Q3 2004 MINERALS TECHNOLOGIES INC Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day and welcome, everyone, to this Minerals Technologies Incorporated third quarter 2004 earnings conference call. Today's call is being recorded. With us is the President and Chief Executive Officer, Mr. Paul Saueracker. Pleasing go ahead, sir.

PAUL SAUERACKER, PRESIDENT AND CEO, MINERALS TECHNOLOGIES INC.: Thank you, operator. Good morning, and welcome to Minerals Technologies third quarter 2004 analyst conference call. I am very pleased to report that we had a strong third quarter. MTI's worldwide sales $236.4 million for the quarter were 19 percent above prior year third quarter while operating income at $24.4 million was 25 percent higher than it was the same period last year. This resulted in net income of $16.2 million, which was up 27 percent compared to the third quarter of 2003. Our strong earnings performance translated into earnings per diluted share of 78 cents.

We definitely benefited from the strong growth in the global economy. Worldwide steel production was up more than 9 percent. North American steel product where the market tends to be volatile was up over 14 percent. Our processed minerals products benefit from the strong construction market. New housing start hit a 2 million annual rate in September, and nonresidential fixed investment expanded at a 12 percent annual rate in the third quarter. On the paper side, although uncoated freesheet shipments in North America, our primary market, only increased slightly, coated paper shipments showed strong growth during the quarter. All product lines contributed to MTI's sales growth, and all grew in excess of the growth reported for our principle markets paper, steel and construction. PCC up was 14 percent, processed minerals increased 19 percent, and the refractory segment increased by 29 percent. The strong growth in sales led to an even stronger growth in operating income despite rapid increases in fuel, utilities, and certain key, energy intensive raw materials.

Following my introduction, Ken Massimine, Senior Vice President and Managing Director of our Paper PCC Business, will provide more detail and report on the progress we have made in the PCC product area. Alain Bouruet-Aubertot, Senior Vice President and Managing Director of MINTEQ, will report on the refractory segment of our business; and John Sorel, our Senior Vice President of Finance and Chief Financial Officer, will provide a brief financial summary. After John's presentation, I will conclude with a few remarks and will open the floor for questions. Before proceeding further, I need to remind you that in our 10-K we listed factors and conditions that may affect future results. Any statements related to future performance by me, or other members of management are subject to these cautionary remarks or conditions.

While Ken will provide you with a detailed description of our PCC business performance, and Alain will do the same for the refractories business, I would like to mention a few highlights. Net sales of PCC were up 14 percent in the third quarter, 9 percent year to date. A continued ramp-up of our filler PCC sales at the Millinocket mill in Maine and at Sabah Forest Industries in Malaysia contributed to the strong performance in the third quarter. You may find that your mailboxes have recently been stuffed with catalogs. Apart from the momentary inconvenience and the need to recycle them, that is a very good sign for our shareholders, because many catalogs now incorporate paper containing PCC to improve print quality. Furthermore, demand for paper PCC continues to grow and we are investing to meet this need.

I would like to outline some of the steps we are taking. On October 4, I officiated at the dedication of our 125,000 ton per year coating grade PCC facility located in Walsum, Germany. This facility is now in the commissioning and start-up phase. We also have significant expansions in progress at several of our existing PCC satellite plants, and construction is underway at our previously announced new PCC satellite plants, located at Dagang and Suzhou in China, with other 225,000 tons of combined annual capacity. The refractory segment increased sales by 29 percent in response to improved conditions in the steel industry, despite significant increase in raw material costs. By focusing on its value-added products and technologies and tight cost control, MINTEQ was able to leverage the strong increase in sales to a 55 percent increase in operating income. This increase was a major contributor the Company's 25 percent increase in operating income.

I am happy to report that there were no significant restructuring charges or bankruptcies in the third quarter. While the refractory segment did not achieve its target of a 10 percent operating income ratio as a result of raw material cost increases, Alain will discuss the programs that have been initiated to overcome the issues facing the refractory segment in order to achieve a double digit operating margin in the future. I would like to briefly touch upon the performance of our processed minerals segment, where sales were up 19 percent. As you would expect, with this sales growth, our operations excellent program, and good cost control operating income for processed minerals increased significantly. We are also adding to our raymon [ph] mill capacity at our largest limestone processing facility in Lucerne Valley, California. The expansion is needed in order to meet the ever increasing demand for our construction-related products in southern California.

Our Synsil program continues to move forward. As we have previously discussed, two glass manufacturing locations owned by the same glass maker are utilizing Synsil commercially. We have also recently added a new specialty glass account. Furthermore a large scale Synsil trial continues, but equally important the product is now delivered at full commercial price. The benefits provided by Synsil clearly provide a favorable value equation for the glass maker. We are hopeful that the successful completion of this trial will result in the construction of a full-sized commercial Synsil facility capable of producing approximately 200,000 tons per year. Overall, the outlook for Synsil continues to be encouraging and we would expect to announce a decision on construction of the new plant prior to the middle of next year. I will now ask Ken Massimine to provide us with details related to the PCC business. Ken?

