Minerals Technologies Inc. (MTX) Q4 2012 Earnings Call Transcript

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 Q4 2012 Minerals Technologies Inc., Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Rick Honey. Please go ahead, sir.

Good morning. Welcome to our Fourth Quarter 2012 Earnings Conference Call. Joe Muscari, Chairman and Chief Executive Officer, will begin today's call by providing some perspective on our 2012 performance. He will be followed by Doug Dietrich, our Chief Financial Officer, who will review our fourth quarter and full year 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. It should also be noted that the earnings per share numbers in this presentation reflect a 2:1 stock split we completed in December. Now I'll turn the call over to Joe Muscari. Joe?

Thanks, Rick. Good morning, everyone. 2012 was Minerals Technologies' third record-breaking year in a row. We recorded an operating income of $110 million and earnings per share of $2.09, both all-time highs. EPS was up 11% over the prior year, and operating income increased 9% over 2011. Our Specialty Minerals segment had a record year. Contributing to this performance was the Performance Minerals operating group, consisting of Processed Minerals and our Specialty PCC line, which also performed at record levels. During 2012, we were able to execute successfully on our strategies of geographic expansion, especially in China and India, and new product innovation, which included advancing our FulFill technology in the worldwide paper industry, as well as new products in Performance Minerals and Refractories. Now I'll go into a little greater detail about this progress in a moment. A great deal of our success, especially in the deployment of business processes, practices and systems, is the direct result of our operational excellence lean initiative, which is now integrated and embedded throughout the culture of the company. Our employees work daily to develop new ways to become more efficient, by reducing waste and improving productivity. Today, because of these efforts, we are a strong operating company that is position to fully leverage improvement in the general economic environment and the growth opportunities we are pursuing. Our cash position remains strong as we generated $140 million in cash flow from operations during the year, and we continue our balanced approach on the use of our cash. November, we announced the 2:1 stock split and a doubling of our dividend, and over the course of the year, we repurchased $28 million of shares, all of which provided value to our shareholders. This slide provides some insight into the improvement we've made in earnings per share and return on capital. As I've said, our EPS for the last 3 years has been record-setting in our 20-year history. And we've seen steady improvement in return on capital, which in 2012, stood at 8.9%. And I should mention that this include our cash as part of the denominator in that calculation. Let's look at some of the advancements we made and our key strategies during 2012. China, as you know, is a major area of focus for us in Paper PCC because the paper industry there as well as the rest of Asia continues to grow between 5% and 7% a year. October, we announced a major contract with Sun Paper to build 100,000-ton satellite PCC coating facility at their paper mill in Shandong Province. In the fourth quarter, we also announced the 22,000-ton satellite PCC plant for paper filling at a mill owned by Jianghe Paper in Henan Province. We're continuing to execute this strategy well and are in discussions with more than a dozen papermakers in China. During the year, we also started operations at 2 new satellites, one in Thailand, the other in India, and we will expand 4 satellite plants in 2013: 2 in Alabama, 1 in North Carolina and another in Minnesota. On the new product front, our FulFill technology continues to gain momentum. 2012, 6 paper mills signed commercial agreements for our Fulfill E-325. Our Performance Minerals and Refractories businesses also continue to innovate, Performance Minerals launched new Optibloc talc blends for plastic applications as well as Titanium Dioxide extenders for paints and coatings. We now have 4 commercial accounts for the Titanium Dioxide extender products. The Refractories. We sold our first Scantrol, our laser measuring and application system, for a basic oxygen furnace at a Russian steel mill. The Scantrol units had previously been used in only electric arc furnaces. Refractories also sold and commissioned its first LaCam Torpedo Measuring Device, which saves steelmakers time and expense in measuring the refractory lining of Torpedo transport ladles that carry molten iron. The business unit also introduced the new fourth generation laser measuring device that is the fastest in the world, 17x faster than the company's previous version. In addition to new products, Minteq, the operating unit of refractories, signed an agreement with United Steel Company to perform all refractory maintenance at a greenfield steel mill in Bahrain that began operation in the third quarter. Minteq, working with the other refractory companies, is responsible for coordinating all refractory maintenance of the steel furnaces and the other steel production vessel. This is a new business model for Minteq, and we are exploring similar opportunities elsewhere. As I explained earlier, we made progress in the introduction of our FulFill technology. We now have 10 paper mills under commercial agreement and we are seeing movement with the other 25 mills where we are actively engaged. We are also quite close to signing contracts with 2 other mills where we are currently running product, and one of these may be signed as early as today or Monday. Our FulFill team has gained invaluable experience in the past 2 years in rolling out this technology around the world, and we will continue to move forward aggressively to work with papermakers in adopting these cost savings technology. As I said, 2012 was an excellent year for Minerals Technologies, with record financial performance and strong growth and profitability in our Performance Minerals business unit. Our operational excellence initiative, which encompasses all employees in every part of the company, continues to be the cornerstone that contributes to our improved overall performance. Just to provide you some insights, our productivity improved by 6% over 2011, and our employees engaged in 1,200 kaizen events company-wide. And these -- as a reminder, these are focused employee group events designed to eliminate waste or improve quality. This year, employees generated 9,800 improvement suggestions, ranging from improving efficiency to new product ideas to expense control. Approximately 3,700 more suggestions than were made in 2011 and of these, approximately 65% of the suggestions were implemented. New product pipeline is robust. We have more than 60 new product ideas in the pipeline and we have commercialized more than 30 new products since 2009. Our expense control efforts continue to bear fruit, as you can see in our results. In 2012, we reduced overhead expenses by 3% from 2011 and as you know, our primary focus at Minerals Technologies has been safety. In 2006, the company had an average safety performance record for a manufacturing company. While today, our safety record is at historical lows and we are approaching world-class in terms of our workplace safety environment. As I've related in previous calls, our corporate development team continues to aggressively seek out research and engage in numerous M&A opportunities. Our objective, as you know, is to find minerals-based companies where we can leverage our expertise in fine particle technology and crystal engineering, as well as move to end markets such as energy, environmental or consumer products, which would -- which serve to help reduce our cyclicality. As we look at 2013, we're anticipating continued slow growth in the U.S., with housing providing some promising potential lift. Europe remain somewhat uncertain, but things do seem to be stabilizing. The steel and paper industries there, however, remain problematic for us as further curtailments and restructurings are likely as we look forward. The Asia outlook, however, is good, and China is expected to continue to be a very positive environment for us. Our focus in this environment will be to continue to advance our strategies of geographic expansion and new product development, while maintaining our momentum and operations excellence and expense control. We will also continue to shift and add resources to support these growth areas. Further successful penetration of our FulFill E-325 is paramount from our priority-focused standpoint and continuing to penetrate China as we did in 2012 with more new PCC satellites is also high on our execution priority list. We expect continued success in both these areas. Overall, we have a positive outlook on 2013 and expect to continue on our performance improvement track. Now, let's turn it over to Doug.

