Cabot Corporation (CBT) Q1 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Cabot Earnings Conference Call. My name is Angelique; I'll be your coordinator for today. At this time all participants are in a listen-only mode. [Operator Instructions]. I will now turn the presentation over to your host for today's call, Ms. Susannah Robinson, Director of Investor Relations. Please proceed, ma’am.

Thank you, Angelique. Good afternoon, everyone. This is Susannah Robinson, Director of Investor Relations. I would like to welcome you to the Cabot Corporation’s first quarter earnings teleconference. Here this afternoon are Patrick Prevost, Cabot’s President and CEO, Jonathan Mason, Chief Financial Officer, Bill Brady, General Manager of our Carbon Black product line, Eddie Cordeiro, General Manager of Supermetals, Ravi Paintal, General Manager of Metal Oxides, Fred von Gottberg, General Manager, Inkjet Colorants, Jim Kelly, Corporate Controller and Brian Berube, General Counsel. I would like to draw your attention to the fact that beginning this quarter, we have a slide deck that will accompany our earnings teleconference. This slide deck is available in the Investor Relations portion of our website. The slides will be downloadable in PDF format for two weeks following the earnings teleconference in conjunction with the replay of the call. I will remind you that our conversation today will include forward-looking statements. Forward-looking statements are subject to risks and uncertainties and Cabot’s actual results might differ materially from those expressed in the forward-looking statements. A list of factors that could affect Cabot’s actual results can be found in the press release we issued last night as well as in our 2007 Form 10-K filings with the Securities and Exchange Commission, copies of which are available on our website. Last night, we released results for the first quarter of fiscal year 2008, copies of which are posted in the Investor Relations section of our website. For those on our mailing list, you received this information either by email or fax. If you are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations. I will now turn the call over to Patrick Prevost, Cabot’s President and CEO, who will discuss the key highlights and business details pertaining to the Company’s performance for the quarter, and our outlook for the future. We will then turn the call over to Jonathan Mason, Cabot’s Chief Financial Officer, who will provide the corporate financial details. We will then open the floor for a brief question and answer period. Patrick.

