Cabot Corporation (CBT) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Cabot Earnings Conference Call. My name is Philip, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Erica McLaughlin, Vice President of Investor Relations. Please proceed.

Thank you. Good afternoon. I would like to welcome you to the Cabot Corporation earnings teleconference. Last night, we released results for our third quarter of 2014, copies of which are posted in the Investor Relations section of our website. For those on our mailing list, you received the press release 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. The slide deck that accompanies this call is also available in the Investor Relations portion of our website, and will be available in conjunction with the replay of the call. I remind you that our conversation today will include forward-looking statements, which are subject to risks and uncertainties, and Cabot's actual results may 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, and are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly in our last annual report on Form 10-K. These filings can be found in the Investor Relations portion of our website. I will now turn the call over to Patrick Prevost, who will discuss the key highlights of the company's performance. Eddie Cordeiro will review the business segments and corporate financial results. Following this, Patrick will provide closing comments and open the floor to questions. Patrick?

Thank you, Erica, and good afternoon, ladies and gentlemen. We achieved another strong quarter of business performance in fiscal 2014. Volumes increased as compared to the prior year in both our Reinforcement Materials and Performance Materials segments as demand in our key end markets improved and we commercialized new capacity. So far this year, we have improved adjusted EPS by 20% as we continue our strong year-over-year performance. At the corporate level, we received cash proceeds of $215 million in April from the final payment related to the sale of the Supermetals business. We used this cash to strengthen our balance sheet and during the quarter, we repaid $256 million of debt. This reduction in debt, along with the outlook for the company resulted in Standard & Poor's reaffirming our BBB+ investment grade credit rating. The Purification Solutions segment has not delivered the expected improvement this quarter due to lower volume, a less favorable product mix and continued unplanned maintenance costs. The last 4 quarters of Purification Solutions have not been a good reflection of the underlying profitability of this business. We have been dealing with a number of ongoing plant reliability issues that we believe are the result of underinvestment by the prior owners. And this has been in excess of what we had anticipated. While I would not call any single event significant, combined, they have impacted profitability by increasing operating and maintenance cost, as well as constraining product availability. We have an operations improvement plan in place to ensure that we will fix these issues and I'm very confident we could do just that. Needless to say, I've been disappointed by the performance, and I'm committed to turning the situation around. I believe we're well on our way to fixing the situation which has overshadowed all of the work we have done to position ourselves for continued growth, developing new products and implementing price increases to enhance margins, upgrading our processes and standards and implementing a global business organization operating on one ERP platform. This business has extremely attractive end markets that are growing at greater than GDP growth rates, due to the macro trends in environmental, food and water. With these strong fundamentals and our global leadership position, we continue to see the business delivering $150 million to $200 million of EBITDA in 2017. I'm also pleased to announce that today, we completed the sale of our Security Materials business. We sold the business to SICPA for $20 million, which represents approximately 3x revenue. I will now spend a few minutes talking about our Specialty Fluids business. During the third quarter, we announced that our cesium reserves available for mining would likely be limited due to the technical challenges and economic feasibility of proceeding with a major development project at our mine in Canada. This mine is the main raw material source for our Specialty Fluids business. In light of these circumstances, we have been reviewing the business strategy and how to best maximize the value for our shareholders. First of all, we will continue to support both the oil and gas sector, as well as our fine cesium chemicals customers. Secondly, and this is somewhat different, we will spend increased time and resources looking into accessing additional cesium whether through future mine projects, the processing of lower grade sources or more efficient reprocessing of the return material after the lease. While we have not fundamentally changed our strategy, there will be a shift in how we operationalize it. More so than in the past, we will be favoring rental jobs and we'll be highly selective about projects in order to conserve cesium atoms. As a result of these actions, we anticipate that the annual earnings of the business may be 10% to 20% lower than what we have experienced over the last few years, while the quarter-to-quarter earnings variability will remain due to the project nature of the business. Over the life of the business, we believe this approach will ensure that we maximize its value. I will now turn the call over to Eddie to discuss the financial results in more detail. Eddie?