Thanks, Joe. Good morning, everyone. I'll take you through our consolidated and business segment results for the fourth quarter and the full year. I'll highlight the key market and operational elements of our financial results in each major product line and comments on comparisons to both the fourth quarter of 2011 and sequentially to the third quarter of 2012. As Joe mentioned, we reported earnings per share of $0.50 versus the $0.52 per share recorded in the fourth quarter of last year, excluding special items. Our solid performance this quarter was due to better-than-expected earnings from our Refractories segment offsetting the Specialty Minerals segment performance, which was slightly below our forecast. In addition, our fourth quarter tax rate was 26.3%, which was lower than expected and improved our fourth quarter earnings by $0.02 per share. Our consolidated sales this quarter decreased 3% or about $8 million from the prior year. Foreign exchange had an unfavorable impact of $3 million or about 1% and the permanent and temporary paper mill shutdowns in Finland and France last year, as well as several steel mill shutdowns this year account for the remainder of the decrease. We continue to be affected by the weak market conditions in Europe. Our total company sales and operating income were down 8% and 18%, respectively. The company's cost to sales this quarter were 4% lower, resulting in a 1% improvement in gross margin. Specialty Minerals segment margins improved significantly over last year due to increased pricing, continued productivity gains and lower energy costs, while partially offset by the Refractories segment margins, which contracted from lower equipment profits this year. In addition, total expenses for the company were slightly lower than last year. Operating income increased 2% to $25.7 million and represented 10.5% of sales compared with 10% last year. Our return on capital for the quarter was 8.5% on an annualized basis. In the quarter, we generated $35 million in cash from operations, of which $14 million was used for capital expenditures. We repurchased $19 million of our shares in the quarter, and cash and short-term investments ended at $468 million. Sequentially, our consolidated sales decreased 2% and our operating income declined 8%, which was slightly better than our expectations. In total, our fourth quarter results reflect continued strong financial performance. As you can see from this chart, our earnings for the last 5 quarters are on a strong track of more than $0.50 per share. We have successfully managed to overcome the lost income from several steel mill shutdowns this year and the 2 paper mill closures in the fourth quarter of last year through new satellite PCC volume, new product sales, productivity gains and overhead expense savings. Looking at free cash flow and cash flow from operations, you can see the improvement in 2012 over 2011. Free cash flow at $88 million is 7% higher than the previous year, and cash flow from operations at $140 million is 5% better. This chart outlines the improvement in our operating margin over last year. Margins have increased in both Paper PCC and Performance Minerals, but decreased in the Refractories segment. The increase in Paper PCC was primarily due to higher profitability in North America and Europe as a result of productivity improvements, reduced operating costs and lower overhead expenses, which offset the effect of lower European volumes. Some of the European overhead reductions were the result of shifting R&D resources to Asia to support our growth initiatives there. The improvement in Performance Minerals was due to higher pricing, continued productivity gains and lower utility costs. In Refractories' lower raw material costs were more than offset by the declines in refractory product sales resulting from the weak steel market conditions in both North America and Europe. In addition, as we anticipated, this segment was impacted by significantly lower profits from equipment sales as several steel mill customers curtailed capital spending for the fourth quarter. This chart shows the changes in North America and Europe over the prior year in our main market segments. Uncoated wood-free paper production was down about 0.5% in North America and 1.5% in Europe. The construction market in the U.S., which includes both residential and commercial markets, was up over 6% from the fourth quarter versus the prior year. Automotive unit production in North America also continues to be strong with production rates up nearly 9%, but has leveled off somewhat as the fourth quarter was only 2% higher from third quarter levels. Steel production in North America was 2% lower than the fourth quarter of last year and 3% lower sequentially. The United States production decreased 4% both year-over-year and sequentially as steel capacity utilization rates went from 75% to approximately 72%. In Europe, you can see that the construction, automotive and steel markets are each down between 5% and 9%. On this slide, I'd break out our profitability improvement by region. North America drove about 1.2 percentage points of the margin improvement due to strong earnings in Performance Minerals and increased profitability in Paper PCC. Europe was affected by lower refractory product and metallurgical wire volumes, as well as lower equipment sales. Foreign exchange also affected Europe's profitability. Asia was affected primarily by lower equipment sales, which profits decreased approximately $1 million from the prior year. Let's go over the financial results within the Specialty Minerals segment. $19.6 million of operating income is 21% higher than the fourth quarter of 2011 despite a similar level of sales. Foreign exchange had an unfavorable impact on sales of $2 million or 1%, and the paper mill closures in Europe affected sales by an additional 2%. Excluding foreign exchange and the shutdowns in Europe, segments underlying sales grew 3%. Within this segment, Paper PCC sales, excluding the shutdowns and foreign exchange, grew 4%. The European PCC volume declines experienced last year were offset by the ramp-up of volumes from several new satellite facilities that began operations over the last 2 years. We will see additional volume growth from 2 new satellites we commissioned in the fourth quarter, 1 in India and 1 in Thailand, and from our 5th Indian satellite, which we expect to start up in March. I'll go into more detail and outline further our capacity additions in a minute. In other segment product lines, Specialty PCC sales were up 5%, talc sales decreased 4% and GCC sales were down 3%. Segment operating income in the fourth quarter increased 21% over the prior year driven by a 25% increase in Paper PCC and a 13% increase in Performance Minerals. The increase in Paper PCC was primarily due to operating -- lower operating costs and 9% improvement in productivity and good expense control. In addition, we're generating profit contribution from our new satellite facilities in the FulFill E-325 program. FulFill, for the full year, generated approximately $1.4 million in operating income. The improvement in Performance Minerals was due to higher prices, improved Specialty PCC volumes, continued productivity gains and lower utility costs. Overall, segment operating income represented 12.2% of sales in the fourth quarter compared to 10.1% last year, an increase of 21%. Sequentially, segment sales were 3% below third quarter levels. Sales in Paper PCC were 1% lower while sales in Performance Minerals were down 7% due to the typical seasonal decline in the construction market. Operating income increased 13%, which was more than the 10% decline -- I'm sorry, decreased 13%, which was more than the 10% decline we anticipated on our last call, primarily due to lower-than-expected talc and GCC sales. Looking forward, current indications are that first quarter sales and profits in our Paper PCC product line will be slightly better than the fourth quarter due to volume growth in Asia. But I'd also like to mention that given the continued weakness in the European paper market, as highlighted by the recent announcements by UPM to close or sell several of their paper mills, we may need to make further adjustments to our overhead in the region. However, there's been some positive news for us that the Alizay paper mill in France have been purchased by