Good morning. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2012 Minerals Technologies Inc. Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Rick Honey, Vice President of Investor Relations, Corporate Communications. Please go ahead, sir.

Good morning. Welcome to our First Quarter 2012 Earnings Conference Call, which is taking place right after the space shuttle made it's lap around Manhattan. The call is being broadcast on the company's website, www.mineralstech.com. We'll start with Joe Muscari, Chairman and Chief Executive Officer, who will begin today's call by providing some perspective on our first quarter performance. He will be followed by Doug Dietrich, Senior Vice President and Chief Financial Officer, who will review our first quarter financial results. Before we begin, I need to remind you that on Page 8 of our 2011 10-K, we list the various factors and conditions that may affect future results. Statements related to future performance by members of our management are subject to these cautionary remarks and conditions. Now I'll turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. We started the year on a very positive note by earning $1.01 per share in the first quarter versus $0.87 a share a year ago, a 16% improvement and a record first quarter for Minerals Technologies. This solid performance, which included a 10% increase in operating income margin was largely driven by the strong results from the Performance Minerals and Refractories business units. Our results for the last 2 quarters now put us on an excellent performance track that is being driven by improved performance in almost every part of the company. We continued to see progress in our major growth strategy of developing and commercializing new products as our fulfilled platform of technologies of higher filler loading gained further momentum. We signed an agreement for our Fulfill E-325 technology, our first in North America. In addition, we announced new product offerings from both the Refractories and Performance Minerals business units. The solid performance from Refractories and Performance Minerals was a result of strengthened operations, bolstered by improved productivity through our operational excellence initiative, as well as product differentiation, pricing and good expense control. In addition, our cash flow remained strong as we generated $25 million in the quarter. But one area that remains a concern to us is the economic situation in Europe. We've closed one satellite PCC plant in Finland and production has been reduced at a second satellite in that country. And a satellite in France remains idle at a paper mill that is being divested by Mesta Board Corporation. We're also concerned about the effect the economic conditions in Europe are having on the steel industry there. As you can see from this chart, our earnings are back on a pre-recession performance track, albeit on lower volume levels, recording over $1…

Thanks, Joe. Good morning, everyone. I'd like to review with you our consolidated and business segment results for the first quarter. I'll highlight the key market and operational elements of our financial results in each major product line and comment on comparisons to both the first quarter of 2011 and sequentially to the fourth quarter of 2011. As Joe mentioned, we reported record first quarter earnings per share of $1.01. It represents a 16% increase from the $0.87 per share recorded in the first quarter of 2011. Strong performances from our Refractory and Performance Minerals businesses were the primary drivers of the growth over last year. Our consolidated sales of $257 million decreased 2% or about $5.4 million from the prior year. However, excluding foreign exchange, the permanent and temporary mill shutdowns in Finland and France and the deconsolidation of our Minteq Korea business last year, our underlying sales grew 3%. Our cost of sales decreased 4%, which had a favorable leveraging impact on sales resulting in a 4% increase in gross margin. Again, this occurred primarily in the Performance Minerals and Refractories business. Total expenses, including plant overhead costs, represented 14.8% of sales in the first quarter, below last year's ratio of 14.9%. This resulted in an operating income of $27 million, an increase of 8% over last year, and represented 10.5% of sales versus 9.5% in the first quarter of last year. Our return on capital for the quarter was 8.7% on an annualized basis, which is above our weighted average cost of capital of 8.3% and higher than the 7.8% achieved in the first quarter of 2011. In the first quarter, we generated $25 million in cash from operations, of which $9 million was used for capital expenditures. We have nearly $35 million in cash on hand…

[Operator Instructions] Your first question comes from the line of Silke Kueck with JPMorgan.

My first question is on the refractory side. And so you did like a really nice job outlining how all the productivity improvements -- we know how the margin improvement came about even though the sales year-over-year were flat. And the -- I was wondering if you can discuss some of the productivity improvements that are still taking place because my recollection is, is that a lot was done from 2007, 2010 already to lower -- the break even levels. And so I was wondering like what the ongoing initiatives are, like how are you achieving those really nice margin improvements and productivity gains?