Thank you, Susannah. Good afternoon. It is a pleasure to be with you today at my first Cabot earnings call. I look forward to getting to know all of you as we interact over the coming months and years. By way of introduction, I have now been with Cabot for about three weeks. I come to you with an extensive background in the chemical industry, and I am very pleased to have the opportunity to lead a company with such a long and admirable history as Cabot. During my first few weeks, I have spent time with several of our business teams and technology groups. Over the coming weeks, I will spend time with our remaining business teams, I will visit key customers and shareholders and I will travel to many of our manufacturing regions including Europe and Asia. Clearly, I am not yet in a position to comment to you about my assessments of any of our businesses, as I have yet to develop specific views about them. I would like to share with you, however, a few of my first impressions of the company as a whole. First, Cabot is a company with several, very strong franchises in the form of our core businesses. From what I have seen, these businesses have been well managed and we have positioned them for strong growth far into the future. This includes a very broad geographic footprint that has resulted from having made some key, and by my estimation and experience, quite bold decisions to position ourselves early in emerging markets such as China, South America and Eastern Europe. Second, the company has a very strong set of core technologies in the area of fine particles. Perhaps, even more importantly, we have a very good understanding of exactly what our core competencies are which has, and will continue to serve us well as we pursue new business development activities. Third, I have been very impressed with the caliber of people with whom I have interacted. It is of a level that one may not typically expect to see at a company of our size. We have a very strong management team, and the company seems to have been able to attract and retain at all levels, a group of exceedingly capable individuals. Last, but not least, Cabot has a strong sense of values that affects all things we do. It is exemplified by our world-class performance in the safety area. Now, I will turn to our financial results for the quarter, and some of the key themes. As I mentioned in the press release, given all that impacted us during the quarter, I believe our performance was solid. We are, however, not satisfied with the quarterly results. Looking at the key messages for the quarter. Firstly, excluding the feedstock related contract lag, the Carbon Black business posted another solid quarter. Secondly, Metal Oxides continued its pattern of strong results driven by expansion in China, Asia Pacific and South America. Thirdly, Supermetals continued to experience competitive market conditions. And finally, I will touch on the Company’s ability to withstand an economic downturn in light of the recent economic views. In the Carbon Black business, volumes grew solidly in our core product lines compared to the same period of last year. As you look through the detail we provided to you, one of the things that may strike you, are our China volumes. Compared to the same quarter last year, our volumes increased, but not at the same rate as in prior quarters. When compared to the sequential quarter, we had a decline. Thus, it is important to recognize that our rubber black capacity in China remains sold out. The impact you are seeing is a result of a curtailing of import of products or feeding volumes. This was necessitated by higher feedstock costs outside of China during the quarter, which would have resulted in selling products into the country below an acceptable margin. We however remain confident in the continued growth of the region driven by solid market demand in both rubber and specialty end use applications. We had a very successful start up of our performance products unit in Tianjin and look forward to our further capacity expansion in Tianjin towards the end of this year. When compared to the first quarter of 2007, profitability of the Carbon Black segment was significantly impacted by decreased unit margins in both our contracted and non-contracted business due to rapidly rising feedstock costs. The chart you see shows the PBT of our Carbon Black business as reported in the blue bars, and adjusted for the contract lag and LIFO impact in the orange bars. The contract lag represents the time lag in our ability to recognize feedstock cost increases through the pricing adjustments in our rubber black contract and our actual feedstock costs. We believe that given the significant impact of these two factors on our results, this chart helps to evaluate the trend of the Carbon Black business PBT over time. The unfavorable impact of the contract lag and LIFO impact was $17 million during the quarter. When contrasting against the $13 million positive benefit during the same quarter last year, it is a $30 million unfavorable swing in PBT. Sequentially, unit margins increased in both our contracted and non-contracted business. However this was almost entirely offset by the impact of the LIFO adjustment and the seasonal decline in performance products volumes. Given the formula timing of the contracts and what we have continued to see for feedstock costs during the quarter, it is reasonable to assume a similar development in the second quarter. Although the performance of Inkjet Colorants remained weak, we believe we have seen signs of stabilization in the aftermarket as evidenced by a 14% increase in volumes from the previous quarter. The weakness during the quarter was principally attributable to year-end inventory management by our OEM customers in the small office, home office market segment. Looking at our order for the first few weeks of January, we believe this was indeed the case. As we mentioned in the press release progress in the high speed segment remains unsatisfactory. Due to the slower pace of development, we have delayed our capital spending for an additional high speed production unit. The de-bottlenecking of our initial high speed capacity announced last quarter was successfully completed and we are comfortable that we are well positioned to be able to supply the market, as it continues to develop. Profitability in the Metal Oxides business segment continued to be strong. Volumes remained solid particularly in the regions China, Asia-Pacific and South America. Additionally, we are encouraged by early market interest in new product developments in our portfolio of specialty products. Turning to the Supermetals business, profitability declined significantly when compared to the prior year as last year’s first quarter contained the last of the favorable supply contracts. We discussed with you last quarter the highly competitive market environment we are facing in this business, and this situation continued during this quarter. We continue to focus on generating cash in this business, and are also looking for additional opportunities to reduce costs. It is unclear how long the situation will continue. The Specialty Fluids business once again had strong results with increased fluid utilization rates. This business had been on a track of expanding its geographic footprint beyond the North Sea and continues to make strides in that effort. We have many ongoing opportunities in the key oil regions of the world where high pressure wells that could potentially use our fluids, exists. Overall, we are pleased with the progress we are making. Finally, as we look more broadly at the company in light of the recent macro-economic and financial market movements, we believe we are well-positioned to weather a downturn, should it occur. Historically, Cabot’s businesses have been resilient to economic slowdown. Looking at the Carbon Black business specifically, our performance has held up well in such times. Also, if we experience lower oil prices, it will be a positive factor in the short-term. As you can see from this chart, our increased geographic breadth has lowered the importance of any single region on our results as our geographic mix had changed over time. We have become less weighed on North America as we have grown our sales in places like China and Asia-Pacific. We have taken a leading role in ensuring our capacity was well situated for our customer growth in these emerging regions. Additionally, our balance sheet is robust. And I will now turn the call over to Jonathan Mason, who will review some of the financial details of the quarter. Jonathan?