Double A Paper. Our satellite there remains in operating condition and we expect to begin supplying PCC to the mill when it comes online, most likely sometime in the second half of this year. In Performance Minerals, we expect profits to be down slightly from the fourth quarter as the first quarter is normally a seasonally low period of the year, and we are currently seeing an increase in energy costs. Overall, we expect the first quarter operating income for Specialty Minerals to be similar to the fourth quarter. This chart highlights the components of the 21% improvement in Specialty Minerals operating margin over last year. As I mentioned earlier, segment operating margins increased 12.2% from 10.1%. Volume declines in Europe associated with the paper mill closures impacted segment margins by approximately 1 percentage point. Currency also had a slight negative impact. Sales from our new satellite facilities, FulFill deployment, improved product mix in Performance Minerals and price increases improve margins by about 2.5 percentage points. Productivity improvements in both Paper PCC and Performance Minerals, lower utility costs and good expense control have also added nearly another percentage point to the margin improvement. Now let's go through the results within the Refractories segment. Sales in the fourth quarter were lower in both North America and Europe, and in total, were 9% lower than the prior year. Foreign exchange accounted for about 1 percentage point in this decline. The decline in North America was driven primarily by the closure of RG Steel's, Sparrows Point and Warren mill's last June. In Europe, it was driven by lower refractory volumes resulting from a 6% drop in steel production, significantly lower equipment sales and the impact of foreign exchange. Operating income for the segment decreased $2.9 million in the quarter to $7.5 million. $2.3 million of this decline was due to significantly lower equipment sales in the RG Steel mill closures. The remainder was due to lower refractory and wire volumes in Europe and the impact of foreign exchange. These factors more than offset the benefits derived from lower magnesium oxide costs. The segment operating income ratio was 9% of sales in the quarter. Sequentially, refractory sales were down 4% from the third quarter but were better than we expected due to higher refractory and wire volumes in North America. Segment operating income increased 4% from the third quarter, which was considerably better than we had expected on the last call. Our North America income came in better than expected due to favorable refractory product mix, overall higher refractory volumes and increased profits from our small non-steel pyrogenic product line, which benefited from onetime sales. In addition, our metallurgical wire product line improved due to favorable product mix in both North America and Europe. Looking forward, we remain concerned about steel production levels in North America and particularly in Europe, as production in both regions has been inconsistent. The recent announcements by ArcelorMittal regarding production curtailments in Belgium reflect the steel market uncertainty in Europe, and as a result, our refractory volumes will be affected in the region. Also the current low level of equipment sales continues to carry through into the first quarter, and profits will be lower in our non-steel product lines. As a result, we expect that our first quarter operating income for the full segment will be slightly lower than the fourth quarter. This chart shows the changes in the Refractories segment operating margin. The fourth quarter ratio was 9%, well below the 11.3% achieved last year. Refractory volume declines, significantly lower equipment sales and the weaker euro negatively impacted margins by nearly 5 percentage points. These factors were offset by lower raw material costs, primarily magnesium oxide, improved productivity levels and cost and expense control programs. These items contributed over 2 percentage points to margin growth. These charts illustrate our working capital and cash flow trends. Total days of working capital increased slightly to 59 days. This increase was mainly due to higher receivables and lower payables in the Refractories segment. Our cash flow from operations was $35 million in the fourth quarter, and capital spending for the quarter was $14 million and $52 million for the full year. Let's take a quick look at the full year. We had another strong performance, and our earnings of $2.09 is an 11% increase from the $1.89 per share recorded in 2012. This represents the third consecutive year of record earnings for the company. Our consolidated sales decreased 4% or about $40 million from the prior year; foreign exchange accounted for 3% of this decline. Excluding FX and the various paper mill and steel mill shutdowns we experienced over the past year, our underlying sales grew just over 1%. Our cost of sales decreased 6% driven by productivity improvements and good cost control, which resulted in a 3% increase in gross margin. We did a good job again managing total overhead expenses this year, which declined 3%. Operating income increased 9% to $110 million, and represented 10.9% of sales compared with 9.6% last year, a 13.5% improvement. Return on capital for the year was 8.9%, higher than the 8.5% achieved last year. We generated approximately $140 million in cash from operations compared with $134 million last year and we repurchased $28 million in our share buyback program, of which $19 million was repurchased in the fourth quarter. In total, we had the strongest performance in the company's history. Let me take a minute to review where we are with our Paper PCC geographic growth strategy. We're on track with the projections we communicated to you approximately 2 years ago, and I thought a summary would be helpful to outline the progress we have made, primarily in Asia. To give you some dimensioning of the volume growth associated with our new Paper PCC facilities, this chart shows the announced Paper PCC capacity that we have been deploying and will continue to deploy over the next 2 years. In total, these new satellites and expansions should add an incremental 525,000 to 625,000 tons of capacity by the end of 2014 and into the beginning of 2015. In 2012, we began operations at 2 new facilities, 1 in Thailand and 1 in India, with a combined annual capacity around 10,000 -- 100,000 tons. In 2013, we'll begin operations at our 5th facility in India and we'll complete 4 expansions in the U.S. with a combined annual capacity of another 120,000 tons. In 2014, we'll commence operations at 3 additional satellites, 2 in China and 1 in Bangladesh, with a combined annual capacity of 150,000 tons. These 2 satellites in China are our first new operations there in 7 years and brings our total satellites in China to 5. As Joe mentioned earlier, we're in discussions with a number of papermakers in China and India, which, if we're successful securing this business, could add an additional 150,000 to 250,000 tons in the 2014, 2015 period. It should be noted that PCC volumes in each satellite we build tend to ramp up gradually as new paper machines come on slowly. We also expect additional volume growth through 2014 from the new satellite opportunities we're pursuing this year and as well from the FulFill program as it gains traction. In total, over the next 2 years, we expect 500,000 to 600,000 tons of PCC volume growth from these initiatives, which represents a 15% to 18% increase in volumes from where we stand today. As I mentioned earlier, our fourth quarter earnings performance of $0.50 per share was above our expectations, primarily due to better-than-expected performance in the Refractories segment. Looking to the first quarter, we expect the Specialty Minerals segment profits to be similar to the fourth quarter, as improved PCC volumes in Asia will be offset by increased energy costs in Performance Minerals. In our Refractory segment, we expect profits to be slightly lower than the fourth quarter, as our volumes will be affected by the continued weakness in North America and European steel markets. Overall, we expect the total operating income to be of similar levels to the fourth quarter. However, net income will be slightly lower due to our projected higher effective tax rate. Now let's go to questions.

