Cabot Corp (CBT) 2004 Q2 法說會逐字稿

Good day and welcome to the Cabot Corporation second quarter earnings result 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. Kennett Burnes.

Please go ahead, sir.

Thank you very much, Sylvester.

Good morning.

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

I would 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;

Dave Elliott, our Controller;

Dennis Fink, our Director of Investor Relations;

Bill Brady, General Manager of our Carbon Black business;

Eddie Cordeiro, General Manager of our Fumed Metal Oxide business;

Carol Flack, General Manager of our Cabot Supermetals 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 subjects 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 our earnings for the second fiscal quarter, along with related supplemental business information.

Copy of the press release and the supplemental business information is posted in the investor relations section of our web site.

For those of you on our mailing list, you received these either by FAX or e-mail.

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

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

Last night, the Company reported second quarter earnings per share of 54 cents, compared to 33 cents of earnings per share for the same period last year.

These amounts include -- included charges from certain items and discontinued operations totaling 2 cents per share for the current fiscal quarter, and 21 cents per share for the prior year quarter.

We're very pleased with the strong results from our Chemical Businesses and extremely encouraged by the developments in our -- in two of our new businesses, especially Fluids and Inkjet Colorants.

The Excellence Initiative we began implementing last year to improve our overall operating performance is making a significant contribution across the Company.

These favorable factors and positive currency effects have offset the decrease in Supermetals earnings related to the expiration of certain contracted intermediate products sales.

The Chemical Business reported a $20 million, or 87%, increase in segment profit compared to the same period last year.

Versus the first quarter, the Chemical Business segment process increased by $16 million.

Carbon Black's profits improved from the same quarter last year due to stronger volumes, lower controllable cost, and positive currency effects.

These favorable factors more than offset the margin decline due to lower prices and higher feedstock costs.

In Fume Metal Oxides, profits more than doubled compared to the same quarter last fiscal year due to solid volume growth at lower raw material and controllable costs.

We continue to adapt our capacity to our customer's migration to developing lower-cost regions.

In Carbon Black, we announced our plans for additional carbon black unit at our plant in Maua, Brazil, and we continue to look at opportunities in the developing parts of the world.

During the quarter, we also announced a joint venture with China Bluestar New Chemical Materials Company, Ltd, a Chinese state-owned company to build the first state-of-the-art fume silica plant in China.

Within the Chemical Businesses, Inkjet's volumes was 61% higher than the second quarter of fiscal 2003, and 34% higher sequentially, with continued growth in both the OEM and aftermarket sectors.

We are pleased to report the Inkjet business reached another significant milestone as it began commercial shipments to a second major inkjet printer OEM during the quarter.

These products will be used in a printer anticipated to be launched later this calendar year.

Cabot Supermetals business earned $16 million in segment profit this quarter, which was $20 million less than last year, due in large part to the expiration of certain contracted sales of intermediate products.

This decline in earnings was partially offset by growth in noncontracted volumes and lower operating costs.

Sequentially, Supermetals' results decreased $5 million, largely due to the timing of shipments to contract customers, which was partially offset by increasing market demand.

The Specialty Fluids business successfully completed its first job under its agreement with Statoil, and our fluid is currently being used in a second Statoil drilling job.

The first drill in job was primarily responsible for the increased volumes and contributed to the $3 million of segment profit this quarter.

This represents an improvement of $4 million versus the same quarter last year, and $5 million sequentially.

During the quarter, in consultation with our auditors, we changed our accounting treatment for Cabot for our Specialty Fluids business.

Previously, we recorded revenue related to the use of our fluids upon completion of the job, when both the rental and lost product amounts were known.

Beginning in the second fiscal quarter, we recognized rental revenue as the product is used.

Additionally, the CGM formate inventory, which previously was recorded as a current asset, will now be classified as a long-term asset.

This change has reduced working capital by $32 million during the quarter and will be comparably reflected in all balance sheets presented.

The reasons for this change, as well as its impact is to recognize rental revenue on a more timely basis.

While we have changed our method of accounting for revenue and inventory, we have not changed the way we are conducting the business in any way.

