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Minerals Technologies Inc. (NYSE:MTX)

Q2 2008 Earnings Call

July 25, 2008 11:00 am ET

Executives

Rick Honey - VP of IR

Joe Muscari - Chairman and CEO

John Sorel - SVP and CFO

Bill Wilkins - SVP & MD

Doug Dietrich - VP Corporate Development and Treasury

Ken Massimine - SVP and MD of Specialty Minerals Inc. Paper PCC

D.J. Monagle - VP and MD of Specialty Minerals Inc. Performance Minerals

Analysts

Mike Judd - Greenwich Consulting

Amy Zhang - Goldman Sachs

Steve Schwartz - First Analysis

Jeff Zekauskas - JPMorgan

Rosemarie Morbelli - Ingalls & Snyder

Daniel Rizzo with Sidoti & Company

Operator

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 Minerals Technologies Incorporated Second Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you.

Mr. Honey, you may begin your conference.

Rick Honey

Good morning. I am Rick Honey, Vice President of Investor Relations. Welcome to our second quarter 2008 earnings conference call. This call is being broadcast on the company’s website, www.mineralstech.com.

Joe Muscari, Chairman and Chief Executive Officer will begin today’s call with an overview of the quarter and an update on the progress of some of the initiatives we have implemented in the last year. He will be followed by John Sorel, Senior Vice President and Chief Financial Officer, who will review our first quarter financial results. After the review of our financial performance, Joe will provide some further thoughts on MTI's path forward and some of the challenges we faced in the second half of 2008.

Before we begin, I need to remind you that on page 7 of our 2007 10-K, we list the various factors and conditions that may affect future results. Statements related to future performance by members of our management are subject to these cautionary remarks and conditions.

Now I will turn the call over to Joe Muscari. Joe?

Joe Muscari

Thanks, Rick. Good morning, everyone. Last night we released our second quarter financial results with earnings from continuing operations of $0.98 per share for the quarter, and net income of a little over $23 million. We achieved record earnings in the last two quarters, resulting in the best first half the company has had since its inception in 1992.

In the first part of this call, I would like to bring you up-to-date on the progress we've achieved in some key target areas, primarily our efforts to improve profitability and return on capital.

As I related to you in the last call, I considered the results we achieved in the first quarter to be pivotal. Pivotal in the sense that they represented a significant improvement from the relatively flat performance track the company had been on for the previous five years.

Our second quarter performance, as you can see in this earnings graph is a continuation of that higher performance track. The improvement in our return on capital in the second quarter is another strong indicator that we have moved to another place.

The second quarter ROC was at an annualized rate of 9.2%, while the first half of 2008 was at 8.7%. This compares to 6% for the full year 2006 and 6.8% in the second quarter of 2007, and it is representative of a 45% improvement over 2006.

We achieved these improved results despite increased energy costs that affected all product lines. We had significantly higher raw materials and chemical costs as well as weak market conditions in the US housing and automotive industries. We continue to realize the savings we had targeted from our restructuring initiatives, and we are, in fact, exceeding them.

As a company, we continue to do a good job of executing this multifaceted realignment of our operations. This effort remains on track and we will continue to focus on it until it's complete.

Our expense reduction initiative which began in 2007 has also continued into 2008. We've reduced the expense ratio 13% from the 12.3% rate experienced in the second quarter of '07 and have reduced actual spending by 4.5%.

Our productivity also improved in the second quarter, sales per employee increased from 380,000 to 448,000 on an annualized rate basis, which is an increase of 18% over 2007 and 29% over 2006.

Looking at the first half of the year, sales per employee increased 16%. We also saw improvement in output per employee during the same period. Paper PCC increased tons per employee by 8%, and Performance Minerals increased by 11%.

This chart gives you a perspective of the size of the increases in costs that we were faced with in the first half, with magnesium oxide and bauxite having the largest impact on us of over $16 million. Lime, chemicals, and energy cost increases were also very significant.

We were able to offset these increases through a combination of actions, including price increases, our restructuring program, expense reduction, operational cost savings, and even some volume growth, primarily in the metallurgical area and Asia Paper PCC where we started up our new satellite facility in Nam Phong, Thailand.

As we look at the second half of the year, we see continued and even more significant challenges from the higher energy and raw materials costs. Lime costs in particular will be driven higher than we saw in the first half, due to the energy cost increases and we'll see a lag in cost recovery in the second half, particularly in the fourth quarter. That will carry over into 2009 due to the nature of our PCC supply contracts.

In addition, now we also see the possibility of lower volumes in Paper PCC business as a result of paper machine and paper mill shutdowns. We also expect our performance minerals business unit to see continued weakness in the US housing market and further declines in the automotive market.

We plan, however, to effectively manage through these forces using the same levers that we employed in the first half. Price increases, cost savings and some volume gains. And we'll continue to deal with these challenges as aggressively and effectively as we have during the first half, we'll also continue to focus on our four major initiatives where progress continued to be made during the second quarter.

Our cash flow improved in the second quarter through the strong earnings performance as well as improved working capital performance. Year-over-year working capital is still higher than we'd like it to be due to the need to build high levels of magnesium oxide inventories to protect our customers.

And as we related to you in the last call, China's sourcing of MGO has become quite problematic. Our product innovation efforts will continue to center on four areas, filler-fiber composite materials, PCC coating products for satellites, minerals for biopolymers and refractory reformulations.