Thanks, Patrick, and good afternoon. Adjusted EPS for the third quarter of fiscal 2014 was $0.88, which was an increase of 5% over the prior year quarter. Total segment EBIT from continuing operations was $109 million, driven by strong volumes in our Reinforcement Materials and Performance Materials segments. I'll now discuss the details at the segment level beginning with Reinforcement Materials. During the third quarter of 2014, EBIT for Reinforcement Materials increased by $12 million as compared to the third quarter of 2013. The increase was due to 13% higher volumes as compared to the prior year. Volumes improved due to the commercialization of our new China capacity, our acquisition in Mexico and recovery in global demand. Raw material purchasing savings and benefits from energy efficiency investments also contributed to the improvement in earnings. Sequentially, EBIT was consistent with our second fiscal quarter as 6% higher volumes were offset by higher maintenance spending due to the timing of plant turnarounds. Additionally, onetime benefits in the second quarter of fiscal 2014 did not reoccur in the third quarter of fiscal 2014. As the global leader in carbon black, we announced a few months ago that we had entered into an agreement with the U.S. EPA to invest in technologies to reduce the emissions of SOx, NOx and particulate matter at our U.S. carbon black plants. As expected we have begun to incur operating and capital costs related to these investments. In order to recover these increased costs and maintain our operating margins, we're implementing an environmental surcharge on carbon black produced and sold in the U.S. effective January 1, 2015. As we look ahead, we continue to be optimistic about the industry trends. Overall, Europe has been improving but is leveling off a bit. South America remains challenging in the near term, and we expect to see continued economic growth in Asia and North America. In Performance Materials, EBIT increased by $6 million as compared to the third quarter of 2013 due to 5% higher volumes in both Specialty Carbons and Compounds and Fume Metal Oxides as demand improved in our key end markets. Sequentially, Performance Materials' EBIT decreased by $6 million primarily due to a less favorable product mix, higher maintenance spending and 5% lower volumes in Specialty Carbons and Compounds. The decline in our Specialty Carbons and Compounds volumes was driven by European demand during the quarter. This was partially offset by 7% higher volumes in Fume Metal Oxides due to strengthening underlying demand and successful commercialization efforts. Looking ahead, we expect to see continued growth in automotive, construction and consumer applications in 2014. We are on track to achieve a record EBIT this year, driven by successful commercialization of recent capacity expansions and new product introductions. Advanced Technologies' EBIT decreased by $14 million from the third quarter of fiscal 2013. The EBIT decrease was driven primarily by lower activity levels in the Specialty Fluids business which caused the EBIT in that business to decline from $18 million in the third quarter of fiscal 2013 to $10 million in the third quarter of fiscal 2014. In addition, a $5 million royalty payment in the Aerogel business in the third quarter of last year did not reoccur this year. Sequentially, Advanced Technologies' EBIT increased by $2 million as compared to the second quarter of fiscal 2014 due to higher volumes in Inkjet Colorants. As we look ahead, we expect to see continued lower levels of activity next quarter in Specialty Fluids, and we will be implementing our revised Specialty Fluids business strategy that Patrick discussed. Adjusted EBITDA in Purification Solutions for the third quarter of 2014 was $7 million, which compares to $12 million for the same period last year. The year-over-year decrease of $5 million was driven by lower volumes, most notably in the gas and air and water sectors. Higher costs primarily associated with maintenance and a higher allocation of functional and indirect costs also unfavorably impacted results. Sequentially, Purification Solutions' EBITDA decreased by $2 million driven by a less favorable product mix and higher fixed costs. Overall, volumes increased by 1% driven by an increase of 5% in the non-gas and aero sectors. I will now turn to corporate items. We ended the quarter with a cash balance of $101 million, and our liquidity position remains strong at $748 million. During the third quarter, we generated $145 million of adjusted EBITDA and decreased net working capital by $6 million. We received cash proceeds of $215 million in April from the final payment related to the sale of the Supermetals business which was used to repay debt. We reduced debt by $256 million during the quarter and used $45 million of cash for capital expenditures. We recorded a net tax provision of $20 million for the third quarter, which included $1 million benefit for tax-related certain items. Excluding the benefit from certain items, our operating tax rate on continuing operations for the second quarter was 27%. We are anticipating an operating tax rate of 27% for fiscal 2014, and we expect capital expenditures to be in the range of $175 million to $200 million. And I'll now turn the call back over to Patrick.

