Cabot Corp (CBT) 2004 Q1 法說會逐字稿

Good day and welcome to the Cabot Corporation first-quarter earnings results 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. Ken Burnes.

Thank you, Sylvester.

Good morning, everybody.

This is Ken Burnes.

I would like to welcome you all to the Cabot Corporation first-quarter earnings teleconference.

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

David Elliott, our Controller;

Dennis Fink, our Director of Investor Relations; and Bill Brady, General Manager of Carbon Black;

Eddie Cordeiro, General Manager of our Fumed Metal Oxide Business; and Brian Berube, our General Counsel.

Before I comment on the quarter's results, I will remind you all that our conversation today will include forward-looking statements which are subject to risks and uncertainties including those discussed in our 2003 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 first fiscal quarter along with related supplemental business information.

A copy of the press release and supplemental business information is posted in the Investor Relations section of our Website.

For those of you on our mailing list, you'll receive these either by fax or e-mail.

If you are not on our mailing lists and are interested in receiving this information in the future, please contact our Website or our Investor Relations Department.

I just want to point out that we have adjusted our method of calculating fully diluted shares as referenced in the financial statements that accompanied the press release.

I will now move to a short overview of the results for the quarter and then the open the floor to questions.

Last night to the Company reported first-quarter earnings per share of 42 cents, compared to 48 cents earnings-per-share for the same period last year.

These amounts included charges of certain items in discontinued operations totaling two cents per share for the current fiscal quarter, while there were no such items in the prior year quarter.

We're pleased that our business has produced strong financial results in an environment of high raw material cost and low industry capacity utilization levels.

Improved performance in our Chemical Businesses largely offset the anticipated decline in the Supermetals earnings.

We saw promising signs of market recovery in a number of our sectors in the first quarter.

Chemical Business reported a $3 million increase in segment profit compared to the same period last year.

Carbon black improvement largely due to cost reductions and favorable foreign exchange, partly offset by rising raw material costs.

The fumed metal oxide and inkjet profits were flat year-over-year.

The Chemical Business segment profit increased by $16 million sequentially in spite of seasonal volume decline and high raw material costs;

Carbon Black's profit increased $9 million as a result of operating in manufacturing cost reductions.

Compared to the force quarter, fumed metal oxides business profit improved by $7 million due to increased volumes, product mix, and lower-cost.

In addition I am happy to report that during the quarter we entered into a new long-term fumed silica supply agreement with Cabot Microelectronics.

This enables our fumed metal oxides business to maintain a majority of its volumes under long-term agreements.

Within the Chemical Business we continued to adapt our capacity to our customers migration to developing lower-cost regions.

In carbon black we have seen strong sales on a year-over-year and sequential basis in South America and Asia, and particularly in China.

A new carbon black unit in our Shanghai, China facility was commissioned at the end of our first-quarter, and we are currently considering further expansion in the China.

We expect to sign a joint venture agreement in China with China National Blue StarGroup Corporation for the development of a fumed metal oxide plant in the very near future.

Additionally we are actively exploring further expansion opportunities in other low-cost regions of the world.

Our inkjet business experienced significant volume growth but profits were flat as we continued to invest in the development of new platforms and products.

The inkjet business remains optimistic that it is on course to secure a major OEM printer platform that should result in significant new volumes.

The first commercial orders for this platform are expected during fiscal year.

Cabot Supermetals business earned $21 million in segment profit this quarter, which was $11 million less than last year due in large part to the expiration of contracted sales of intermediate products.

Sequentially Supermetals results declined by $6 million.

These declines were partially offset by continued market recovery particularly in the Asian sector and lower operating costs across the system.

Specialty Fluids profits declined by $1 million versus the same quarter last year and $3 million sequentially.

These declines in profits were primarily due to lower volumes.

However, we have since completed one significant completion job in the North Sea and are in the final stages of our first drilling job under our Statoil contracts.

The revenues associated with these jobs will be recognized in our second quarter.

As indicated in the earnings release, during the quarter we recorded after-tax certain charges in discontinued operations of $2 million or two cents per share.

For more details about these charges, please see Exhibit 1 of the press release we issued last month.

Our cash balance increased by $5 million during the quarter from 247 million to 252 million on strong operating cash flow performance.

During the first-quarter the Company repurchased roughly 750,000 shares or approximately $22 million, leaving approximately one million shares to repurchase under the current Board of Directors authorization.

