Good morning. My name is Cristy, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2012 Minerals Technology's Inc. Conference Call. [Operator Instructions] It is now my pleasure to hand the program over to Mr. Rick Honey. Please go ahead.

Good morning. I'm Rick Honey, Vice President of Investor Relations. Welcome to our Second Quarter 2012 Earnings Conference Call. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call by providing some perspective on our second quarter performance. He will be followed by D.J. Monagle, Head of our Paper PCC business, who will discuss the advancement of our portfolio technologies. Then Doug Dietrich, our Chief Financial Officer, will review our second 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 will turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. We continued our strong overall operating performance into the second quarter and that's a 3 consecutive $1-plus quarters as we earned $1.11 per share. This was also another record quarter in the company's history as well as a record first half with an EPS of $2.12. Earnings in the second quarter increased 23% from the $0.90 we achieved in the second quarter of 2011. This solid performance included an 18% increase in operating income to $29.5 million, and a 25% increase in operating income as a percentage of sales to 11.6%. Our return on capital continued to show improvement, increasing 19% to 9.4% for the second quarter on an annualized basis. In addition, our cash flow remain strong as we generated $40 million. Both the Specialty Minerals and Refractories segments recorded improved operating income as a result of higher productivity, lower material and energy cost, good expense control as well as pricing improvements. Specialty Minerals benefited from very strong operating performance from Performance Minerals, as well as higher profits in North American Paper PCC. It's important to note that we were able to achieve this high level of performance despite a lower revenue base than previous highs, which attest to our strategic and operational initiatives to improve performance on all fronts: operational excellence, new products, growth and market positioning. In fact, if you isolate the European recessionary effects on our sales as well as the currency impact of the weakening Euro, the underlying growth in the company is 1% to 2%. Our FulFill new products achieved a significant milestone as we recently announced 3 new contracts, 2 of which are in Europe. We now have a total of 9 commercial agreements with paper mills around the world and this program continues to gain momentum as…

Thanks, Joe. Let's look at the progress made with the FulFill E and V technologies. To provide some perspective, here's the slide we showed you from our fourth quarter conference call when we had 5 signed commercial agreements and we're actively engaged with 24 paper mills. Now let's take a look at where we are today at our marketing activity for the FulFill portfolio of technologies. We now have 9 commercial agreements but more importantly, we're actively engaged with 26 other paper mills around the world that are interested in this cost saving technology. The arrows show the progress we've made since the fourth quarter. We now have agreements with 6 paper Mills in Asia, where it is customary practice to adopt new technologies quickly. In the first quarter, we executed our first agreement in the United States when we began our application at a plant in Wisconsin with Flambeau River Paper. More recently, we added the 2 customers Joe referred to in Europe, one with Mondi, a premier paper maker at their world-class paper mill in Slovakia and another in Asia. We're also quite close to commercialization with several more paper mills in North America and a fourth from our European region. The FulFill E and V technologies used primarily in uncoated freesheet or office-type paper typically allow the papermakers to consume 15% to 25% more filler, saving $5 to $20 per paper type. We see this portfolio as advancing our position as the global leader in paper filling technology. In addition to these commercial accomplishments, we continue to make technical progress across the FulFill portfolio. FulFill E-325 remains the workforce technology and we're running numerous trials across the globe. As this program gains further momentum, our objective is to work with papermakers to expand the technology across all…

