Cabot Corp (CBT) 2004 Q3 法說會逐字稿

Good day and welcome to the Cabot Corporation third-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, Kennett Burnes.

Please go ahead, sir.

Thank you Stephanie.

Good morning.

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

I'd like to welcome you all to the Cabot third-quarter earnings teleconference.

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

Dave Elliott, Corporate Controller;

Dennis Fink, Director of Investor Relations;

Bill Brady, our General Manager of the Carbon Black Business;

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

Carol Flack, General Manager of our 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 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 website, www.cabot-corp.com.

Last night we released earnings for the third 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.

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

If you're not on our mailing list and are interested in receiving this information in the future, please contact our website or our Investor Relations department.

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

Last night the Company reported second quarter earnings per share of 62 cents compared to a loss of 9 cents per share for the same period last year.

There was no impact on results from certain items discontinued operations for the current fiscal quarter in contrast to 57 cents per share in the prior year's third quarter.

We are very pleased with the performance of the Company this quarter, as all of our business units turned in excellent performance.

The Chemical business reported profits of $45 million, which was a 50 percent increase in segment profit compared to the same period last year.

Carbon Black's profits improved 10 million from the same quarter last year due to stronger volumes, lower controllable cost, and positive currency effects, offset partially by a decline in variable margins.

Overall volume grew 12 percent compared to the same period of 2003 with all regions participating, particularly China and South America.

This growth also reflected higher new product sales in North America from our Performance Products business group.

Also during the quarter, we entered into an additional long-term supply agreement with an existing contracted tire customer.

This contract extends the geographic scope of our supply arrangement with that customer.

In the Fumed Metal Oxide business volumes increased 13 percent compared to the same quarter last year as all markets reported strong demand which has led to our facilities operating at or near capacity levels.

Profits improved $3 million from the same period last year, primarily due to higher volumes.

Business continues on schedule with its new plant in China that is targeted for commissioning late in calendar 2005.

Within the Chemical business, Inkjets' volumes was 39 percent higher than the third quarter of fiscal 2003 due to strong growth in both the OEM and aftermarket sectors.

The business is now solidly profitable and has active development programs with all of our major customers.

We're pleased and excited with the evolution and prospects of this business.

Cabot's Supermetals business earned $18 million in segment profit this quarter, which was $4 million more than last year.

The results were driven mainly by significant increase in tantalum powder volume and lower operating costs.

We are pleased with the performance of this business given that the prior year's quarter included profit from contracted intermediate product sales that ended at the end of last year.

With regard to the Sons of Gwalia negotiation, the Company has exercised its right to extend its raw material purchase contract with Sons of Gwalia.

Under the terms of the contract the price for the period of the extension will be determined by negotiations, or failing negotiations by arbitration.

Due to the potential length of an arbitration proceeding, Sons of Gwalia has initiated and arbitration proceeding in London in accordance with the terms of the contract.

Negotiations are ongoing.

We remain confident that we have a secure long-term supply of this important raw material.

The Specialty Fluids business was active on five jobs during the quarter, none of which were completed during the quarter.

These jobs are expected to be completed in the fourth quarter, at which time the bulk of the revenue from these jobs will be recognized.

The business broke even for the third quarter of fiscal 2004 compared to $1 million loss in the same period last year, due primarily to the higher level of activity.

The decrease in segment profit sequentially is mainly due to the timing of completion of jobs.

Our drilling fluid has now been used in three wells under the Statoil agreement and in each case it has performed well.

Although Statoil is not contractually obligated to use our fluid in future wells, we anticipate significant activity going forward.

Our cash balance decreased by $72 million during the quarter from 257 to $185 million, mainly due to the transfer of $65 million of cash to short and long-term investments to improve yields.

During the third quarter the Company repurchased 662,000 shares as part of our open market repurchase program for approximately $25 million.

Year-to-date, open market purchases total 1.4 million shares for $46 million.

These year-to-date amounts do not include approximately 376,000 shares reacquired under the Company's long-term incentive program.

Capital expenditures totaled $23 million for the quarter, and we expect total capital spending for fiscal 2004 to approach 130 million.

Due to our opportunities to add capacity in China and other rapidly growing regions of the world, this Company is likely to increase its capital program for fiscal year 2005.

Finally, I want to draw your attention to the fact that over the next few weeks you will see executive officers of the Company, including myself, buying and selling stock in the Company.

This is in connection with the Company's equity incentive plan in which certain officers need to repay loans associated with the vesting of an earlier award and to purchase new shares awarded to them this year.

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

Stephanie, I will turn the call back to you.

(OPERATOR INSTRUCTIONS) Michael Judd, Greenwich Consultants.

Congratulations on a good quarter.

A couple of questions; one on the Supermetals business.

In your supplementary business information there's an indication that the volumes were down 4 percent year-over-year, and in your commentary you talked about higher tantalum powder volumes.