During the quarter, capital expenditures totaled $22 million versus $26 million in the same quarter last year.

In conclusion, we are very encouraged by the results of the first-quarter.

We continue to face challenges in our core businesses due to margin pressure from high-energy cost and low-energy utilizations.

However we are continually reducing our cost structure, adjusting capacity, to improve our competitives to beat changing market conditions and are starting to benefit from market recoveries in many of our sectors.

We are also encouraged with the progress of our new businesses and both inkjet and the cesium formate businesses could end the year having achieved a new level of market penetration, revenue, and profitability.

Both seem poised to become valuable business for Cabot and its shareholders over the long-term.

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

Thank you, sir. (OPERATOR INSTRUCTIONS) Michael Judd of Greenwich Consultants.

The question about -- there was a number in the annual report or the 10-K that said for fiscal year 2003 approximately 28 percent of I believe your volumes in carbon black were under long-term contracts.

But I imagine that does not really take -- it takes into account for part of the year the new long-term contracts that you have, which is your second one of I understand correctly.

So what I'm trying to get a sense for is on an ongoing rate if we to say look at what that number without possibly to be for fiscal year 2004, what would that percentage be?

That's my first question.

Let me give a little bit more complete answer than what the (technical difficulty) question calls for.

The 28 percent number covers the volumes that we had in the 2003, which were subject to long-term margin adjusting contracts.

As you know we entered into an additional contract at the end of last year and the volume under that contract rose over a period time and it is now in effect and it is starting to grow.

So we would anticipate seeing that 28 percent number grow up towards the range of 35 or 40 percent during the year, although I want to add one other thing.

The key to those contracts to us is two things.

One is the stability in terms of volume, but also the margin guarantee that we get out of them, and the resulting adjustment in our prices as feed stock fluctuates.

We have an additional shorter term contract generally for a year that have similar margin adjusting provisions in them.

So to try to give you a -- I think what you're looking for I would put in your head a 35 to 40 percent number during 2004, which will be subject to contracts with margin adjustment provisions.

And as I think you're also aware, Mike, we try to grow that number.

We think it is an appropriate way to run our business and we continue to try to reach agreements with customers to expand percentage of our volume covered by such contracts.

A clarification on that.

You mentioned that some of the short-term contracts also have the margin escalation or margin changes with raw materials.

If you were to incorporate those in there, then what would the percentage have been and what could it be this year?

I think it could be right in the 35 or 40 percent this year.

I don't have the number for 2003 in front of me.

All right.

And secondly, I believe in August of 2003 you began construction of a facility in Aetna, Ohio for tantalum sputtering targets.

I guess there's an indication that sometime in fiscal 2005 that plant could begin producing product.

Do you have any sense whether it would be the beginning of the year, the middle of the year or the end of the year?

They I'll get back in line.

Two things about that.

We have leased the building and are in the process of equipping it to do some of the work in producing tantalum sputtering targets.

We are today in the process of developing a production line for tantalums sputtering targets that includes use of our (indiscernible) equipment and facilities in our border town plant and some contracted facilities and have actually delivered our first sputtering target for testing to a customer.

So we will be delivering sputtering targets here in the not too distant future, and over a period time instead of using external resources to produce -- to do some of the work on those sputtering targets, we will be bringing in a more of an in-house as a facility in Ohio comes on stream.

Thank you.

I will get back in line.

Jeff Zekauskas of J.P. Morgan.

The question I have is on your tax rate.

Your tax rate is in the low 20s, which is one of the lower tax rates in the chemical industry.

And in looking at your tax notes, there's two big items that push the tax rate down.

There is impact of tax at different rates for repatriation and other; and there is also extra territorial income exclusion foreign sales corporation.

Can you give us a little idea of what to those two factors are?

And can you talk about the sustainability of your tax rate at the current level?

A complex question.

We have worked, like every company, very hard to minimize our tax rate, trying to take advantage of appropriate tax planning that was available to us.

We have taken advantage of the provision in the U.S. tax code that provides that if you don't repatriate earnings you can avoid taxes in the United States on foreign earnings.

We have also worked hard to arrange our capital and debt structure of our foreign subsidiaries to have as much of our foreign earnings sheltered by our interest costs.

It is, as you can imagine, a complex and to some extent delicate balance of trying to do that and optimize the situation.

I would be honest with you, Jeff.

We continually get a little bit surprised.