We apologize for any confusion this may cause, and we would be happy to discuss further if anyone has questions.

As indicating in the earnings release, during the quarter, we recorded after-tax charges from certain items and discontinued operations of $1 million, or 2 cents per share.

The second quarter of fiscal 2003 included after-tax charges from certain items and discontinued operations of $15 million, or 21 cents per share, primarily due to the impairment of our investments in Sons of Gwalia.

For more details, please see exhibit one of the press release that we issued last night.

Our cash balance increased by $5 million during the quarter from $252 million to $257 million on strong operating cash flow performance.

During the second quarter, the Company did not repurchase any shares.

Capital expenditures totaled $21 million for the quarter, versus $24 million for the same quarter last year.

In conclusion, we are very encouraged by the results for the second quarter.

We are benefiting from improved demand in all of our businesses, and an increasing impact of our excellence initiative.

We are also pleased with the developments during the quarter in inkjet colorants and our cesium formate businesses.

Their recent results have given us even more confidence that they will be solidly profitable this year and become valuable businesses to Cabot and its shareholder in the future.

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 and loans associated with the vesting of earlier awards, and to raise the cash necessary to purchase new shares awarded to them this year.

This is an annual event that we all go through in connection with the -- with the vesting of a long-term incentive awards and is generally the only time that I, in particular, sell any shares.

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

Thank you, sir.

If you would like to ask a question, you may do so by pressing star one on your touch tone telephone.

Again, to ask a question, you may do so by pressing star one on your touch tone telephone.

If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

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

We'll take our first question from Michael Judd with Greenwich Consultants.

Yes, congratulations on your commercial shipment to the second OEM.

Thank you, Mike.

We -- as you can imagine, we're very excited about that development.

Well, it's good news.

It is very good news.

My first question is about your Carbon Black volumes.

In total, up 7%.

You know, year-on-year and up 11% sequentially.

And actually up year-on-year in Europe by 11%.

I'm just kind of curious, you know, looking forward into this quarter, do you see that the same kind of strength in volumes -- what was the reason for the pickup there last quarter and where could things go this year?

Well, as you know, Mike, and you're always very good at trying to get us to give forecasts which we don't do, I can tell you that you know, we've seen strong economic activity across the sectors, as you saw in the numbers.

Which is very encouraging to us in the carbon black and other businesses.

I can tell you that we see no indication going forward that that's not likely to continue.

But we have not -- we do not make a forecast of that number.

How about just the strength in Europe.

You know, last year -- I mean last quarter, on a year-over-year basis, the volumes had been down 6% and then they were up 11% in the second quarter.

Was that just some catch up or what are your thoughts about that?

Well, let me get Bill Brady to give you the details there, Mike.

Hey, Mike, there were really two things if you look at this quarter versus last year.

One was the tire manufacturer contract that we signed up not too long ago is starting to kick in this year.

And the other thing is last year in this quarter, we had lost some customers that we gained back.

So, that year-on-year comparison, while we're excited about the growth, may be a little bit overstated because of the lost customers last year.

Ok.

Thank you.

And secondly, in tantalum, I think you indicated that there might have been a timing issue this quarter in terms of some shipments.

Were implying that, you know, perhaps that there might be a little bit higher level of shipments in the June quarter?

No.

We did not mean to imply that at all.

The timing of the shipments of the contracted volumes is not 100% level throughout the year and is to some extent outside of our control and it varies a little bit.

It is not -- we don't think over any period of time it is material.

Thank you.

I'll let somebody ask a question.

We'll take our next question from Lawrence Alexander with Deutsche Bank.

Good morning.

Good morning.

Just want to follow up on tantalum.

Can you give a little more color on the firming demand that you're seeing, and what your utilization rates are in your Japanese facility?

Yeah, we are seeing, as we mentioned, you know, significant -- significant increase in what -- in the activity in the marketplace.

We're seeing increase in what we call our noncontracted volumes, which is the volumes we sell largely out of our Japanese facility.

But across our entire system, outside the contract.