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

If I understood properly, you are expecting net income to be lower than last year in the first quarter, Joe? And what kind of gross do you expect for the full year?

Well, we are expecting a growth -- overall income growth that is going to be commensurate with the track that we are on, Rosemarie. As you know we don't give annual guidance and try to give you what we can see for a quarter out. So yes, we expect to be a little bit lower in the first quarter. But overall, for the year, we are targeting to be up on a year-on-year basis. And a look at the earnings track we've been on, on an EPS basis for the last 3 years, I would say, we're targeting to be in that kind of a range from an annual year-on-year increase standpoint.

Okay. And what kind of -- are you expecting a similar type of stock repurchase in 2013 versus what you did in 2014 -- I mean, 2012? I'm sorry.

Yes. It could be -- the potential is there to be more. Every year, every period is going to be a little bit different depending on where we are, the rate of cash that we're accumulating, but also more importantly, how close we may or may not be to a particular deal that has an effect on cash. We're going to stay balanced and which -- and we have another $45 million -- $47 million that we could buy shares on the current program. So I'd say, if you look at the last 3 years, 4 years, we're going to -- right now, from what I can see probably on that track, which might suggest that there could be more than 2012.

And Joe, if I may, you gave us -- you and Doug gave us a lot of details on the Paper PCC on the refractory. If we look -- so I have to go through all of that, that data. If I look at the new products that you have launched like Optibloc and TiO2 extenders, did they contribute to 2012? And what are your expectations for 2013 or '14, if you have to go out that far in order to see bottom line and top line type of contribution?

Yes. There are actually -- the products are different in terms of the earnings impact or the sales impact. The Titanium Dioxide is, right now, we're still positioning, so I'd say the sales are relatively small. We have 4 accounts and it's -- we're looking at maybe more towards later 2013, '14, '15. We've also seen a softening in Titanium Dioxide prices, which is reducing some of the pull that the market has had around that. But over the longer term, we think we're going to see but nice and steady growth in that, but we're still in the embryonic stages. The Optibloc is, we've got a much stronger position. I'm going to ask Doug Mayger, our Business Unit President for Performance Minerals, to maybe elaborate a little further down.

Rosemarie, so the value proposition for the Optibloc line is really [indiscernible] films. And then in addition to that, you have this thing called antiblocking, which is a layer that creates -- you're able to pull the films apart easily, and you see that in polypropylene and polyethylene films. And the sales in 2012, about $3.25 million, and we expect that to increase in 2013.

Okay. And then lastly, on the tax rate, why was the tax rate lower in the fourth quarter?

Rosemarie, the tax rate was lower similar to last year at 26.3%. It's largely due to mix of earnings, also some tax planning strategies. We take dividends toward the end of the year, which provides some tax credits, foreign tax credits. So it's a mix of things that affect the fourth quarter to get us to our full year rate. Full year rate was about 28.75%. It's a little bit lower than it was last year.

So is that what's were expecting for 2013? That particular tax rate? The 28.5%?

We're at 28.75%, so probably going to be singular next year.

Your next question comes from the line of Silke Kueck with JPMorgan.

