Cabot Corp (CBT) 2002 Q4 法說會逐字稿

Please stand by we're about to begin.

Good day and welcome to the Cabot Corporation fourth quarter earnings release conference call.

This call is being recorded.

At this time I would like to turn the call over to the chairman president and chief executive officer Mr. Kenneth Burnes.

Please go ahead, sir.

Good morning.

This is Ken Burnes, CEO of Cabot Corporation.

And I would like to welcome everybody to the fourth quarter, our fourth quarter earnings teleconference.

With me here on the telephone this morning are John Shaw, our Chief Financial Officer;

Eddie Cordeiro, Controller;

Jim Kelly, Director of Investor Relations;

Bill Noglows, General Manager of Carbon Black;

Bill Brady, General Manager of Fuel Metal Oxide, Tom Odel, General Manager of our Performance Materials Business, and Brian Baruby and Hoyle Kim, our Business and General Counsels.

Before I comment on the quarter's results I'll remind you that our conference today will include forward-looking statements which are subject to risks and uncertainties, including those discussed in Cabot's 2001 Form 10-K filing.

A copy of which is available on the company's web site www.Cabot-corp.com.

Last night we released earnings for the Federal Court fiscal quarter fourth fiscal year along with related supplemental business information.

For those on the mailing list you received these either by fax or e-mail.

If you're not on the mailing list and are interested in receiving this information in the future, please contact our web site or our investor relations department.

Today I will begin with a short overview of the results of the quarter at fiscal year and will then open the floor to questions.

Last night the company reported fourth quarter earnings per share of 32 cents, compared to 38 cents per share for the same period last year.

Included in the 32 cents was a total of eight cents per share in charges for special items.

Earnings per share from continuing operations before special items was therefore 40 cents per share, compared to 38 cents per share for the same period last year.

Fourth quarter contained two unusual adjustments to the income statement.

During the quarter, the company concluded an extensive review of its post retirement benefit plans, resulting in a charge of eight million dollars related primarily to post retirement benefits which should have been recorded in prior periods.

In addition, the company reduced the overall effective tax rate for the year to just over 22 percent.

Which resulted in a tax benefit of approximately six million dollars in the fourth quarter.

We believe that the 40 cents earnings per share of continuing operations before special items reasonably reflect the operating performance of the businesses during the quarter.

You can find the details of the eight cent charge of special items in the earnings press release and in the supplemental information posted on our web site.

Incidentally, we apologize for the complexity of the earnings statement this quarter due to the number of unusual items.

We hope to avoid these in the future.

I trust our explanations are clear, and I am of course willing to answer any questions.

We are pleased with the results we achieved in the quarter given the uncertain economic environment during the period.

The improvement in operating results compared to the fourth quarter of last year was driven by a combination of higher volumes in Carbon Black and fuel metal oxide businesses as well the completion of two large jobs in the specialty fluids businesses.

These improvements were partially offset by higher fee stock in operating costs in Carbon Black.

The chemical businesses reported an increase in operating profit of a million dollars from the fourth quarter quarter of 2001 and a ten million dollar decline sequentially due to normal seasonal volume trends in Carbon Black.

Tantalum business earned 20 million dollars in operating profit this quarter, which was flat with the same quarter last year.

The results were driven by higher volume and lower ore cost offset by lower average pricing increased operating cost and lower results from Cabot Super Metals.

During the quarter we received a favorable court ruling in the Kemet litigation.

In addition ABX has initiated a suit against Cabot but they continue to purchase products in accordance with the terms of their tantalum supply agreement.

This litigation is ongoing and therefore we cannot comment on it further.

Overall, the electronics market continues to be weak, but it appears as if our customers are beginning to work through their inventory.

With the addition of Cabot Super Metals during the year we feel we're well prepared for renewed strength in this market when it arrives.

In our new business effort, our ink jet business continues to make progress with volumes growing in both the OEM and after market areas, supported by our R and D efforts.

Cesium formate is also progressing we're seeing continued success and realizing more value from this product through a trend of increased pricing.

Looking forward we're observing lower drilling activity which may affect the volume in this business in the near term.

Each of these new businesses contributed modestly to the earnings of Cabot in the fiscal year.

Finally, during the quarter we started up our nanogel plant in Frankfurt, Germany and shipped our first products.

The company reduced the overall tax rate to 22 percent.

Resulted in a tax benefit of approximately six million dollars in the fourth quarter.

We expect the fiscal year 2003 tax rate to be between 26 and 28 percent.

During the fourth quarter the company repurchased approximately 1.1 million shares, leaving approximately 3.1 million shares left to repurchase under the latest board of directors authorization.

Chemical businesses showed signs of recovery, with strong volumes during much of the fourth quarter in 2002, which is typically a soft quarter.

However, given the uncertainty in our end use markets, we remain cautious concerning the short-term outlook.

High oil prices, volatility in the financial markets and the political situation in the middle east further add to that uncertainty.

We continue to be optimistic regarding the future growth opportunities provided by the ink jet.

Cesium formate and nanogel businesses.

In addition we will continue to aggressively manage costs and are committed to achieving the benefits from our new ERP system.