Thank you, Patrick, and good afternoon, everyone. I just have a few brief comments on four corporate issues. First, on tax, during the quarter our earnings benefited by approximately $14 million from the settlement of tax audits as well as various tax-related credits in China. Excluding these benefits, our tax rate on continuing operations would have been approximately 27%. We anticipated tax rate between 26% and 28% for the full year, excluding the impact of current and possible future settlements on the tax rate. Second, we invested approximately $33 million during the quarter in capital expenditures. These expenditures included spending on our continued Carbon Black expansion into China and on our energy centers. We continue to anticipate spending approximately $225 million for the full fiscal year 2008. Third, during the quarter our operations consumed approximately $42 million in cash. Our cash flow was unfavorably impacted by the effective rising Carbon Black feedstock costs on working capital. And finally, during the quarter we repurchased approximately 119,000 shares on the open market at a cash cost of approximately $4 million. We have continued to repurchase in the second quarter. Back to Patrick.

Thank you, Jonathan. In conclusion, I believe our quarterly results were solid, given all that affected us during the quarter. So far, I am pleased with our robust financial state and our leadership position in our core businesses. I am pleased to have the opportunity to lead such a strong organization and look forward to sharing with you my full impressions of the businesses and our strategies at an appropriate time in the near future. I would like to thank you all once again for joining us today. Thank you.

Thank you, Patrick. Angelique, I am going to turn the call back over to you for our question and answer session. Question and Answer

Thank you. [Operator Instructions]. Your first question comes from the line of David Beglieter of Deutsch Bank. Please proceed.

Thank you. Good afternoon. Patrick, can you share with us the data on Carbon Black volumes in prior recessions, how that has trended?

We have indicated… as I mentioned in the call that we were pleased with our performance through the last recessions and prior to the call of course we went through those numbers, and what I will do is ask Bill Brady to provide some background to that data set.

Well, I think if you go back over the past two recessions we found certainly a dip in the volumes for relatively short period of time, and then it bounced back relatively quickly. The other thing we saw in both recessions is that oil prices decreased, as economic activities slowed down and so that had an offsetting effect to a lower volume. So that’s really what we saw in the last two recessions.

And Bill, how much of your rubber black volumes are now in Europe… Western Europe and North America?

Rubber black, I would say… just a second, I will give you the exact number.

And one more question while you look that up. Just on Cesium Formate, despite higher utilization rates neither the revenues or profits increased? Can you just explain why that occurred?

Let me try to take that question while Bill looks at the data in terms of volumes for rubber black. Dave, the unique situation with the Cesium Formate is that it is a business where we rent out products and it’s a business that’s driven very much by projects. And as we go from project to project, it’s the portfolio of these projects that determines the performance of the business. So, it is a business that will have, underlying, some volatility due to that unique feature of it. I… what we are seeing is that we are seeing more and more demand for the type of product like Cesium Formate is, because of its unique features from a technical point of view allowing drilling at very high pressures and very high temperatures, but also because it is a much better environmental solution for these type of drilling. So we are seeing more and more requests. We are working with more and more people in this field and we are quite confident that we will start… continue to see some trends. However, performance on the quarter to quarter basis will be somewhat volatile because of the project nature of the business.

Thank you.

Bill?

Yes. And the percentage volumes those two regions combined is about 50% of the rubber black volumes.

Thank you very much.

You are welcome.

Angelique?

Your next question comes from the line of John Roberts of Buckingham Research. Please proceed.

Yeah. The last period… the last page of the release, excuse me, had some restructuring initiatives, Altuna, North America, Europe. Could you discuss that a little?

John, thank you for your question. I will ask Jonathan to provide an answer to that.

The most important restructuring initiative was the sale of our Australia, Altuna facility that we closed down, I guess, it was probably two years ago now, October of 2005, and we had an considerable gain on the sale of that property. Then the other restructuring initiatives like North America, as we had projected or told you two to three quarters ago, cost of the shutdown of our Ohio River facility, we can’t take those all immediately, so those will bleed into multiple quarters. And so we had some spend there. European restructuring initiatives there is a facility that we shut down some time ago that we had a residual loss on.