I was wondering whether I can start with a FulFill question. You said operating income from FulFill-related sales were $1.4 million in 2012. And I was wondering whether you can talk about like maybe how much tonnage that represents or level of sales, and whether that's related like the 10 contracts that you actually I think passed today?

Silke, for competitive reasons, as we've indicated before, we really prefer not to disclose and we haven't been disclosing what the tonnage and the actual sales number is, because the technology fee is a very important part, important component of the total pricing for the product.

Okay. The satellite mill expansions in the U.S. in 2013, when are those suppose to come online?

Yes, I'm going to ask D.J. Monagle, our BU President, to talk about that a little bit. D.J.? D. J. Monagle: Certainly. Silke, most of those will come online more towards the fourth quarter. Got some issues just making sure that we go through all the permitting processes and everything else. But fourth quarter, they would come online and we would expect them to ramp up relatively quickly given the familiarity those customers have with our products.

And are those customers rolling over to the FulFill product line, or they're just -- this is just an expansion of existing product, of the existing PCC product? D. J. Monagle: So we've already announced, to date, one North American FulFill customer, Silke, and these are for expansions that are in the U.S.. So the best way that I could put it is that these expansions enable us to do some things with the customer that include application of the FulFill product line. So FulFill is a factor in this for sure.

In terms of the TiO2 product that you've commercialized, did you work with all of the major paint producers? And is it a product that have some incremental sales this year? Or can you quantify what you may expect to to 2013, in any form?

We do work and have been working with many of the majors, running trials. The sales are relatively small -- were small in 2012. But I wanted to ask Doug Mayger again just to share a little more around that. Doug?

Right. So Silke, the -- we have really 2 products, the ALBAFIL T10 and the ALBACAR. T10, and it's, like Joe said, it's been relatively small. We do anticipate incremental sales in 2013, and we have been working with most of the major paint companies also with non-paint companies where we've received some traction, such as the grout industry that is also looking to displace TiO2. In the paint side, we can get the upwards of 10%, maybe 12% replacement on the high end. And then on the low end, maybe around 5%, depending on the paint formulation.

Are you allowed to divulge which paint companies have tested this?

I cannot do that.

Okay. And lastly, I was wondering whether you can just like discuss the current business trends. When I look at North American paper shipments, if I look at steel utilization rate, like everything seems to have slowed quite significantly in the month of December. And I was wondering whether you can talk about how things look in January, and maybe how important the individual months are in the first quarter? Do you do most of your business in March or is it more in January, less in February? Do you have like any guidance on that?

Yes, I'll maybe start and then ask others to chime in as well. The -- I guess the way to think about the company in a, sometimes, in a simple way, but I'll repeat, the pattern, the fourth and first quarters are the shoulders and the peak period for us because of the seasonal nature of some of our product lines, and our businesses are going to be in that second and third quarter. And particularly, the second quarter, will tend to be a little higher. And so we'll see subject to differences quarter-to-quarter, or like the fourth quarter, we've seen over the years because of equipment sales due to how budgets are affected in the steel companies. We might see a ramp-up in the fourth quarter, or like this past year, we saw a significant cutbacks. So that affected what the fourth quarter looked like because of the equipment sales. What we're seeing is equipment sales appear to be slow, for instance, in steel, going in -- that slowness in the -- or really non existence of sales in the fourth quarter equipment, that slowness is carrying over. So we're seeing that. We're seeing, however, steadiness in paper. Our paper is positive right now, so that's kind of solidifying. It held up, I think, well last year, in general. But from time to time, I think you see some shakiness. You run into period of mill maintenance or some cutbacks in productions for periods of time. But by and large, I would describe it as steady. The Performance Minerals business, what we've been seeing is now for over 2 years is, although it's subject to the seasonality more so than the other 2 businesses that I've described, it has been on a continuous improvement trend, upward trend. So we've seen sales improvement and profitability improvement. Doug, you want to add something to that?

I was going to say that we've seen also the construction markets have improved this year. So as Joe mentioned, though the seasonally low period, the fourth and first quarter, are starting to see some pickup over last year in the construction markets. So that's positive for us.

And in terms of differences in month, Silke, March is can be sort of a swing month. It's a good month to look at coming out of spring. East Coast, depending on the weather, will have an effect on us because of our plants. We have 2 plants in Performance Minerals on the East Coast. And obviously, during the winter, weather has somewhat of an effect. It hasn't been too bad. We had a cold spell beginning of January that have had some effect on us. But by and large -- and last year, if you recall, it was a very -- on the East Coast, it was quite warm.

Your next question comes from Adam -- Andrew Gadlin with CJS Securities.

I wonder if you could comment on -- or approaching the question about this a little differently. With about $1.4 million of EBIT in 2012, what was the run rate exiting the year?

Exiting the year, we were pushing -- I'm trying to remember the number. We are probably at a run rate of approaching $1.6 million to $1.9 million. We indicated on the last call, we would -- we expected -- and the call before that, expected to come in at, for the whole year, $1.4 million to $1.7 million. We came in at $1.4 million. And we also on the call indicated that for 2013, what we were seeing is that op income based on a run rate, we're seeing $2.5 million to $3 million. That is still holding for us.

And that is for next year?

For next year, yes.

2013.

For 2013, okay. And as you look at some of these other plants that Doug went through, what kind of run rate do you think you could have coming out of next year?

Coming out of next year? Oh, first of all, I think the mills that we have up there, D.J. mentioned the expansions in the fourth quarter. There's some applicability there. What we'll see as we put these mills in those regions, they are -- some of them are free-sheet. Now let me mention the Sun Paper, the coated paper application, so it's not a necessarily one that we look at as the FulFill opportunity. But the others are uncoated free-sheet, and there's opportunity in each of those for additional FulFill up-income generation.