Thanks, D.J. Good morning, everyone. I'll now take you through our consolidated and business segments results for the second quarter. I'll highlight key market and operational elements of our financial results in each major product line and comment on comparisons to the second quarter of 2011 and sequentially to the first quarter of this year. As Joe mentioned, we reported record quarter earnings per share of $1.11, which represents a 23% increase from the $0.90 per share recorded in the second quarter of 2011. Another quarter of record earnings from our Performance Minerals business, a solid performance from our refractory segment, higher profitability in our Paper PCC business and continued productivity improvements were the primary drivers of the earnings growth. We're able to achieve this level of income despite the continued weakening of our European end markets, where sales and operating income were down 17% and 27% respectively. Our consolidated sales decreased 5% or about $14.4 million from the prior year. However, excluding foreign exchange, the permanent and temporary paper mill shutdowns in Finland and France and the deconsolidation of our Korea Refractory business last year, our underlying sales were up slightly at 1%. Our cost of sales decreased 8%, which had a favorable leveraging impact on sales, resulting in a 5% increase in gross margin. A favorable leveraging occurred in all business units, but most significantly in Performance Minerals. Expenses declined 6% from last year and represented 10.6% of sales in the second quarter versus 10.7% last year. This resulted in operating income of $29.5 million, an increase of 18% over last year and represented 11.6% of sales versus 9.3% in the second quarter of last year, a 25% improvement. Our return on capital for the quarter was 9.4% on an annualized basis, which is above our weighted average…

[Operator Instructions] Our first question comes from the line of Rosemarie Morbelli with Gabelli & Company.

So you have already answered a few of my questions regarding where your surprise was and the sustainability of the gross margin in the next 2 quarters, I am also guessing is going to be lower. I mean, you won't be able to sustain this particular level based on your comments. Any potential positive on what you actually can control versus what is going on in the marketplace, which could improve those margins or at least keep them at the same level?

This is Douglas, let me start. I think you're right. I think it will be difficult to sustain these type of margins going forward. Let's take Specialty Minerals segment. Paper PCC, we see some stability but in Performance Minerals, you'll see the normal seasonal decline and you'll see that operating income could drop 5% to 10%. I think, last year, it was 8% as a result. So there could be some pressure on those level of margins coming in the third quarter. Refractories, it's twofold. We have the market conditions in steel, both in North America and Europe, the loss of RG Steel will pressure our margin, but also magnesium oxide around the world, though we've purchase most of it, is purchased in dollars. So the currency impact of our sales, our foreign sales, could pressure those margins as well.

Given the lower level of utilization in the steel industry, do you expect the magnesium oxide price to decline?

Well, we do. It actually has recently had come off slightly. Hard to predict where it will go further, but I don't suspect it will go up. Well, this is my personal -- it will go up significantly over the next couple of quarters, so we purchase -- because of our long supply chain, we purchased most of our magnesium oxide for the year.

So did you -- if you look at your inventories, are they -- are the costs higher than where the price is currently and how long will it take before you can actually offset, kind of close the gap?

Slightly higher, but again, we continue to buy magnesium oxide on a regular basis. But it takes us a little over a quarter before -- especially in North America -- to both purchase, deliver and consume that magnesium oxide. So the lower prices would manifest themselves further in the first quarter.

If I may, on the SG&A side, the $23 million expense in the second quarter, is that something that you can reduce some more going forward or is this a good level in dollar signs, in dollars that you can expect?

So you said the SG&A expense?

Yes.

Part of that decline sequentially and year-over-year was due to currency. I'd say half of the decline was currency-related. So I think a portion of it, we'll be able to hold. Again, we could be spending some expense dollars to support our growth in Asia and again, depending on where the currency goes, that's half of the decline so far this year.

Your next question comes from the line of Jeff Zekauskas with JP Morgan.

This is Silke Kueck for Jeff. So a couple of questions. So I understand that your earnings guidance or like your profit guidance is all based on what theoretically should happen to your segments based on the underlying fundamentals, the utilization rates, the shipment levels of paper and then of course, the various rationalization programs that you must have in place. And so I think in like in the past 4 quarters, you've guided your operating performance one way and essentially, you beat it. So I understand in your guidance is that your profits maybe lower by 10% from the second to the third quarter, but if you take a step and factor in what kind of cost savings opportunities there are, do you think your profits in fact may just stay flat?