I think you're aware we anticipated 25 percent for the year and the current estimate out of our tax department and what you see in the first-quarter think is 23 percent.

We work hard to optimize that cost position I would say it; and I hope we can maintain it.

But it is an ongoing challenge and it is an ongoing management challenge.

The second question is can you talk about the raw material effects on carbon black in the second fiscal quarter for Cabot?

That is to be able to begin to catch up or we will need to wait until the third fiscal quarter before you begin to catch up on some of your contracted business?

On the contracted business, it depends on what happens to oil of course, but we've have had feedstock prices high here for awhile and some of those have been passed through and will be continued to pass through in the adjustment as we come to the end of a quarter.

Although it is not precisely a response to your question, you should be aware that we don't appear and the industry does not appear to date to have much pricing leverage to pass feedstock cost increases through to our non-contracted customers.

I guess the last question is, are there any other significant pieces of business that may drop off in the Supermetals area in fiscal 2004 and fiscal 2005?

Contracts drop off is a complex question.

The contracts as you know expire over the next two and three years.

On the other hand, we are today selling product outside the contracts to all but one of our contracted customers.

And generally are observing a strengthening in the tantalum market.

I believe a good way to measure this is the capacity utilization, current capacity utilization in our Japanese facility, which does not sell, if you remember was not part of the contract, is close to 75 percent.

So while we have the contract expiring, I continue to have my fingers crossed that that is going to happen at a time of market strength and enable us to continue to sell those volumes.

But as you know, it continues to be a concern for us.

What is the next expiration that we're looking at?

We have one portion of one of the contract that expires.

The first contract we entered into expires at the end of this calendar year I believe.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) John Roberts with Buckingham Research.

I missed the very beginning of the call but it sounded like it was short.

If you covered some of this, stop me.

Did you have the full impact of the drop in tantalum intermediates during the quarter or was it a partial quarter impact that lingers into the current quarter?

It was a full impact in the first-quarter.

The contract expired at September 30.

Thank you.

Were both of the large cesium formate jobs in the Statoil contract or was only one of them Statoil and one something else?

They were both Statoil but only one was in the contract.

One was on an existing platform and field that we had done previous work on and that we finished our substantial completion job just the end of fiscal year.

Actually the material came out of the hole on December 31.

As you know, John, we don't bill or recognize revenue until after we've got the material back and cleaned it up and figured out how much material was lost.

We loaded out last night for an additional large completion job in the same field.

Again, outside of the Statoil contract.

And therefore does Statoil expect to be sequential, sort of one well after another or will you have under the contract parallel wells going on?

The first well took an extended period time.

The first well under the Statoil contract, which was a drilling and incompletion job.

I think it started around December 1.

It is a floating rig, deep conditions off the central coast of Norway.

They had weather problems in December and the material is as we speak still in the hole.

We anticipate they are at the bottom of the hole and the drilling and the logging and everything about the hole went very, very well and they're going to take it out here in the next couple of days.

We anticipate the second rig under the contract is in use now doing drilling activities that gets them down to the production zone, which is when we start.

So we would anticipate here sometime during the quarter having two rigs in use under the Statoil agreement.

In the inkjet business, volume was up 5 percent sequentially.

That seems relative to historical or low sequential gain.

It analyzes to only something in the low 20 percent annual growth rate?

I don't know where you got the number, John.

The numbers I have in my head are roughly 20 percent in our OEM sector -- oh, sequentially numbers.

I'm giving you quarter-over-quarter.

Sequentially, so the 5 percent sequentially would annualize too a little bit below trend for a deceleration in growth.

Is that just noise bouncing around?

We think it is noise.

Again there's two sectors.

We have been in the major OEM.

We've been a customer for considerable period of time, as you know, so at some point you reach a point of saturation.

We don't think that has happened yet and we continue to penetrate into more and more of their business.

In addition, we have some very encouraging results in getting additional new customers in the aftermarket segment.

I continue to hope for and anticipate volume growth in existing business in the 20 to 40 percent range, but you're never quite sure.

I've got some other questions.

I'll get back in the queue though.

(OPERATOR INSTRUCTIONS) A follow-up from Mike Judd.

Ken I have a question about earning sensitivity to changes in natural gas and also oil prices.

I don't know if you have a statistic in mind for let's say if you have a dollar change and dollar per million BTU change in natural gas costs.

What impact does that have on the bottom line from an EPS perspective?