Is there a round number that we can put that?

I think, Andrew, it really depends on the traction that we get through this year. As Joe mentioned, it's really hard to predict 2014 at the moment. We look at 2013 where were coming off at the run rate this quarter, as Joe mentioned, around $1.7 million. We think we can double that. We're still on to $2.5 million to $3 million for '13. But we will see as we gain traction here in North America and at these mills when they start up, what 2014 looks like.

And looking at the new mills that are coming on for 2014, meaning 152,000 tons capacity, would I think that the EBIT associated with that could be similar to -- I mean, are proportional to the EBIT, let's say, from 105,000 tons this year -- in 2012 and 120,000 in 2013?

Yes, they're similar. I mean, again, the Sun Paper is a coating facility, so prices are different there. A different process, different cost structure with that one, though. The other one's also...

Did higher or lower?

The pricing is higher. The margins are somewhat probably a little bit lower on that one. Coating is expensive from a cost standpoint. I think the other uncoated free-sheet mills that we're putting in there will be slightly lower than what you see in North America and Europe. Prices are a little bit lower in the Asian region.

Okay. On the refractory side, can you talk a little bit about the pyrogenics product that was a source of strength this past quarter?

8 Sure. Pyrogenic is just a very small non-steel, actually a graphite product line we have in our Refractories segment. I only highlighted it this year because we had a number -- actually, a little bit much higher than any other period, onetime sales that came through in the quarter. So it generated some benefit, which we weren't expecting those sales to come true in the fourth quarter. We projected to be down from the third quarter when we're actually up, and that was just one small piece of the contribution to it.

Got it. But you don't expect that to kind of trend into Q1 or 2?

No. I mentioned that that's one of the reasons we see the Refractories being slightly lower, not just refractory volumes and the market conditions we're seeing, but also we won't have those onetime sales.

And can you talk about the Bahrain refractory management agreement, how that came to pass? And you mentioned that you'd like to grow that relationship or that business model and talk about some of the things you're doing there.

Yes, that started with some basic development work from a business development standpoint on looking at opportunities around the world, and looking at what we could bring from an added value standpoint. And it's actually quite an interesting story, I'm going to ask Han Schut to elaborate a little further and give you a little more sense of what was involved and where we may be going with that as well. Han?

Thank you, Andrew, for your question. So first of what if you look for this greenfield facility that they are putting in, it's an investment by the customer of $1.2 billion and they're going to produce approximately 1 million tons of steel a year in their electric arc furnace, so it's a completely greenfield. And it's the first time that we have entered into a cost-per-ton contract where we are responsible for full refractory maintenance from start to finish. So this includes the bricks and the flow control of refractories also. This is a 3-year contract, with a total value between $25 million and $30 million, and we started, together with the customer, in 2012 in the third quarter and so we expect that for next year, our revenue will increase just on this concept alone by approximately $8 million. And it's, of course, a completely new business model. So normally, we do a -- we are very strong in BOF, full managements and electric arc furnace environments. But for us, this is a -- I know you could say, a new business model that we also want to extend to other customers. I think in this partnership what is special is that we have very strong technical salespeople on the ground in Bahrain and we are working very close in cooperation with the customer. So if operating conditions change, we also adjust the contract accordingly. And we're looking, of course, to extend this also to other regions and also further into the Middle East.

Excellent. Would you imagine that this type of agreement would be most appropriate, or only appropriate, even for new facilities?

No, not necessarily. I think the main issue is the cooperation with the customer and whether you can come to an agreement where you drive improved productivity in the steel mill, and that, in combination with total low refractory cost. And if you can get to such a partnership, it can be applied in any region and also for existing steel mills.

You said 3-year contract $25 million to $30 million. When would the contracts start, or when would revenues associated with the contract start?

It started the end of the third quarter.

Okay. And it's ramping by, I think you said, $8 million?

Approximately $8 million in 2013.

Andrew, that contract started at the end of the third quarter, but that mill is just now ramping up. So I think it's a little bit behind from where they are predicted at the end of the year. It's probably 50% in terms of their production.

And when did production start?

They open the mill and started the mill, end of the third quarter, probably October.

Yes, right.

All right. And profitability on this contract is in line with your existing business?

Yes, yes, it's in line with our existing business.

[Operator Instructions] Your next question comes from the line of Steve Schwartz with First Analysis.

Seemingly simple questions, I think. On FulFill, is that run rate generally consistent from quarter-to-quarter?

Not necessarily. You have some starts and stops, I guess the best way to describe it, it can be a little bit herky-jerky. And in terms of running and -- things -- when I mentioned in my remarks, that it has been -- the team has learned a lot in the past 2 years. Part of that learning is adjusting to changes in things, simple things like, which are not that simple, grades of paper that are being made, types of paper, those can cause where you're -- let's say, even running for 2 or 3 months with FulFill, that brings in a new type of paper that we have to make adjustments to in the product and sort of ramp up. So this is not a smooth straight line. It requires a period of stability and in some cases, even with some of those 10, we're still going through that process right now. D.J., you want to...

Okay. So as it becomes a bigger part of your profit, we need to be prepared for maybe a little bit more volatility?

Yes. I think that's a fair way to look at it. And that's why I'm trying to give you numbers and ranges, and it gets a little difficult to point -- pinpoint exactly because of that. But over time, we're continuing to build greater technical fees and higher volumes and in turn, higher total operating income.

Okay. The expansion of these 4 U.S. satellites is surprising news, and so I'm just wondering if you could give us a little color around what's driving that. Is this a speculative move on your part? Is it a mix change by the paper maker with their production? Are they doing paper machine expansions? What's driving it?