Well, Silke, this -- and what I'm about to say really applies to all of the businesses and all of the functions in the company. The continued improvements that we're seeing come about through the application of operational excellence principles. The -- today, we have standard work, daily management control, the things that you've heard me talk about over the past several years are -- have been reaching much higher levels of deployment throughout the company. There are very high levels of participation throughout the company by operators, by all employees in finding ways to save money, improve processes, improve quality over product, improve delivery. So a good part of what you're seeing is that continuous improvement efforts. And we -- and Kaizen is an event where employees come together for anywhere from 1 day to 3 days or 4 days and examine a process, and out of that, come out with ideas on how to improve it. Well, last year, we had roughly 700 Kaizens throughout the company, which is a fairly large number for a company this size. And this year, we're probably running -- the first quarter running at a rate that's probably 20% higher than that level. So it's a strong indicator of continued high level of employee engagement. We also -- another indicator that contributes to ongoing savings is our suggestion system. We are now averaging roughly 5 to 6 suggestions per employee around the world, which is a fairly high number when you consider that, we were at a very low level 3 years ago, something somewhere between 0.1 and 1. But it's another aspect of operational excellence that builds in a high level of employee involvement, I'd say employee engagement, plus focused areas for improvement combined for not only Refractories, but other parts of the company, to the improved performance levels. But I'm also going to ask Han Schut, who's with us on the call, to just share a little bit about some of the specific initiatives that Han and his team are focused on. Han?

Yes, thank you, Joe. Yes, Silke, thank you for the question. I think when you look at the transformation of Minteq and specifically to the first quarter of 2012, what we have seen is specifically higher productivity in our Bryan facility in Ohio. So last year, we consolidated the Old Bridge facility into the Bryan facility and that has started to pay off. And in general, also there was a lot of concentration on stabilizing the supply chain. And that has led to increased magnesium oxide yields and lower waste on the MgO sites, less expediting. So in general, you could say that on the supply chain side, that there is much more stability, and that's starting to pay off also in our operations. So whether it comes to MgO yields, when it comes to changeovers and just in general, the productivity in our operations.

That's helpful. So it's like a general level of like expense reduction rather than just employee reduction?

Yes, correct. Yes, definitely.

And if I can ask like one question on raw materials. So in general -- and I understand, I guess, there are different -- this is in Refractories again, there are probably different grades of refractories that you produce. But if you make a ton of refractory materials, how much magnesia goes into a ton of refractory materials? And, similarly, I guess I'm interested to know like how much energy is needed to -- when you make minerals to make a ton of, I don't know, ground calcium carbonate or talc, if you can give us any metrics, that will be helpful.

Yes, Silke. I think first of all, we have to distinguish between 2 main product lines, which is alumina-based and magnesium oxide-based. And when you look at a magnesium oxide-base, typically, the content is between 70% and 90%.

I think, Silke, and to your question of energy per ton, it varies quite a bit depending on the product line of the company. Probably, the highest energy usage embedded in our product comes in our PCC business through lime and the purchase of lime. Our -- and that carries over to, for instance, a facility like we have in Adams, which is a GCC and a Specialty PCC business where in a year, we use Number 6 fuel oil in the year we'll spend on how much -- so it's, say, 5 million gallons times, say, $3 a gallon today, a little bit less than that.

So it varies quite a bit, Silke, depending on where in the company the facility is, but the product line as well.

Do you buy any natural gas at all, or is your exposure to natural gas, is it more of a -- is it more geared towards fuel oil?

We do buy natural gas. We also have some projects that are focused on converting. In one case, Number 6 fuel oil to natural gas.

Yes, Silke, most of the energies in refractories is electricity, also some propane used in the wire business.

Your next question comes from Rosemarie Morbelli with Gabelli & Company.