Also the same type of number -- a dollar per barrel change in resid, what kind of impact does that have on EPS?

Two answers to your question, Mike.

I think you are aware of this but if you're not I will repeat it.

The carbon black yield question, i.e. how much carbon you capture per barrel or of oil you use or per ton of oil you use and per volume of metric of natural gas is a very important technical issue in our business.

And I think you are aware that roughly the yield of the carbon out of the oozed (ph) hydrocarbon fuel is in the 60, 65 percent range.

But it is a very, very important trade secret to us and we worked very hard to maximize that number and do not disclose our activity to our competitors.

So although we maintain the kind of numbers you're looking for, it is not something that we disclose.

I will tell you however that the rise in natural gas, the high natural gas costs are a significant problem or significant challenge for us in maintaining our costs, particularly as we try to lower our operating costs.

And when we mentioned lower operating costs in the carbon black business, that is after absorbing a not insignificant increase in the cost of the natural gas we use.

So we have been working very hard to lower our total operating costs and had very encouraging results for the quarter.

Is there another way to ask that question like if I say what percentage of cost of goods was energy or hydrocarbons, raw material based?

Would you be able to answer the question that way?

I'm going to work very, very hard not to give you a number that would enable you or somebody who really understand the business to figure out our yield.

And I think as I hope as a stockholder and a follower of the Company, I think you understand that is in your benefit.

Okay, fair enough.

I'll get back in line.

A follow-up from John Roberts.

Ken, in Europe where the volumes were down 6 percent from a year ago you got the French facility coming down.

Did the operating rate decline at the other facilities?

Was all of this volume decline absorbed at the facility you closed?

Europe has been a soft market.

I think the decline quarter-over-quarter is largely due to some metrics that we engaged in in the middle of last year to see if we could get the prices up.

And at the time we walked away from a bit of volume that we thought would yield a higher price for us and we were unsuccessful.

We have been working to get those volumes back and I think you'll see them come back into the system here in the next quarter or two.

And then in Asia-Pacific where you had a 10 percent increase in volumes but it was more than offset by unfavorable product mix, it sounds like that was a hell of a product mix shift to more than offset 10 percent volume growth.

What happened in the mix there?

As usual you have information that I don't have at my fingertips.

I honestly was not aware of what you just said and I'm looking at Bill Brady and I don't know where you get the notion of an unfavorable mix.

In the supplemental disclosure sheet that you have on your website, under Asia Pacific in the year-over-year discussion it discusses the 10 percent volume increase and it says the increase was more than offset by unfavorable product mix.

I think what you are seeing there although I'm not 100 percent sure -- somebody put a chart in front of me.

I think you're seeing there is a continuing effort during the quarter to see our growing markets in both China and India.

And when we take product out of another plant and ship it into one of those markets, we don't get much margin on that product at the end of the day.

And so that is an effort as I think you are aware we've been doing that.

The new unit in Shanghai is opening up essentially sold out.

Because we have been producing in Australia and Indonesia to do that.

We recently started to do the same thing to ship into India, which was very, very marginal business, but enables us to look at an expansion in India that would come online with substantial economic return as it starts.

So to be sure, we continue to do that in China even though we have the new unit up and running because the market exceeds the new unit, our capacity, and we're starting to do it in India.

Thank you.

Bob Goldberg of New Vernon Associates.

I was not aware that there was any expiration or contract expiration in the Supermetals business until the end of calendar '05.

I think you mentioned earlier that there was something coming off at the end of this calendar year.

I think if you go back in your brain in memory, Bob, you will remember that before the events that led to the transformation in that business, we entered into one long-term contract with one of our customers at what turned out to be very, very low pricing.

And that contract was entered into roughly a year before all of the events that led to all the contracts.

I believe that contract expires at the beginning of '05.

Not a really big problem then if you entered into it at -- .

I'm glad you asked the question.

Because it is a price.

The price in that contract is actually today at or below the open market price.

That was my next question.

Obviously if you're hoping for a tighter environment so you can sell these volumes when the contracts expire, but where are open market prices relative where the existing contract prices are?

Are you making up some of that gap or what is the trend in the open market prices?

Well, the complex answer to what seems like a simple question.

I think you are aware of the high cap issue and high-capacity powder is something that we particularly our Japanese friends have done very, very well in.

I believe today that roughly 50 percent of the volumes being sold by our Japanese plant is in the high cap range and above which any of our competitors can produce.