Well, we, as a matter, of course, we continuously, as I touched on in my remarks, have cost-reductions and so our current quarter reflected the efforts in our lean manufacturing approach and our suggestion system and our increasing utilization of Kaizen as a way to bring employees to solving problems. So those will continue and those have now become a normal part of a -- I touched on the term waste elimination, but it is about dealing with both opportunities to reduce costs and as new costs and pressures confront any companies as ours, we find ways to overcome those. And in terms of what we're trying to share with you is to give you the best possible insight into what we see as of today, and that's basically what it is based on where the markets are moving. What's a little different right now is the European situation is creating even more uncertainty and, for the first time, we're seeing some movement in steel that gives us some concern and both Doug and I share that with you. So what you're seeing is our best estimate based on current conditions and not having a perfect crystal ball because the planning horizon is somewhat limited right now of what we see happening, Silke.

Okay. And then if I can ask a question on PCC. I think you said that PCC sales, in fact, improved 6% in the second quarter year-over-year if you exclude currency and if you exclude the mill shutdowns and idling in Europe, is that correct?

Correct.

And can you give an indication whether all of that was priced or was there any incremental volume?

We had some incremental -- we had volume increases in each region except for Europe. So really, the major volume decline both year-over-year, on a year-over-year basis, was Europe. It was due to those shutdowns. There was some pricing impact due to currency. But for the most part, the only volume declines we saw year-over-year was in Europe. Sequentially though, the volume decline was in North America, which was due to the shutdowns.

Okay. And has the shipment of initial volumes for FulFill made any difference to volume and price, if you can quantify in any way?

They're very small in the second quarter, a very small amount. I don't think -- in the total volumes, it's not contributing a significant amount yet, Silke.

Okay. And I guess one more question on FulFill, if you expect operating income from the 9 contracts signed today of $1.4 million to $1.7 million for the year, does that translate into sales of like $14 million to $17 million, somewhere in that ballpark?

Well, we've -- as I think I touched on, on the last call, is that because we have a mix of technology fees and additional PCC volume sales, that we're very sensitive to competitive disclosure just how we're pricing right now, and so we're trying to give you is a direct line of sight into as we see it as to what the operating income impact is going to be, and that's why I gave you a range of 2.5 to 3. If you do a straight extrapolation of op income as a percentage of sales, that would take you into, on an annualized basis, you have a factor of 10%. Well, our op income percentage is going to be higher for these products than the 10%, 11% that you see. And so I really -- at this point in time, based on where we are, it wouldn't be appropriate for us to share anymore detail than that. It will obviously have an impact on sales, but there's actually a pretty significant impact as you can see or hear from the numbers we're sharing with you on the op income.

Okay. That's helpful. And last question, my recollection was that you said that if there aren't any opportunities to deploy the cash that you have in your balance sheet, you would begin to repurchase shares and so it looks like this quarter, you began to repurchase shares again. Does that mean that you're just a little bit further away from being able to do anything strategic?

Well, not necessarily and I'm not avoiding your question, but it is all about timing and in some cases as we've been deep into negotiations, that could require significant cash. We could put a hold or slow down the amount of repurchase. Other times, we see as we did this quarter a good opportunity to buy shares back and it can also be a reflection of the timing around doing something, having moved a little further out. So in any one period, that buying doesn't necessarily signal anything. It can, but it could be a number of different things. In this particular quarter, the share price did move down, and we felt it was a good value, a good opportunity to buy.

Your next question comes from the line of Andrew Gadlin with CJS Securities.

I wanted to follow-up on Slide 17, I think it is, that discuss the market conditions in North America as well as Europe. Could you comment on how the North American markets there through the quarter, meaning, did momentum accelerate or decelerate through the quarter?

I think it's down for this sector. I think the steel market decelerated through the quarter. We saw utilization rates, as I mentioned, go from 81% high. So in April, down to about 76% through June and we've seen utilization rates continue to decline further and that's in steel. Automotive, I think, continues to be strong, though, automotive really impacts -- are you -- you're talking about the industry market condition?

Yes.

Sorry. Automotive continuous, I believe, pretty strong. Paper, we indicated, an increase of about 1.5% and that's largely due to the -- we're past the shutdowns. I think if you saw International Paper, their earnings came out yesterday and indicated the impacts that the shutdowns had, and so if it's largely through those shutdowns, then we should see paper production pick-up slightly in North America.