Let me ask D.J. Monagle to kind of walk you through that. D.J.? D. J. Monagle: Yes. So Steven, as I've said before, we've only announced one North American FulFill customer. We expect to be announcing more in time. So what I would say is, we -- for these particular mills, we've hooked up with some world-class performers. They're going to be around for a while. They have -- we've helped them improved the utilization of our products, and we've got several pathways to -- for them to use more of our products, and including in those pathways is FulFill. So I'm not announcing that these are all FulFill customers, but I'm just saying that the Fulfill is a part of our consideration here.

I have to admit, D.J., it is exactly that earlier comment you made that made me mention the word speculative, in a sense. And I don't mean that negatively, but it sounds like you're preparing for potential new business. D. J. Monagle: That is a proper way to think of it, Steve.

Okay, very good. In the Refractories business, gentlemen, you showed steel being down from 2% to 5% year-over-year. The business itself was down, revenue was down about 8%. What was the reason for that? Was it all equipment? Was it lower pricing? Did you lose some share?

To recall, Steve, RG Steel was a large customer of ours and they filed for bankruptcy, so we took a higher than trend line hit or change hit year-on-year from the steel industry. So we had more exposure on average to RG Steel, and that's what affected us. Doug, you want to elaborate a little further on that?

Yes. I think the majority of the decline, as Joe mentioned, was RG Steel in sales. Also the lower equipment, but that contributed a piece of it. I think the reason that you're getting to it why operating income was better -- much better mix, as I mentioned. We have better mix in the refractory products, more BOF sales in other mills than EAF. We have better mix in wires as well. So really, the sales decline more so than the market was RG, and really had its full impact the second half of the year.

You have been talking about 2 mill closures in the second and third quarter. Now you're talking 4. Are the additional 2 part of RG?

There are 2 mills from RG, there were 3 other -- actually 2 others that were in Europe. They affected mostly this full year over last. There was some sales to those in the fourth quarter of last year, which is why I called them out. Those were European mills. They were ArcelorMittal and at [indiscernible] steel mill.

Okay. And then -- you've been generous with time. If you have time and can answer what the 2013 raw material outlook is like, I'd appreciate it. If you need to move on, I certainly understand.

No, not at all. So we're seeing some increases in magnesium oxide prices over where they were at their lows last year. A little bit of stability recently in magnesium oxide, that's one big cost. We've seen some line cost increases that's largely due to increased energy prices, we'll expect to see some of that this year. I think the major impact that we're seeing is what I mentioned in my comments is energy, specifically electricity cost on both coasts are affecting us in the Performance Minerals business. So I think the majority of the impact on our raw materials I think would be the utilities this year.

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

Just a quick question. You've done a good job cutting cost. I mean, is most of what you can do, done already, I mean, at this point, because of what you've done over the last 2 years?

Well, I was asked that question 4 years ago. And just to put it into perspective, part of what we're doing that I think differentiates us from other companies that from cost reduction standpoint is that, we've taken a continuous improvement approach. And really, the philosophy and the principles behind that is that the small incremental improvement across the globe throughout all parts of the company add up over time. And so we're constantly finding ways to save money. And as we bring new business in, one of the things it's doing is we were able to produce that new business in a more efficient way. But we've extended our operational excellence to all departments in the company, all resource units. So whether it's our finance department, our legal department, they're basically employing the principles of lean and how we operate. So there's just a constant positive pressure to make smart decisions on cost, find alternatives, find better ways to do it. So we expect to continue to have savings from that over time. And that's what the suggestions that employees make. Many of those are around ways to save money, and you just don't run out of ways to save money. At the same time, as I said, you combine that with a strong emphasis we have on growth through the geographic expansion. FulFill, we can get extremely good leverage on new sales that we're bringing in to the company.

Okay. And then you mentioned before about something not being a FulFill opportunity because it's coated paper or FulFill doesn't really apply. Is that's something you're working on that could be down the road where you could use FulFill for coated papers as well? D. J. Monagle: Yes, this is D.J. So our target market right now [indiscernible] attraction is in the uncoated grades. We do see applicability to the coated paper grades, but it's not a focus for us right now. The biggest bang for the buck is getting everything proliferated in uncoated free-sheet. So over time, will we be getting into the coated business? We believe so. Early indications are that, that there's a value equation. And one of the dots that was on the graph that Joe had shown earlier is in fact a coated location, so we're moving toward in that area just not with the same level of progress in the uncoated grades.

Your next question comes from the line of Jay Harris with Goldsmith.

Two questions, basically one on the steel industry and one on cost reductions. The model that you're implementing and borrowing, does that have to be up and working for some time before you'll be able to sign up additional customers? And does the model work in all areas of the world where you're serving steel industry?

I'll start off, Jay, and let Han complete it. But the -- we haven't -- I mean, we are looking at other opportunities for the model -- to apply the model, and we're in discussions with at least one company right now. But we also want to make sure that the model works. We believe it will, so we want a little bit more experience with it. But based on what we've seen so far and the experience with the Bahrain mill was very positive. So that keeps looking very good for us. Now I'll let Han add to that. If you would please, Han?

Yes. You asked, Jay, specifically about the applicability on a global basis. I think it very much depends on the customer environment and the customer relationship. So if you are in a relationship with the customer where you can drive improved steel productivity and lower total refractory cost together, and there is a fair contract when operating conditions change that you can also adjust the total refractory cost, then you can apply it in that environment. In the case that you are there as a refractory supplier alone and the steelmaker will just drive for productivity only, then you take the risk that we don't want to take. So it very much depends on your cooperation with the customer.

The key point I would emphasize here or the key takeaway is changes in operating conditions. One of the things that basically kills the cost-per-ton model is when conditions change and that causes, one, either the customer or the supplier to either have unusually high gains or unusually high losses. What's different about this contract, we have a customer who has set parameters with us that allow for change over that period, and it requires total openness and total trust between the customer and the supplier. That's sort of what's different about this model.

