Cabot Corp (CBT) 2003 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Cabot Corporation's Second Quarter Earnings Results Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the call over to the Chairman, President and Chief Executive Officer, Mr. Kennett Burnes.

Please go ahead, sir.

Thank you, Jessica.

Good morning.

This is Ken Burnes, Chairman and CEO of Cabot Corporation.

I'd like to welcome you all to the Cabot Corporation's Second Quarter Earnings Teleconference.

With me here on the phone this morning are John Shaw, our Chief Financial Officer, Eddie Cordeiro, our Controller, Jim Kelly, Director of Investor Relations, Bill Brady, General Manager of our Fumed Metal Oxide business, Greg Landis, Chief Financial Officer of our Carbon Black business, and Brian Berube, our General Counsel.

Before I comment on the quarter's results, I will remind you that our conversation today will include forward-looking statements, which are subject to risks and uncertainties, including those discussed in Cabot's 2002 Form 10-K filing, a copy of which is available on our website, www.cabot-corp.com.

Last night, we released earnings for the second fiscal quarter, along with related supplemental business information.

A copy of the press release and the supplemental business information is posted in the investor relations section of our website.

Those of you on our mailing list will receive this either by fax or e-mail.

If you are not on our mailing list and are interested in receiving this material in the future, please contact our website or our investor relations department.

Today, I will begin with a short overview of the results of the quarter.

We will then open the floor to questions.

Last night, the company reported second quarter earnings per share of $0.33 compared to $0.36 per share for the same period last year.

Earnings from continuing operations before special items were $0.54 per share for the current quarter, compared to $0.39 for the same period last year.

We are pleased with the results we achieved, given the continued high raw material costs and the uncertain business environment during the period.

The chemical businesses reported a decrease in operating profit of $7 million the second fiscal quarter of 2002, and $1 million sequentially.

The decline compared to the second quarter of last year, was primarily in the Carbon Black business, where price increases failed to offset higher feed stock costs and higher operating costs.

Business did, however, benefit from a slight volume increase, and from favorable foreign-exchange impact.

Carbon black volumes in North America and Europe were considerably below second quarter 2002 levels, but this was more than offset by the growth in South America, and in Asia-Pacific.

Cabot's tantalum business earned $37 million in operating profit this quarter, which was $23 million higher than a weak quarter last year.

The results were driven by higher contract sales of both finished goods and intermediate products.

During the quarter, the initial ABX lawsuit in Federal Court against Cabot was dismissed on jurisdictional grounds.

To expedite the resolution of this matter, Cabot has brought a declaratory judgment action on the same issues that ABX had raised, which will be heard in the same Massachusetts state court that heard the previous [Chemet] suit.

In the interim, ABX continues to perform under the terms of its contract.

Last quarter, we recognized revenue on certain tantalum contracts on an estimated average selling-price basis, which resulted in deferring $8 million of revenue and profit to future periods.

This quarter, we deferred an additional $3 million of revenue and profit on the same basis.

These deferrals will be recorded as revenue and income in future periods, extending through calendar year 2006.

Volumes in our inkjet colorants business grew by 37%, but were offset by higher R & D costs, and higher costs associated with our new manufacturing facility located in Haverill, Massachusetts.

These costs are strategic investments, which will position this business for future growth.

The CG informate (ph) business reported lower sales, and a $1 million less profit than the same quarter last year.

The decline was primarily driven by lower volumes, which resulted from continued low industry-wide drilling activity.

Finally, our air gels business continues to progress.

We reported our second commercial successful translucent panel application during the quarter, and commercial interest continues to be strong.

Work continues on refining the manufacturing process in our semi-works plant in Germany.

As indicated in the earnings release, we reported $22 million of special items during the quarter.

This resulted in large part to the write-down to current market value of our equity investments in Sons of Gwalia and Angus & Ross by $21 million and $1 million, respectively.

In addition, we reported a $1 million insurance recovery, and incurred a $1 million charge for corporate restructuring.