We've seen a significant increase in the price of tantalum raw material in the marketplace.

In the last 12 to 18 months, it has roughly doubled.

And generally, the market is recovering.

We're -- where I think the Japanese operating rate which is -- I want to be cautious in giving you the number.

We've given them in the past, and we'll give it again.

It varies depend on the grade of powder being produced and is not consistent over any period of time because of that.

But it's operating rate today is close to 80%, 85%.

Thank you.

And on carbon black, if you exclude the ramping up of the long-term contract, what would the volume increase in Q2 have been?

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

We don't have -- Lawrence, we don't have that number off the top of our head.

It would be less -- if I had to guess and I'll take a guess and we'll come back to you.

Dennis will come back to you and give you a better number, I would say it was in the 3% to 4%.

Ok.

Thank you.

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

Thank you.

Can you hear me?

I can, John.

How are you?

Good, thank you.

Very few things are going down in price out there.

And you talk about the prices for carbon black and lower prices in the fumed metal oxide business.

Maybe you could elaborate a little bit more on that?

Yeah, we had sort of an odd quarter in terms of pricing in carbon black in that we had a small reduction in our contracted tire price because of the formula effect on the lag basis, and it happened at a time when we saw firming of feedstock costs.

So, there was -- it was a price decline in that business across -- when you average it all out, that was not huge but significant, but more importantly, because of the actual feedstock cost, it was a margin squeeze.

In the fumed silica business, it's a more complex and strategic issue.

I think as you're aware of that for us, at least, that business divides in three components.

Roughly a third to Cabot Micro.

Roughly a third to Dow Corning, and roughly a third to our -- what we call our niche customers which are all of the other customers outside those two sectors.

The sales to Dow Corning and Cabot Micro are under contract and therefore the prices are relatively stable.

In the niche sector, we have -- and have had for a number of years, an overcapacity issue based on the fact that fumed silica capacity is built particularly by one German competitor to burn their by-product chlorasinalines [ph].

And so there's generally excess capacity for the niche volumes around the world and has put pressure on those prices.

Not a huge amount this last quarter, 1% to 2%, but it is a factor that we have been managing for a number of years, and we believe we'll continue to be with this going forward.

Ok.

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

Good morning, Ken.

Good morning, Jay.

I'd like to ask some -- a couple of overview kind of questions.

As you look at the quarter that you're reported, what were the pluses and minuses versus what you expected several months ago for the quarter?

Second question, basically, is there much of a difference in the foreign exchange rate today versus the average for the quarter and if so, how much would the quarter have been lower with today's exchange rates?

Let me take the second question first.

I think there's not a lot of difference.

I think the dollar's a little bit weaker on average, but not significantly.

So, I don't -- I don't think -- if your question is aimed at what we see going forward, I don't see a big transformation there.

Good enough.

On the first question, I would -- a number of things, you know.

As you can, I hope indicate from my remarks, we're very pleased with the quarter.

The volume, of course, is positive.

The volume in all of our businesses is very positive.

The news in tantalum is encouraging.

You know, we may be getting the kind of pickup that will benefit us for the next couple of years as the contracts run out.

The volume in carbon black, particularly in China and the other developing parts of the world, is very encouraging for us.

You know, we spent a lot of money building capacity there.

We're spending more, and we continue to see very, very attractive growth in those areas.

But equally so, the tire rubber volumes, and special blacks volumes in North America and Europe were encouraging this quarter.

I mentioned in the press release, we are seeing significant impact of the Excellence Initiative.

Not only in the quality and you know the excellence with which we operate the facilities, but in the costs.

The Excellence Initiative contributed substantially to the earnings improvement across the whole company.

I was looking for really a variance kind of analysis from you, rather than the absolute which you gave.

In other words, three or four months ago, had you expectations for this quarter.

Where did things exceed your expectations?

To the extent that they may have.

Well, I think we were -- we certainly plan as a company for the Excellence Initiatives.

I think it's fair to say that we are ahead of our expectations in that area.

That has had a positive effect on all of the business, and particularly the chemical businesses.