With the fundamental strength of our businesses and Cabot's strong financial position, we feel that we are well prepared to weather the current conditions and grow as the market recovers.

With that short overview I will conclude my comments and open the line for questions.

Sill vest ster I will turn it back to you, please.

If you would like to ask a question on today's call you may do so by press star followed by the number 1.

Again that's star one to ask a question.

We'll pause a moment to assemble our roster.

We'll take our first question from Don Roberts with Buckingham Research.

Good morning, guys.

Congratulations on a good quarter.

Could you break apart for us the impact of Show of Cabot [ph] On the flat year over year results and the tantalum operations in the 75 percent sequential gain, how much of that was Show of Cabot [ph] Versus ABX coming back into the contract.

Show of Cabot [ph] Was substantially negative in the quarter.

In the sequential?

Oh, in the sequential quarter.

It's a modest negative impact sequentially.

Really?

Sequentially.

No, not sequentially.

It's about flat sequentially.

Excuse me, John.

Okay.

We're starting to see some volume recovery in Show of Cabot [ph].

But we also had to, as you know had to absorb the incremental cost associated with the operation.

The fully consolidated Show of Cabot [ph] Results in this quarter, if I look at the year-over-year, the fully consolidated Show of Cabot [ph] In this quarter was worse than the equity contribution from the year ago?

Substantially worse.

Remember, a year ago the market was still strong.

And Show of Cabot [ph] Was quite profitable.

And our equity contribution a year ago was substantially above the benefit of Show of Cabot [ph] In this quarter.

Performance materials is pretty impressive.

Performance material had a strong quarter.

You'll recall we started to ship product to Vishay in the quarter.

Secondly not being in the oil field drilling analyst here, is there lower industry drilling or is there lower interest in drilling with Cesium formate?

Our information is the latter.

I think there's two things going on that we're aware of.

First of all, there's either a proposed or in place new tax coming out of new K on drilling activity in the north sea.

And then secondly the drilling industry last time during the Gulf war that we had a spike like this they all started to drill like mad.

When it settled down they had a lot of excess capacity more material, more oil and gas, which leads them to be cautious.

We've seen a significant decline in rate counts in the industry and people are sort of sitting on their hands waiting for it to resolve.

We actually see in our own business we see an increase, a substantial increase in the number of inquiries and the number of potential jobs that could evolve over the next period, whatever that period may be.

So our own view of the market remains positive, insofar as the use of the fluid is concerned.

But remember we're a pretty small part of major drilling activities in the North Sea and elsewhere.

But the North Sea is a big big part of this business.

Is this a one or two quarter delay issue because of this tax situation?

I wish I could answer the question.

If I could answer the question I might be useful in Washington, but probably not.

I'll get back in queue for questions

We'll take our next question from bill [inaudible] From Davis investment advisors.

I have a couple of questions.

First of all, with regards to the Kemet settlement or judgment I guess as the case was, both Cabot and Kemet said you received favorable rulings in the situation.

I was hoping you could explain that to me.

I have a completely unrelated question.

I can explain to you the court rulings that we received.

I'm of course not able or think it appropriate to comment on Kemet's release.

There were two matters that were resolved by the judge during the quarter.

The first was the summary judgment that we asked for in connection with Kemet's counterclaim against us on the validity of the contract.

And the judge awarded us a summary judgment and dismissed Kemet's counterclaim.

The second matter that we asked for summary judgment on was whether or not Kemet had the right to take all of its contracted material at the end of the calendar year covered by the contract.

We had asked for a release saying they had to take the material on a commercially reasonable basis instead of at the end of the period.

And the judge agreed with us and ordered a summary judgment.

So we received the relief we asked for from the court.

I cannot comment on Kemet's view of the litigation.

We are willing, if you would like, to provide you with copies of the public documents that are available reflecting the judge's decision.

But beyond that I don't think it's appropriate for me to comment on Kemet.

Were there, Ken, some areas of the lawsuit that did not go as you had anticipated or had hoped, where Cabot lost?

We felt that we got precisely the relief that we were both entitled to and asked for.

We were not in any way disappointed in any respect of the judge's decisions.

And then my second question for you is relative to the chemicals business and the fact that you're seeing solid volumes there.

That seems very counter intuitive relative to the weak economy that you have highlighted.

And we all read about.

And counter intuitive relative to the seasonal issues.

Would you walk us through whether maybe Cabot is seeing the beginning signs of an overall economic rebound, if there's some market share issues specific to you folks or what may be creating this phenomenon.

I can tell you the following.

We had two very strong months, the month of July and August.

And a month of September that I would describe as moderate at best.

The net of this was a strong quarter and a strong volume.

I wouldn't describe it as softness but the moderate volumes in September make us wonder.

Clearly in some of the businesses we are seeing inventory rebuild from a substantial draw down in prior periods and some of the businesses we're seeing higher consumption of our product.

I said in my remarks that we're cautious looking forward.

We haven't been, I think it's fair to say, hurt as badly on the volume line as we thought we might be.

On the other hand, we don't see today the kind of robust recovery that we have seen in prior situations like this.