And in Asia, you have a number of PCC satellites beginning productions this quarter and next. Could you comment on conditions in there?

We actually have 2 satellites that are coming online, 3 satellites coming online, but that's in the fourth quarter of this year. We have 3 -- 2 that are online now, 1 that continues to ramp up. Conditions are stabilizing. I think we have -- they're online. They're producing the PCC tonnages that we expected. We are having some startup costs associated with them and some stability around getting some local lime sources adjusted in our production process.

Is that typical?

That's typical. That's typical for a startup. It usually takes at least 6 to 9 months before, hey, they ramp up and we get stability in the process with the lime source.

So you indicated on SG&A that about half of the, call it, $2 million improvement was related to currency? Could you give a little more granularity on the other half?

Well, I think the other half has just been both in all of our research units and the business units just good cost control. Taking a look at as we go through areas of waste, we've also removed some costs in Europe, but we may probably look to redeploy some of that into Asia. So I think it's just been a diligent cost control in the areas that we find waste. It's an ongoing thing that we look at in the company quarter-over-quarter.

Doug, I would add, the implementation of Oracle in Europe last year had a very positive impact on us that we're seeing the benefits of that. We also, just as a matter of info, we've recently upgraded to Oracle R12, which is the new version, and it also will give us -- allow for doing some additional things to the enhancement that are built into that current version.

And so that -- you're expecting that to be a benefit for the coming quarters as well...

Well, yes. It's something that we will continue to get benefits from as we go forward and I would reinforce the ongoing deployment and utilization of lean principles and processes by all resource units and our business units. It's having an ongoing positive impact on improvement to where that -- that is a way of how we work in a company and it's a very positive thing.

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

If we could touch back on a comment you guys made and then Silke brought it up, regarding the European paper volume. If you take out the mill closures, what was your underlying operating mill volume in the region for the quarter on a year-over-year basis?

It's about additional 2%, Steve. So down...

So it was up?

No, it's down 2%. So if you take out the mill closures, there's still an additional 2% decline due to the conditions there.

Okay. And on a consolidated basis, what -- to what extent did pricing contribute? It sounds like it was a positive for revenue growth.

It is a positive. I've broken it out largely on by business unit, I have to get you the total consolidated number. We have it by segment. It's about -- I'd say it's about $1 million in PCC, but is -- a portion of that is pass-through of lime prices. So when you look at the revenue increases, it comes with the pass-through of that higher lime cost.

Okay. When you guys came into this year, I think there was a gap, right? Your cost had run-up through last year, pricing hadn't yet caught up. At this point, mid-2012, have your -- has your pricing caught up to where your cost inflation was?

Well, let's take that in 2 pieces. So if you look at paper PCC, we generally take cost increases due to lime at the beginning of the third quarter of each year and we get to pass those through at the beginning of the year. So for North America, we're caught up, but we'll see that increase again beginning in the fourth quarter. In Europe, we take -- in general, we take lime cost increases twice a year at the beginning and at the middle of the year and pass them through. Some of our contracts, we're able to pass -- are set-up to pass through immediately. So it depends upon which region you're looking at. Steve. In Europe, we're largely caught up now. In North America, yes, but we're going to see another increase coming in the third quarter.

[Operator Instructions] Your final question comes from the line of Rosemarie Morbelli with Gabelli & Company.

I was wondering if you could quantify the savings from raw material and energy costs and whether you see them continuing at that particular level and I'm talking dollars over the next 2 quarters?

I think if you look at raw materials in Refractories business, majority of the raw materials -- it's about $2 million of savings year-over-year. The majority of that's MgO and I think that's probably sustainable through the third quarter and into the fourth but then again, we're starting to purchase some raw material. Energy savings for -- mostly in Performance Minerals, so most of the energy we buy and consume is in the Processed Minerals and Specialty PCC. That's been about $1 million, $1.2 million. We've also taken some steps to try to lock-in some of that cost savings through conversion to natural gas. We do consume #6 and #2 fuel oil and with the prices of natural gas, we've taken some steps in our Specialty PCC business to move over to natural. So looking to make some investments to lock-in those lower costs.