Now those powders attract a very attractive price.

The pricing for what you might call commodity powders is of course below our contract price in most of the contracts, but at or close to the pricing that we have in the contract that expires at the end of the year.

And those prices are to our pleasant surprise, well above the pricing that was in effect before all of this took place.

So as we look at the whole situation today, we're feeling somewhat more confident or optimistic about our ability to maintain the profitability, maintain or grow the profitability levels of this business as this works its way through in the next two or three years.

How do the prices of the high cap powders compare to the prices you are selling under the contracts domestically?

I guess I would rather not specifically answer that question.

Lastly on that issue --

Let me explain why.

Those are prices between us and our customers and as you can imagine both confidentially and competitively important.

Can you give us some idea of how much revenue you're getting from the Japanese operation versus the Boyertown operation?

It seems like there's more upside near-term from the ramping up the operating rate in Japan.

That is certainly the case.

You know that we lost a big chunk of profitability, absolute profitability this quarter over the sequential and previous quarter, but our profitability in that business was down substantially less than one could have expected.

That is largely because we are seeing a strong Japanese recovery in the Asia-Pacific region and strong demand out of our Japanese plant.

And I mentioned that the utilization rate in that plant is up close to 75 percent.

I think a year ago it was in the 35 to 40 percent.

I don't think we give out the specific revenue per plant numbers.

I missed the early part of the call also.

Did you revise your guidance for the Supermetals business for the full year, given the --?

We don't like to give guidance.

You'll recall we gave guidance when we started this all and I said when it settles down, I'd try to give you a final guidance.

I hope the guidance we gave that it will be somewhat below, modestly below the 79, $80 million level that we made in 2002 is still out there, and that's where we're going to leave it.

I would say generally that we're feeling more optimistic about that business.

Lastly and I apologize for being so long.

Was there anything unusually positive in the fiscal first quarter in the Supermetals business because your run rate is obviously already above the 79 million?

We had one unusual accounting issue in that when the plant, the Japanese plant was operating at a very low rate, under the accounting rules we expensed the fixed costs of that plant rather than adding it to the inventory costs.

And that started with the increased operating rate of that we saw in the first quarter, that process was stopped and started to get reversed.

That gives us some modest benefit with selling low-cost inventory out of the Japanese plant in the quarter and in the next two or three quarters, but it is not substantial.

But you are right to point out that the run rate in the first quarter is at a rate that would certainly ask whether we have upside on the guidance.

That is a fair question.

I guess I would like to leave it at that if I could give away with it.

Thanks.

(OPERATOR INSTRUCTIONS) Jay Harris of Goldsmith & Harris.

Good morning, Ken.

Where I am it is sunny and bright and warm.

Two questions.

What should we expect in terms of magnitude and over what period of time in terms of costs coming out of the carbon black business as we go forward?

And the second question goes back to tantalum, but let's hold off on that for a minute.

I think you recall, Jay, that when we put in the our ERP system that we made a commitment to ourselves, our Board and to our shareholders that we would -- I think the period time was in the fiscal year 2005 -- reduce costs in the system, which is largely carbon black, by an annual amount greater than the total cost of the system.

And the total cost of the ERP system was in the range of $40 million.

And I would tell you today that we feel confident that we will achieve that objective.

Does that mean that we are at that rate in the December quarter, or more of it shows up in subsequent quarters?

As I think we made clear, we are very pleased with the cost progress we made in the first quarter.

I will remind you, I'm sure you understand this, it is a little hard to pick out of our operating statements because of the weakness in the dollar, our operating costs on a translated basis outside of the United States look higher than they were a year ago.

The currency effect on cost is always hard to figure out.

We measure ourselves in terms of some sort of constant dollar measure and if you apply a constant dollar measure to those costs across the system, the run rate in the first quarter leads me to be very optimistic that we will meet our 2005 target.

Is there another cost reduction program in the winds for carbon black?

I don't think other than as you know we continue to examine our capacity and may at some point in the future conclude that it is appropriate to close another plant either in the United States or Europe.

I don't think other than that there is any major cost reduction activity like you saw at the end of last year.

However, the reason to that is we think we plucked the low hanging fruit.

On the other hand we have and will continue to press hard on what I would call a continued improvement process, an increase in productivity process.

We're working very hard on purchasing.

We're working very hard on supply chain.

We're working very hard on the yield issue I mentioned earlier.

We have extensive programs.