This is in the chemical business.

So I would describe ourselves as cautious.

We look at the weekly volume numbers as they come in.

And we're sort of watching carefully.

What can you tell us about the October volumes in the chemical business?

I'm not so sure I'm supposed to tell you anything about the October volumes.

I guess though since the lawyers are telling me I can answer the question - no the lawyers are telling me not to answer the question.

How about if you can give a qualitative viewpoint on just whether September modestness has continued or whether you're seeing some signs of improvement.

I would say, first of all, it's too early to tell.

But generally we haven't seen any significant movement in either direction.

There's neither good nor bad news.

Great.

Thank you very much.

We'll take our next question from Jay Harris with Goldsmith and Harris.

Good morning, Ken.

How are you?

How are you?

I've had better years.

Several unrelated questions but let's continue on tantalum first.

What can you tell us about what's happening with Kemet?

It seems to me that they were intending to purchase about 70 million dollars, full year's requirements of materials here in the December quarter.

When I read the judge's ruling, it suggested that he was encouraging them to start working on the next 70 million dollars of annual requirements in an orderly fashion which suggested that if they followed that they would come in with another 17, 18 million dollars of orders in this quarter.

Where are we with Kemet?

You I know have read the court decisions maybe I could ask you to answer the question about the difference of opinion with Kemet.

You could but my lawyers tell me not to answer it. (Laughter)

We all have good lawyers.

Jay, you followed this pretty closely.

The judge has made it clear, I think, that the contracts are valid and that absent agreement to the contrary the contract will be performed.

We are preparing to ship the full volume covered by the contract in 2002 to Kemet in December.

And as you may have heard from the Kemet earnings release, they're prepared to accept it.

They quoted a number in their teleconference.

Well, I presume as analysts we should assume that that's going to happen unless we hear differently.

I think that's right.

I think you can clearly understand our position.

We now I have I think the right to a certain amount of revenue.

Specified revenue that's clear under the terms of the contract that unless the contract is revised by agreement between the parties, the contract will be performed.

That would suggest that we should assume that revenues for tantalum ought to be about 180 million dollars in this quarter.

I don't have the numbers ahead of me.

You did 106 million in the quarter just ended.

I don't want to confirm or deny the number because there's some funny movement in some products in that business.

But let me go back to what I think is the key question here.

The question that we have is do we live with the contract or is there an alternative situation that would capture appropriate value for the Cabot shareholders in an amendment to the contract?

As we go through the period, as we went through the pain and difficulty of the litigation, our ability or willingness to back down from the full dollar value of the contract of course reseeds.

And of course as we get closer to receiving that 77 million dollars, and as we get closer to next year's full volumes, we become less willing or capable of giving up short-term revenue and profit in exchange for something else in the future.

We continue, however, to be willing to resolve this on a basis that may be more acceptable or reasonable to Kemet, but we need to get paid close to the full value of the contract in order to do that.

I can tell you, as we've said before, that conversations are continuing.

If you expected to ship on a normal quarterly basis materials to Kemet looking ahead into the March and June quarters of next year, when do you have to receive from them specifications on materials so that you can comply with your obligations?

The history of this is that this is the first decision that came out of the court quite a while ago.

If we cannot reach agreement with Kemet on this here in the next 30 days, maybe less, and either agreement to amend the contract or agreement on next year's volume, the grade mix and the dates of the deliveries, the judge will order some, in my view, some reasonable delivery dates spread out over the course of the year, at a rate specified in the contracts.

We hope not to have to go back to the judge and ask for that relief but are prepared to do so if we have to.

Sounds to me like you are thinking early December, if you haven't reached an arrangement with Kemet prior to that.

Something in that range.

Remember, though, that Kemet's volumes are roughly or less than 20 percent of the volumes coming out of our facility in Boyer Town.

There's less than 10 percent of the total volume capacity that we have coming out of both our Boyer Town and Cabot Super Metals facilities.

So we have some flexibility as to when we need those volume, the grade mix and volumes in order to deliver if it were on a reasonable quarterly basis.

Are there any grades of material unique to Kemet that have to be especially manufactured?

Yes, there are.

And is there much of a lead time in satisfying that?

There's some reasonable lead time.

Several weeks?

It's a complex issue because, Jay, it's a very complex plan with multi stages, multi different batch processes.

You have to line the plant up to get the right materials to the final process stage.

So it's a complex -

If you were - let me phrase the question this way: If you were expecting to ship monthly quantities starting in January, when would you have needed to receive the specifications on the materials required from Kemet?

I'm going to give you a rough estimate because I'm not in the materials planning business myself.

But I think it's at least six or eight weeks ahead of time.

Change of subject.

It's the arrow jet semi works facility, nanogel semi works facility.

Is that being charged to R and D costs from this point forward?

No it's an operating cost expense in the numbers - the cost of bearing that plant we expensed it this year, we'll expense it next year.

And what is the revenue capacity of the facility relative to the, can you share with us what the revenue capacity is and the capital cost is?

I think the capital cost of that plant was in the range of 25 million dollars.

And I would just remind you that it is what we describe as a semi works plant.