Thank you, Eddie. As we head into the last quarter of fiscal 2014, I would like to provide an update on our $5 earnings per share target for 2015. Over the past 3 years, we have substantially implemented the key foundational elements of our plan to achieve $5 per share. And they include continued investment in growth businesses and regions such as our fumed silica and carbon black expansions in China and carbon black debottlenecks in Indonesia and South America. We also launched the broad commercial excellence initiative to drive margin improvement, which can be seen in the increase in adjusted EBITDA margins to 16% year-to-date. We have introduced a number of new products to the market to serve fast-growing and valuable applications. We've also implemented key asset rationalizations, such as the close of our Malaysia carbon black plant, the restructuring actions in Advanced Technologies and the repositioning of our Specialty Compounds business. And we've also completed a number of key portfolio moves. We sold our Tantalum and Security businesses and acquired our activated carbon business, as well as our partner's shares of our Mexican carbon black joint venture. The combination of all of these action has increased our adjusted EBITDA from $398 million in 2010 to $529 million in 2013, which represents a compound annual growth rate of 10%. For fiscal 2014 we are on track to continue to improve EBITDA again at this level of growth. Over the same time period, we've also returned approximately $350 million of cash to our shareholders through consistent payment and increases in our dividend and some share repurchases. With all of this in place and the new projects and activities we have in the pipeline, I'm very confident that the company has the operating capability to deliver $5 earnings per share. However, for this to happen, we also communicated that achieving $5 earnings per share will require a sustained mid-cycle economic environment. While the environment has been improving as of late, we have not seen a normalized global environment for some time. As a proxy for a normalized environment, we previously noted that we needed to see a 10% to 15% improvement in volumes in our Reinforcement and Performance Materials segments over 2012 to achieve this target. In 2013, we actually experienced a modest decline in volumes as compared to 2012. And this year, we're seeing some growth with organic year-to-date volumes up 5% to 7%. However, this still means we would need to see close to 10% improvement in volumes in 2015 to be operating at the level that is necessary to achieve the $5 earnings per share target. Although this is not impossible, at this stage, it is hard for me to say today that a volume increase of that magnitude is likely for next year. The other area where we expect significant improvement is in our Purification Solutions segment. Although the business has suffered from operational end market issues since our acquisition, we have a handle on these issues and we're 9 month away from the beginning of the MATS implementation. The business will see substantial improvements in the second half of 2015, with additional step up in earnings in 2016 and '17. The 2015 planned improvement will, however, not be sufficient to support a $5 per share delivery for Cabot. At this stage, we would believe that it will take us a year longer than anticipated to achieve our longer-term target of $5 adjusted EPS. Our results track record confirms that the company is well-positioned for continued earnings growth and I'm confident that we can achieve $5 of adjusted earnings, albeit a year later than planned. With that said, we continue to be optimistic about fiscal 2014, with a positive year-over-year demand trends in our Reinforcement Materials and Performance Materials segments. Year-to-date, our adjusted earnings per share is 20% higher than 2013, and we have delivered EBITDA growth each year over the last 4 years, and we are on track to make it a fifth year in 2014. We're confident in our ability to continue to deliver earnings growth for our shareholders. Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

[Operator Instructions] And our first question comes from the line of Kevin Hocevar with Northcoast Research.

I was wondering if you could give us some color around your outlook for Reinforcement Materials' volumes. Give indicated your outlook was for moderate growth going forward. Just wanted to get a little bit more color on what that means. Volumes were up pretty strong this quarter, organic was 5%, NHUMO was 8%, so I'm assuming you're talking about that organic piece. So could you give us some more color as to what you expect out of that going forward?

Most certainly. So Kevin, as you're saying, we're quite pleased with the volume developments and what we have achieved during the course of fiscal 2014. And what I would say is that as we look forward and as we engage in conversations with our customers around the tire industry, we're sensing that the expectations for the year -- for the rest of this calendar year and perhaps moving into 2015, we believe that the tire industry is looking at 3% to 4% growth. This is what I meant when I said moderate growth. We certainly would like to see an excess of that, and we would certainly welcome that. However, at this stage, I would say we are more into this moderate growth forecast than anything beyond that.

Okay, great. And in terms of the Norit business, it seems like there's been additional operational issues that seem to keep popping up every quarter. And it sounds like you have action plans in place to take care of this. But I'm just wondering, is this having any ability on -- your ability to win these MATS business as they're being put out for bid here as we're preparing for MATS? And how confident are you that you'll have these issues resolved come April 2015 when the demand really picks up?

Yes, so as you can hear from my earlier address, we're certainly not and I'm certainly not pleased with the performance of the business. We've been seeing operational issues that we hadn't expected. We, during the diligence on the business, have seen that it needed some additional maintenance and smaller capital to take care of the fact that previous owners haven't taken care of the business the way we would have. However, we've had a few more surprises than we had expected, and we're continually working at getting these out of the system. These are, in general, smaller things that are happening but it's the combination of these, several of these that have been putting some pressure on the business, not only in terms of costs but also in terms of availability. But if I move to the MATS side of things, we're very confident that none of this will affect the MATS opportunity in a way also because the more recent assets are the ones that are actually going to be supplying MATS and we've had much less issues on that front. So I would say in summary, we're very confident on the MATS support and where we stand with that, and we're working very hard on fixing the issues that have been popping up recently.