KEN MASSIMINE, SVP AND MANAGING DIRECTOR OF PAPER PCC, MINERALS TECHNOLOGIES INC.: Thank you, Paul. Let me begin by providing a summary of current conditions within the paper market followed by highlights of our business results for the third quarter and some expectations about the remainder of the year. The global paper industry appears to be on the road to recovery after 3-plus years of recession. In the first half of this year, U.S. total printing and writing paper shipments improved by 6.8 percent over the first half of last year. We now anticipate that shipments for the second half of this year will grow by slightly more than 4 percent. Because of the strong first half numbers, U.S. paper shipments this year are expected to show decent growth over last year. Still, over 3 years since 2001, total printing and writing paper shipments have grown an average of less than 1 percent per year. For the quarter just passed, U.S. shipments of uncoated freesheet, our most important market segment, showed very modest improvement. Estimated shipments were only 0.2 percent ahead of last year's third quarter. Sluggish business demand, persistent inroads from electronic communications, and slowing economic confidence continue to temper growth of this paper segment.

Operating rates are above 90 percent, but this rate has more to do with reductions in paper grade capacity than increases in consumption. Demand for coated papers remains strong during the third quarter. Coated freesheet shipments advanced almost 8 percent quarter over quarter, while coated groundwood grew by almost 5 percent. Early indications suggest the tight market for both of these grades will expand into next year. Internationally, western European production of printing and writing papers advanced almost 6 percent in the third quarter, on top of a similar jump in the second quarter. The improvements in production are partially due to real increases in domestic demand, as well as rising exports especially of coated papers. European coated paper production is expected to remain strong going into next year.

The entire Asian pacific region, propelled by China's strong economic growth, will see domestic production of printing and writing papers growing 4 percent this year and almost 5 percent next year. In China alone a tally of new capacity expansions announced for the 2005 to 2007 period shows almost 1.7 million tons of coated freesheet and 200,000 tons of light weight coated papers coming online. MTI has 5 operating PCC satellites in the Asian region and 2 more under construction in China with start-ups slated for early next year. I am pleased to report that our year to date sales performance reflects continued quarter to quarter sequential growth. MTI's total PCC revenue for paper and nonpaper applications increased 4 percent over the second quarter, after a 6 percent sequential increase from the first quarter. Sales growth over the prior year's third quarter was 14 percent, from approximately $109 million to $124 million due primarily to strong volume growth in all regions. This volume growth plus the weakness of the U.S. dollar were the primary drivers affecting our sales increase. However, with significant increases in energy and raw materials forecasted for the remainder of this year, and start-up costs associated with the major coating facility in Walsum, our fourth quarter performance is expected to be somewhat tempered versus the third quarter.

Total PCC operating income grew at a low double digit rate in the third quarter compared to last year. Rising research and development expenses for trial related activities were higher than planned, but should pay off in the future when we see new business from these activities. Global sales tonnage of paper PCC on a same store basis increased almost 9 percent in the third quarter, compared to the year ago period. The restarting of the Millinocket satellite, as well as the start up of the Sabah Forest satellite in Malaysia helped contribute to our excellent growth over the prior year. Growing industry demand and successful penetration of the coated paper market improved our European regional revenue and operating income significantly during the third quarter, and as Paul mentioned, our Walsum, Germany merchant PCC plant is now in the commissioning phase. Earlier this month we were pleased and proud that many dignitaries, paper industry associates and friends participated in the dedication ceremonies of this initial 125,000 ton facility. We fully anticipate that the Walsum plant will enlarge and strengthen our overall coating related presence in Europe.

In addition to Walsum, I am pleased to announce recently approved capacity expansions at several global PCC satellites. As you know, in January we will provide you with a tally of total added capacity in 2004. I am also happy to report that construction is well underway at our previously announced new PCC satellites at Dagang and Suzhou in China, each representing four units of PCC capacity. Fabrication is on schedule, and both plants will be completed by the end of the first quarter 2005. All of these important expansions are not only evidence of growing regional paper demand, but also of the host mills commitment that MTI PCC is the product of choice for meeting their mineral requirements. Moreover, our filler-fiber composite research work to date continues to look promising. This composite material will allow the replacement of up to 30 percent wood fiber and depending on the paper mill, has the potential to double current PCC consumption. Additional trial activity is planned for the fourth quarter.

Now, let's briefly turn our attention to special PPCC for nonpaper applications. Sales of our special PPCC segment registered good growth this quarter, compared to the same period a year ago and results primarily from increased sales into plastics-related applications in construction and automotive markets. In conclusion we are pleased with our sales progress during the third quarter. Our focused business programs initiated the end of last year have generated a solid framework for current and future advances in sales and net profits. Now I will turn the microphone over to Alain who will review MINTEQ's business performance. Alain?

ALAIN BOURUET-AUBERTOT, SVP AND MANAGING DIRECTOR OF MINTEQ, MINERALS TECHNOLOGIES INC.: Thank you, Ken. Again, I am in the privileged position of being aboard to relate MINTEQ's performance in a short, direct, and straight forward manner. MINTEQ delivered a very strong third quarter. MINTEQ's sales for the third quarter were up 29 percent versus last year when our increasing total expenses was limited to 7 percent leveraging operating income to $7 million, a 55 percent increase compared to prior year third quarter. There has been a dramatic change in our business environment from serving what appeared to be a dying business, to serving what has become a dynamic and highly profitable growth industry. Who would have thought two years ago that such a description would ever fit the steel industry? …