We scaled it up ten times from a pilot scale or bench scale.

We did bench - we went to pilot and then from pilot to semi works we scaled it up ten times.

And to go from semi works to full commercial looks like another five times.

The process is pretty solid.

It pretty much lined out - it's a continuous process we've been operating on batch to test and validate each individual stage in the process and my understanding is that they're very close to converting it to a continuous process.

And it looks like the process is going to be robust and solid.

So we're very encouraged by that.

Can you share with us what the revenue capacity is on that?

I don't have it off the top of my head and I'm probably not prepared to deal with that number because out of that plant comes a number of different products and different market values and prices depending on application.

Is it your thought that the plant will be a slight drag next year?

This year?

It will be a drag this year and maybe not so much next year.

I can put it this way, Jay.

We're optimistic that if we sell out the plant, the business will be close to break even.

That's what I was looking for.

I'll step aside now.

Thank you.

Next question comes from Bob Goldberg with Newburn and Associates.

I want to touch on the tantalum business as well.

I wanted to delve into the question of your comments that customers are gradually reducing their inventory levels.

Clearly that would be the case with Kemet, which hasn't been taking any product this year, but they still said on their call, as I'm sure you're aware, that while they're willing to take, and I should say they're re.Signed to take the product in the December quarter, they don't need it.

I mean they still don't really need any product and it's just going to sit on their shelves except for some particular grades that they might need.

I'm wondering, number one, my question is on the other customers who are taking product, are they - how are they able to reduce inventory if Kemet still has excess?

I wish you would maybe touch on that a little bit.

I of course can't comment on that.

I can only tell you that Kemet is doing what they are doing to us, have been doing, and that their inventory comments are what they are.

I can tell you as I have said before that we have other customers who are taking and using the material and seem to be actually growing their consumption.

And I can't - it's not our business, I would make no comment on what's happening to the market position in that industry.

But we get completely different messages from different customers in the industry.

So what you're saying is that your other customers are, they're taking product and at the same time they're not taking any more product than they can use, so they are bringing inventories down.

We have had some customers ask for additional volumes of certain grades.

Okay.

I also wanted to follow up on your comments about Cesium formate, this UK tax on [inaudible].

Can you give any help as to what we should expect over the next few quarters.

Will there be any stream of business?

How does the pipeline for new business look like now?

There's a pipeline of business.

There's one very small job this quarter.

And beyond that it's unclear.

I think it's an unsettled time in the industry.

And how it works its way throughout in the next three, six, nine months is unclear.

We have seen some postponement of drilling activity that was committed for this quarter.

We've seen it postponed into the second and third quarter.

How that plays out, I wish I knew the answer to that question.

But it's an issue for us.

So the small job, these are completion jobs that you're mainly getting now?

Are there any other drill in -

I'm not aware of - there's not been another drill in application this quarter.

There was one completed in the previous quarter.

Is it fair to say that until this situation is resolved the business might be back to sort of a break even.

I would hope not.

I would hope the situation, the drilling activity and the volume picks up.

On the other hand I needed to warn you with the current economic conditions in the industry, one has to be conservative.

Sounds like you have achieved some of the price initiatives.

We've done two things that - we've satisfied ourselves and increasing numbers of our customers and people in the industry that the fluid works, as we have believed.

And we've now been in 60 different wells and in each of those wells it has performed at or above our expectations.

And therefore well above the customer's expectations.

But 60 wells is a lot of wells.

I think it's fair to say and target to be the default fluid on these applications.

And we went during the year to sort of a next phase of this business evolution and that is getting it priced at a level that we thought was appropriate given the value.

And we did have during the year some reasonably significant price movement, upward price movement.

And we've made it clear to the customers that that's where we're going and the material will be more expensive in the future.

So I don't think that the warning on volume has anything to do with Cesium format or the validity or the usefulness of the effectiveness of the product.

It really is related to what's going on in the industry as a whole.

It wouldn't make sense from a marketing perspective to roll back that pricing increase a bit to gain more volume?

We've talked about that and I'm very much convinced that would be a big mistake.

I continue to believe this fluid has the potential to be priced at a high price and generate a lot of income for the company.

But I can't control the middle east or the drilling activity.

Lastly on the Carbon Black business.

You mentioned importing into Europe sounds like you had a fairly good quarter in Europe, up volumes, you still had some price improvements.

I was a little bit unclear as to why the earnings were down a little bit.

I guess raw material costs were -

We had two things that affected the Carbon Black earnings.

One we had feed stock costs coming out of the higher oil prices that squeezed our margins.

On the Carbon Black business as a whole the lag and the environment hurts us in that environment.

And incrementally we had some operating cost issues in the fourth quarter that appeared to be mostly one time maintenance issues and other sort of adjustments coming out of the implementation of our ERP system as we clean up the whole system and put it into a new computer system.

And that affected profitability for the Carbon Black business as a whole.

With respect to the European imports, there's a plan located in Egypt that is importing a fair amount of product into Europe.

It's sort of a classical situation that existed in the Carbon Black business for a long time.

They exist in a protected market.

They produce for the protected market.