This restructuring charge was partially the result of efficiencies stemming from the implementation of our new ERP system.

We continue work on cutting costs and gaining efficiency across the board.

We may, therefore, report similar charges in the future, as we continue to capture efficiencies related to this system.

Our cash balance increased by approximately $6 million during the quarter, despite share repurchases of $8 million, and the repayment of $12 million in short-term debt.

We continue to work on improving our working capital position.

Subsequent to the end of the quarter, substantial payments were received from certain customers, which have significantly improved our current cash balance.

We expect to gain further benefits in this area before the end of the fiscal year.

During the second quarter, the company repurchased approximately 328,000 shares, leaving approximately 2.8 million shares left to repurchase under the current board of director authorization.

I would like to remind you that over the next several months, in connection with our employee stock incentive program, you should expect to see certain offices of the company including myself, selling shares to both pay taxes associated with the vesting of an earlier award, and to purchase new shares awarded to them this year.

Overall, we remain cautious with our near-term business outlook, as we continue to struggle with today's uncertain economic environment.

We hope to maintain volume and overall margins in the chemical business.

While the Supermetals business remains strong, we do not expect to sustain the volume level achieved during the second quarter.

Furthermore, I remain encouraged with the developments in our new businesses.

In particular, we're beginning to see some signs of increased drilling activity, in especially the fluids business.

I'm also encouraged that our inkjet business will continue to grow in both the OEM and the after-market areas.

Finally, I'm pleased with the initial benefits made possible by our new ERP system, which over time will bring considerable value to the company through cost and service improvements.

With that short overview, I will conclude my comments and turn the line back to Jessica.

Jessica, if you would like to open the line for questions, we would appreciate it.

Thank you, Mr. Burnes.

To ask a question, please press the “star” key followed by the digit “one” on your touchtone telephone.

Also, if you're listening on a speakerphone, you may want to disengage your mute button to allow your signal to reach our equipment.

Once again, that's *1 to ask a question.

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

Please go ahead.

Good morning, and congratulations on a good quarter, guys.

Thank you, John.

You worked late last night, I noticed.

Yes.

Most nights, during earnings periods.

Anyway, Ken, the volume trends in carbon black in North America and Europe are much worse than overall economic activity for the auto numbers or miles driven or any metric I think you try to compare the business against.

Is there something in the year ago period, like an inventory build, that made the comparisons difficult?

You had very strong volume in South America and in Asia.

Is there just an accelerating geographic shift going on among the tire manufacturers?

We believe so.

It's a little early to tell.

We've seen swings in volume like this in the past, particularly in Europe, but also, to a lesser extent, in North America.

We are starting to believe that we're seeing a migration of tire manufacturing capacity out of Europe and North America, and into the less-developed world.

So we should expect North America and Europe to be below whatever economic metrics you want to measure against?

It's going to tend to trend below, because of a secular shift that seems to be picking up momentum here?

It's something we're watching very closely.

Thank you.

I'll get back in the queue.

Thanks.

Our next question comes from Bill Bezelum (ph) with Davidson Investment Advisors.

Please go ahead.

Thank you.

I'd like to follow up on the last question.

As the result of your belief, and I realize you're not sure that it's fact yet, but it's your belief that tire-manufacturing capacity is moving out of the US and Europe.

Would you anticipate the shutdown either of any of your facilities or any of your competitors' facilities in the US and/or Europe?

Excellent question, Bill.

You're I think aware that there has been some capacity reductions, particularly in North America, in the last 12-18 months.

Primarily with your competitors?

Primarily with our competitors.

We were asked the question at our last conference about our plans.

We responded then that we constantly monitor and observe where our capacity is located, to make sure that it's located in enough places that are most appropriate to our customers' needs.

We do feel at this point very fortunate to have made the investments we've made over the years with South America, and in Asia Pacific, in that we are extraordinarily well-positioned today to capture the volume as it moves into those regions.

