looking at your previous 2015 revenue targets, you were expecting an additional $150 million on the paper side, $150 million to $250 million on the new products, and then market help of about $100 million. Where do you stand today?

So, obviously, we are not tracking with those targets that we set. However, you look at the three components that you gave us, the $150 million geographic growth we are on target with. We have mentioned a number of new satellites, some geographic expansion with wire products, as well. So that $150 million, we are on track.

In the $250 million new products, not tracking quite to $250 million, though. As you know, we are making some progress with Fulfill. We have continued to deploy new technologies in both the performance minerals business, and D.J. has a number of them that are prepared to be commercialized, but we are still working with customers on that. And if you remember, filler fiber was part of that, in terms of the deployment, what we thought we would see out of Fulfill F, which we call it now, through to 2015, and we have not commercialized fully the filler fiber.

As far as market growth, we have seen some of the $100 million in terms of the North America market, but what we didn't expect back in 2010 is we didn't see the European drop, which has taken some of that revenue back. So we are not tracking on the market growth, but we are on the geographic expansion piece and, to some extent, on the technology.

Okay, and if I may -- thanks, and if I may ask one last question, is it reasonable to assume that you will buy back about 1.3 million shares a year in each of the next two years, and how much of that could be offset by dilution? What would be the net net change to your average fully diluted shares?

I guess I can't comment on the exact number of shares because that will depend on, I guess, the price that we purchase them at (multiple speakers)

Yes, no, I know. I did the math at $58 or something like that.

Yes, it will probably equate to around a 5% per year share count reduction, and the dilution is only through exercising of options and other things that are out there. So it should be very small -- a small impact to dilution over at least that $150 million buyback.

Okay, thank you.

Jeff Zekauskas, JPMorgan.

Hi, again, I just wanted to go really quickly over the satellite -- or the new PCC plants that were coming on in 2014. So there is the Shandong Sun Paper plant that is 100,000 tons in PCC that was scheduled for the first quarter and another smaller one of 20,000 tons for the first quarter. Are those still on plan to start up as scheduled?

The Yongher, which is the smaller of the two, will start in the first quarter. Sun Paper has been delayed because of some changes in the customer's operation, but that will come on later in 2014. Second half is what we are targeting right now. And then, Nanning Jindaxing would be in the fourth quarter, would be when that comes on.

And then, we are aggressively pursuing some other opportunities and we hope to contribute even more.

They were also a couple of US satellite expansions that were to come on in the fourth quarter, if I remember that correctly. Are those still coming on?

They are still coming on.

Those may have been switches to Fulfill?

They were associated with the Fulfill technology in many cases. I think one of the things that happened with this recent shift in the North America market is we have got a bunch of our customers that are reassessing what their grade structure is. So these -- we had to work through them with that, so these expansions start coming on.

I had something going on in Latin America that is coming on now, North America starts coming on in the first quarter, and then I have got them trickling out through the next several quarters. It's mostly to do with just what Doug was speaking to earlier. There has been a shift in the market regarding capacity. These people are now going to be coming up to some 90% operating rates and they are working through the specific grades. So we just had to make sure we were deploying the right technology to meet their needs.

So it sounds like some of these opportunities will just be pushed into early 2014?

That is correct. None of them went away. They are just slid back so that we could be more efficient and more sustainable.

Did you lose any opportunities with the Alabama plant? Was the plant shutdown -- was one of the expansions at the plant that is being shut down?

No, no, all the expansions are continuing. As we said, they just got shifted around. But did I lose opportunity with Courtland? International Paper is a dear customer of ours. That was one of our facilities, and so it's unfortunate that it shut down, yes.

Okay, thank you for clarifying.

Alan Mitrani, Sylvan Lake Asset Management.

Can you remind us what leverage ratios you are comfortable with? I know you have none now, but maybe you could just remind us.

I was about to say we are very comfortable with (multiple speakers)

You are a little too comfortable, in my opinion, but that's fine.

I think as a small-cap company, as we are, in cyclical end markets, I think having a conservative balance sheet is prudent. I think we could look at a balance sheet that has 20%, 25% debt to capital. I think that is something, with our cash flows, we could certainly sustain and also still be on the conservative side, given the cyclical end markets.

I'm not thinking debt to cap. I am thinking more about debt to EBITDA, maybe, in terms of coverage ratios. Do you think that way in looking at deals?