Sell into the protected market for a high price and import into Europe or elsewhere at a very low price.

Anything above their variable costs.

And that's a problem for us because our customers use the availability of those imports to try to ratchet our prices down.

When you started the September quarter, I think the expectation was that Carbon Black margins would improve sequentially, because you were going to get some -

We did.

You were going to get some benefit from contract pricing, but raw materials moved up during the quarter.

That's correct.

Similar outlook going into the December quarter that you're going to again get some price improvement in the contracts.

As long as raw material costs stay where they are roughly that you will get some sequential, is that fair to say?

It will be some adjustments to the price under our contracted volumes.

And we have had some other price movement that we commented on.

But at the end of the day, Bob, a lot of it depends on what happens to the price of oil.

Let's say it doesn't go anywhere from here.

If it stays where it is, our margins might improve a moderate amount.

If it goes down our margins could improve substantially.

If it goes up - there is the lag, of course.

There's two lags in our system.

One is the lag of our buying inventory and our accounting treatment of the purchases.

And the other is the adjustment.

As you know, it's pretty hard to get really good prediction of what's going to happen to our margin based on looking at oil prices.

But generally, when the price goes down, we are able to, our margins expand at least until the market takes it away and when prices go up our margins contract.

Thanks for the help, Ken.

Thank you, Bob.

We'll take our next question from Jeffrey Dukakis with JP Morgan.

Good morning.

I've got two questions.

In some of the supplementary information you provided it said that for the year Carbon Black lowered earnings per share by 31 cents and volumes were flat.

So if oil prices stay the same with the change in, with the contract regulators you've got, sort of how much of that 31 cents comes back?

Maybe another way of asking the question is, how much of the 31 cents was lower price and how much was raw materials?

When you look at the whole Carbon Black business for the whole year, the bulk of that 31 cents was related to lower margins.

We were particularly at the beginning of the year we were at a period of time when there was substantial excess capacity in the business and the margin, the prices and therefore the margins ratcheted down.

Then we went into a phase of increasing oil prices which exacerbated the problem.

The cost of operating the Carbon Black business throughout the year was down a bit.

We operated a higher volume structure with a little bit less dollars, absent the feed stock costs.

So we had a margin problem coming out of both the pricing related to the capacity utilization in the industry and the margin related to the fee stock cost.

Looking forward there was also, I think it's fair to say, during the year eight cents benefit of feed stock, foreign exchange, excuse me, that helped us in the business.

So the issue that we are looking at, and I think you've sort of identified, is what's going to happen to those margins going forward?

Can we recover them?

And if we get a recovery, are we going to be able to recapture the portion of the pricing or Marge that we lost due to the excess capacity and will we will be able to establish, reestablish what is a more historically justified margin level in the business.

It's something we're looking at.

Then let me try a second question.

I think Sensqualia [phonetic] Announced their volumes in tantalum would be down roughly 10 percent next year.

I heard the same thing.

I was wondering if that was a hard bench or a trend in your business.

And can you comment sort of on the generic lumpiness of tantalum next year, I'm a loss to think about the various levels of the quarters the various profitability of the questions.

Let me comment on Sensqualia [phonetic] You must have read the same text of their analyst meeting that I did.

I didn't stay up and listen to it live, it being on the other side of the world.

I was surprised with their comments upon the concessions that they had made to their customers, because Cabot has not asked for or received any volume concessions with respect to Sensqualia [phonetic] And that's in the face of pricing in our contracts that are today substantially above pricing that is available in the open market.

I guess what was being told to you and us they have made concessions to our principal competitor, which surprised me.

I want to repeat, we have neither asked for nor received any concessions from Sensqualia [phonetic].

With respect to the seasonality of the business, it's a little bit hard to get at that through the Sensqualia [phonetic] Volumes.

They appear to be in sort of a difficult situation, is in a difficult situation in that tantalum pricing is roughly half of what their contracted pricing is today.

We of course will do whatever we can to buy raw material at the lowest possible cost.

But the seasonality of our business is, I'm not aware of a real seasonal pattern.

We tend to get more capacitors consumed for the Christmas portion, into miniature electronics, but generally the electronics industry, I'm not aware of a seasonality pattern.

And I don't understand their seasonality issues.

It must come out of the arrangements they have with their other principal customers.

Let me try that another way.

That is, both things being equal, will the year in tantalum on a profitability basis start off strong or weak or sort of normal as far as you understand it.

Normal is a hard thing for us.

Remember that when you look our historical earnings, at least for the last couple of years, and before the industry cracked, we were getting substantial equity out of Show of Cabot [ph].

And Show of Cabot [ph] Having no contracts is now having to sell at market prices and at low volumes.

So there's a - I mentioned this to John, Show of Cabot [ph] On a quarter-to-quarter basis did much, had a much weaker fourth quarter this year than they did in '01 because of the performance in the industry.

I would expect that we'll see a continuing slow recovery in the electronics industry which would bring Show of Cabot [ph] Slowly back up to solid performance.

They continue, we believe, to have a, or we continue to have a very strong position in what we call the high cap market and increasingly we're seeing demand for those products increase.