As the numbers indicate, we're showing solid volume growth in those regions.

I guess the best I can do is repeat what we said last quarter.

We do examine continuously where our capacity is located.

As you have observed in the past, we are willing and capable and able to reposition our capacity as appropriate.

I have two completely unrelated questions.

The inkjet business, with revenues up, I believe you said 37%.

Is this an indication that the business is now gaining real traction and we should expect or anticipate these, sort of, strong rates of growth for some time, going forward?

Or was there some kind of one-time phenomenon in the quarter?

My second question is relative to tantalum.

You'd mentioned that you do not anticipate the volumes to hold at the March quarter levels.

But what are the dynamics that make you feel it will not hold at this level?

Let's deal with inkjet, first.

I don't believe, and we've looked at those volumes fairly carefully, that there's any one-time event of significance in the inkjet volumes.

Rather, there is solid growth, which is something that we've been working to achieve over a considerable period of time.

We're not quite sure, but we're 12-18 months into a trend of regular growth in that business.

We're seeing growth in three major segments--the sales to our OEM customers, the sales to customers who serve the after-market, and we're now starting to see some solid growth in the sale of colored pigments into the printing business.

We just finished and opened up a substantial new plant in Haverhill, Massachusetts.

It has the capacity to produce substantially more volume, and grow the business to a considerable size and we're working in that direction.

What's in the future is, of course, always hard to predict, but we have a lot of confidence that this is going to be a very attractive business for us in the future.

With respect to the tantalum business, we have as I think you're aware-though we probably haven't focused on it in the past-under our contracts, we sell certain intermediate material to one of our customers, in particular.

Those sales are continuing this calendar year.

Under the terms of the contract, the contracted sales will stop at the end of the calendar year.

Therefore, we will not have that revenue, going forward, at the end of the calendar year.

We're seeing some signs of growth in the underlying consumption, both in the capacitor market and increasingly in what we call the thin films market, in the use of copper in the manufacture of integrated circuits.

Tantalum is used as the barrier film, and that market seems to be getting a bit stronger.

So it's a little bit hard for us to predict accurately where the volumes are going to go in that.

We're comfortable with our contract positions and we're comfortable with the stability of those volumes, going forward.

We believe we have improving customer relations.

We'd like to see a strong recovery in that business, and fill out the capacity of our Japanese facility.

But we do have the particular issue of the sales of the intermediate products that I'd mentioned earlier.

Thank you.

Thanks, Bill.

We'll now go to Thomas Henwood (ph) with OMC Capital.

Go ahead, please.

Thanks.

I've got three.

The first is a follow-up on the tantalum.

It seems like there may have been something extraordinary or above expectation in the tantalum business in the March quarter.

Could you explain what that might have been?

Or was it in line with your expectations?

It was pretty much in line with our expectation.

The way the volumes sort of fell out of the system-we had a bunch of volumes in the March quarter.

It is a stronger quarter, generally, across the board, than we would expect-even absent the intermediate [inaudible].

But it's the volumes aren’t level across the board.

We had a little bit more volumes in powder and wire, and particularly bill products.

I don't think there was anything extraordinary, other than the intermediate products.

Profits were up about $6 million from the fourth quarter, weren't they?

I think that's about right.

Presuming the contractual business was relatively flat, the upside then came, you said, in the intermediate materials?

Those sales are not-They're spaced irregularly throughout the year.

So we had several more shipments during the quarter than we otherwise would have.

Got it.

That helps a lot.

So looking forward, the tantalum business ought to be more like the fourth quarter than the first quarter?

I would not tend to forecast, but certainly in that direction.

The second question is currency.

If I remember correctly, it was something on the order of maybe a $10 million benefit during the quarter.

Yes.

Given currency exchange rates that exist today, will that continue into the second and third quarter?

Well, let's just take the second quarter.

On a quarter-to-quarter, or 2002 to 2003...let me back up.

The currency benefits that we mentioned are as a result of the translation of our non-dollar earnings into dollars.