Do you have candidates in other geographies at this point?

Yes, we have candidates in other geographies as we speak, yes.

All right. And a little further on steel. It's my perception that you've not followed the steel industry as the center of -- geographic center of manufacturing has moved into Asia. Is that going to change?

Well, Asia is, of course, very broad. If you talk to China and if you look just specifically to Minteq, we are a value sales company where we sell productivity and we sell total refractory costs, like I just mentioned. In China, we are also involved with major steel companies where we can and where we find customers that are looking for this kind of relationship. We have been very successful with that in India, which has been a major growth market for us, and there, we signed acceptance of our, you could say, our value equation. In China, it has been limited so far. So it depends a bit on the country.

All right. Switching to what I think has been an exceptional record of getting costs out of the business. If we get into a more robust business environment, are any of these reductions going to have to be reversed?

Reversed?

Reversed cost savings.

No. I'd say, nothing comes to mind. We're -- what we've been driving is sustainable reductions over time. So it's a sustainability model that we -- our focus was -- I don't know if you recall, but the first 2 years of developing lean or my first 2 years in the company, I said, "Please don't expect any savings to come out of what we're doing in operational excellence." It takes 3 to 4 years to really build this into a company and bring about the culture changes. And it is because this is sustainable. It is for the long-term that this isn't something that goes away when you have a recession. That's not a high overhead process. It's involvement of all employees operating differently, operating in a way where we ask folks to bring their hearts and minds to work every day and help us figure out how to do things better. And that really is at the core of it.

And, Jay, also just to add to it that over the past 5 or 6 years, we've really changed the structure of that overhead. We have a shared service model in the company that we've been adding to and expanding to other regions. So that efficient kind of back-office model can be scaled with new sales. We won't have to add those expenses. We can leverage that overhead.

Jay, if I can ask you a question. Are you concern about the ability to swing up in terms of sales? Well, it just occurs to me that some of the efficiencies that you've installed are a reflection of static or declining volume.

No, it's quite the opposite. For instance, we have -- and for $1 billion company, this is a little unusual. We have a complete and total shared service -- business shared services. So every function that you can think of that should be in the shared services model, we basically have. And if anything, we're not fully utilizing it. And that's why as we talk about leveraging acquisition that come into the company, we're extremely well-positioned to bring in and get efficiencies or inefficiencies from other companies and capture them. So it is, in terms of where we are today, the ability to step up is we've got a lot of leveraged capability in that.

But where do you think your operating expense ratio -- let's take 3, 4 years from now when the business climate is, let's say, robust, you're suggesting that your operating expense ratio would be significantly lower?

Well, we've -- if you recall in 2010 when we set our 5-year targets, we were targeting to have an operating income margin improvement of -- going from 10% to 12%. So we're looking at a 20% improvement. Part of that improvement comes from leveraging the overhead. Another part comes from having higher valuated products from the new products that were out there selling today, so it's going to be a combination of both. Depending on companies that we bring in to the company that we integrate will have an effect on that particular ratio. But if you look at where we've been tracking, that also is now in a continuous improvement mode. So we're making year-on-year improvements that range from 5% to 10% from a productivity standpoint. From an overhead standpoint, we're probably running in that 2% to 4% range.

I just heard one of you say that you have access on a shared -- I've forgotten the terminology, but on a shared services basis, you have excess capacity.

We do. We have a capability that has both inside -- it's inside the company and outside. So we have business services that support us in places like Romania, India. So we have a very robust model that can flex up very easily can also flex down if it needs to.

So there should be a substantial improvement then when you start to grow your revenues more aggressively?

Yes.

Your final question comes from the line of Rosemarie Morbelli with Gabelli & Company.

A lot of additional questions I had were answered. But I was wondering, Joe, if you could give us some feel for the progress you are making on the M&A front, and whether we will see something in 2013?

Rosemarie, I would love to do that. I would love to give you more granularity of what we're doing, but unfortunately, we really can't. Other than to say we're active, as I've said. And active means, look, we're in discussions with companies, we continue to identify new targets and we're at various stages, so I really can't tell you anything more than that right now other than this is a very serious effort for us.

Okay. And just on the expansion of the satellites in the U.S., so I understand you are preparing to maybe do some trials on FulFill. But are those expansions on the paper mill side due to the fact that some of the capacity from the shutdown mills has been transferred into those 3 or 4 entities and therefore, require more PCC? Or is it just brand new capacity?

Yes, I'm going to ask D.J. to cover that. D. J. Monagle: Rosemarie, there is incremental gains and capacity at the mill. What you're mostly seeing is our ability to put more PCC in the sheet.

Okay. So not the mill making more paper? D. J. Monagle: They may be making incremental more in system with the normal progress of a world-class mill. They figure out over time how to improve their productivity, but the major increase in those tons is really about us putting more PCC into their sheet.

Okay, great. And just really quickly on the Bahrain model. When you say that the profitability of that particular model is similar to that of the Refractory business, are we talking about that, let's call it, 9.5% operating margin for your 2012 year? Is that a level that we are -- that you are referring to?

Similar, Rosemarie, yes, it's in the similar profitability to the refractory products that we sell. Remember, we also partner with other suppliers as the general contractors, so we're buying and providing the service. We have a Steel Mill Service on-site and then we also sell our own products, our own refractory products, which are sold at similar margins.

And is the model mostly adoptable -- I mean, for greenfield steel mills or can old mills be retrofitted to that particular model?

No, it's not only for greenfield mills. Han mentioned earlier, it's applicable to other mills as well, but it's the type of contract, the type of model that's different than other cost per tons that are out there in the market today.

Right. And then you'll have to kick out everybody who is working at that mill at the moment, right ?

I think so, yes.

I think we're done. Thank you for your interest in Minerals Technologies. And everybody, have a good day.

Thank you.

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