If I go through each business in terms of timing of the number of active wells, Statoil is behind schedule.

But the business relationship and the overall level of activity under that arrangement looks to be probably larger than we originally anticipated.

So, that's -- you know, we're a little behind schedule but the news is -- I think more positive there than we thought.

The inkjet business had a very, very strong quarter as you'll indicate by the numbers.

The volumes in both segments were very strong and of course, as you know, you've been with us for a while.

The fact that we've finally got, hopefully, another OEM buying our product, is significant news for us.

We anticipated that, but it had been so long in coming that that probably -- it may exceed our expectations.

The volume in fume metal oxide is above expectation.

Again, in all segments.

I think the -- in the two contractive segments, volumes have been solid.

We've been doing better than anticipated in maintaining our position in the mix business.

Carbon black, I would describe it as no real surprises, but generally solid performance everywhere.

If there is a surprise or positive surprises in the performance at the high end of the product line, in the special blacks businesses.

Those have been very strong for us this quarter.

Thank you.

Once again, that is star 1 to ask a question.

We'll take our next question from Bill Devalin with Davidson Investment Advisors.

Thank you.

We have two questions.

First of all, relative to the inkjet business, if you look at the new printer OEM and look out over the next 12 months, meaning starting with the June quarter and then rolling out the following three quarters, over that 12-month time period, what do you anticipate a reasonable range could be in terms of revenue that that customer could generate?

Those are forecasts that we don't give out.

I can tell you that you know, a printer, by the use of the term printer, we mean a printer platform.

It'll actually, we believe, be multiple printers under that platform.

And if it's a success, it could have significant impact on our revenue over a 12 to 24 month period.

We regard it as a very significant event for this business.

We were hoping since we asked for a range rather than pinpoint number, we might be able to get a shot at --

Well, Bill, thanks for trying.

As you can imagine, we don't forecast, as you know.

I know that frustrates some of you, but more importantly, the economic details of that business are hard to predict, even for us.

And we just as soon not put out any numbers that may be -- may not be accurate.

Would it be fair to say and just to directionally -- that if the printer platform is successful, then the second 12 month period will see significantly higher revenues than that first 12-month period and if, in fact, the printer platform is not successful at all, then the first 12 months ends up being larger and then you see a trailing off over the second 12 months.

Would that be a correct way to conceptually think about this?

Yes.

But I need to -- I need to expand on that thinking a little bit.

First of all, although I'm not in this business, and I'm not in a position to predict success or failure to printer platform, I would tell you that I have seen, personally, the printer, and as an individual in my family, I'm not buying any inkjet printers until this one's available in the marketplace.

I'm optimistic that it is going to have a significant impact.

More importantly, for Cabot, going forward, as I think you -- we've explained before and I think you understand, the big issue for Cabot is to get in and to become the sort of the default pigment supplier for this OEM.

You know, in the first OEM, we got into a number of years ago, we have successfully maintained that position as each successive printer platform has been introduced.

So, if we -- this is successful and we can maintain that position, there'll be another printer platform coming along behind it, and on forward, so, over a period of time, the business starts to have considerable size and volume potential because of the installed base in printers.

So, we've been working for this for a long time.

We're very optimistic.

We're working hard to make sure everything goes perfectly and that we maintain the position, but we're very pleased with where we are.

Ken, circling back to that, my original statement that first 12 months, if you're successful, then the second 12 months would grow on top of that, would be accurate.

However, misses an important detail which is if this is one platform within this OEM that has multiple platforms, so frankly, if the -- if the pigment -- pardon me, not the pigment, but your colorant -- if it is successful within this platform, then Cabot's interest and challenge moves to adding additional platforms, which then really could send this business in an exponentially upward fashion.

I can tell you as I think we've mentioned before, we are currently at work at multiple successive platforms for the OEMs.

Right.

Let me shift completely to the tantalum business.

The tantalum customers' inventory trends, what did you see during the second quarter?

We've answered this question carefully in the past, and I want to answer it carefully again.

We, of course, really just have access, maybe a little bit more anecdotal information than you might because of our position in the industry.