Okay. And just my final question, I'm wondering if you could comment on the U.S. carbon black environment over the next couple of years, particularly '15 -- 2015 and 2016. Because I've seen reports that suggest that based on all the onshoring of tire capacity that's coming to the U.S, to note [ph] carbon black capacity, that utilization rates should become really tight in the '15, '16 timeframe. So I guess, I'm curious to your thoughts on how you view this playing out, and do you believe the industry in the U.S., in particular, how the pricing power of the industry should be kind of as that unfolds?

Well, we're certainly pleased to see the opportunity for us to serve the North American market developing in a positive fashion. This is certainly very different from what we have seen in the last decade where we're also pleased to see our customers investing in tire capacity in North America, which is new and very welcome. Now some of that capacity will be designated to replace some of the less efficient and effective assets. However, there's an expectation that the North American market will grow, and we will certainly be there to participate in that growth. Now in terms of the total market, we believe there's still capacity available to meet that growth in demand over the coming years. And we will be continuing to monitor this growth in demand and looking at, certainly, our assets in North America and that includes our assets in Canada and Mexico being available as the market grow in the U.S. But we also, of course, have the option of bringing material in from other assets, but I would say expansions in North America are also a way for us to meet any demand that will exceed the current capacity. But I would say in general, we're quite confident in our ability to support the industry.

And our next question comes from the line of James Sheehan with SunTrust.

Could you comment on where your overall carbon black utilization rates were during the quarter and what your expectation is for the fourth quarter?

Yes. So we're continuing to see utilization rates in the 80% to 85% range, which has been somewhat in line with what we saw in the last couple of quarters, perhaps one quarter. And as we look forward, of course, we should see that tightening as the demand increases. But again, back to the comments I made earlier, we were banking on perhaps, a more moderate growth, 3% to 4% going forward, which should result in a moderate ramp-up of that utilization.

And were your carbon black prices during the quarter up sequentially?

Well, we'll be looking at the market forces, but at this stage, there's no indication in this area.

I mean, for the quarter you just reported, the fiscal third quarter, was that up or down or flat relative to the prior quarter?

Well, we don't really provide -- for competitive reasons, we don't provide more granular -- granularity on prices. I'm sorry about that, James.

Our next question comes from the line of Ivan Marcuse form KeyBanc.

In China, your volumes were up very strongly sequentially, and I assume that's because your new plant has been -- is coming online. So just for looking out the next couple of quarters, should volumes sort of rise at that pace for the next couple of quarters as the plant fully ramps on or is this sort of a onetime thing or could you walk -- give the dynamics of how this plant should be -- come up and how that should impact your China volumes on a sequential basis?

Okay. So first of all, I would say if you look at the growth in volumes that we report in our press release, you can see that on a quarter -- a year-over-year basis, we're indicating 11%. I would say that, that is more the type of growth that we're expecting for the business in China. The current indications for the first half of the year is that tire production has been up between 8% and 9%. So we're kind of in line with that on the carbon black front. And the 26% that you're seeing on the sequential side of things is more related to a seasonal effect which is the lumpiness that Chinese New Year creates for us. So I would say, back to that 10%-ish growth, I think that's what -- considering that the economy in China has recovered, that's what we would be expecting. And certainly, that has been supporting, strongly, our new Xingtai investment, so we are very well on track with that growth there.

Okay. And then just looking at the other side of the world, you mentioned that South America has been weak, which it has been, but it did improved sequentially. Was that -- is this more of a seasonal aspect or is that an indication that maybe things are getting a little bit better there? And is there a certain region or country like Argentina, et cetera, that's weaker than others that's sort of driving down the total region? Or is it sort of generally the same story across the board in that area?

I would say that it's, in general, a weaker story across the board and I don't see that changing in the near term, at least not until the end of this calendar year. I would say that we may have better business -- a better business environment in Colombia, but the Brazil, Venezuela, Argentina geographies where we have assets have been quite weak. Now coming back to the sequential change which looks quite positive for South America, this is actually related to a unique situation with a new customer win, and has somewhat distorted the numbers and you have to put it also in the context of South America being a somewhat smaller region than the other regions we have.

Okay. And then you talked about [indiscernible] through your surcharge to cover the costs of the EPA in North America, is surcharge, is that something that needs to be negotiated with your customers? And will it be enough -- you may have said this and I missed it, enough to cover the full, the total cost or does this put you sort of in a cost disadvantage relative to maybe other competitors that having or have not settled with EPA or are planning to?