And then, secondly, the…

Land and building from that facility in Europe.

Okay. Thank you. And then secondly, the fumed silica business has often in the past been termed leading indicator business for Cabot or maybe a more coincident indicator. The fact that you had declines both in silicon and the electronic segment, the bigger segments within that business in the quarter, is that somewhat concerting to you if it still is a leading indicator type business?

John, I am not familiar with this leading indicator connotation, so I am going to ask Ravi to pick up this question.

John, a couple of comments. One, you are right, historically we have always looked at silicon as a leading indicator of where the business maybe headed. So we have been watching volumes and our silicon segment very closely. The small decline that we saw in silicon volumes in the last quarter, as best as we can tell almost had very little to do with a drop off in demand on the silicon side and it has more to do with operational motivations that in the first part of January, we believe had gone away. So while we continue to watch it closely we don’t really see any strong signals that a downturn has headed our way based on volumes in Q1.

Thank you.

Your next question comes from the line of Jay Harris, Goldsmith and Harris. Please proceed. Jay Harris - Goldsmith & Harris: A couple of Carbon Black related questions. First, if your raw material cost in China caused you to reduce your outputs that would suggest that you couldn’t get selling price relief. Was that other producers had lower cost, raw material costs or some other factors, could you delve into that for a moment?

Jay, I will try to answer the question. The message was that we actually during the high growth phase of our business in China, supported the local demand with volumes out of other parts of the Asian region. So we were importing Carbon Black into China in addition to the local production. In the last quarter, we actually pulled back on some of these import volumes which showed the decline in the absolute volumes sold in China. However, it did not actually indicate that we reduced our production in China, what we did is we pulled back on some of the export volume to China or import volume into China because of higher feedstock cost in Asia not specifically in China. Jay Harris - Goldsmith & Harris: Second Carbon Black question, what were the reasons for the consecutive quarterly decline in performance products. What were they related to?

Bill, would you take that question please?

Jay, it’s almost entirely seasonal. I mean, if you go back in time and look at the sequential fourth quarter to first quarter you will see very, very similar numbers. Jay Harris - Goldsmith & Harris: So, are we starting this quarter with better volume trends, the one we are in now?

We are very early into the quarter, but as I indicated, we check on the inkjet side because we saw weakness there in the first quarter, and the first few weeks of the January have given us conformation that it was inventory draw down by our customers. And similarly we are seeing in the first few weeks of the year, although this is a very short period of time and cannot be taken as a indication for quarterly performance, we have seen that volumes and order intakes have been robust. Jay Harris - Goldsmith & Harris: In the performance products?

Correct. Jay Harris - Goldsmith & Harris: Okay. Coming back to Cesium Formate, the language in the press release sort of suggests that in the last couple of quarters, there were some trade-offs. You had higher drilling activity, and then the drilling activity, I guess in the summer wasn’t as high but the daily rental rates went up because the fluid was on the platform for a longer period of time. Are we entering a period, well I guess in the… in the March quarter in the North Sea, in the northern hemisphere you can get storms that interrupt activity trends, but is it your sense that looking forward, drilling activity end will go up because… rental rates will go up because of drilling activity? And the second part of my question is basically what kind of a loss ratio are you experiencing, has it improved so that we are retaining more of the fluid for future use?

Let me try to answer the question. I would say to the first part of the question, the business is a very mixed business in terms of the geography and the types of wells and the types of technical problems our customers encounter. Therefore it is difficult to make any prediction. But what I can say is that we are continuing to see high level of interest and we are not, albeit us being a special provider to that industry, we are not seeing any reduction in the amount of drilling going on and especially not in the high technical drilling. On the other question, I believe again, each of the projects that we are working with has a different profile, and we can go from 30 days of usage of a drilling fluid in a project to up to 14 months, so you could see that the availability is very high. And similarly also, loss of fluid can be very different depending on the formation in which we are drilling. So it is very difficult to provide any indication in that respect. Jay Harris - Goldsmith & Harris: Or has there been any trend in terms of the recovery ratio of the fluid used in wells?