That's one aspect of looking forward in the business.

The other is all tied up in the contracts.

I'm relatively optimistic that we will put this contract issue behind us in the next two or three months one way or the other.

Either we're going to put Kemet into a new agreement and resolve it or we're just going to go ahead and live by the contract and move on.

I also, I hope and believe that we can resolve our differences with ABX in the next couple of months and put that behind us.

And that of course resolving at all depending on the way it's resolved will at least stabilize the business.

As I've said on a number of occasions, we would prefer to stabilize our relations with these customers and we're willing to spread the volumes out in an effort to provide long-term stability for the business.

Okay.

Thank you very much.

We'll take our next question from Frank Duenow [ph] With Adage Capital.

I have a relatively question you recorded for the full year 22 percent tax rate.

Do you have an estimate what it's going to be next year?

We think it will be in the range of 26 or 28 percent.

The reason for 22 percent this year was largely related two two issues.

We had a favorable resolution of an issue that had been hanging around in our tax portfolio for quite a while.

And then we had some significant export sales in the fourth quarter coming out of the resolution of one of the tantalum contracts.

Thanks.

That's it.

We'll take our next question from John THEES [ph] With Random Mail [phonetic].

You mentioned the first commercial shipment of nanogel.

Can you tell us what the application might be and perhaps something about what you see as the ultimate potential for it?

The first commercial application, the first shipment is into the business we call the translucent business, which is use of the nano gel particle in the manufacturer of translucent panels are used in gynmasiums and auditoriums that allow light transfer into the building.

The nanogel particle has very high insulation capacity or capability as well as to some extent controllable light transfer capabilities.

I believe the particular application is the installation, the manufacture and installation of translucent panels in a swimming pool building.

We think it's a very promising market.

We provide the - the particle provides with significantly lower volume and better light transfer control, better insulation capability than the panels are made out of today.

We have a number of customers who are excited about using it in that application.

Good enough.

Sounds like an interesting start.

It is.

We're very encouraged by it.

I was going to ask about the principal factors causing the gyrations in the tax rate.

But I think you have addressed that completely enough.

Thank you very much

We'll take our next question from Lavon [inaudible] From Hockey Capital.

A couple questions.

In terms of this tax related issue for the 22 percent tax rate this year, and you said you had some resolutions that occurred.

Is there anything else from a tax perspective that's still kind of outstanding, it's not resolved that we need to know about?

Well, we have the normal, I don't know - I'm assuming you're sophisticated about what goes into a tax reserve and how you calculate that and how you file your returns and negotiate with the various governmental authorities.

Me sophisticated, no.

What happens is that when you file your tax return you take a position and make an estimate of what the ultimate tax liability is going to be, which is only received when your returns get audit and you finally settle with the various tax authorities, not only in the United States but around the world.

It is as I'm sure you're aware our job to minimize our tax liability, that famous Oliver Wendell Wholmes quote that it's perfectly legitimate to arrange your affairs to minimize the amount of taxes you pay.

And what you do is you take a position in your return and you establish a reserve to make sure you're adequately covered.

And as the various issues get resolved, as the audits get completed you have to re-examine your reserve and adjust it accordingly and it all flows in and out of your tax rate.

What happened to us this year is we had a favorable resolution and it had an impact on our reserve and therefore on our tax rate.

Those issues will continue, candidly.

It's a nice thing to have a favorable resolution.

And I hope our tax department continues to be successful in achieving those results as we go forward.

But in the normal course of business, we don't tend to have such large discrepancies between what we're reserving for and what actually occurs.

The tax rate kind of jumps around that much.

We're not happy with that either.

And we do have a couple of issues - we do have a couple of issues that we're looking at going forward.

But we hope not to have the kind of surprises that we had this quarter.

If they go against you, could they cause you any kind of - would there be any type of a cash consequence from that?

I do not believe to the best of my knowledge that there's any substantial risk of a substantially negative outcome out of our tax reserves.

In terms of some of the one off items in the quarter you talked about the true up in this pension issue.

Why wouldn't that simply be expense in future quarters.

Why are we kind of looking at backwards information trying to pick a charge for that as opposed to expensing as we go forward?

What that is, to be a little bit more precise, is that we under, I guess it's under FAS 106, all companies have been taking a very close look at their post retirement obligations and we've been doing it and have been working hard to clean it up.

We discovered some issues with respect to post retirement medical, largely medical benefits in Europe and they're obligations in fairness should have been accrued over a period of time in the past related to our obligation to provide medical benefits after our employees retire.

And they should have, it was an accounting error.

They should have been recorded in relatively small amounts over the last 15 years.

They were in some, in a sum small plants in Europe and they were apparently missed.

Going forward we will have in our statement a very small insequential charge each quarter so this doesn't happen again.

On the cash flow statement I'll see it flowing out to cover those issues.

It's not a cash issue.

It's an earnings issue.

And just coming back to the tantalum contracts.

Two questions.

Could you characterize at least the way you look at ABX's lawsuit against you or what's their issue related to trying to nullify the contracts or at least your understanding of how they're approaching it and once you go through that I have another?