So the intent here -- and actually, what we're implementing is a stated surcharge which would be the same for all of our customers. And the intent here for us is to recover the cost of both the capital and operating costs that will come our way over the coming years. So this is a surcharge in a way. And it will be implemented as of 1st of January 2015, and we've structured it so it will be covering the costs that we'll incur.

For my last question then I'll check back in. Have you talked about MATS starting to come through in April 2015? Do we -- should conformance of Purification Solutions sort of charge at this level for the next couple of quarters until we get into the second half of your fiscal '15, or do -- or will MATS allow the demand to sort of start to ramp-up in maybe the first or second quarter of fiscal '15? How is that sort of going to go? And how will that impact your overall operating results at least for the next couple of quarters?

Okay. So considering the size of the MATS opportunity and the ramp-up between '15 and '16 and the fact that we'll have a 2.5-year in '15 and with respect to MATS, we expect to the second half of the year to be stronger than the fast first half of the year.

Right, will that -- will the first half be similar to 2014?

So the -- our expectation for next year is to bring the business into profitability which has been, clearly, what we were hoping to do this year. We've been -- we've had a few setbacks, but what I was saying is that we're clearly keen on getting this in the right place and having a 2015 that is more akin to what we can perform within the Purification Solutions segment. Now, of course, I mean, we -- this will assume smooth operations and no new surprises but clearly, at this stage, that's what we're looking forward to.

Our next question comes from the line of Laurence Alexander from Jefferies.

This is George D'Angelo sitting in for Laurence this afternoon. Can you guys provided a little bit of an update on trends in the aerogels business?

So, George, we've seen -- as you could see from the press release, we've seen a decline in the revenue of the Aerogel business during the last 2 quarters. And the decline that you see in terms of revenue is due to 2 factors. One is a factor related to the lack of royalties that we had received in the past that are not recurring this year. And the second effect is that we have exited the oil and gas business, which has been a nice revenue generator, but has not actually been providing profitability for us. So the business has been concentrating in the areas and niches that it has the most impact and the best bottom line performance and those are niches such as -- and one of the larger ones, such as the insulation, building insulation and building materials business in Europe. But we've also seen some very good inroads in the coatings, industrial coatings area and the daylighting, which is the application of aerogel inside of polycarbonate sheets to provide insulation but still have some light coming through that -- those -- that insulating material. So these are the 3 areas we are focusing on and it has resulted in a decline in revenue but we're still in a place where we believe that we have strong potential with this unique material.

Our next question comes from the line of Jeff Zekauskas. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: You talk about instituting a surcharge having to do with your higher environmental costs. I don't think any of the other carbon black players in North America have signed agreements with the EPA or are bearing higher costs. So would it be difficult to actually put a surcharge through since my imagination is that you'll be higher priced than your competitors?

So Jeff, thanks for the question. We clearly will have this issue to deal with. But let me just tell you that we have been in contact with our customers for a month already on this issue because the regulatory environment is -- has actually -- or will be such that we will incur a significant additional cost to run the carbon black business. And for our customers to have reliable and high-quality supplies there's a need for them to understand that higher cost will be part of the game in the future and that they will need to think about passing on these additional costs all the way to the end consumer. The other point I would make is that we understand, from what we've heard, that all of our competitors are going through the same type of negotiations that we have gone through with the EPA and we believe that they will be facing the same additional costs in the near future. So our belief is that the entire industry will be in the same boat in having to deal with that same challenge going forward. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. In Purification Solutions, can you sort of divide the operating losses into the, I guess, difficulty in operations versus what the underlying profitability of the business is?

Brian. So let's use this quarter perhaps as an example, and we've indicated that we had issues with regard to our reliability and that there was slightly weaker volumes and a mix effect and all in all, I would say that each of these 3 buckets are about of a similar size. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: So the business continues to lose money even if you were operating it adequately, is that the -- at the current level of revenues?

I would say that's correct, yes. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And in the moderation for Reinforcement materials demand, you have a benefit from the NHUMO acquisition. Is the moderation in demand that you're talking about, is that inclusive of NHUMO or exclusive of NHUMO? In other words, is volume -- is your overall total volume going to become, I don't know, low single-digits or something like that inclusive of NHUMO or exclusive of NHUMO in the fourth quarter?

It will be exclusive of NHUMO. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Exclusive of NHUMO, okay. And in cesium formate, have you effectively ruled out plans to expand the mine's capacity? Is that unfeasible? And so now, what we're really doing or what you're really doing is finding a way to maximize the output as the mine depletes itself.