So if you look at the Euro, in the third quarter of last year, or the second calendar quarter of last year, versus what you project it to be for the second calendar of this year-if we still see that kind of a gap improvement in the dollar, we would expect to continue to receive comparative currency benefit.

That's really it.

You probably know more about that than we do.

I doubt that.

But if you held the exchange rates today, I haven't looked at currency rates and stuff like that-but presumably-you'd have a similar-type benefit.

I, too, haven't looked.

I don't have the numbers precisely in my head.

Eddie's got them.

Yes.

Eddie's here.

Eddie?

Yes.

All else being equal, Eddie just wrote me a note.

All else being equal.

But of course, it's hard to predict.

Terrific.

Eddie, do you remember when the Euro currency started to strengthen?

It was last fall, wasn't it?

Yes.

It was around December.

I'd also remind you, Tom, that there are many currencies that can also happen to outside of the Euro.

Recently it's just been the Euro that's been pushing it.

Thirdly, I wanted to follow up on the chemical margins.

You expect those to be flat.

The raw material prices have been presumably coming down, compared with the first quarter.

I know there are some lead lags involved there.

But instruct me, one would logically expect some improvement in those margins because of the lag.

For some reason, you're not forecasting that.

What might I be missing in that?

I have two comments.

First of all, we try not to forecast, as I think you're aware.

I think also, I said or if I didn't I certainly intended to say, that with the price increases in the carbon black business that we've had in the last three-to-six months, and the decline we've seen in our oil prices.

You've seen it in the oil prices and we've seen it in the psot (ph) costs or our proxies for psot costs.

We would hope that we would see some margin recovery, going forward.

I misunderstood your comment, then.

Thank you very much for clarifying it.

Okay.

We'll now go to Bob Goldberg with New Vernon Associates.

Please go ahead.

Good morning, Bob.

Good morning, Ken.

I apologize if I missed this.

But did you talk about the Japanese subsidiary in the tantalum business, and the operating rates?

I did not.

I would tell you that the operating rates are very modestly better.

We expect during the year to have some recovery in that business, from its performance of last year.

But it's certainly not a robust growth picture that I would describe.

We continue, we believe, with our contracts, to absorb a very substantial percentage of the tantalum being sold into the marketplace.

We have not seen the kind of recovery that we're hoping for and expect at some point in the future.

We do see market indications-not in our purchases, but in other information we have about the overall market-that the inventory position in the tantalum industry--our customers and beyond-is getting consumed and at some point in the not-too-distant future, we should return or industry should return closer to where it was before all this started.

It hasn't started to happen in a significant fashion, as of yet.

On the cesium formats business.

Can you talk a little bit more about that?

In the press release, I think you talked about a bit higher level of activity, going forward.

What is happening there?

It's a little bit hard to predict.

These are projects that seem to take a long time to plan and actually put in place.

There seem to be a lot of blips on the way to the store, so to speak.

You think you're going to have a job, and then for some reason, something happens to the rig, and it gets postponed.

We started to see, however, a significant level-a higher level-of inquiry, and what I would describe as backlog.

We have 2, 3 or 4 jobs that we expect to take place in this quarter, and substantial interest in the product, and the material uses of the product, going forward.

I guess I would describe us as being very pleased with the acceptance of the product in its zone-in its range of applications in the North Sea.

We've monitored the market share.

If you look at the wells that we think the product should be used in, we've had for the last period of time, and it looks like we will continue to make a very, very high market share in what we call sweet spot wells.

We're optimistic that we're going to see increase in volume, going forward.

Do you expect to make money this year in that business?

A little bit hard to predict.

It depends on the activity.

It's possible.

But I would describe us as being increasingly optimistic that this business is going to be a significant contributor to our profit in the future.

Lastly, I just wanted to mention that you have a lot of manufacturing capacity on the ground in Asia, including China.

I'm sure you've been thinking quite a bit about it.