I prefer not to get into a discussion about the merits or lack thereof of the ABX lawsuit.

That's fine.

The specific claim that is covered in their contract, in their complaint is unfair and deceptive trade practices in connection with entering into the contract.

Those are if not identical, very similar to what was covered in the counterclaim in the Kemet lawsuit.

And I feel again as I've said before about Kemet, we feel very comfortable if we have to pursue this resolution in court, which we would rather not have to do, that we will prevail.

I would much rather, particularly with ABX because they're an important, valuable long-term customer I would very much like to resolve that amicably in the near future.

In terms of remaining length of the contract can you talk about the remaining time on the existing contracts with Kemet Vishay and ABX and if you could characterize the volumes associated with those contracts.

If I'm not mistaken we had kind of plateaued this year and we kind of start to trail down next if I'm not mistaken.

We plateau this year next year and start to trail down.

I'm under some confidentiality provisions in the contract that I want to be careful with.

Of course our customers or at least two of them have violated those provisions to a large extent in suing us and making the contracts public, therefore.

I'll try to answer the question this way without causing myself any problems.

We have three long-term contracts.

One was for two years and covered roughly 20 percent of our volumes.

We had to actually - we had four long-term contracts with three customers.

The Vishay situation I think you're all aware of is resolved and behind us.

That contract was extended out an additional year or two, I think.

We have one that theoretically expires at the end of next year and I think everybody is aware and it's public information that's the Kemet contract.

That covers roughly 20 percent of the volume.

You're all aware of the numbers because of what's been [inaudible] In the contract.

The last contract is with ABX and I believe it goes through more years starting January 1st.

So it has three more years.

Three more years starting January 1st 2003.

We did extend and lengthen the Vishay contract and remain willing to give ABX to the extent it wants relief in the short-term in exchange for long-term extensions.

Thank you.

We'll take a follow-up question from Don Roberts.

At the current tantalum market ore prices, are there any ore sources that are economical to operate besides the Sensqualia [phonetic].

You ask great questions.

That's a very complex question.

We believe that to start up a new mine and to build the concentration facilities at a new mine would result in an ore price in the range of 50, 55 dollars a pound.

There is today on the market an awful lot of material at substantially lower prices.

It is unclear to us the precise origin of that material.

We do not believe that over any extended period of time it is going to be economical for anybody to start up and produce tantalum, significant volumes of tantalum over a five or ten-year period at 25 or 30 dollars a pound.

But there is material out there because of the crisis that the industry has been through that's sitting in warehouses or in inventory that can be bought [inaudible].

It's a fascinating issue we're trying to sort out as we speak.

I assume you're a much larger customer of Sensqualia [phonetic] Than your competitor.

The decline at Senqualia [phonetic] Would it be logical to imply a declineat your competitor's consumption of ore that would be a multiple of that or a percentage decline [phonetic].

All we know, Jeff asked the question, is that apparently Sensqualia [phonetic] Gave moderately significant contract relief to our competitor.

I'm not clear the details, either covering this year and next.

And it sounds to me and it would make sense if I understand City of Sparks business and the given the contracts and volumes that we're aware of, they were given choked on ore.

Maybe just switch gears on Carbon Black.

During the quarter we had what looked like two conflicting developments.

We had price increases I think that were announced by a number of U.S. tire companies.

But we also had good year announced closure facility and let some people go.

Can you reconcile some of these developments for us?

I do know good year has been engaged in what sounds to me like an appropriate restructuring of its manufacturing facilities.

I tried to figure out if the U.S. tire or North American tire business is healthy or not.

Price increases in the OEM demand plus with more people driving instead of flying and extra cars in the garages and so forth you would think that tires would be healthy.

But the good year closures would sort of be in the face of that.

I don't think those two things necessarily tie.

We do fundamentally agree with the conclusion that the U.S. tire industry is at least moderate if not healthy.

And I think what you're seeing coming out of good year is more a rationalization of their manufacturing capacity.

And an effort to make themselves more cost competitive.

Lastly.

Could you maybe just comment on the sequential change in margins in Carbon Black?

Because earlier in the year you would have been caught in a lag, but I would guess over the last three or four months that pricing in raw materials have been roughly going up in tantalum on a sequential basis.

I don't quite think so.

I wish that was correct, but I'm quite sure that in this quarter we lost margin.

We lost a fair amount of margin this quarter.

Our volume was - our volume pick up was more than our margin, but we also lost it on the cost side there, John.

In the North American market that would only happen if raw materials were accelerating relative to the prior adjustment period?

That's right.

And this quarter we had oil prices go up I think from 26 or 27 up into the low 30's.

It's back down, a day ago it was back down to 29.

I'm not sure where it is today.

Thank you

We'll take our next question from Bill Deeslum [inaudible].

A couple quick follow-ups, you mentioned with respect to nanogel facility, semi works facility when it's at full production you'll be at approximately break even.

And I assume you can see our confusion at running a plant at full capacity yet being at break even.

I'm curious if that's number one a function of the size of the plant or, maybe I should say and/or a function of pricing that you currently receive on nanogel similar to the Cesium needed to prove it and at that point you can make a reasonable price and make money [inaudible].