Filler-fiber trials have continued and we are still targeting fill rates of 30% or more in uncoated free sheet paper. Our refractory product, formulation efforts are continuing to provide sustainable competitive advantage and we're also now focusing some of our efforts on providing lower costs formulations using substitute materials as potential alternatives for MGO. And in the biopolymers area we've succeeded in initial commercialization and have our first customer.

Our initiatives and continuous improvement at all levels of the company continued in the second quarter as we have rolled out the 5S process across all of our manufacturing facilities and are now preparing for the second wave of the deployment in the processes of daily management control, problem solving and total productive maintenance.

The implementation of these processes will provide us overtime with a more disciplined approach to operations and process management and gives us a much better foundation for continuous improvement.

In safety, our recordable rate for first half was 3.1, and our lost workday rate was 1.34, both lower than our historical average, but higher than we'd like it to be. We expect to drive these down during the year as we implement our key safety initiatives of new standards deployment, self assessment, risk assessment and fatality prevention.

Customer performance improvement and responsiveness to their most significant needs remains of course our highest priority. This quarter, we introduced the new customer need survey process designed to give us better insights into areas for improvement.

Now I'll turn it over to John Sorel.

John Sorel

Thank you, Joe, and good morning, everyone. I'll now provide you with an overview of our consolidated and segment financial results for the second quarter and highlight the key market and operational elements of our performance.

First slide provides an overview of the company's consolidated results for the second quarter. Overall, the company recorded earnings per share of $1.22, $0.98 were derived from continuing operation representing the company's strongest quarterly earnings performance is in its history.

Earnings from discontinued operations were $0.24 per share of which $0.22 relates to a gain on the sale of two of the idle Synsil facilities. Sales increased 10%, or $28 million over prior year.

Foreign exchange had a favorable impact on sales growth of $14 million, or 5 percentage points of growth. The additional sales growth was primarily reflected in refractory segment due to price increases necessitated by a dramatic rise in the price of raw materials and chemicals and due to volume increases of metallurgical product as a result of the continued strong demand in the US steel industry.

Volumes were below prior year in the specialty minerals segment, in both the PCC and processed minerals product lines. Operating income increased 7% to $28.8 million, and represented 9.6% of sales, including $900,000 of additional restructuring costs.

Operating income growth occurred in all product lines and was derived primarily from the savings achieved through the execution of the restructuring program laid out in third quarter of last year and the favorable effect of foreign exchange which more than offset the market and cost pressures that Joe discussed.

Income from continuing operations, which includes the benefit of lower interest expense and lower tax rate compared to last year, grew 16% to $18.7 million. Total EPS grew 65% to $1.22 per share reflecting the improved income from continuing operations, a $0.22 per share gain on the sale of idle facilities and a $0.11 per share benefit derived primarily from discontinuing the Synsil development operations.

Our return on capital excluding the gain on asset sales, on an annualized quarterly basis was 9.2% as compared with 6.8% in the second quarter of last year. The ROC metric improvement of 2.4 percentage points was generated primarily from the increase in net income was about one-half percentage point coming from the lower capital base resulting from the restructuring program.

Cash flow from operations was approximately $33 million and capital expenditures were only $10 million in the second quarter. We also repurchased 91,100 shares of stock for $6 million, or 66 per share during the second quarter.

Depreciation and amortization totaled about $20 million. We expect a more difficult third quarter as the trends in the construction automotive and paper industries continued to be unfavorable. In addition, we expect to experience margin compression in both segments due to the increasing costs for raw materials, chemicals and energy, and a delay in our ability to mitigate these pressures through price adjustments.

MTI sales for the quarter were $299.8 million, a growth of 10%, or $28.4 million. Sales in the specialty minerals segment, which is comprised of the PCC and processed minerals product lines in the table were $189.1 million, a 5% growth in $8.3 million above prior year.

This growth was attributable to the favorable impact of foreign exchange as unit volumes declined in both product lines. Sales of PCC, which benefited from the favorable foreign exchange, increased 6% or $8.5 million, to $158 million from $149.5 million in the same period last year.

Sales within the processed minerals product line decreased 1% in the quarter to $31.1 million. Volumes were down 7% below the already depressed level experienced last year due to a continued decline in residential construction activity, and a weak automotive market in United States.

During the quarter, both product lines began to realize the effect of higher selling prices related to the pass-through of raw material cost increases. Refractory segment sales in the second quarter increased 22% or $20.1 million to $110.7 million from $90.6 million in the prior year.

Foreign exchange had a favorable impact on sales of $6 million. Refractory product sales increased $16.7 million, or 23% to $89.8 million from $73.1 million last year. This growth is primarily attributable to our pricing initiatives and to foreign exchange.

Sales of metallurgical products increased 19% to $20.9 million, as compared with $17.5 million in the same period last year. The increase in metallurgical sales was primarily attributable to higher volumes.

This chart reflects the financial results for the continuing operations of the specialty mineral segment. In total, segment profitability in the second quarter improved 9% over the prior year driven primarily by cost improvements achieved through the restructuring program and from favorable currency in the Paper PCC product line.

PCC product line operating income grew 18% over prior year and was slightly below 11% of its sales. Processed minerals operating income decreased 18% as volumes, although sequentially stronger were still 7% below prior year levels.

It should be noted that cost improvements derived from our operations excellence program are beginning to have a significant positive effect in mitigating these volume reductions particularly in our California operations, one of the hardest hit.