When you say you are working towards converted to natural gas, does that mean a lot of changes within your facilities? Or can you already go between the 2 of them and you have not fully moved over to natural gas?

Rosemarie, we're primarily making quite a major conversion at one facility up in Adams, Massachusetts and I'm going to ask Doug Mayger to kind of describe that because it is a major project. Doug?

Yes. Rosemarie. We converted one of our kilns, large kilns over to natural gas. It was fired before #6 fuel oil. Just to put that in perspective, the natural gas savings for the second half of the year will be in the neighborhood of $1 million.

Okay. So this is on top of the $1 million to $2 million that Doug just talked about?

No, I think you're additive [ph]. So we're still going to consume -- so we've seen some #6 oil decreases over prior year. So we've captured that in this quarter. You're probably going to look at a little bit more than that because we're converted gradually. It does have an effect -- could have an effect on some of the lime, so we're moving over gradually. There could be some additional savings of that $1 million, but it's not a direct replacement, Rosemarie.

Yes, the other thing to keep in mind, we just started this up 2 weeks ago, Doug?

Two weeks ago, right.

So we're in the early stages of it, but so far, it looks pretty promising and we'll have a better feel in about 6 to 8 weeks in terms of what it's delivering for us.

What is behind the raising cost of lime?

Lime cost increases, largely energy driven and so what you're seeing is really a timing impact. Our lime costs, our lime prices or cost to us are based on energy that is an average over 1 year or 6 months prior. So really, when you're looking at lime costs in Europe in terms of increases there, it's based on the lime cost that was the 6 months prior, which really includes November through April, which lime -- our energy prices were much higher then. They only started to come off late in April or June. So that benefit of lower energy prices on our lime cost won't be seen until the adjustments next year.

Okay. And then on the refractory, a lot of the furnaces were relined in the first quarter, and so that affected your second quarter if I understood properly. How long does it take before they need some maintenance after having been newly relined and would we -- would you benefit from it in the third quarter even if the capacity utilization is lower? Could you help me on that?

Yes, we're going to ask Han Schut to address that, Han?

Yes, Rosemarie, thank you. Yes, so we had 6 relines in the second quarter and of course, it depends on when they took place in the second quarter, what will be the effect on the third quarter. But typically, it will -- it is 2 to 3 months before you are back to the consumptions levels that you saw before.

Okay. So that could affect some of the shut down of the lower capacity utilization, correct?

Yes, and we have built that into what Doug shared with you in that range of 10% to 15%.

Okay. And then lastly on the FulFill side, Joe, you talked about the potential of $2.5 million to $3 million of operating income from the new FulFill agreement. Is that a full-year number for 2013?

Yes. It would be if they track this line the way we believe they should, then it would be taking their contribution in the fourth quarter and basically annualizing them.

And it's something -- actually, your earlier question about sustaining margin levels, there are a number of things that will help to sustaining as you -- as we look through some of the downward pressure's on the business like steel utilization and lower volumes there. We will have things working to improve above that, like our FulFill 325 going into next year, like the significant savings in natural gas versus lime and the overall general improvement in the Performance Minerals business, which has done a very good job of raising its margin levels pretty much across the board with an exception or two. So again, you're seeing in the -- what's coming up against us is pretty normal in Doug Mayger's business, where you have a seasonal decline. And I would submit to you that the margin levels on a relative basis for that business are at a good level and we do believe we can sustain those next year.

Okay. Yes, I was going to ask you last for your crystal ball on 2013 looking at the bottom line.

That for -- we would appreciate your help with that in terms of maybe you have a better crystal ball and that is part of what I think is confronting many companies today, the ability to translate Europe into economic impact on the U.S. but really, economic impact on all world markets and what effect that is going to have, and that is still playing out right now and we're -- what we're sharing with you is the best we're able to see right now.

There are no further questions at this time. I'll hand the program back over for any further comments or closing remarks.

I just want to thank everybody for joining us today, appreciate it.

That concludes the call. Thank you very much.

Thank you, everyone, for joining. You may now disconnect.