You did mention, Joe, that some of the Refractory business in Q1 was really taken for Q2 because of 2 steel furnaces being re-lined next quarter. Did anything of the sort happened in your other product lines? And if you look at Europe, do you think that you've got a little bit of Q2 business into Q1, or was Europe kind of slowing down throughout the quarter?

No. Rosemarie, I think we didn't see anything else. I think from -- sequentially, from the fourth quarter, one of the major items was the equipment sales in the refractory, which are typically higher in the fourth quarter. And as all of those units that we've built in the year are generally sold in contracts consummated in the fourth quarter. So we do see a drop off there. We had a couple of re-lines, as I mentioned, in the Refractories business that moved off into the second quarter. So that helped the demand. I think the remainder of it, especially in Europe, we did see some shutdowns in the quarter. So that wouldn't be pushing volume off. Those were actually steel mill furnace shutdowns from the fourth and the first quarter. And we're going to see a couple of those re-lines again be pushed from this quarter into the second quarter in the Refractories. The other product lines, I don't see anything that was pulled in significantly into this quarter.

Okay. And then if you look at your -- changing gears here, if you look at your new contracts in Asia, the size of existing contracts, did you get any revenues from them in the first quarter? Is it too early? If you could talk about the potential revenue for 2012 for the year, as a whole, and 2013? And I was wondering if it is -- if those contracts are only for 1 paper machine, in 1 paper mill and given 1 paper company, what would be the potential for that as you move from 1 machine to another and then from 1 mill to another. Can you help us understand how it is going to progress?

Rosemarie, is your question around the Fulfill E-325 or new satellites?

The Fulfill E-325.

On the Fulfill E-325, just to give you a little bit of dimensioning because I did indicate on the last call it was a little premature, we needed to have a little more cook time. But I can give you some perspective. Of the 6 contracts that we have right now for commercialization that I mentioned, we -- those 6 contracts, could -- I should say have the potential to deliver this year around $750,000 to $1 million of operating income, okay? We have more coming. Each one of these will be a little different because of the size of the sites that we're implementing this in, and as well as the degree of penetration of the new product in each one of those sites. In some cases, the ramp-up is very quick. In other cases, it's going to take longer. So in terms of visibility that we can give you right now, it would be roughly around the numbers that I shared with you. And as we get further in, in the next quarter, we'll -- we foresee more contracts coming on. They're being negotiated right now, and we'll have an opportunity to share even more with you.

Well, Joe, just so -- I want a little more detail if you didn't mind, when you say that it depends on the degree of penetration, are you talking about how many machines at the mills, at 1 particular mill or are you talking about more mills within 1 big company?

It's both. It's the number of machines that would be in a paper mill, at a paper mill site, as well as the different grades that are made at those sites. So -- and we typically will qualify with -- on one machine 1 or 2 grades, get acceptance and then move beyond that. Other cases, we go through a longer qualification period for all the grades. So it really varies. I'm going to ask D.J. to kind of give a little more granularity about -- around how that process works and how different it is from site to site. D.J.?

Sure, Joe. So, Rosemarie, what we had indicated during our -- some of our other conversations, and what Joe says is exactly right. It's a combination of getting across the different paper machines, but also within a paper machine, it's getting across the grades. So this step that we call technology validation is, in fact, our longest step in getting this to be commercialized. And it takes into account everything from each grade that our paper machine makes. We've also been engaged in -- well, just in-situ product development for the paper makers as they look at different raw materials and different cyber species that they can do and sometimes, the paper makers ask us to do specific customer qualification. So it's a combination of those items. And what -- in terms of just looking forward, I think Joe's projections are spot on with what we've announced so far. And it's -- we've not -- this will the first time where we are coming out of the gates saying, "We've got several more coming in the next quarter." But we have several more coming in the next quarter and our chart showed 3 European mills that are right on the verge, and we'll hope to be able to embellish more when those cross that finish line.

And if I may ask one quick question. Your R&D expenses were $5 million this quarter. Is that a new quarterly level? Is it linked to additional trials? What is behind the high number?