Overall, segment operating income represented 10.6% of net sales in the second quarter. The North American and European paper industries continue to consolidate to improve operating rates and profitability as demand continued to decline in the North American and European uncoated free sheet markets.

Since the second quarter of last year, we saw additional machine shutdowns and paper mill closures, which were largely offset by increased volumes from new facilities and ramp ups, primarily in Asia during the quarter. As a result, Paper PCC volume declined only about 1% from the prior year.

Residential housing starts remained low and were at lowest level in 17 years. This has caused a significant drag on our processed minerals and specialty PCC lines which support all aspects of the construction industry. In addition, the US automobile industry volumes remain on a downward trend.

We expect further market weakness in the third quarter of this year and the major product lines within this segment due to forecasted weakness in North American uncoated free sheet paper production as well as continued declines in construction and automotive industries.

We have initiated price increases to mitigate the continued rising costs of energy and the processed minerals product line. However, pass-through of these cost are subject to delays in recovery in the Paper PCC product line in accordance with our long-term contracts.

In refractory segment, the sales trend over the last three quarters has been increasingly driven by foreign exchange rates and higher selling prices associated with the increased cost of raw materials. During the second quarter, increased pricing accounted for the largest component of sales growth with foreign exchange rates accounting for nearly 7 percentage points of growth and higher volumes, particularly in the United States accounting for the rest.

Operating income increased $0.4 million, or 5%. The operating income performance included restructuring charges of $700,000. Profitability increased significantly in the metallurgical product line due to increased volumes and a more favorable product mix.

However, our refractory product line profitability decreased due to the margin compression caused by the significant cost increases in MgO and other raw materials despite our aggressive actions to address the realities of the supply situation in the marketplace.

From our market perspective, the steel industry remains a relative highlight for MTI. During the second quarter, steel production growth occurred in all regions. And our two largest markets, North America and Europe steel production grew 8% and 2% respectively.

However, our refractories business continues to face unprecedented pressure on its magnesia and alumina raw material costs. We expect their profitability in this segment to continue to face compression later this year due to additional raw material cost increases.

We have comprehensive programs in place to mitigate this cost pressure through price increases and through the introduction of more advanced product formulations and manufacturing cost improvements.

As you can see from this chart, the delivered cost of 90 grade MgO imported from China, the primary raw material on our refractory product line has more than doubled since second quarter 2007.

We have initiated a series of price increases on a global basis to address its escalating costs. However, we continue to experience margin compression in the refractory product line as a portion of this cost increase continues to be absorbed by the business.

The working capital chart reflect our operating working capital trends defined as trade accounts receivable, inventories and trade account payable. This became a major focus area for the company's leadership as part of the initiative to improve return on capital.

However, after some success in the program during the third and fourth quarters of last year, inventories and accounts receivable increased approximately $40 million from December 31 levels of which $10 million was attributable to foreign exchange.

Most of the increases occurred in the refractory segment due to the timing of purchases of higher priced raw materials import from China, which were accelerated to avoid potential supply interruptions later in the year.

Our days of working capital increased to 75 days from 70 days in December, but still decreased 8 days, or about 10% from the prior year second quarter and three days from the first quarter of 2008.

Our cash flow from operations was approximately $32 million in the second quarter and our capital investment for the quarter remained at record load levels of $10 million, a rate well below the target of $75 million we set earlier in the year and far below the $100 million run rate we have been maintaining in the past.

As I mentioned earlier, we also continued with our share repurchase program during the quarter. For the first half now we have repurchased a total of 380,900 shares for $20 million, on an average of $63 per share.

In summary, our earnings of $0.98 from continuing operations for the quarter represent record earnings for the company. The earnings growth provided a step improvement and return on capital.

The anticipated savings from the restructuring program are being realized through the efforts of the management teams and all of our business units. Savings to date are tracking above target, primarily because we have been able to execute our key programs more quickly.

We have begun to liquidate the assets being held for sale and have realized pretax gain from that sale of two of our idle Synsil facilities of $6 million. and we expect to complete the sale of additional facilities in the third quarter.

We expect business conditions throughout 2008 to remain difficult tin Paper PCC product line. We remain concerned about lime cost increases, which normally affect us in the fourth quarter and potential capacity closures in the North American and European paper industry, which could impact our overall growth.

In processed minerals, we expect continued weakness in the residential construction and automotive markets with likely downward revisions in demand forecast. There is also some uncertainty in the steel industry from the same underlying markets that could affect our refractory segment.

While steel demand has remained steady in our major markets, we expect the escalating costs of our key raw material, MgO to continue to pressure the refractory segment financial performance as management works to mitigate the impact through increased selling price. Because of all these factors, we do not expect our second half to be as strong as the first.

Turning to the first half results, we achieved record earnings for each of the first two quarters of 2008 despite very weak economic conditions. The primary reasons were our enhanced performance for the half, with the execution of our restructuring programs and price increases to mitigate the effect of escalating costs.

The result was an operating income performance on a continuing basis that was 13% above the prior year. When combined with the lower interest expense and a slightly lower tax rate, this performance led to an after-tax income from continuing operations of $35.5 million, 24% above prior year.

Our total EPS, including discontinued operations of $2.12 per share was 63% above the prior year earnings of $1.30. However this includes a gain of about $0.22 from the sale of idle assets.