Actually, we're -- the original plan that we had in terms of accessing areas of the mine that we wanted to access has not actually worked out. And in a way, it was economics of that set us back in terms of the complexity of what needed to be done to ensure safe and reliable mining. We, however, have and continue to have work going on in terms of smaller projects around the mine, to access additional cesium. And we will be proceeding with those. And then we're going to be looking at other ways to achieve access to cesium for the future. These are -- they may be around the mine, in the sense that we may have lower concentration or in and around the mine, but they will also be around recovering more cesium from some of the fluid that the rent and recover, in addition to the fact that we will be spending more resources looking at other geographies around the world to access cesium. There are some known sources, albeit at lower ore concentration -- or cesium concentration levels which will require additional technology and different extraction mechanisms to achieve. So this is where we're going to be spending more of our resources in the future to extend beyond the 5 years visibility that we have today. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then lastly, with the extra costs that you're bearing or the extra expense that your bearing because of the environmental requirements, are those extra capital costs or are those in addition -- extra capital costs and operating costs?

These would be both capital and operating costs. So the capital will be over a defined period of time with, of course, additional capital but at a lower rate to maintain the equipment. And then operating cost as the assets get started up. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: What's the magnitude of the surcharge?

The -- we -- I would rather not get into that. We've been communicating with our customers as of last week. So this is something that I'd like to keep between us and our customers for the time being.

Our next question comes from the line of John Roberts with UBS.

After January 1 when the surcharges are in, will you break out for us how much of the Reinforcement segment revenue change is due to the surcharge?

No, we won't break that out.

Okay. Because -- will it be meaningful enough that we'll ask about it or we won't notice it?

I would say that it is designed to recover our costs and we're -- we have designed it in a way that it's as close as possible to the recovery of our capital and our operating costs over time.

I used to think in the cesium formate business that you needed an oil field services partner, but now I'm sort of thinking maybe you need an ore or a mining partner in that business? Is it a little bit like the Tantalum business years ago, looking for new sources of material? Is that something you might -- I guess, let me rephrase the question, is this a Cabot core competency to go out and discover new sources of ore?

I would say that it is not our core competency. However, in the world of cesium, we may actually be one of the experts. So in a way, we're experts in this area, but clearly, not experts in scouring the world for new sources of cesium. So we're certainly going to be getting the support of external experts to help us in this process. But certainly, something that we've been thinking about, John.

Our next question comes from the line of Christopher Butler from Sidoti. Christopher W. Butler - Sidoti & Company, LLC: Sticking with the cesium formate business, understanding that this is historically very lumpy. As we think of normal for this business before the adjustments that you make, should we be thinking in the operating income of $35 million to maybe $40 million like you seem to be shaping up to this year or a number higher than that like you did last year?

I would say it's a business that's been difficult to predict, and it will continue to be that way because we've got such a strong project connection to it. So as we've said, the last 2 quarters and the quarter ahead of us will be most likely weaker at this stage. And as we look at our new strategy, we're going to be somewhat more conservative and we will be spending a little more. So we said that all in all, if you look over annual periods, we should be 10% to 20% lower than in the past. Christopher W. Butler - Sidoti & Company, LLC: And the cost improvements that you were hoping to make out of this -- from this business at one point in time, are those kind of gone by the by because of the change in strategy?

I'm not sure what cost improvements you're... Christopher W. Butler - Sidoti & Company, LLC: Right. Your Investor Day, you had highlighted improvements that you're trying to make in each of the different segments including Specialty Fluids. I'm going back a little bit of ways here.

Not sure I can relate to that. I think the Specialty Fluids business has been properly resourced, there's been a strong focus on maximizing value, and we have some costs related to our mining operations. But, again, a lot of these costs have been put in question as a result of our change in strategy because we realized that the -- some of the mine projects we had were uneconomical. Christopher W. Butler - Sidoti & Company, LLC: And shifting gears to purification, could you speak to the soft demand that you saw on the water side, which I always viewed as a little more stable?

Right. Now what's been going on, on the water side has been -- and as you know, the water business tends to be more seasonal and we're at the -- in the period where the water business is stronger than the rest of the year. We have seen some of that coming through. However, what has happened is that the water business has happened a little later than the normal season, due to some weather effects and impacts. I'm not an expert here, but I've been told that the water sector in general has been slower for the industry and we're only now seeing the pickup of things, and actually, in July, we've seen the business becoming more normalized in that respect. Christopher W. Butler - Sidoti & Company, LLC: And in the third quarter of last year, you had a royalty payment, and I may be mistaken, but I thought there was one more payment coming this year. Was I...

That is correct. And we have received a royalty payment in and around the same amount as last year. Christopher W. Butler - Sidoti & Company, LLC: So that's included in the loss in the quarter?