I am not aware of any indication in this respect, no. Jay Harris - Goldsmith & Harris: All right. Thank you.

Your next question comes from the line of Laurence Alexander of Jefferies. Please proceed.

Hi. This is Lucy Watson speaking for Laurence.

Hi, Lucy.

What is your pricing power in specialty blacks?

Bill, may I pass the question to you?

Our pricing power in specialty black, it is not bad. We have been able to do very well in keeping up with raw material increases pretty consistently over time in the business, and we would expect to continue to do that.

Perhaps additionally to what Bill just said, we have been doing price increases both on October 1st and on January 1st and that is not only because of raw material increases and trying to keep up with those, but also because we have a trey value pricing philosophy in this business and we are looking at extracting maximum value of the performance of our products in our customers’ end users.

Okay. And what is the demand outlook for the next couple of quarters in fumed metal oxides?

May I ask Ravi to take this question?

As I mentioned earlier on, we are only three weeks into our second quarter and our order book at this stage is looking robust, but it is very difficult for me to predict what’s going to happen in the coming months given the uncertainties in, obviously in the North American economy but what could happen globally as well. So all that I can say is that based on the very small window of three weeks in January, things look good, but I can’t say anything beyond that.

Can you give us any visibility by end market?

I am afraid I can’t, my earlier comment applied to any individual segment within the industries that we serve.

Okay. And just one follow-up. Given the current valuation, what is your willingness to become more aggressive on share buyback?

On share buyback I would say the situation we are in right now is that we have a $5 million authorization from our Board, and we are in very early stages of doing that share… that access that authorization. We will continue to look at the how, the business develops and how the opportunities for share buybacks will occur, and we will continue to consider that as a way to utilize our cash.

Thank you.

Your next question comes from the line of Jeff Zekauskas from J.P. Morgan. Please proceed.

Hi. Good afternoon. You have got an unallocated expense line with an $8 million profit. Can you tell me what’s behind that?

Jeff, thanks for your question. I will ask my colleague Jonathan to give you an answer to that.

That would be primarily related to the sale of our Altuna, Australia facility I think that’s where that’s showing up, yes.

I thought that that only influenced that line by $1 million, isn’t there a $11 million that ripples through the Carbon Black business? Isn’t that the way you show it in your last slide, your exit at one?

Okay so. Certain items of which Altuna is a certain item, an income certain item, we never would show those in the segment process. So the Carbon Black results exclude the benefit of the sale of that facility.

Okay. So that… so this certain item’s, this $10 million pre-tax certain item number ripples through the general unallocated expense?

Correct.

Okay. That’s helpful.

Yes.

And second question, in the Supermetals business, do you have a sort of a general outlook in… can you see into your customers demand at this point in time and when you look and when you look at the order pattern, do you see business accelerating or do you see business decreasing?

We… this is Patrick speaking, we looked at the demand situation in the capacitor industry which is the main application for our Supermetals and we are seeing continued growth in capacitor demand at fairly significant levels, I belive, in the high 6%, 8% a year. However what is working against us is that capacitors are getting, becoming smaller and smaller…

Yeah.

…and needing less and less of our super metals. But on a combined basis, if you look at those two effects, we believe that there is going to continue to be a 1% to 2% growth in demand for super metals coming from that industry sector.

Okay. I just have two more questions, if I may. Can you expand a bit more as to why there’s a slowdown in demand for inks in your high speed printing business?

Certainly. What I would say here is that it is not really a slow down in demand, it is actually part of the development and the marketing of a new technology, and with that you have bumps in the road. And where we are continuing to experience bumps here, we are not particularly pleased with the speed at which the high speed technology gets introduced in the market. But of course we can only influence part of that. And we are somewhat of a taker of how the end user accepts this new technology. So, I would say, this is the situation we are in, we are not seeing a decline, we are just seeing the normal slowness in development of new technology. And what I will do is I will ask Fred to provide, cast a little bit more insight into that.