For the first half, the annualized ROC rate for the company excluding the gains from the sale of assets was 8.7%, 43% above the 6.1 achieved in the prior year. And we have continued to use the free cash flow from operations to fund a more aggressive share repurchase program.

The company will remain in the transition phase throughout 2008 as we continue the transformation plan initiated last year. The economic outlook remains uncertain and we do not expect to see any meaningful improvements in our major market.

However, we have established stability in our product line and have defined a clear strategic direction for each of them.

Now I will turn the call back to Joe for closing comments.

Joe Muscari

Thanks, John. Before we turn it over to questions, just a few additional thoughts that I wanted to share with you. We've accomplished a great deal in the last 16 months. We've been able to reverse many of the downward trends in performance the company has been experiencing in the past six years.

We've established a clearer sense of direction and purpose that has resulted, I believe, in a stronger foundation that we can now continue to build upon. Our restructuring was well executed and is now tracking to exceed the savings levels that we targeted.

Cash flow remains strong and we've been able to buyback, as John mentioned, 381,000 shares of our stock in the first half of around $24 million. The second quarter is significant in that it is a continuation of the performance improvement we had in the first quarter.

We have a long way to go in terms of the growth potential, and value potential ahead of us, but as you can see from our shareholder value checklist, many things came together well for us in spite of the challenge and economic difficulties that confronted us in the quarter.

We're now fundamentally better positioned to move forward and we'll continue the improvement process begun last year to increase shareholder value. We're also much better positioned to focus on growth and begin to seriously evaluate and consider acquisitions and alliances that can enhance and compliment some of our strong product and market positions.

As we look ahead, we do face, as I mentioned earlier and as John mentioned, some increased challenges and greater uncertainty in some of our market and input factors. But we also have a more comprehensive set of tools in place along with a stronger leadership team and a higher level of employee involvement to deal with them.

Now let's open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mike Judd with Greenwich Consultants.

Mike Judd - Greenwich Consultants

Yes. Congratulations on a good quarter.

Joe Muscari

Thank you, Mike.

Mike Judd - Greenwich Consultants

Just trying to get my hands around some of these leads and lags in the second half in terms of the higher raw material costs and the time lags, and I'm just wondering if you could maybe help us understand perhaps on both the talc side and also on the refractory side, the impact of the higher raw materials and how does that flow through?

And is there a greater impact, let's say, in the third quarter than there is in the fourth quarter? Just a little help would be appreciated. Thank you.

Joe Muscari

Yeah. Typically we're expecting for PCC to have some lag, primarily it will hit us more in the fourth quarter than the third quarter, but it's the size of the increases and the way it will flow, and our ability through our contracts to recover those.

The flow itself will not be much different from what we've experienced before, if we look back in time. The movement or the flow, there's nothing different relative to what we've experienced over the years.

So it's going to be more of the size of the increases due to the size of the energy increases that, where we have our supply lines linked to and our supply sources linked to that will drive those and how we turn those around and the timing of the contracts relative to our customers.

Talc will tend to be more immediate and when I say immediate, we recently announced a price increase on talc and we're working through those right now, where there isn't necessarily a delay, it's a different competitive type of situation, the number of contracts that are long-term are much less for that business.

So there we should expect to see a more immediate effect of the actions that we are taking. Refractories, the negotiating cycles are on six months. So right now, we've been negotiating for the second half, we've been in that process, we have more to go, we're not complete yet, so we've got some uncertainty around there.

But for the most part, the contracts in refractories are on a six-month period. It can vary some for that for some other customers, but on balance, it's a six-month period.

Mike Judd - Greenwich Consultants

Okay. And just as a follow-up on the refractories, I realize that you have made some changes there obviously in China, you've cutback on your operating rates, etcetera. But if you were to look at it on a year-over-year basis, is it fair to say that you would anticipate that the operating profits in refractories would be up or down in the third quarter just as an example? So that really supports quarter at this point is well off.

Joe Muscari

Well, fortunately we have a nice product mix, which gives us some balance. And right now we are getting a good improvement, operating income improvement, sales improvement in our metallurgical line, which is helping to offset in some parts of our dealing with refractories business where we haven't been able to achieve as higher level, or that may be flat. So I'm going to ask Bill if he could offer any additional insight to that.

Bill Wilkins

If we look at the forecast for the back half of the year, certainly, we have to deal with as John had mentioned, some unprecedented movement in our raw material costs, which we are in process of mitigating through price increases and internal improvement activities.

As we look at the coming quarter, certainly, we have every opportunity to mitigate most of what is coming at us. So my expectation for the third quarter would be similar level of activity as we saw prior year.

Mike Judd - Greenwich Consultants

Thanks for the help.

Operator

Thank you. Your next question comes from the line of Bob Koort with Goldman Sachs.

Amy Zhang - Goldman Sachs

Good morning, this is Amy Zhang sitting in for Bob. I have a couple questions. I think in the prepared remark you were saying the company exceeded the cost savings target. I think that is probably $15 million to $20 million on an annualized basis. Did I understand your commentary in the right way?

Joe Muscari

Yes. And if I could elaborate a little on that it basically says we've been able to achieve savings sooner. If you recall, after the restructuring, we laid out that we expected to get $15 million to $20 million and report on that in the last quarter that we were tracking. And what we've been able to do is actually achieve some of those savings sooner, savings that we thought would be further out, we've been able to capture.