But we also see the same public information you do.

With that caveat, it's our feeling that all but one of the major capacitor manufacturers have their tantalum inventory down to normal levels, and are buying tantalum incrementally above and beyond the contract -- their contracted obligations to fill their current needs.

We believe there's one capacitor manufacturer that still has a significant inventory problem.

But by in large, other than that one customer, one company, the inventory issue that has plagued the industry for the past three years seems to have been -- the inventory seems to have been absorbed and the problem seems to be behind us.

Thank you.

Our next question is from Jeff Zekauskas with J.P. Morgan.

Good morning, Jeff.

Good morning.

This is Silke Kueck for Jeff, sitting in.

How are you?

I'm good.

Yourself?

Not so bad.

Two questions.

The first is how much of your volumes in the second quarter was contracted versus not contracted, and how may that change for next year?

As far as I remember, there is I think, like the first contract that you entered into, I think it's expiring the end of this calendar year.

And so how do things look going forward?

And then secondly, is there any update in the investigation into the carbon black industry, and can you just give us a quick update both on any civil filings and just the investigation itself?

I'll answer the second question last, there is no further information about the antitrust investigation in Europe.

As you may recall, I guess a year and a half ago, the European antitrust investigations launched an investigation of the carbon black industry.

We were visited.

Provided a bunch of documents and they went away.

And we have not heard any further information.

Our own investigation did not discover anything in Cabot that would give rise to any concern.

In the inevitable behavior of the legal fraternity, we were subsequently sued in the United States in a number of class action cases claiming that our antitrust violations caused them damage, even though the lawsuits and the customers -- the plaintiffs are in the United States and the antitrust allegations against us were in Europe.

Again, we believe that there is no merit in any of those cases.

But therein lies a problem.

If you look closely at our numbers, you'll see that we had some administrative cost increases during the quarter in that we're spending a fair amount of money, multiple millions of dollars, you know, providing -- defending ourselves in particular, responding to discovery of requests for the plaintiff's lawyers.

I continue to believe that these cases in particular are entirely without merit, are a drain on the company's earnings that have no substance, and are frustrating to say the least.

But I don't -- continue to believe that the company did nothing wrong, and that we will eventually emerge unscathed other than contributing our share of the lawyer's funds.

I want to make sure I understood your first question.

This is -- you're aimed at the contracted versus noncontracted tantalum volumes, is that right?

Yeah.

And also, you know, what pieces -- I mean like how much of your contract in volume should expire like this year versus next year.

In rough terms or maybe as percentage terms.

I don't have the precise numbers in front of me.

I can give you the general picture.

We had a significant portion of the one contract volume expire at the end of the last fiscal year, and you see that in our tantalum results this year.

This was the sale of the intermediate product material.

At the end of 2005 -- is that right?

That the first contract expires?

The first contract which is the contract at the lowest price expires at the end of 2005.

And that's for -- in the order -- if my memory serves me, about 20%. 20% to 25% of the contracted volumes.

Then the contracts mostly expire in 2006 and -- at the end of 2005 and the end of 2006, with some small portions get going on into 2007.

Ok.

Thanks very much.

Once again, that is star 1 to ask a question.

We'll take a follow-up from Michael Judd.

Yes, I think that the number of completions and drill-ins that you had at the end of the December quarter was around 72.

Do you have the number for the March quarter?

That is the total run rate so far?

Well, we had -- we had one very large -- I guess two large jobs in the second quarter.

The big Statoil job and one other job that had been completed during the quarter.

So the number would be up in the 70 -- actually, there was -- Mike, part of the problem there's some small jobs and large jobs.

There were two in the first quarter, and four, I believe, in the second quarter.

Ok.

So, we're basically at 76 now.

And I guess --

I need to provide one other piece of information that confuses those numbers.

We have been working recently with the oil industry in Saudi Arabia in that they're -- their oil fields, as you may have read or -- their oil fields where they can poke a hole in the sand and yet the flow of oil and gas have largely run out.

And although they continue to have extraordinary amounts of reserves, most of their reserves are deep and in high pressures -- increasingly high pressure zones.