Thanks, Patrick. So I think Patrick overall has got the message right in that its really about a technology being adopted and that takes time for that technology to be adopted. However, there was a decline year-on-year on volumes and that is based as far as we can understand, to what we call a launch bubble. And so when a new product goes out to the market they need to fill up the supply chain and that created an unrealistic demand last year versus what we seeing as sort of re-occurring demand of current units that are in the marketplace. So hopefully that answers your question.

So the launch bubble will last, I don’t know… so that’s a 2008 phenomenon and maybe you pick up in ‘09, something like that.

So it’s very difficult to predict a pick-up and when it will occur, it really depends on the selling of units, the growth of installed base and the number of pages printed. So it’s very difficult for me to speculate on when that will grow.

Okay. My last question has to do with the Carbon Black business in the second quarter. So because the way your contracts work, you got to see your prices move up as they catch up with raw material costs. And if you assume that raw material costs don’t change from this point, I assume that there will be some positive variance for you on a sequential basis, as your prices go up, though it may not be… it may not be very much. How do we think about it, that is, all things being equal, if your raw materials don’t change from here, should the second quarter be a materially better quarter than the first quarter?

Let me try to address this. We… a significant part of our Carbon Black business is contracted in and the contract structure which we believe is the right way to market this product because of its strategic nature, has built in a lag in terms of raw material to price, and this lag goes for three months, and we have tried in the graph we outlined to show the profit or the EBIT of the business adjusted for those changes to give a sense for the underlying business. I would say that also in my introductory words I mentioned that we are at this stage of the quarter, considering that the lag or the negative lag will also continue into the next quarter because of recognition of several months of raw material purchases.

So what’s the meaning of contract lag and LIFO impact? Does that mean that all things being equal there will be a day when we will get back the $17 million we’ve lost in the first quarter or the $13 million we’ve lost in the fourth quarter of ’07?

Well. Let’s first of all say that we didn’t lose anything, it’s just a matter of…

We lost it temporarily?

We… what will happen is of course as oil prices or raw material prices decline, you will start seeing the opposite effect and I mean in a symmetrical way. So I think what’s important is to understand how these contracts work and how they affect our PBT and also to understand that it can be symmetrical, meaning that it works both ways, either as a lead or as a lag, and in the last three quarters we have been in a lag mode and the indication for second quarter is that most likely we will also be in the lag mode.

So, in the third quarter we won’t be in the lag mode, all things being equal?

We, at this stage don’t have any information to provide any insight on that.

Well, if raw materials didn’t change, wouldn’t you lose your lag?

That’s correct.

All right. Thank you very much.

Your next question comes from the line of Saul Ludwig from Keybanc. Please proceed.

Good afternoon everybody. A couple of questions. In the performance of products area, while your revenues were up sharply year on year what was the directional change in there of profitability?

I will ask Bill to pick up on that.

Your question, Saul, is on year-on-year?

Yes, Bill.

Yes. So we don’t talk specifically about the profitability of the product lines.

Bill, what was the delta?

But remember last year’s first quarter was exceptionally strong for us because of what was happening with oil crisis and we actually had falling oil prices last year’s first quarter and of course we had rising oil prices this year’s quarter. So you can imagine what that did, that did in the business.

Would you say you had a negative swing of $2 million, $3 million, $4 million, $5 million?

Sorry, Saul, I can’t get that specific with you.

Okay. Let’s go just on the chart that you have on page five on the PBT for the Carbon Black business for a moment, where you show that on the adjusted basis your earnings fell modestly $3 million from $41 million to $38 million, and that’s a very good chart, by the way, and I appreciate you putting that together. You also say in your text… and by the way that adjustment really relates to the pricing lag versus your raw material cost… but you also say in your text that the PBT in the Carbon Black sector was improved by $14 million due to the sharp increase in volume, but particularly in the Carbon Black area where you are up 8% volume. So if we look at last year’s $41 million adjusted, you theoretically would have had on top of that a plus $14 million, to pick up on the statement that you have $14 million more from improved volumes, which it would seem like something had a pretty sharp profit drop because that $38 million adjusted number, didn’t really… would be even higher if you added in the $14 million on the volume. So it seems like… the reason I ask the question about the performance product and also Inkjet that’s combined, they probably had a negative swing of, one sec, maybe a $11 million year-on-year. Am I thinking about it the right way? And the loss in inkjet had to be a pretty substantial number. We are just using your data… is that the right conclusion to come to or am I missing something?