Amy Zhang - Goldman Sachs

Okay. Then at this point do you have a new savings target for this year?

Joe Muscari

Well, again, we've got a number of things coming at us, and it gets difficult to predict. But where we were look at $15 million to $20 million in savings right now, we're looking at 20 to 25.

Amy Zhang - Goldman Sachs

Okay. And the second question is regarding your ROC. For the first six months you have achieved a very impressive ROC improvement, and that that has made your 9% target look a little bit conservative.

Do you expect the ROC improvement to continue in the second half at a similar, or even an accelerating base, even the fundamentals may not come as strong as the first half.

Joe Muscari

Well, thank you for expressing that so kindly. One, we have an entire year to go through yet. But the reality is we have done better relative to being able to do more in a shorter period of time. And that required a total organizational effort on all fronts, including working capital.

We have some additional things coming at us for the balance of the year. Would that suggest that the target we have for 2010, which is exceeding cost of capital by then, could be brought in some? Probably could, but I prefer to let's get through this year, see where we are and then we can reset our target.

Amy Zhang - Goldman Sachs

Okay. My last question is, the raw material pressure on your refractory business. See this MgO, raw materials have spiked in particular, and it looks like the traditional price hikes you are pushing, you are trying to pushing through is sufficient to offset those input costs. Why not do you just implement more aggressive actions like surcharges given the underlying demand from the steel industry is still pretty strong?

Joe Muscari

Yeah, rest assure the Minteq team is using every lever they possibly can. The reminder here is, we are in a competitive environment and so, I think they've done a good job of pushing through as much as possible and then working hard at trying to make up the rest.

And I think they've done a pretty good job there as well of trying to reformulations, cost savings to make up the balance. But it does suggest we need to obviously continue to go after and wherever possible continue to get price increases and that's true with every one of our business segments.

Amy Zhang - Goldman Sachs

Okay. Thank you.

Operator

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

Steve Schwartz - First Analysis

Hi, good morning gentlemen.

Joe Muscari

Hi, Steve.

Steve Schwartz - First Analysis

Going to slide 7 and I'm recalling this off of memory, I couldn't find a presentation on your website, but I got it through the web cast. That's a nice slide, because it lays out some of the components and quantifies. It looks like restructuring was $15 million in the quarter. Am I ballparking that right?

Joe Muscari

It's a little under that, but that's the ballpark.

Steve Schwartz - First Analysis

Okay. And then if we could frame the discussion for the second half around that slide, where you show raw materials being about $16 million and energy about 6 or so, pricing at 17. For the second half, can you put some numbers around it in that context?

Joe Muscari

Well, at this point in time, as we look at , let's say the cost pressure side, we're still working through contract negotiations, particularly in the refractories area, also, on the material supply area.

So we know enough right now , to share with you it's going to be more than the first half. Where we end up we will have a better sense within the next couple months.

Steve Schwartz - First Analysis

Okay. If you did you that chart for the first quarter, would it look similar, with the exception of restructuring? Because we know that was lower?

Joe Muscari

We've started to see more lime and phosphorics coming in the second quarter, or other types of chemical increases coming into the second quarter. MgO as well was higher in the second quarter.

Steve Schwartz - First Analysis

Okay. So that 16 number was lower. How about pricing in the first quarter? It looks like about $17 million in the second quarter. Was it about the same?

Joe Muscari

Again, the pricing goes over a six-month period and you have different contracts over different periods. It's hard to go to a point-to-point. John would like to offer a comment.

John Sorel

Just one clarification here, Steve, the chart on page 7 is a full half at six months.

Steve Schwartz - First Analysis

It's first half?

John Sorel

Yeah.

Steve Schwartz - First Analysis

Okay. I missed that then. I'm sorry.

John Sorel

I wasn't sure if you had taken it as a quarter or the half, I just wanted to clarify that.

Steve Schwartz - First Analysis

I was trying to play catch-up. Next question, you are talking about margin compression in refractories and Paper PCC. When you make that comment, is that sequentially from the second quarter, or year-over-year? Because you had some interesting things on your comp quarter last year for the third.

Joe Muscari

Steve, I'm not totally with you. Would you mind repeating that again?

Steve Schwartz - First Analysis

I'm sorry. When you say refractory margin compression is it reflected in Paper PCC, when you say compression, are you saying relative to the second quarter of this year what you just reported, or relative to the third quarter of last year, so your comp quarter?

Joe Muscari

Well, relative quarter-to-quarter sequentially, we were relating compression.

Steve Schwartz - First Analysis

Right.

Joe Muscari

And that's also the way we're forecasting it, Steve. Further compression that chart I showed on the refractor and the MgO price, shows that acceleration, and so it takes some time to catch up there.

Steve Schwartz - First Analysis

Okay.

Joe Muscari

So an acceleration in sequential, not year-over-year.

Steve Schwartz - First Analysis

Okay.

Joe Muscari

The MgO had doubled second quarter to second quarter so it's that curve we are trying to account for.

Steve Schwartz - First Analysis

Okay. And then just one last one before I get back in queue, you mentioned or noted on one slide that ForEx and refractories did carry through to op income. For every dollar you've realize in revenue for ForEx, how much of that hits op income?

John Sorel

Yeah. Obviously, our expenses as well are impacted by the ForEx. So on sales dollar basis, down to operating income on a companywide basis, it's probably in the range of 20%.