We think one of the issues we're facing in the carbon black business is a need to learn across the entire system to operate the system at a cost level that will enable us to be as or more profitable with lower margins than we have experienced in the past.

And we're working very hard on it and I sit here today feeling moderately optimistic that we can do well in the months and years to com on that objective.

As I recall, your cost reductions in carbon black for this year reflect one, the closing of a plant in Spain; and then a reapportion of the output to your other Western European facilities.

And two, a consolidation of the general and administrative functions in Europe.

Correct, and there was a third one, Jay, which was the staff reduction we had in North America.

Should -- I am going to reask my first question.

Should we assume that all of those benefits are ratably reflected in the December quarter, or do we get incrementally more benefits going forward?

Thinking about currency.

If you measure everything in local currency.

I will answer your question in local or constant currency.

I think there is some reason to be optimistic particularly with the Spanish plant closure that we have more benefit ahead of us in that we had planned originally when we put that program together to close the plant I think during our second quarter of this fiscal year, but had an opportunity because of a number of things to close it six months earlier.

That took the cost of the plant out of the system, but added to our operating costs some logistics and shipping and transportation costs around the European system.

Those are being worked on as we speak and will come out over the next I would say, six to nine months.

The other thing, Jay is that the European shared services activity is an ongoing activity.

And I think it is fair to say that our costs actually had to go up a bit before they came down, because we had to build the shared services activity actually outside of Brussels and Belgium before it took those costs out of the plants.

I would describe us as 60 percent through that.

We have a couple more conversions taking place here in the next couple months and will certainly be done by the end the fiscal year.

So there is reason to believe that some of those costs benefits of those activities are still to come.

You'll also note that some of the certain items that we had this year under the new accounting rules although we announced them last year, we don't get to charge them to income until we actually expense them.

And some of those certain items this year are those expenses coming into the income statement this quarter.

We're working very, very hard on costs.

Internally we had very aggressive targets and I hope to be able to -- as the numbers unfold in the upcoming quarters to show you that we can do some significant things in our cost area across the system.

If I might come in with one last question.

Is the ramp in Japan something that is assignable at this point in time?

If one were going to look at the March quarter, looking at the level of business today, would we have a higher operating rate for the March quarter in Japan than we had in the December quarter?

It's a little hard to predict, but the trend is positive.

Just a couple of public things that you may or may not have seen; we saw earnings announcements of some of our customers last week who indicated that they were seeing the same thing that we were seeing, that the market was stronger, that they were seeing improvement again case size activity.

And there is a general positive feeling in the tantalum industry as we sit here today.

History would tell us that that is going to continue for awhile and that if it does, the tantalum industry generally at our level will get back to being fully sold out.

That of course would be very beneficial to us.

Internally you identified a slope of improvement?

I'm not quite sure how you -- ?

In other words if you look at Japan and you look at the trend of incoming order rates, do you have enough confidence to say that there is definable slope of improvement?

There has been in the last few quarters a definable sloping, a recognizable improvement in capacity and orders and business going forward.

And we sit here today -- you are always nervous in any business like this that the orders are essentially stopped, but we have no reason believe as we sit here today that that will not continue.

On the ore cost (ph) colorants, at what point do you expect that revenues would start to grow faster than product development costs?

Let me give you one more data point that we've talked that in the past that is an indication of where you're going.

And that is we have seen and the industry has seen a strengthening in ore costs.

I am told anecdotally that there has been a recent purchase in ore in the world at over $30 a pound.

Ore was in the $15 a pound about a year ago.

Can you give us some indication of where your ore costs are based?

Our ore costs are tied into our contracts in Australia and they have been substantially above the open market price was for the last two years.

The market price is getting a lot closer to our costs as we sit here.

And the comment on inkjet colorant, the rise in product development costs relative to revenues, when do those two curves separate?

Assuming we are successful in getting this clear platform in the second major OEM, we would anticipate that we would see them start to separate certainly in fiscal '05.

There is a fascinating question in that business however, is that we are already receiving significant requests from the OEM sector for further development beyond what we're spending on now.

And we started to debate internally the question of how long you chase the golden ring and where do you start to harvest some profit instead of trying to get it to be a very, very large business.

I guess I would have two comments about that.

First of all, I would regard that as what we call in the company a very, very nice problem to have because that means that you have an option to convert it into a very profitable business.

The second one is that it's also a very, we think a very favorable comment on the strength of our core technology.