We have been working with the Saudis recently in lower pressure areas.

And have been working on two wells we've been supplying the engineering and potassium formate, which is a lower-density material in anticipation that they will eventually need to move into this cesium formate range.

So, the numbers of jobs are a little bit confusing, and I apologize for that confusion.

It's a positive evolution development for the business, but it's going to make it a little bit harder for you to follow it in the traditional method.

Ok.

I believe on your investor day, had you indicated or someone had indicated we might be in a number in terms of total completions by the end of the September quarter in the low 90s.

Is that sort of the right way to be looking at that?

Well, a large part of that depends on the timing in the Statoil contract.

As I mentioned in my remarks, we're in the hole, actually.

Fluid went in the hole yesterday, in the second well on the Christian platform.

We're actually loaded out a week or so ago onto the platform for the Capitheyourn -- of the first hole on the Kvitebjorn platform, but they had a problem unrelated to the fluid and it looked like they postponed it four or five weeks.

So, it's a little hard to give you good numbers there.

You know, as I said in my remarks, it's going very well and we're very optimistic about it.

The fluid is performing very well.

It is providing the value and the importance that our customers need.

But the timing of these big wells is very hard to predict and they're very complex.

I think we can feel fairly confident that the Statoil schedule by the end of the -- I guess by the end of next September will be close to as anticipated because they have apparently committed to deliver gas under a contract that's coming out of these wells.

So, they'll have to catch up here in the next 12 months or so.

But timing is hard.

Ok.

And then on the U.S.

Gulf Coast, you had indicated that you know, you were allocating some resources to try to get more involved in that area.

Is there anything new there?

I think your memory is correct.

We've been working -- I guess the hardest and with the most promise in Saudi Arabia, which I mentioned a few minutes ago.

We also continue to work in, I guess, Kazakhstan because there's some very high pressure zones there that look like they'd be ideal for cesium formate.

Then, we have been spending a lot of time recently trying to develop the market in the Gulf Coast.

I can tell you that we got a lot of prospects, we got a lot of people interested.

But as it was, when we penetrated in the North Sea, it's a tough sale because of the price of this material.

And we actually -- we do not yet have somebody who's actually put in it a hole.

But I have learned to be patient and I believe it'll happen.

Thank you.

We'll take the next question from Al Kaschalk with MDB Capital Group.

Good morning, team.

Good morning.

Most of the questions have been answered.

But on the specialty fluids, can you add any color on the large jobs that you're referring to that were completed in the quarter?

That's a little hard to know precisely how much of this is going to carry forward, but it was a job on a large -- it was a drill-in job.

Remember that each well has a drill-in portion and completion portion.

The first job we did for Statoil was a drill-in job on an extended-reach gas field -- into an extended reach gas field with a very long production zone.

Because it was the first production well into this field, they worked it very, very carefully and spent a lot of time collecting data as to how they were going to drill the balance of the wells.

The result of that was that the material was on the rig for a long time, which increases our rental revenue and because they did a number of trips in and out of the hole with the fluid, the losses were higher than either we or they anticipated.

One conclusion from all of that was that it looks like they'll need more volume of material going forward.

There has been a relatively -- there has been some discussion going on or repricing -- small repricing the material based on the increased volume, but generally, things are -- I would describe it as very positive.

I would not anticipate going forward that incremental wells on either this field or the Kvitebjorn field would be the size of this first well but I do -- we have been told by Statoil that they'll need more material because of the way they plan to drill the wells.

Ok.

The earlier question was trying to get at the number of completions.

Can you -- add some color as to what percentage of the specialty fluids revenue and/or profits was cesium formate or the other fluid, potassium?

Oh, yes -- 90.

I think in this quarter, virtually all of the profit revenue with cesium formate -- potassium formate is something we buy and pass on.

So, it is not -- now, it is not a significant business for us.

It's intriguing, though, that we had the opportunity to bring it to the Saudis as they learned how to use solids-free drilling fluid and potassium formate is the lower density solids-free drilling fluid.