No, there's nothing specific there, Rosemary. I think it's pretty much on par. We do have some additional trial expenses going into Fulfill, but there's nothing behind that typical number.

Your next question comes from Steve Schwartz with First Analysis.

Just wondering if you could help disaggregate this weather benefit that you mentioned in the press release?

Sure Steve. So I think as we all -- well, most of us experienced a pretty mild winter in the northeast. And I think it was more mild than expected. And so a lot of what we forecast going into January, February and March is a lot of extra energies, snow removal that requires ore that can get wet and pumping out water, et cetera. So in the mining operations, we saw a little less than about $400,000 of the growth sequentially was just due to that weather benefit. Again, I don't know what next year's going to hold, so I don't know if that's sustainable. But I think more of the profit improvement you've seen year-over-year is really due to the mix, the pricing, the productivity that the Performance Minerals business has been able to affect and also the reduction in overhead costs.

Okay. And Doug, what roughly was the operating margin in the Processed Minerals business?

Well, give me one second, Steve. Well, the gentleman next to me is telling me we typically don't disclose that number, but I can give you an idea. In Specialty...

Come on now, Rick. Give the [indiscernible] room on the leash, please.

It's lower than the 16.3% that we showed. But PCC, Specialty PCC is a more profitable segment of that product line so.

Sure, sure. And then just to touch on a few things that Silke brought up, I guess just to clarify on the natural gas situation in North America, so do you guys see any great opportunity there now that we have lower cost nat gas?

We do see some good opportunities. We've been looking out and seeing how the forward prices have been dropping, and so we take advantage of some of the lower cost natural gas. We have -- we do use quite a bit, as Joe mentioned, in our line production process, we use fuel oil. And fuel oil has generally increased significantly actually over the past couple of years, which is a drag on the margins that I've shown you. We do investigate opportunities to move more of our productions to natural gas, and those are things we're going to continue with throughout this year.

Okay. And then just lastly, again, on the raw material front with magnesium oxide, it looks like you were able to work through your high-cost inventory in the first quarter, maybe a little faster than we thought coming out of the fourth quarter. Would you say -- I guess, part a to the question is, would you say your pricing now has caught up with your costs? And then in your commentary, part b, you mentioned that it looks like MgO costs could be going up. What does that then look like, the pricing versus cost profile as we go into the second half of this year?

Well, again, prices are changing. We're continuously selling our value proposition. You are right -- part a, you are right. We did move into some of the lower-cost inventories faster, especially in North America, with a higher consumption rate. So I think you'll see a little bit of that benefit continuing in the second quarter. My comments on the higher MgO prices is it's a timing effect. We are seeing higher MgO prices, and I think that will manifest -- it will manifest itself in the second quarter, but primarily in Asia. Our supply chains in Asia are shorter, so we consume -- we buy and consume much more rapidly there. But if they continue to increase we will see some of that effect the margins that I showed out into the third and fourth quarter where supply chains are longer like in North America

Looking back, say, 1 year or 2 years ago, when we first had this trouble with getting with MgO, and essentially came down to higher costs for you. Has your supply chain changed at all? Have you been able to do anything differently there over the past couple of years?

We have. So I think in the past, significant, I'd say almost 75% of our magnesium oxide was purchased from China. We've had a real concentrated effort, Han and his team over the past couple of years to diversify that base to a number of different suppliers around the world. And we've been able to do that. So we reduced our dependence on specifically Chinese MgO significantly. We also have increased our production out of our own facility in Turkey, and so we're self-sufficient to some extent in part of the business. So it's really been a conscious effort to diversify our supply base.

How much has the supply out of Asmus [ph] in Turkey changed over the past couple of years?

We've had some productivity improvements. It's similar, it covers about 25% of our total magnesium oxide needs, and the majority of that is into Europe. I'd say we probably had about a 5% increase in productivity over the past couple of years.

At this time, there are no further questions. Mr. Honey, I hand the call back over to you for closing remarks.

Thank you very much for your interest in Minerals Technologies and have a good day.

Thank you.

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