And that we get requests from a significant number of people including the major OEM's to do research with them so they can improve their product that they sell to their customers.

So we remain encouraged about the business, Jay, and we would hope to start to see it contribute measurably and significantly to the earnings stream of this company in the 2005.

Thank you.

A follow-up from Michael Judd.

Yes, in the carbon black business it looks like volumes were flat year-on-year and I was just wondering if you could comment on -- it looks like last year on a full year basis they were down and I think you have explained and talked about in other conference calls about the movement of the tire manufacturers to Asia.

But surely the pickup in the economy, things like that, stronger autos sales and things like that, there's obviously the replacement tire issue.

What would you expect for this fiscal year in terms of volumes in both North America and Europe?

Would you expect them, let's say Europe was actually down six percent in the first quarter year-over-year, but would you expect that -- is that more a function of the fact that you shutdown one of your plants or is it just underlying demand?

What is going on?

I would expect -- these are always hard to predict and I would remind you Mike, that historically carbon black volumes in a good year might grow three or four percent for the industry.

And on average over any period of time they grow one to two 2 percent on a worldwide basis.

We get spikes in volume with the cycles, but not huge spikes.

I would expect -- I think if we would have flat volume in Europe and North America that would be solid performance for us in those regions.

We are experiencing as you will note more significant growth in Asia and South America.

In South America it looks like in this particular quarter or any one particular quarter could be noise, but it was basically flat year-on-year in the December quarter.

Are there seasonal issues there?

There are some seasonal issues in the market, but we actually are looking hard at increasing capacity.

And you just added some new capacity in your Shanghai facility.

Were you sold out before?

I think you had indicated that you might have been sold out and that with the new capacity, assuming you're looking at Chinese growth, how long would it be until you would be sold out again?

Yesterday.

I explained in an answer to a question of John Roberts about the margin.

What we do, particularly in Asia Pacific, is that as we build a new unit, what we call seed, what you would understand is importing product or other plants into the market.

And so we expand our market position before we have internal capacity.

So I think roughly speaking the third unit in Shanghai when it opened was essentially fully sold out.

We are continuing to seed into China in that we can sell more product, more of Cabot's quality carbon black in the China market that we can currently make in China.

And we're bringing products from other plants in the Pacific region into China to do that.

We are also doing a similar thing today in India.

The market there continues to grow overall very attractively and for us candidly almost more than we can handle.

We seem to because of our long position there and the quality of our operation, we seem to have taken a very, very solid market position and be the supplier of choice.

So it is a nice position to be an.

Also in North America and Europe, were there any actions by your competitors to (indiscernible) capacity or anything along those lines in the quarter or any expectations of that?

I realize you're not in charge of your competitors, but have you heard anything?

I think there was one thing.

Bill Brady, would you tell us?

The most recent announcement was by Degussa in their German plant.

And that was not a total unit shutdown but they announced the closure of two units.

Two rubber black units.

Not a total plant shutdown but two units which is probably 60 or 70,000 tons, roughly the same amount if we could guess.

But not dissimilar to what we took out of our Spanish system.

So if operating rates in North America are switching again, but if operating rates in North America were around 80 percent or so, I think you might have indicated that last quarter or so?

That remains roughly the operating rate we are experiencing.

And you did increase your operating rates in Europe by idling a facility.

Are you still thinking about potentially doing that here?

As I have said consistently last two or three quarters, we continually examine that and if we find an appropriate opportunity, we would of course do it.

But we have that issue under examination.

Thank you very much.

A follow-up from Jeff Zekauskas.

I would just like to follow-up on some of the litigation issues.

Could you update us as to the asbestos claims involving the respirators?

And secondly, can you describe the beryllium litigations and whether that is something we need to worry about?

What the size of the claimant population is and how we might think of that in 2004?

I'm going to get Brian Berube, our General Counsel, to talk about the beryllium matter.

I will give a little background and then turn it over to him.

The asbestos matter I would describe as have been roughly static since we took the reserve, the charge two quarters ago.

We, like everyone else, observe closely what happens in the Congress and we were optimistic for a while, two or three months ago that this whole issue might get resolved on a basis that was reasonably satisfactory.

And as the Congress reconvenes here we will look again, but other than that it seems to be very quiet.

The beryllian issue comes out of the business that Cabot owned in the '70s and sold not too long thereafter.

Beryllium is a very complex topic because most of it was built for the government.