Is it just that the intermarry intermediate material was down and then overall everything was down 4 percent?

No.

The issue there is that in the third quarter of '03 we had, as you will remember, substantial volumes of intermediate products which we're no longer selling due to the expiration of that contract.

The powder volumes in the fourth quarter compared to the third quarter, I believe, were up 28 percent third-to-third; ‘03-to-'04 powder volumes increased 28 percent.

But overall the total volumes were down 4 percent, that's right?

That is correct.

Secondly, with the new long-term contract that you have for carbon black supply to an existing major tire customer, where does that put you in terms of sort of the percentages that we have talked about in the past?

I believe that the total contracted volume of our tire market today is slightly in excess of 50 percent.

Thank you very much.

Laurence Alexander, Deutsche Bank.

In the fumed metal oxide there's a reference to higher operating costs compressing margins in that business.

Could you discuss how that could be turned around --?

We're sorry for any confusion we may have caused in the release and in the supplemental information there.

We have two things happening in that business.

The per unit costs are down due to the excellence program.

Total costs are up for two reasons -- one, because of volume; and secondly, because in the third quarter we had an annual adjustment of our raw material supply contract that comes in once a year and gets trued-up at this time.

The actual run rate to of the cost for that business is very encouraging when you look at it on a per unit basis and even out the onetime events.

This business, like the carbon black business, is benefiting substantially today from the excellence program.

Thank you.

In tantalum can you discuss what you're seeing in terms of demand from your customers, particularly in capacitors?

I can't comment on capacitors.

I can tell you that as I mentioned a few minutes ago we have seen a strengthening of demand for powder volumes -- volumes up quarter-over-quarter 28 percent.

This is particularly true for our Japanese affiliate, our Japanese subsidiary.

And the market has been strong for us.

One indication of that that you'll find interesting is that tantalum raw material prices -- the price for the ore -- has risen up close to $40 a share compared to 20 or $25 at the same time last year.

Thank you.

John Roberts, Buckingham Research.

What was the incentive for the tire customer to extend their contract in geography right now?

We're in a market with high raw material costs, and I would suspect that they would be more likely to do that when things were down than up.

That's a hard question for me to answer of course because we're not the customer.

Our feeling it is -- as you know we've entered into two of these contracts in the last six months -- that these companies are looking for a secure, reliable supplier for a sort of -- to base load their operations.

And they have chosen to do it -- I don't think the time of the market is so important.

You remember these contracts are sort of stable margin contracts and they float up and down -- the absolute price floats up and down with feedstock.

But we think it's a desire to have a significant portion of their demand covered by a secure, reliable supplier.

Secondly, is there anything unique about Epcoss' (ph) position that would make them the first one to sign up for a contract going out through the second half of this decade?

We don't think so.

We are in discussions with at least one other customer on a similar arrangement.

And we see this as an opportunity to secure our market position going forward and to use to the benefit of the contracts we have to help us do that.

But I don't think there's anything unique about it Epcoss (ph), and we would hope to be able to do it with other customers.

Lastly, you mentioned there was a currency benefit in the carbon black results, but in the detailed reconciliation tables it shows a -1 cent currency year-over-year in EPS.

And you've probably explained it to me before, but I've forgotten why that one would be negative.

Is that a hedging-related offset?

No.

What it is I think and somebody may correct me if I answer this question wrong, but we sell substantial amounts of tantalum powder in yen out of our affiliate Showa Cabot today, and those yen earnings get translated back to dollars.

So where historically we've had only one way on that issue because of the translation in the other direction, we now sort of have a balance.

So it's a little bit more confusing than it's been in the past.

Jay Harris, Goldsmith & Harris.

As I look at your third-quarter numbers versus second-quarter numbers, the changes are very small per line.

You've got a lot of moving parts, and I'd like the hear you talk about the priorities that we should focus on the moving parts going forward.

In other words, which ones are likely to be more significant and which less significant?

That's an interesting question.

I'll tell you how I think about that, and what we watch and try to focus on it within the Company.

First of all, the volumes.

We've experienced strong volumes.

We hope that we can continue to do that.

I think you will note in there, particularly in the carbon black business we reported some very encouraging results in our new product efforts in the performance products group, which comes out of the efforts we have been making in that business over time.

We would look particularly in the volume area with the continuation of the powder sales into the capacitors segment and our ability to maintain our market position and the underlying strength of that market going forward.

We watch closely, and you've heard us mention it a couple of times, the excellence initiative.

We are now in a position where we're comfortable that we will this year exceed the $40 million cost reduction target that we established for the three-year program.

That is one year ahead of schedule.

And we hope to continue those efforts going forward.

We will continue to strive to take costs out of this system as we go forward.

And then the other thing that I think is going to have a -- continue to believe will have a big impact on our business is the evolution of both the inkjet and the cesium formate business.