Yes.

It is of concern to us.

Thanks for asking the question.

We have a lot of people on the ground in both China and Hong Kong.

They're not expats.

They're local Chinese or Hong Kongese in all cases.

We are in constant contact with them.

The last time I guess I personally talked to them was at the end of last week or the beginning of this week.

We have no instances of anybody working with Cabot or associated with Cabot who had any experience with the disease, either directly or with their family.

We have stopped all travel into the region, and we are not allowing those people to travel out of the region, other than emergencies within China or the region.

We're trying to keep them as secure from the disease as possible.

It has the potential to have the following impacts on our business.

Inevitably, if it continues for very much longer, it's got to have an impact on the level of economic activity in China.

Our businesses there are based on the local economic activity, and so they're at risk.

Probably more importantly, as we've announced before, we've been hard at work on several projects that we're trying to develop to expand our position, there.

Our ability to bring those projects to fruition will be threatened or challenged if we do not have the capability or ability to send people into China to do the necessary due diligence and negotiation work.

So we're watching it very closely, but I think we're of the view that this is a serious problem that will be with us for a while.

Have you slowed down that project, though, in China, yet?

I think it's fair to say that it's not yet had any direct impact on the timing.

We have some work being done on them with local resources and local subcontractors.

But at some point here in the future, it's going to start impacting us unless we get a break and can travel.

I don't believe you've seen any economic impact on the numbers.

No, we have not.

But you have to wonder whether it's going to start to hurt us.

Thanks, Ken.

Thanks, Bob.

We'll take our next question from Jeff Zekauskas from J. P. Morgan.

Please go ahead.

Hi.

Good morning.

Good morning, Jeff.

If I remember correctly, in the fiscal fourth quarter of 2002, I think your revenues and performance materials were about $106 million.

Your income was about $24 million.

In the current quarter, I think you're at 107 and 37.

So there's a $13 million improvement.

At the first of the call, you were kind enough to mention that you sold all kinds of intermediate product.

If I remember correctly, intermediate product probably has a lower margin than the normal product that you sell?

So were your inventory costs dramatically different in the current quarter?

Or is there some other factor that accounts for the striking change in profitability?

I think, Jeff, it's in your assumption that our margins are strikingly lower in the sale of the intermediate products.

Okay.

It's probably just the reverse.

It’s just the reverse.

Okay.

In terms of your inventory costs, did they change very much from the first quarter of 2002?

We have been on a program to reduce the operating costs-particularly the Boyertown facility.

At the height of the bubble, we historically had been operating that facility at very, very high rates.

Because of the union contract, we had very, very high costs when we had to operate using a lot of overtime.

The repositioning of the volumes in the contract has put us in a situation where we were required to turn down the rate.

I know their costs have come down significantly because of that.

I suspect what you're seeing some cost benefit from that activity in the numbers, as well.

Last year, Ken, there was a lot of margin volatility in performance materials.

Some quarters, the margin was in the mid-30s, and other quarters it was in the mid-teens.

Is that margin volatility, at least for this year, a thing of the past?

If it is, why is it?

If it isn't, why is that the case?

We still have the volatility around the sales of intermediate products.

They have a different margin structure, as I'd mentioned then, powder and wire and mill products.

So we're going to still see that for the balance of the calendar year.

Beyond that, I don't think of any substantial volatility other than caused by volume variance.

Earlier in the call, you said that the intermediate sales or the particular intermediate contracts won’t occur next year.

Yes.

In rough terms, how much revenue is comprised by this intermediate material that won't re-occur next year?

We're not at liberty to disclose that information.

Okay.

I guess the last question is this.

If I remember correctly, I think that Cabot in general thought performance materials would be sort of roughly flat on an income basis, versus ‘02-a quarter or two ago.

I think you're almost all the way there in the first two quarters.

I think that's right.

So have you changed your view about how the business might perform this year, or are you sort of sticking to the flat view?

No.

Let me range it this way, without getting too close to forecasting.