That's correct.

Our next question comes from the line of Jay Harris. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: I have a couple of questions. One, when you look at the cash you've expended and will expend to correct the operational efficiencies in the Purification Solutions business, what will that aggregate?

The -- it's a lot of small things, Jay. It's in the millions of dollars per quarter, single -- low single-digit millions of dollars per quarter. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: Yes, but if you add up all the quarters, are we talking $10 million, are we talking $20 million?

Yes, $10 million or so is a good... Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: And then, is most of that being expensed as a sort of a maintenance?

That is correct, yes. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: Okay. So to what extent is that responsible for generating the losses in the business?

It's been a significant factor in the business because what you have to realize is it's not just the cost, but it's also actually the fact that we've had equipment that has not been available to produce, and we've not been able to supply at the rate we would have liked to. So we've been losing business partially because of these operational disruptions. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: And the other question I had, going over to Advanced Technologies, it's -- it looks like Inkjet Colorants is a successful growth segment -- or subsegment, and I'm not sure about the aerogels. And given your disclosure today on Specialty Fluids, I wonder if you could go -- cover those 4 businesses and tell me what you expect out of them in terms of achieving a size over, I don't know, a 4- or 5-year period.

Right. So we still see -- first of all, I would say that when I joined the company, we spent quite a bit of time doing a deep dive in all of the activities we have and businesses we have. And we, over time, have been hydrating the efforts of the company in the areas where we have the most value creation potential and that has resulted in projects that were perhaps not visible to the outside world, disappearing and being shut off. It has resulted in us selling the Security Materials business where we achieved the sale of $20 million and the cash was received, actually, today, but we have ended up concentrating on these 4 businesses that we currently report back, and have been quite pleased with the performance. Now the performance is driven by different types of markets and the performance have been -- let's say, the performance have been at different levels because of the maturity of the business in which we're in. So if you look at the Specialty Fluids business, is the business where we have matured, where we're continuing to become or to see the adoption of the technology across the industry, and we continue to be very positive with regard to the business model and the margins that are being achieved in that business. And we see, say, for the current restrictions that we have encountered on cesium access from the mine, we believe that over the coming years, we'll be able to get cesium at a reasonable cost for us to continue to grow the business. If I move to the elastomer composites business, which we also call CEC, we, over the years, have decided to move this business more into a technology royalty model which is now reflected in the earnings and the sales that we have reported this quarter, and will be happening at a constant rate going forward. And we have reduced the sales of materials to a very low level because we're actually, today, using the equipment we have in Malaysia more as a, what I would call, technology-driven asset to continue to develop and progress the CEC technologies. So the business has been moved more into a technology realm with expectation of royalty payments in the future. Moving on to Aerogel, this is a business that has had its cyclicality. I mentioned early on the call that we have concentrated the markets that we will be considering in the future, to the 3 markets, or essentially those 3 that I mentioned which is the coatings, the insulating materials, building materials, mainly in Europe, and the daylighting. And here, we see opportunities. In the past, we would seize more opportunities than we could -- than we should have perhaps pursued and we have restructured the business, have shrunk its cost base and have made it -- have repositioned it to be successful in the future. So a lot of effort, certainly now, put onto these 3 markets I mentioned. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: Look, can you get the Aerogel business to $50 million or larger size over a period of time?

Right. So I think this is a business that, in my view, has the possibility of growing to a significant size if the European building material -- insulation material develops in the way that we perceive it may. And what I mean here is that we've been working with European building materials producers, in very close cooperation, to include the aerogel into their final products. And if we can get these products -- and they have been getting these products to markets, and if we find a space where we can manage the cost value benefit, then this could be a very large opportunity for us and would require, at that moment in time, a new investment. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: And if I could ask one more question. Could Eddie please refresh my memory as to where the debt levels were? You talked about over a $200 million reduction in debt and yet when I'm looking at the September 30 of '13 versus June 30 of '14, long-term debt is up $6 million and short term debt is up $4 million. What happened in between?

I'm looking for the numbers that you're referring to. So yes, I think there's a shift between long term and short term, Jay. And so if you look at the net debt for the third quarter, we're at $1.06 billion which is quite a substantial reduction from September of 2013. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: Well, I was asking specifically about the $256 million for the repayment of debt.

You'd have to look at the March quarter to the September quarter. Jay Richard Harris - Goldsmith & Harris Asset Management, LLC: Was that -- debt levels were much higher in the March quarter?

Yes.

And our next question comes from the line of Ivan Marcuse with KeyBanc.