Jonathan, may I ask you to pick up on this?

Saul, the chart on the adjustments only relates to what, approximately 50% of our Carbon Black business, that is the contracts. Okay? So go back to Bill’s original point or comparing… and just think about spot business now there, we are comparing ourselves year-on-year to one quarter when oil prices fell all the way down to $50, right? It was precipitous fall a year ago, and then to this quarter that ended in December where we had the biggest quarter-on-quarter swing upward in the last 10 years on feedstock prices. So, our spot businesses had a very favorable environment a year ago, a very tough environment this past quarter and that would account, you have gotten the delta right, and that would account for most of the delta.

Of this $11 million, you say the biggest chunk would have come in lower profits in the spot business, in the non-contract business?

Due to the different…

Yes, that’s kind of the reason that you enunciated. So the biggest chunk would be in the non-contract business, some would be in the performance and some would be in the Inkjet? Will that be about the right way of putting it?

It’s the first… the major thing is the first two.

The first two meaning the performance lags and the non-contract business?

Yes.

Is that what you said, Jonathan?

Yes. That’s correct.

Great. Thank you, that helps on that question. The other question is, on Cesium Formate, when you rent a barrel for a day, now granted, it’s different prices for different jobs but Cesium Formate is Cesium Formate. What’s your average price that you charge per day to rent a barrel of Cesium Formate?

I am not sure we disclose that because of the competitive nature of that information. So if you bear with us here we won’t be able to give you that number.

Okay. How many… what is your… you show that you have $43 million worth of assets that you ran out. How many barrels is that, 40,000, 50,000, 20,000? I mean, what’s your inventory of Cesium Formate in terms of barrels, I guess? And is that increasing… I saw the dollar amount went up a $1 million year to year so it doesn’t look like it went up a whole lot, but what’s the barrel inventory, if you will?

We only provide the inventory in dollar terms, we don’t provide the inventory in barrels. And I think just to give you a sense, Saul, we… from what my understanding is that at this very early stage is that we replenish inventory based on losses so we are not producing or adding much Cesium Formate beyond what we are losing in the process of renting it and we continue, as the business grows to add Cesium Formate to our inventory. But at this stage we feel very comfortable with the way we manage this.

And the other question on, I think in the text you talked about that one of the reasons that you had the year-on-year decline is that last year you sold more barrels, relative to rental whereas this year you have more rental and less sales. How much, I mean if last year you sold a 100 units of Cesium Formate what was the percentage decline in… if you sold a 100 units last year, how many units did you sell this year?

My understanding is that we had a bigger loss last year than we did this year. And if I look at the way the business runs we can actually sell Cesium Formate either because we have loss in the drilling process or in the cabin formation process. Or it happens also that we sell Cesium Formate in times where very special needs are required where the Cesium Formate cannot be recycled and reused. So it’s a fairly complex and a difficult way to account for it and I am not sure that we would be able to get you that level of detail and would like to do that. Also, most likely my colleagues tell me that, no, we wouldn’t want that information to be known by our competitors because although we are one of the few Cesium Formate producers, we also have, our competitors have alternative drilling fluids and would be interested in that data.

And then finally, what was the delta in the losses that you incurred first in Aerogels this year versus last year and secondly, in superior micro powders this year versus last year?

I am not sure that at this stage we can provide an answer to this question, because we do not …

You have given the loss on Aerogels in your 10-K each year?

On a full year basis, Saul, absolutely.

Full year.

But just directionally on a quarterly basis, does the loss get less or does the loss stay about the same?

Aerogel is a very new development, it’s highly technical product that is showing growth in sales, albeit from a low base. We see a lot opportunities in this business, we believe there are options for us to grow, continue to grow the business. But again, we don’t provide any indication on a quarterly basis at this stage.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Bob Goldberg of Scopes [ph] Asset Management. Please proceed.

Good afternoon. I had a question on the Inkjet Colorant business. I was just wondering on the recent capacity expansion that you made in that business, where you are in terms of filling out that new capacity? And I believe I heard you say earlier that you are delaying some further capital spending in that business. What was the timing of that decision and what would cause you to rethink that situation with regard to the Inkjet business?