We do believe the business will perform better than it did last year.

So that's the bottom range.

We do not believe, however, that you can multiply 37 x 2 and add that to the numbers.

That's the top range.

The problem in this business still relates to the contract matters.

When we gave you the guidance that we did on this business, we were making an assumption that we would have resolved all of our disputes with our customers, and would have exchanged some of the current benefits in those contracts for extension of the contracts into the 206-207 timeframe.

We've done that, as you know, with two of the customers, but not with the third.

The third continues, although it continues to perform fully under the contract.

But because we have not resolved that matter on the basis that we anticipated, we're continuing to enjoy the current benefits of the contract.

I apologize for belaboring all this.

I guess this is my final question.

If you look at the revenues and profitability of the performance materials outside of the capacitor area, I know you've got some military applications and some other applications.

Can you sort of describe what's going on, in terms of rate of change of that business, outside of the electronics area?

I don't have that information, off the top of my head, Jeff.

You know, that business continues.

What we call the mill products business continues to perform, I think roughly as it has in the past.

We continue to sell that product.

We did have what turned out to be a very small spurt of activity when the Gulf War was at its height.

The fortunate, rapid end of that war sort of turned that off quite quickly.

There's the other influence there.

It's that our principle competitor, of course, is trying to make up for its lost volume in powder and wire by moving its products into the mill products area.

But I'm not aware of anything material in that segment of the business, other than the evolution of what I mentioned-the sputtering target market-which I'd mentioned earlier.

Thank you very much.

Our next question comes from John Vees (ph) with Grantham Mayo Investments.

Please go ahead.

Good morning, Ken.

Good morning, John.

How are you?

Fine, thanks.

A couple of nitty-gritty things.

Tax rate in the quarter at 20%, and 22.7%, year-to-date.

That implies, I guess, that you expect continuing benefits for the generally fairly low tax rate.

Let me explain that.

The actual tax rate on our operating earnings was 25%.

The tax rate you're seeing of 20% and when you average it, the 22% is because of the write-off of Nagwalia's (ph) stock comes with a tax benefit.

Right.

So if you wash that particular transaction or issue through the income statement-I apologize for the complexity of it.

The actual tax rate on the operating income is 25%.

That's the rate we expect to be in place for the year.

Fair enough.

Ex-Nagwalia your full year consolidated rate ought to be on the order of 25%.

Correct.

Good deal.

The balance sheet summary shows about $100 million greater current assets versus end of the fiscal year.

I'd like to think most of that's cash.

It doesn't reflect a serious inventory build on your part, I trust?

There is, and we mentioned this in the last call, and I mentioned it briefly in our notes.

We did have what I would describe as an accounts receivable issue that we were monitoring.

I think I said in our opening remarks that we had received substantial payments from certain customers very shortly after the end of this fiscal quarter.

So we believe that the accounts receivable issue is in good control.

We have seen some very modest inventory build in the performance material business, which is an interplay between the ore markets, our contracts, and what we perceived as a need to participate in a very small way in the spot market when ore prices got very low.

The other area is that we have had a modest, I would describe, inventory build, in the carbon black business, which we are in the process of working on.

We expect the working capital to be back at a level that we're comfortable with before the end of the fiscal year.

I'll look for the detail in the 10-Q, then.

In the inkjet business, do you feel as though you're at the point where you have an adequate range of color capability?

Or is there some work to do, there?

We of course hope and believe that the quality and performance capability of our color pigments can and will improve.

But I would tell you without disclosing anything that you can go into a store today and buy Cabot color pigments in replacement cartridges for printers that you might very well have in your office or home.

Bravo.

I'll look forward to doing that.

Again, I'm not at liberty to tell you what printer.

Okay.

We're left to guess.

Yes.

You made some fairly optimistic comments about your expectations for productivity from the new ERP system.

For the most part, is that outlook being borne out?

Is there anything in the way of anecdotal evidence you can give us as to how far you are in getting it all implemented and humming like an orchestra?