Just a quick follow-up. You're going to be producing quite a bit of cash now that you've paid down debt -- your debt level. Your debt-to-EBITDA levels are priced as low as you want to get them maybe. Where do you see, if you access free cash flow now with your CapEx coming down a little bit, do you anticipate maybe picking up a little bit more insured purchase size or looking at raising your payout ratio in terms of dividend? Could you just talk about that?

I think we've been pretty clear in terms of our cash strategy and we haven't change that. We're clearly focusing on projects that generate good returns for the company, then the dividend has priority and we're continuing to show our shareholders that we're a dividend paying company and have been for many years. And we've raised the dividends over the last 2 years. And then, we were clearly also making sure that we're holding onto our investment-grade rating. So all of that is in place. We're continuing to do the right thing in terms of managing our balance sheet. We will also be repurchasing shares to offset dilution, and we'll also at times be considering opportunistic purchases of shares if we have excess cash on hand. Does that answer the question, Ivan?

Yes. Well, I mean, just the last quarter there was a lot of conversation around paying debt or buying back stock, or et cetera, and now that you paid down the debt, that would imply that maybe that, as a priority of cash, is maybe fallen in terms -- and you're still going to continue to produce quite a bit of free cash flow over the next -- if my projections are right, over the next several quarters. So the thought was that your CapEx is coming down. I know that you want to invest in your -- [indiscernible] your business but then there's 2 or 3 other ways we could spend the cash outside of that. So I'm just wondering if those priorities have changed or if you assume bigger dividend payout ratio or maybe look at buying back stock well above and beyond offsetting dilution.

I would say, we're still looking at projects that have high returns as our first priority and that will stay that way. And with regard to repurchases, the first objective is to offset dilution and then of course, if there are opportunities to access the market at prices that we consider attractive, we will be looking at our cash position and working that opportunistically.

Your next question comes from the line of Kevin Hocevar from Northcoast Research.

I was just wondering if you could comment, just back to the Norit operational issues, when you think you'll have the majority of these equipment issues fixed. Will it be the end of this fiscal year, the end of the calendar year? And also, if you could you give us an idea of how much business you've lost because of the problems?

Well, on the loss of the business, we'd rather not comment for competitive reasons but with regard to the operational problems, I was hoping that we would be complete this year in terms of being able -- this calendar year -- in terms of having fixed the things we have seen. Unfortunately, we've had more surprises in areas that we hadn't expected. Again, these are all smaller things, not so significant but quite disruptive. And I would say, with that additional knowledge of the last couple of quarters, I would say that we will have additional spending needs in this area into 2015.

Got you. And just one other quick one, the Performance Materials segment margins were good, they're up nicely year-over-year, but they were down sequentially about 200 basis points and it seems like historically, those 2 quarters are kind of on par with each other or the third quarter's normally even a little higher. So just wondering why the sequential decline? Was it just more that the second quarter was more abnormally high and this is kind of more a normalized margin for the business or was anything that drove that down sequentially?

Yes. I would say that these are global businesses and yes, we've got puts and takes depending on applications and customers. I would say that in general, it was in line with historical movements so the slightly weaker Q3 was not anything that concerned us. We saw a slightly weaker European environment in our Specialty Carbons that affected the third quarter but we were pretty comfortable with the business. We're seeing some real strong potential here. We're applying some of our new commercial excellence tools and processes on to the business, and we're driving new products into the market in certain new applications, plus we've seen a nice rebound in the silicones business recently which across the board, across the globe, but more specifically in the U.S. where silicones are heavily used in commercial buildings. And the -- we've seen that actually pick up quite nicely and has been supporting, to a greater degree, our FMO business recently.

Okay. And I guess, could I just make one more, and I just wondered when do you think Norit turns profitable? I mean, do you think it will be before the back half of fiscal 2015 or will we have to wait until that time?

We expect the business to be profitable next year. But again, as I mentioned, we're going to have 2 halves to the year with MATS kicking in after April of '15. So that's kind of second half of our fiscal year '15. So we'll see a gradient here but all in all, the objective is to return the business to profitability next year.

And our next question comes from the line of James Sheehan with SunTrust.

On environmental surcharges, how much time do you expect to elapse between when you implement surcharges and when your competitors do? Would it be weeks or months or do you have any idea?

I must say I really don't know what our customers -- our competitors are going to do in this field. So we've decided that it's a necessity for us to pass through these additional costs and we will be implementing these surcharges 1st of January 2015.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call back over to Patrick Prevost for closing remarks.

I just wanted to thank you for joining us today, and we are looking forward to speaking with all of you again next quarter. Thank you. Bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you all for your participation. And you may all now disconnect. Have a wonderful day.