We have been -- there is a disease called Berylliosis, which is a lung disease comes from contact with too much airborne beryllium.

It is an issue that has been kicking around Cabot for an extensive period of time and it is a complex issue.

A bunch of the insurance claims that we've captured and you have seen us bring into the balance sheet in the last few years comes from that.

There is a very complex indemnification shared liability story behind it.

Maybe Brian could tell you what he thinks.

I think, Ken, it's a very good summary of the beryllium situation.

Jeff, I think you may have seen our disclosure in our recently filed 10-K.

I think that that is a very good description.

I will just point out that the beryllium issue, because it has a particular citist (ph) that is involved; it is a fairly limited issue for us, and as I said, I think the disclosure in the 10-K is a pretty accurate or very accurate assessment of what is going on there.

In the 10-K there was a phrase about there being a large number of claims.

What does large mean?

I'm going to flip through the 10-K and try to understand.

Very recently a large number of individuals and their spouses have asserted claims now pending in 34 Pennsylvania court (indiscernible) .

In 34 separate - I believe that is under 100 people and what those are folks that live around the facility.

So are any of these cases coming to trial this year?

I am not aware of any trial dates on these.

They were recently filed and many of these we're still sorting out where all of these things stand.

There is one more that says the matter in Florida has been scheduled for trial in July '04.

Has that changed?

Not that I am aware.

So there is one coming to trial then?

In Florida.

I thought you're talking about the Pennsylvania ones.

Right, okay.

I guess what I will do is follow-up.

In terms of the asbestos claimants, did the number of claimants change as of the end of the quarter?

And if it did, what did they change to?

They were once again identified in the 10-K.

I'm doing this off of memory but I think it was 87,000 claimants.

I mean as of the end of the year.

What were the claimants?

I do not yet have not number.

We will have that number in the 10-Q.

That number gets collected and gets to us here sometime in the next week or two.

Thank you very much.

A follow-up from Michael Judd.

I think you indicated last quarter that your comfort level in terms of cash on the balance sheet was around 200 million or so.

You're up above 250.

I think you also indicated you still have the ability to repurchase shares under the current authorization.

Can you just update us in terms of your thinking there, please?

I don't think our thinking has advanced in any significant way since we last talked about this or last quarter; and yes, you're right to observe that we purchased 750,000 this quarter.

We generally try to purchase somewhere between 1.5 and 2 a year on an ordinary basis.

And to continue to do that we're going to have to update the director authorization because there's roughly only a one million shares left.

More fundamentally, we will start looking more carefully at the cash position of the company and what we do.

I continue to believe that $200 million is an appropriately conservative number and that much over that should be either targeted for relatively short-term use or returned to shareholder.

But we will work that issue in the next quarter or two.

And any update in terms of Superior MicroPowder?

I think you had indicated that there was some interesting technology there in terms of developing lower-cost hydrogen, and also in fuel cells.

Yes, I continue to be very encouraged.

We have identified two specific business opportunities.

We have hired two new individuals to lead those individual areas.

One is in the whole hydrogen catalyst absorbance fuel cell area; and the other is again the what I call the electronic ink or the RFIP tag area making powders for use in printing or manufacturing electronic tags that can be pinged as I say, and I'm not technology person.

And there are business opportunities that we have a lot of interest in the outside world on.

I would caution however, that when I talk about internally, my expectation of the business development activities, I talk about ink jet and cesium formate starting to have a significant impact on the company in the next 12 to 18 months.

I talk about in the aerogel business in the period three to four years out; and then I would be hopeful that five years and beyond that the activity in Cabot's Superior MicroPowders would start to have a major impact.

These things are complex and we have learned take a long time.

I feel better today about our long-term pipeline than I ever have in my years at Cabot.

And I'm very, very encouraged about what is going on.

I have learned that I can't -- we shouldn't even try to get that kind of value recognized in our stock until we build a business.

Internally I call our business strategy with the analysts field of dreams, build it and you will come.

Because I don't want to sell you on anything until it's real, but we are optimistic.

Thank you.

Mr. Burns, there appear to be no further questions at this time.

Thank you, Sylvester.

Thank you, everybody.

If you have any follow-up questions Dennis will be available.

I will be here today.

I'm leaving over the weekend for a trip to the Pacific, so I will be gone for the next two weeks, but we will be available to answer any questions.

Thank you for your interest.

This does conclude today's conference call.

At this time you may disconnect.