I can give you one example, maybe, of the kind of leverage that it provides us.

I think we've said in the past that before the installation of the ERP system, we had free-standing, individual, distinct systems all around the world.

As a result, we had individual purchasing functions.

Almost plant-by-plant in some of our businesses-particularly carbon black.

With the ERP system in place, and the work that was carried out in the implementation process of standardizing our part numbering process, we have captured the ability to what I call aggregate our purchasing processes and functions.

We're now able to purchase items for our businesses, particularly the carbon black business, on a global basis.

That has given us, as you might well imagine, significant leverage.

Instead of buying bricks for carbon black plants in 28 different locations, we now buy it once.

The opportunity and the leverage that gives you is very significant.

We're starting to capture those kinds of benefits today, as we speak, and we're optimistic onboard that there are a lot of them on board.

We've said in the past and continue to believe that by the end of 2005 or 2006, three years-we will have put into place cost annual cost reductions in excess of the $35 million that the system cost.

We believe that within three years, we'll have a better than 1-for-1 return on investment

Good enough.

That's a fine snapshot.

Thank you very much.

Thank you, John.

We have a question from John Roberts with Buckingham Research.

Go ahead, please.

Ken, what triggered the write-down of the Gwalia interest in the current quarter?

Was that a subjective assessment by you?

Or did something mechanically make you have to do that?

As you may know, Gwalia had financial problems from two issues.

One, it apparently made an unfortunate acquisition in the gold business that put it in trouble.

Then it had some difficulties with its hedge book.

It hedges its US Dollar receivables, both in the gold and tantalum business.

It got on the wrong side of the swing on the Aussie Dollar.

Stock went from roughly $8 to $1.75-$1.80, I think it was $1.82 or $1.83 yesterday.

Our cost is in the range of $4, or $3.75; something like that.

Under the accounting rules, if you believe an impairment in value of that magnitude is anything other than temporary, you're required to write it down to current book value.

We really had no choice.

We had a little bit of leverage flexibility in timing.

We had a long discussion with the accountants at the end of the previous quarter and essentially said to them that unless we become convinced that Gwalia can solve its problems in the short-term, we'll write it off in this quarter-and we wrote it off in this quarter.

I want to be clear that it's a book entry.

We do not have any plans to sell any of the Gwalia stock.

Gwalia remains, we believe, the principle supplier of tantalum ore in the world, today.

It's far and away the largest and most reliable supplier.

We will continue to work closely with them in the coming months and years about the supply.

You could have done this last quarter, and I guess it's just you were studying it.

We were in the midst of some discussions.

I candidly did due-diligence about Gwalia to make sure we had a better understanding of why they were where they were.

Not that that it’s big, but what was Angus & Ross?

Angus & Ross was a very small investment we made in an English company that continues to try to develop several tantalum assets.

At one point in the run-up, we ran a scenario that indicated that Gwalia wasn't going to have enough tantalum when the market really was expansive.

To protect ourselves, we made a $1 or $2 million investment in this company that owned the rights to a very large tantalum deposit in Greenland, and some small, what I would describe as [Captain Dodd's] opportunities around the world.

Again, we continue to own the stock.

We continue to deal with the company.

But the stock in the English market has lost more than half of its value.

Again, the accountants said they cleaned up.

The silica business continues to have very strong volume numbers.

You've only got one more quarter I think where you don't have an easy comparison against the manufacturing problems you had during the start-up of the new plant.

That's right.

How does that volume trend, as we anniversary those manufacturing issues?

Bill Brady is here and may want to correct this.

The volume trend in that business is moderately solid, I would describe.

Our silicone business with Dow Corning has been solid.

It's been very strong, recently.

They appear to have picked up some market share.

They have what appears to be a very effective new way of marketing, called, "diameter," which is an internet-based marketing program for their commodities of silicone products, which we think has picked up some substantial market share for them.