The explanation it's a semi works plant.

It's not a commercial plant.

It's not intended to be at commercial scale.

In fact, I think if we are successful at running the business on break even on the basis of the semi works plant and can therefore develop the market for the product to support a commercial plant, it is very, very encouraging about the potential profitability of the business and commercial scale.

I think I mentioned the numbers earlier.

This is one-fifth of what we would believe to be a commercial scale plant.

And we are having both the operating costs that is incumbent upon a small plant plus all of the ST and A to support the business.

So we're quite encouraged with the possibility of breaking it even on a small scale plant.

The semi works is largely to prove the process.

That is helpful.

Relative to the existing physical location where the semi works plant is at, can you turn that into a commercial facility or will you need to moth ball that one and then go build a commercial facility?

I would hope in a three or four-year period to be telling you we are building or are in construction, hopefully shorter than that.

Maybe we'll be operating it.

A commercial scale plant at a different location.

We need a specific location that's associated with the availability of raw materials and other capabilities that are associated with operating silicon based facilities.

There are a number of facilities that have that capacity or capability around the world, particularly in Europe, that we're currently in conversations with.

The semi works plant is located at the old Herbst chemical site out of Frankfurt.

They turned it into a tolling or they operate the site for the benefit for people like us who come build a small plant.

They provide a whole bunch of infrastructure support services.

I hope and believe that in midterm the semi works plant would continue to operate on a commercial basis to produce for developing markets in the fullness of time it is hopeful or possible that that would turn into a research facility as we develop further commercial plants for this business.

That is helpful.

Let me just say one other thing.

This initiative is representative of the challenges of developing an entirely new product in the chemical industry.

In that this is a new product with a new process and we first have to validate the economics and the quality and the environmental and safety applications or implications of the new process, which is what we're doing.

We also have to make sure there's a market for the new product.

We have a number of market initiatives we're pursuing.

But it takes a long time.

This takes years.

We'll be at a most aggressive thing it will be five or six years before we see substantial contribution out of this business.

When we look forward ten years, we think this business has the potential to be substantially larger than the few silicon facilities.

Thank you.

I have one other really small question.

Tell us about the tail gas engine write down from -

We started a project a number of years ago to see if we could take some of the engines, gas turbine engines, not gas turbine.

Gas driven engines where you use natural gas in an engine to generate electricity.

And we put in, we bought some of these big engines, they're expensive, million, $2 million, depending on their size.

And we tried to retrofit them and put them in Carbon Black plants to use tail gas instead of natural gas to generate electricity.

The problem is that the tail gas is a low BTU fuel and has some other material in it that wouldn't be simple.

We've got four of the engines installed in two plants in Europe.

And they're operating moderately.

And we're working hard to get them operating more effectively.

Two in particular in one plant are operating on a fairly reliable basis.

We're struggling with two others that are larger in another plant.

We had bought some other engines in anticipation of putting them in in other parts of the world.

We have concluded it was not a successful initiative and we shouldn't spend any more money trying to make it work.

Therefore we wrote off the existing, the engines that we have in warehouses, we will continue to try to make the engines that are installed work.

And are moderately optimistic that we can make them perform on a reasonable basis.

Thank you very much

We'll take our next question from Bob Goldberg.

Just a follow-up on tantalum.

Setting aside the resolution of the issue with Kemet and how much and when they're going to be taking product, what other factors that would affect the sequential performance of the tantalum business from the September quarter to the December quarter?

If I could expand it to the resolution with Kemet and ABX.

Remember ABX today is taking its volumes in accordance with the contract.

We've indicated a willingness to ABX and to you to reposition or reschedule the volumes in a way that may be more acceptable to them.

So if you put those two aside, it's really the recovery of the market.

As I mentioned we are seeing some modest or moderate signs of recovery, particularly in the high cap area.

And I would hope that as the year plays out that the electronics market generally is going to recover and we're going to see more tantalum consumed as that happens.

You mentioned earlier there might have been some, I forget what adjective you used, but some special factors in the September quarter that maybe helped you.

We sell material as well as powder.

And those come in odd chunks during the time.

We sold some of our intermediate material during the quarter ended September 30th.

And how much of those sales we have going forward is very hard to predict.

It depends on to a large extent on the contract resolutions.

Thank you.

I know it's hard, and I apologize for not being able to be more clear.

I think it will become clearer and more predictable in the next two months.

In the meantime we're doing everything we can to help you but I don't know how it's going to turn out.

Seems like if you don't resolve ABX that would produce a wind fall.

That's right.

I think that's a very good description particularly today.

I'd rather have good relationships and longer terms on these contracts than the windfall that appears to be available to us out of the Kemet situation.

If we have to accept the windfall, as you've now figured out, it's a lot of money, a lot of cash, a lot of earnings at least in the short-term.

I'd rather have them be happy customers for the next ten years.

That's great

Mr. Burns there appears to be no further questions.

At this time I'd like to turn the call back over to you.

Thank you very much.

I look forward to seeing you in the next few months.

I hope the market does better in the meantime

That does conclude the conference call.

At this time you may disconnect.