Steve Schwartz - First Analysis

20%? That's great. Thank you very much.

Operator

Thank you. Your next question comes from the line of Jeff Zekauskas.

Jeff Zekauskas - JPMorgan

Hi, good morning. I assume you've made some further progress on your tax rate. How did you do that? And is there more to go?

Joe Muscari

Our tax man keeps it a secret. He doesn't tell us how does he that. I'm just kidding.

Jeff Zekauskas - JPMorgan

Okay.

Joe Muscari

I'm going to let John review that with you. Please, John.

John Sorel

There's actually a very minor difference between the first quarter and the second quarter. We're at 30.8, I think, for the second quarter, and year-to-date is about 30.9, so roughly running at about 31.

The change from last year, which is about 32.7, at the half, was mostly related to geographic mix. There's nothing really structurally in the overall tax strategy or structure that has a big impact.

Jeff Zekauskas - JPMorgan

So where are you selling that's giving that you benefit?

John Sorel

We're doing less in Germany, and rates are down. As you know, some of the higher tax countries in Europe have reduced their rate to more or less equalize or unify throughout the European region, and that has some favorable impact on us as well.

Jeff Zekauskas - JPMorgan

And you talked about your cost savings being ahead of schedule, so how much did you pull out in the first quarter and how much did you pull out in the second?

John Sorel

Well, on the chart roughly for the first half, we're estimating it's a little under $15 million.

Jeff Zekauskas - JPMorgan

So, I mean, all things being equal you've got 5 to 10 to go?

Joe Muscari

Yeah. What basically it's not that what we also have things that get netted against that, so we have more of that coming. That's why I said if before we were saying 15 to 20, now we're look at $20 million to $25 million on an annual basis.

And the potential is higher than that but I wouldn't want to really give you a sense that it, at this point in time. We'll obviously know better once we get through the third quarter.

Jeff Zekauskas - JPMorgan

Has your amount of gross Paper PCC capacity gone up since the beginning of the years and how much do you expect it to be up this year, if at all?

Joe Muscari

I'm going to let Ken review that with you. Ken, please.

Ken Massimine

Jeff, really, we haven't seen volume growth at all at this point, to be frank with you. We've seen some compression in volume, frankly due to the uncertainty in the market and some of the shutdowns that we have been experiencing.

And we really do continue to expect to see those shutdowns continuing in the third and the fourth quarter, especially with the volatility in the marketplace and thigh energy prices, so really I don't expect to see significant volume growth at all.

Joe Muscari

And what I'd like to add to that, what tends to get masked is we have seen some pretty decent volume growth in Asia where we had had on a half-year basis the Asia growth was over 4%.

So when we have a number of those things happening, at our different businesses, there's so much downward pressure in total that they get masked in the numbers. But we actually had improvements in some volume improvements in performance minerals, but you don’t see it because the base business is fundamentally down because of the market and PCC is pretty much the same way.

Jeff Zekauskas - JPMorgan

So your CapEx spend, you're running at about $10 million a quarter, and there shouldn't be much change in that.

Joe Muscari

We’re so far along in the year, there still could be, if you recall from last time, on the last call, we talked about the capital expenditures target. There was an expectation of having additional growth projects as well as, we've moved further into the year, companies have moved their plans out. So that's pushed those capital expenditures out.

Last estimate we gave you, we expected to be around 50. It could be less than that. If project were to come in, in the next month or so, we could still have some additional spending in the fourth quarter.

Jeff Zekauskas - JPMorgan

So if you were going to acquire something, is it possible that you could acquire in minerals business, or in refractories or is your acquisition intention really only in one businesses?

Joe Muscari

Well, we're really open in our screening process that Doug Dietrich and the corporate development team goes, we're really looking for opportunities in all business segments. So we're not really limiting to one of the other. Obviously some have more opportunities than others.

Jeff Zekauskas - JPMorgan

And just, I guess, a couple of last things. If there's a margin squeeze in the second half, presumably the squeeze is greater in the fourth quarter than in the third quarter?

Joe Muscari

That's what we're seeing right now.

Jeff Zekauskas - JPMorgan

Right. And all things being equal, should your earnings be higher in the second half than they were last year? Or you can't tell?

Joe Muscari

Well, you have the restructuring. It's a little difficult. John, do you have some better insights

John Sorel

Yeah. The comparison to the third quarter is going to be extremely difficult as you know, because of the P&L was done before the restatement, so it will be a bit challenging to do that comparison, but if you look at sequentially the way we're going, you would expect to show continuing operations improvements over both of those quarter.

Remember in the fourth quarter of last year, although we did the major restructuring in the third quarter. In the fourth quarter, we only got the benefit of the fixed portion of depreciation portion of the restructuring.

The other part of the program didn't begin to kick in until the first of this year. So you would expect some push from that quarter-over-quarter.

Joe Muscari

We thought it more meaningful, Jeff, as we were just reviewing information that we're going to share in this call, that we hope you'd be better served by having a sense of sequentially what we see happening, because we've got a much more stable platform now in the first half.

Jeff Zekauskas - JPMorgan

And then lastly, what kind of alliance might be of interest to you?

Joe Muscari

Well, it could range from a partner in Asia to an alliance in marketing with people in the paper, and supplying the paper industry. So alliances can take many different forms.

And it could range from something in the refractories business to better position ourselves to the paper industry as well to be able to compliment some of our products with other companies that have strong positions.