What we call our niche business, which is the silica sales to every other application, is okay.

We're experiencing some pricing pressure there, as we seek some capacity additions from our competitors.

But the volumes have been reasonable.

We all watched and read the release last night.

I'm sure you did as well from Cabot Micro is, of course, the other one.

We'll see how that evolves, going forward.

It will be aninteresting one.

But that's been what I'd describe as moderate-which is reflected in their numbers.

You might not have seen this yet, but [Crompton Corp] is selling its organosilenes (ph) business to GE silicones.

I'm not sure if that would have any impact on your business.

You deal primarily with Dow Corning, and not with GE.

I don't know whether there's any integration issue that you would pursue with the Crompton business that might affect the marketplace.

I don't think so, and Bill Brady is nodding his head “no”, as well.

We don't have any substantial business with GE, at all.

Our almost inclusive customer in that market today is with Dow.

I wasn't even thinking much about customers-just the intermediate flows between the...

The intermediate flows, as you know, John, is a very challenging, confusing issue.

Again, it's candidly more confusing and more complex as time goes on.

The cost of raw materials, therefore, has some volatility and some interesting, strategic issues, as we look forward.

Lastly, is ARO (ph) at all benefiting from the increased focus on safety globally?

I don't have with me anybody.

We used to have a bunch of people here who were on the ARO board.

Bill, can you answer the question?

Could you repeat the question, please?

There's obviously been an increased move and focus on safety.

ARO's primary focus is around safety products-workplace safety products and so forth.

Their business was very lackluster ever since you did the LBO with them, because of the weak industrial trends.

I didn't know whether the sort of secular move toward greater safety here has finally picked their business up off the bottom.

I assume the intention here is to monetize that at some point in the future, here.

I didn't know if this was providing some improved results.

The sales of ARO have actually been showing pretty solid, steady growth, over time.

They have spurts.

After the September 11th tragedy, they had a spurt.

They have spurts, here and there.

Overall, it's pretty steady growth still.

I did read a note, actually, that was on our Yahoo page.

I was not aware of this, and I don't know if you were, Bill, that ARO's little white mask for some reason has had a very strong position in the SARS market.

I don't know whether that's good news or bad news, given the liability issue.

I just thought I'd ask.

You see everybody wearing the face masks and so forth.

ARO's market position with those face masks is not huge.

Isn't 3M the dominant maker?

Earplugs remain the core of its business. 3M, I think has the lion's share of the market for the little white masks that we all wear.

Thank you.

Just a reminder, to ask a question, press “star” “1” on your touchtone phone.

We'll now go to Bernard Biggins (ph) with Gardiner Lewis Asset Management.

Please go ahead.

Hi, Ken.

How are you?

Good.

Yourself?

Pretty good.

I joined the call late, and I do think you talked about this a few minutes ago.

I'm going to ask you to give us some color on the efforts you guys are making to sort of wind down that inventory level a little bit and build the cash a little bit, as well.

Yes.

Let me just briefly repeat.

I did answer that question.

We've been working on two aspects of that.

The accounts receivable issue, first.

We did receive shortly after the end of the quarter, several substantial payments from certain customers that had pretty much cleaned up the issue.

Great.

The cash balance today is substantially more attractive than it was at the end of the quarter.

Good.

Now, the working capital issue.

During the quarter, we consumed a little bit of working capital.

But we did not make a lot of progress on consuming what we built in the first quarter.

We're working hard on it we're pretty satisfied, although of course we'll nervously await the results.

But I'm pretty satisfied that we'll have it behind us by the end of the fiscal year.

Thanks a lot.

There appear to be no further questions in the queue, so I'll turn the call back over to Mr. Burnes for any additional or closing remarks.

Jessica, thank you very much, everybody.

We appreciate your anticipation, and look forward to talking to you again in three months.

I hope you all have a good day.

Thank you.

Thank you.

That does conclude today's conference call.

Again, we appreciate your participation.

You may all now disconnect.