Cesium formate is the higher density.

All right.

And two quick questions.

On the Supermetals side, is there any update given the results for the quarter for the fiscal '04 targets that you put out there?

I would again -- you probe an area where we have, in the past violated our rule of not giving forecasts.

We have given the forecast that this would be somewhat below what we made in 2002.

Right.

I think generally, and I'd like to tell you this and not have to forecast it again, we're confident that we can meet that expectation and hopefully exceed it by a bit.

Ok.

So, the way the view -- like you said earlier, the timing is, we'll see that flow through this quarter then.

On one of the delays.

Or some of the revenue that I think slipped.

Well, that's true.

I think you're referring to the deferred revenue issue.

That is flowing back into the income statement each quarter.

Ok.

So that comes back in as well.

But the general issue is the improvement in the market.

Right.

No, I agree.

And then finally, I'm sure you won't answer this, but it's worth a try.

Is the OEM the one expected and the one you wanted?

[ LAUGHTER ]

Thanks.

You're right in your first prediction about whether I'd answer the question.

Thank you.

Good quarter.

Thank you very much.

We'll take our next question from Lawrence Alexander with Deutsche Bank.

Two follow-ups.

First one, carbon black.

The product mix issue in Asia, can you give a little bit more detail on at what point that might reverse or at least cease as an issue?

You know, that's a hard one.

To make sure you understand the issue, the unfavorable product mix there is that we probably sold more tire volumes, rubber black and tire blacks to the tire companies because of their rapid growth than we had historically in terms of the relationship between tire volumes and what I call special blacks volumes, the higher margin, higher price blacks.

Both segments are actually, you know, growing nicely.

The tire segment happens to be growing, for us, at least, extraordinarily fast, particularly in China.

So, it results in a little bit of a mix problem.

I guess I would describe it today as what -- as what I call a high value problem because we're -- you know, we're doing very well in the carbon black -- in our rubber blacks business in China, in particular, but also all over the Pacific and it's growing very rapidly.

Our challenge is to build, candidly, is to build enough capacity to serve our customer's needs which is, of course, a nice position to be in.

And that does create a mix problem because the tire manufacturing market is probably growing faster in that part of the world than the market for the high value carbon blacks.

So, although, you know, when we come to explain the detail of our numbers, it looks like a mix problem, candidly, it's the kind of a mixed problem I love to have, and I hope it continues.

Fair enough.

With the two new -- with inkjet and the aerogel businesses, can you give any color on how much you've invested in Q2?

Or how much of a drag on earnings investment in the Nanogel business might have been?

Yeah, I can tell you as we said in the past, Nanogel looks to be roughly a $20 million drain on earnings this year, and I think the quarter was roughly consistent with that number.

Ok.

We would hope to be able to start to draw that down next year.

Ok.

And lastly, on the Cantalon [ph] business.

Any -- it's like this will be a question you won't want to go into too much color, but with the negotiations with Sons of Gwalia on the contract, what might your objectives be?

Is the focus on getting the cost to be more reflective of the market, spot pricing or how do you prioritize your objectives?

That's a fascinating question.

And you know, I'm perfectly willing to answer at least part of it.

You know, of course, we are, and remain dependent upon Sons of Gwalia for a significant portion of our raw material.

So, one objective is to maintain a securities -- a secure supply.

On the other hand, you know, the pricing of tantalum raw material in the past few years has been well below the price that we pay Sons of Gwalia under the contract, so it is our hope that we can get some price relief and get our cost of raw material more competitive than what's available in the open market, on what we call the spot market.

And I can tell you that those conversations continue.

Ok.

Thank you.

Once again, that is star 1 to ask a question.

We'll take a follow-up from Jay Harris.

Ken, on the change in accounting in cesium formate, was there a significant amount of incremental revenues reflected in the March quarter?

No, there was nothing -- no impact in revenue in the March quarter.

The only impact in the March quarter was the move from current to long-term assets.

Ok.

And so that'll commence in the June quarter?

Yeah.

Assuming it all depends on where we are on the jobs but you know, I would -- based on what we -- based on our forecast of job activity, it'll have an impact at the end of every quarter now.