Jeff Zekauskas - JPMorgan

Okay. Thank you very much.

Joe Muscari

You're welcome.

Operator

Thank you. Your next question comes from the line of Rosemarie Morbelli from Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

Good morning, all.

Joe Muscari

Hello Rosemarie

Rosemarie Morbelli - Ingalls & Snyder

Following up on Jeff's question regarding the second half, last year in the third quarter you earned $0.59, and John said that the third quarter would be a difficult comparison with '07, and it is going to be down sequentially from the $0.98 in the second quarter of this year.

Are we dropping below $0.69, or are you looking at another number for Q3 of last year? Am I missing something? Is that $0.69 wrong?

Joe Muscari

Yeah, John is looking, is pulling out some backup material. He can better answer the question.

John Sorel

Yeah. I'm not sure I can derive the $0.59.

Rosemarie Morbelli - Ingalls & Snyder

$0.69.

John Sorel

Third quarter last year we had.

Rosemarie Morbelli - Ingalls & Snyder

$0.69, John.

John Sorel

We have 540, $0.60 there you go, as the $0.69 sounds better. The $0.69 was taking out the all the restructuring charges we took but that still left operations that have been discontinued, that’s before we restated it to discontinued ops. So that's not a direct comparison, and that was my point.

Rosemarie Morbelli - Ingalls & Snyder

Okay. So when we are talking about a difficult comparison, it does not reverse that $0.69. You have to adjust it for the discontinued ops

John Sorel

Right, that's correct. What became discontinued operations were obviously a significant drag embedded in that.

Rosemarie Morbelli - Ingalls & Snyder

Do you have a feel for, how much of a drag?

John Sorel

I don't recall, off hand now. But it is restated. It will be restated when we do obviously the reporting next quarter. I don't know if it's been stated before that.

Rosemarie Morbelli - Ingalls & Snyder

Okay.

John Sorel

Yeah. I could probably derive that for you Rosemarie, if you want to call me I’ll go back to the K, if you want me to give me a call offline, I’ll go back and derive that for you.

Rosemarie Morbelli - Ingalls & Snyder

Okay thanks. That would be quite helpful. You said also, John that you expected no change in economic outlook for the second half. Isn't the general expectation based on what I am reading that actually the second half is going to be weaker than the first half, at least in Western Europe, and most likely in the US?

John Sorel

Yeah, that's what I thought I said. Expect I wasn't clear. I'll be happy to repeat that. My conclusion on the summary, I said because of all these factors, we expect second quarter to be weaker. We're expecting downward revisions in housing and automotive.

We're concerned that some of the things that have already affected the processed minerals group will begin to affect the steel industry as well and the paper industry has been reporting downward trends in demand.

And as we pointed out, the lime cost increases generally impact the fourth quarter more heavily than any other quarter of the year. And remember, and a norm and a good year, there is some seasonality in the processed minerals business and the fourth quarter tends to be weak.

Rosemarie Morbelli - Ingalls & Snyder

Okay.

John Sorel

So our direction is downward for the second half.

Rosemarie Morbelli - Ingalls & Snyder

I understood that your direction was downward, but I was wondering if you had been looking at a flat economy as opposed to a down economy, so sorry for missing your comment.

John Sorel

It's okay. Now, it was the economy was the primary driver for it. We’ve said the business performance is really ahead of schedule on some of the things. We're needing that to cover these economic conditions.

Rosemarie Morbelli - Ingalls & Snyder

Okay. And on the MgO, you are putting through price increases and so on, do you think you will ever catch up, or are you going to have, because of competitive pressure, to give up some of that, and in the end, until you find a substitute minerals, it is going to be quite a difficult environment?

Bill Wilkins

This is Bill Wilkins. I guess to answer your question, Rosemarie, it's a balancing act that we have to really play, particularly with relationships we have, very close relationships we have with many of our key customers. It's never easy, conversations are never easy relative to pricing, but given the cost of magnesium oxide and the bauxite based materials that we source from China it's pretty evident that we do have to pass on these costs.

What we try to do is certainly not due to a lack of aggressiveness on our part, but again, we try to balance what we do since we are a service based business, and so in many respects, yeah, we will be recovering as much as we can.

I believe that we will not be recovering dollar-for-dollar, because, again, as Joe had had mentioned earlier that we do to have balance what we do with the competitive nature of the marketplace we're in.

So the way that we try to recover to the best degree possible, again is through internal improvements that we are beginning to enjoy the benefits of in addition to the continued reformulation activities and looking at substitute materials. I mean, that's the smart approach and the balanced approach which we'll continue to undertake.

Rosemarie Morbelli - Ingalls & Snyder

How long do you think it will take before you find a substitute that works, and is accepted by your customers?

Bill Wilkins

Difficult question. It's an ongoing activity relative to looking at materials such as dollar-based as opposed to MgO-based and also other things and we use many of these products in some of our reformulations today.

Again, it's a balancing act because of the fact that MgO has particularly unique qualities for quality for that matter and so as a business that drives itself on high levels of quality in the products that we produce.

Finding substitutions is a difficult thing to undertake, given the acceptance that we have for this material in the marketplace. So it takes time, Rosemarie. I really wouldn’t be able to put a timeframe on it but it's something we're actively pursuing.

Rosemarie Morbelli - Ingalls & Snyder

Okay. Lastly, if I may, any chance of changing the length of the contract whether in PCC or in refractory?