Let me perhaps start the answer and then pass it on to Fred who is running the business. As I mentioned in the notes at the beginning of this earnings call, the business on the high speed opportunity is not developing as fast as we would like. We have the bottleneck, the capacity and have been successful in de-bottlenecking the capacity to provide products for this application. However, we also had in parallel a project to add a new capacity, and this is the project that we have delayed at this stage because the development speed of the technology is not moving at the pace that was originally planned. What I would like to do is hand over to Fred perhaps to add some color to this.

Yes, let me try and provide a bit more context behind the expansion. Last year we had which we now believe was a launch bubble, so there was considerable demand and as a result we went down in de-bottlenecking as well as an expansion activity. As the quarters have gone by we have seen weaker demand in the high speed segment and as a result we revisited the capital expansion for the new line. We will continue to monitor with our customer on a regular basis, the need for additional capacity. And as we believe eventually the demand will arrive we will then work on to install the capacity at the appropriate time.

I guess, I am still not clear, is there now unused capacity in your system that’s unabsorbed?

Yes. There is considerable unused capacity in our system. We did the de-bottleneck, that’s provided us with additional capacity and so we believe we are very well prepared for when there is an uptick in the demand that we can meet the demand with the existing assets.

And is that a significant fixed cost issue in terms of not being able to utilize that capacity fully or is that a fairly minor issue for you?

No. Like with any new plant, when you install a new plant and it’s underutilized that does have fixed cost implications that you will experience in the period.

But in the whole scheme of Cabot, it is a minor event.

Yes.

Okay. And Patrick, just wondering… I appreciate those thoughts. Any thoughts, I know you have only been in Cabot for a few weeks but on the broader new products and business development portfolio, where… what are you most exited about as you look at the opportunities the company has?

Well, as I mentioned at the beginning, I see… I am not ready to make any specific comments about the businesses. But one of the reasons why I joined this company is I saw a very attractive portfolio, both in terms of well established franchises with further potential for development but also a set of business development opportunities that I believe have strong potential. And it’s that mix and the capability of this team and the technology competencies of this company that has attracted me to join. I believe there’s a strong potential here, but I, at this stage would like to not get into more details in terms of the various businesses, and I will hold my comments for a later stage that I have indicated that we would set up.

Thank you. I look forward to that. Thanks.

Thank you.

Your final question is from the line of Mike Judd of Greenwich Consultants. Please proceed.

Hello.

Hi Mike.

Thank you. This is Dave Goldman with Hertz [ph] Research. A couple of question, Patrick. I like you enthusiasm for the company. Regarding operational improvement initiatives, what you guys doing in your 42 manufacturing facilities to improve on operations regarding like Lean manufacturing, TPM and the Six Sigma and how are you measuring the benefits so you can let us know, hey these are the quantifiable results we are seeing and that’s why we are a good company?

With my experience in the chemical industry I look at that part of the activity as a bread and butter thing, and what I can say is that Cabot is doing an exceedingly good job in this respect. We have our finger on the pulse; we consider that cost and productivity is an essential part of running a solid and robust business going forward. We have got all the right tools in place. I don’t have of course details, I have gotten an overview from each of the businesses, but I believe we are on the right track. I also looked at, of course our historical data and I am seeing that we are doing the right thing in terms of continually managing our cost and our efficiency and productivity.

Well, what metrics are you guys using in your 42 facilities to make sure you are up to par in terms of throughput? Are you looking at OEE, RONA? How are you gauging that your facilities are running at full strength?

We, we don’t… these are… this is something we don’t disclose what we are using in terms of measures, because we have a set of measures we have which we describe the company externally and we will be sticking to that set of measures. What I can tell you is that we have measures in place and we are tracking those and we are doing benchmarking and comparing internally and externally the performance of our businesses.

I believe his line is disconnected. I apologize. There are no further questions from the audience.

Thanks, Angelique. Thank you everyone for joining us today. We look forward to speaking with you again next quarter.

Thank you very much.

Angelique, are we all set?

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the presentation. You may now disconnect.