We should -- if the Statoil job continues, it should be in place every quarter.

A little bit hard to know, Jay, precisely how big an impact it is, depending on where we are in a job.

You could it be at the very beginning of job and it have a very small impact, you could be close to the end of a job, and it could have a $2 or $3 million impact.

I would say, as -- I've been a little surprised and concerned that the accounting rules put us in a position where we have to take a more aggressive position in recognizing revenue and earning, but the accounting rules are the accounting rules, and I think, as you know, particularly in today's world, you don't fight city hall.

On tantalum, where -- some of the capacitor manufacturers are now taking more than their contract minimums.

I presume they're buying from Cabot Corp, otherwise you might not be aware of it.

Is that a reasonable assumption?

They are buying from Cabot Corporation volumes in excess of their contracted volumes in the cases of the people who need the volumes.

That's happening.

And are they buying at contract prices?

They're buying at open market negotiated prices.

Ok.

And what can you tell me about the open market price versus the contract price at this point?

I guess I could tell you that, of course, I prefer to be selling at the contract price.

Ok.

That answers the question.

Over the last two quarters, the operating rate in Japan has moved up tantalum quite dramatically.

Correct.

What has happened to the -- well, how do I phrase it?

Are you getting a -- what's happening in market share over the last six months?

Little bit hard to be precise, but I can give you some general trends.

Wait a second.

You know, when the contracted sales were the only sales taking place in the industry, we had a market share -- I think at one year, I think we reported this, we thought our market share of sold powder was in the 80%, 85% range, because nobody was buying any powder other than a few small Japanese people that didn't have contracts, because the only powder they needed was contracted powder.

That's largely washed away, Jay.

And you know, we're now back competing in the open market for volumes and prices.

So, I think --

Are you back where you were two years ago?

A little bit hard to know precisely.

I don't think quite yet, but we're getting close.

You know, all we can do is look at volumes of what we think happened in the market.

But I think we're getting back into the 40% to 50% range.

Ok.

Which is roughly where we were before this all happened.

I don't think -- we're not -- well, we benefit from some stability and normalcy in this market and a healthy market.

Change of subject.

Fumed metal oxides, you gave in answer to a question or in your formal remarks, some indication of volume changes, and I thought it was year-over-year by the three major segments of the business.

What does that look like on a consecutive quarterly basis?

I'm going to give you the numbers here in a minute.

Eddie Cordeiro will give you the numbers.

Hi, Jay.

Sequentially the business is up 10% in total.

And how about by silicon's -- Cabot Micro and niche applications?

Jay, we've never -- I don't think given those numbers, we've been --

Well, I just asked for a profile.

You gave it year-over-year.

Give us a minute here to think about it.

But you know we're very cautious about giving out numbers that has any ability to disclose information about Cabot Micro that we shouldn't be doing.

I can tell you that the volumes are up slightly.

Ok.

Thank you.

And we'll take a follow-up from Michael Judd.

Do you have the -- just a quick one, the total debt at the end of the quarter?

I do.

Give me one second and I'll dig that number out.

I think it's 5.

It was roughly flat, Mike.

While we get you the number.

We paid off 15 and picked up 15.

Long-term down.

Short term up.

Total debt long-term was 544.

Short-term was 30, so 574.

Down $3 million.

All right.

What is that -- in terms of your free cash flow for the quarter, if you look at that, it looks like you generated probably around $40 million or so.

That's after Cap Ex.

So, 21 and dividends of 10, right?

So, what did you do with the 40 million in free cash flow?

We had a significant accounts receivable build.

Which is expected because of the rapid growth in volumes.

Ok.

Fair enough.

Thank you very much.

Ok.

Mr. Burnes, there appears to be no further questions.

At this time, I would like to turn the call back over to you, sir.

Thank you all, gentlemen, for participating.

Look forward to seeing you in July and hope we have, at that time, as equally positive results.

Thank you very much, Sylvester.

You're welcome.

And this does concludes today's conference call.

At this time, you may disconnect.