Joe Muscari

One of the challenges that PCC has had, I will start with them is to where, we do have longer contract’s, attempt to shorten as they come up. But again, as new contracts come up, it is a negotiation process.

So if we're able to shorten, then we're trading potentially something else off, and Ken and his team have also, as contracts have come due, look carefully at some of the terms we have, the formulas that are being used to help shorten that timeframe, as well as some of the indexes to make sure we've got effective indexes that we're tying these increases to.

And in the refractories area, the team there is also trying as much as possible to shorten wherever they can, so in the upward market to minimize the time exposure.

It is again different customer by customer based on what the relationship has been, and also the degree sometimes of if the customer is global, we're negotiating a global contract or the framework for the various regions.

Rosemarie Morbelli - Ingalls & Snyder

Okay. Thank you very much.

Operator

Thank you. Your next question comes from the line of Daniel Rizzo with Sidoti & Company.

Daniel Rizzo with Sidoti & Company

Thanks, guys. Actually, everything was just covered. Thank you.

Operator

Thank you, Daniel. (Operator Instructions). Your next question comes from the line of Steve Schwartz with First Analysis

Steve Schwartz - First Analysis

Well, thank you for taking the follow-up here. On R&D expense, it looks like $6 million a quarter is your new run rate. Is that safe to say going forward?

Joe Muscari

Well, it could be higher. If we move into more filler-fiber trials, you could see that move up pretty quickly. And that's our objective, is to, one, increase the level of trial activity there.

The recent trial we held was successful, in the sense that we moved our own learning and the customers forward and we're scheduled at this customer for another trial in September.

Ken, perhaps you'd like to elaborate on that a little bit?

Ken Massimine

No problem. I think, just to add to what Joe is saying, in terms of focusing the R&D expenses, I think the key opportunity for us is that we will fund what we need to fund to make sure that we're continuing to grow our new product programs the way we need to, for the future.

With respect to the filler-fiber, we do have another trial planned, though we continue to make good progress, if it's still albeit a development program, but we are making progress.

Matter of fact, in that regard, we are going to actually another potential customer is now expected to trial a product in the late third quarter, or early fourth quarter. So as the opportunities come up to spend the money to support our new programs you can be assured that's definitely what we're going do.

Steve Schwartz - First Analysis

Okay. And the $6 million that we've seen over each of the past three-quarters, have you been comfortable at that level with what you've been doing in biopolymers, for refractory, PCC and then the filler-fiber, or do you feel like you need to do more there and would that drive an increase?

Joe Muscari

Right now, and I'll let D.J. Monagle add to that. I think in the biopolymers, we have the right compliment of people focused on it, where we've had our first commercialization. I think we've got a good marketing and sales team and we're well-positioned to move that forward.

And again, if we need to add there, we clearly will. But I think what I've seen so far we've got a nice team focused on it. D.J. you want to add to that?

D.J. Monagle

I would affirm those statements. I think from my perspective, the current run rate in that area is good. As Joe mentioned in the highlights, we've commercialized with our first recurring customer.

So the continued development in spend will be on taking that technology to other locations. But also, as biopolymers develop, it will be augmenting the product portfolio with some new products that would be adjustments to support the evolution of biopolymers.

So to answer the root of your question, I'm pretty comfortable that the current spend will allow us to grow in that area.

Steve Schwartz - First Analysis

Okay.

John Sorel

Steve if I could just add to that a little bit just from a reference standpoint, if you look at where we were, let's say in 2006 versus where we are now, a good percentage of the delta was in Synsil and we no longer have Synsil.

We also had a refocusing in the revised strategy for our performance minerals business that fundamental mine-to-market strategy that allowed us to hone in on the key areas where we felt we had the greatest chance of success in the shortest period of time.

The other area, where we had consolidation in our coatings development and in our facilities for coating, again, because we've shifted to a satellite model focus from a merchant model focus, so if you think of those three areas, those are the major reasons for the delta that will you find over the period.

Steve Schwartz - First Analysis

Okay, and then just one last one. This will be quick. Regarding your gross interest expense, even though your average debt level stayed about the same, your interest expense sequentially here in the recent quarter dropped 25%, almost $0.5 million. What was behind that?

John Sorel

Debt levels are down. Half-over-half, debt levels are down from about $50 million, from 180 down to about 130.

Steve Schwartz - First Analysis

From the first half of last year to the first half of this year?

John Sorel

Right.

Steve Schwartz - First Analysis

Okay. Am I missing something here, though, in terms of you spent about $1.5 million on interest in the first quarter, $1.1 million in second quarter?

John Sorel

Right.

Steve Schwartz - First Analysis

But your average debt in the first quarter was at about 132 and it's now at about 129?

Doug Dietrich

Yeah. This is Doug. It's about $121 million at the end of the second quarter. But I think its two things. It's both, year-over-year debt levels are down about $50 million as John said, but also our interest rates are down year-over-year about 120 basis points.

Steve Schwartz - First Analysis

Okay. Thank you.

Operator

Thank you. At this time I'm showing no further questions. Do you have any comments or closing remarks?

John Sorel

No, I think we're all set, Stephanie. I want to thank everybody for their interest in Minerals Technologies and have a good day.

Joe Muscari

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's Minerals Technologies Inc. second quarter 2008 conference call. You may now disconnect.

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