Yes, okay, on an EBITDA basis, we would look to stay in the investment grade. Sure, we could lever up to 2.5, 3 times for a time period. If we found something on the M&A front that was transformational, that really fit the Company, we could see ourselves levering up for a time period, but I think very quickly pushing that leverage back down to the 2 times EBITDA, 25% debt to cap kind of levels on a sustainable basis.

So we will undergo a little bit higher for something that is the right deal, but we would work that down very quickly to a sustainable level.

Okay, thank you. And about a year and change ago, I think before Bob came on, maybe Joe was talking -- you guys were talking about looking at big deals. Have you had something that passed over? You guys are very disciplined, obviously, which we appreciate. Any big deals on the horizon or is it more of the incremental geographical expansion type of thing?

Obviously, I can't give you specifics, but as Jon mentioned, we have a very -- I would call it -- active and healthy portfolio, and the range, the size of the deals in there are all over the map, from small -- we have some things we have talked about in the past in terms of acquisition opportunities in the talc arena, our specialty PCC arena in different parts of the world to, let's say, larger possibilities. So we really have a fairly wide range of possible targets that we continue to work.

The reason I ask, and we have had this conversation, you guys, as you do well, appreciate the buybacks, I just -- I see where high-yield spreads are to treasuries. I see where the debt markets are, and to me, in looking at the market, I appreciate that you are a small cap company, but you are also a Company that focuses on lean and cash flow very carefully.

And what that means is with [$11.50] of net cash on your books, you might miss an opportunity to really put in permanent capital, 10-, 20-year capital, and take advantage of these rates and really be able to look at your cash flows years out. And I would say -- I mean, you guys have the capabilities of doing a $20 dividend and still being meaningfully comfortable.

Now, I would rather you buy something so we can have that cash flow for a long time, or buy back meaningful amount of stock and not just the 2% to 4% a year. I just -- I'm trying to weigh what you have done relative to the opportunity, as it relates to putting in permanent capital. The companies that have this cash flow certainty, the way you guys do, in an industry where you are an essential provider, seem to be all buying back stock and lengthening out their debt capacity. You guys seem to have been paying off debt over the years and only now are returning capital more aggressively.

So, can you just help me bridge that with relative to where your funnel is for acquisitions?

Yes, we -- first of all, I appreciate the perspectives and the comments. And this is more of a reminder in terms of where the approach we have historically taken -- I say historically, the last three, four, five years, but post the recession -- is conservative, but also balanced.

And the balance is between how close we may be to an acquisition, the size of the acquisition, and the timing around that to determine -- if we don't think it's going to happen fast enough, then we accelerate the stock buyback.

Now, we just doubled our historical rate of buyback. That should be an indication of what the Company is willing to do and is going to continue to be willing to do in the interest of shareholder value. And so, it's looking at that and taking that balanced look of, A, the potential to increase and improve long-term value for shareholders through the various paths. We also doubled our dividend within the last year, so we are -- we're really -- we are absolutely sensitive to the points that you are making and we are well tuned into it, and we're going to continue to work like hell and make smart decisions.

And we are very willing for the right acquisition to invest for the long term because, clearly, that has to be something that is in the best interest of what our shareholders want. And we are going to continue to be prudent around doing that. I used the term in the past when I have met with a number of you, we're not going to do something dumb. We haven't done that so far. But we -- our objective is to do something that is going to make sense for the longer term.

And if we can't get there fast enough, we're going to keep looking at ways to deliver value in the form of stock buyback or dividends back to shareholders. Doug, you want to add anything to that?

No, I think I mentioned in the comments, as Joe mentioned, the balanced approach. We're going to take our free cash flow for the next couple of years and deliver it back to shareholders.

That means we're not going to continue to pile on to the cash balance, but as we see those acquisition opportunities ebb and flow, we're going to maintain, at least in the near term, the opportunity to make a meaningful acquisition, should it come across.

And as Joe mentioned, we will be able to, then, and we are willing to lever up to do so. So I think it's just part of, as Joe mentioned, that balanced use, and we are showing that we are willing to, obviously, put capital back to shareholders as needed.

Thank you, guys. I appreciate the lengthy response.

If there are no other questions, I would like to close out the call and thank everyone for their interest in Minerals Technologies. Have a great day.

Once again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.