As I mentioned in both in the release and in my remarks we're very pleased with the evolution of both of those businesses and are optimistic that they will continue to move forward in a positive fashion.

Cesium formate, what kind of volatility and well completions do you expect over the next three or four quarters?

As I mentioned, we have two or three things going on there.

We have the Statoil arrangement.

We were on two large Statoil wells during the quarter that did not complete at the end of the quarter, so the revenue was -- you will see the revenue and hopefully the profits in the fourth quarter.

That activity going forward we're optimistic will continue and should be substantial.

As I have mentioned in the past, we believe we're on the verge of getting some substantial business out of Saudi Arabia.

We've been on two potassium formate wells there, and we're currently working to develop a couple of cesium wells.

So I would look closely -- I think I have answered the question before -- I think the next major indication there is whether we can open up and become a significant player in a second regional market.

We have been, we remain, a very large player for these type of wells in the North Sea.

And if we can get either the Saudi Arabia or other opportunities in the Gulf or the Gulf of Mexico it would be a significant evolution for that business.

Operating rate on tantalum in Japan?

Roughly 80 percent, I believe.

So a marginal improvement?

Yes.

No, that business has slowly ticked up on a regular basis and is doing quite well.

I will get back in queue.

Thank you.

Bill Dezellem, Davidson Investment Advisors.

We also have a group of question.

First of all, relative to inkjet, what are you seeing relative to the new platform and new customers that you folks have talked about in the past?

And then following up relative to Statoil, I believe that earlier in your comments you had referenced that you do anticipate a significant increase in the number of wells that will be drilled under that agreement.

Walk us through exactly what you're seeing there and the visibility that is going behind that comment please.

First of all, on the inkjet we remain very encouraged about the business and the new platform that we have talked about in the past; not only the platform, but a strengthening relationship.

I would prefer not to say anything more about that because of customer confidentiality.

But I can tell you we're working hard and pleased with what's going on.

With respect to Statoil, the agreement that was put in place provides for the possibility that the material will be used on 23 wells before the end of -- I think it's the middle or the end of calendar 2006, if I'm not mistaken.

We've been used in three wells, the only three wells that have been drilled on the two platforms.

One is the Christian Platform (ph) and the other is -- or the field and the other is Kadipjoren Field (ph).

And as we understand it, Statoil has sold the gas that is going to come out of the two field and has to get these two wells drilled here in the next 24 months.

So it's conceivable, we think probable, that we will see 20 wells coming out of this in the next period of time.

That would be significant business for us because these are both drilling and completion jobs, and they tend to be big wells requiring lots of fluid.

I would remind you that the arrangement commits us to provide the fluid if Statoil wants it, but each separate well is a sale within itself in to convince the people who are doing it that this is the best fluid.

We have been successful thus far, and I anticipate we will continue to be successful.

So we're feeling pretty good.

The fluid works.

And I personally, and I think increasingly in the oil industry others remain convinced that the value proposition is very powerful.

And that if you're going to drill a higher pressure, high-temperature well in these conditions you ought to be using cesium formate.

Two additional questions.

First of all, relative to the cash, given that you had referenced that next year you anticipate capital expenditures increasing just due to the number of opportunities that you're seeing, especially in Asia, does this limit your propensity to buy stock back?

That's the first question.

Secondarily, there has been a fair amount of economic chatter relative to a slowing here in the last month or two.

I'm curious whether you folks with your volumes generally saw a slowing late in the June quarter and into July, or whether the strength that we saw in the reported numbers was rather linear.

With respect to the cash, one comment.

We do have some debt repayments coming in the fourth quarter, so we're going to consume a bit of our cash, more than normal, in the fourth quarter on some debt repayments.

And we do anticipate a fairly significant increase in the capital expenditures next year because of two plants we're looking to construct in China and one in South America -- or one big unit in South America.

That inevitably will consume more cash than we've had.

I'm pretty confident, however, that we will continue at a minimum to buy sufficient stock to offset any dilution coming out of our incentive plan, which is where we've roughly been in the last couple of years.

We have bought a little bit more each year.

And I don't believe that we would stop that.

The Company's cash generation capability and the health of its businesses give me confidence, and the strength of its balance sheet give me confidence at that level.

Remind me (multiple speakers) we did not see any significant slowing in June at the end of the quarter.

We do have some seasonality, particularly in our carbon black business, because of vacations and the like; shutdowns particularly in Europe.

So our fourth quarter has historically been the weakest.

I would describe us as anxiously watching the volume numbers, like I assume every other company.

We read the same thing you do.

But I can't sit here today and tell you that there's anything dramatic happening.

It's certainly not -- we're not busting the tops off everything.

But we're not -- we don't see an awful lot of excess capacity either.

So I would describe us as sort of in the middle there; neutral on that issue.

Thank you.

Bob Goldberg (ph), Gopus Asset Management (ph).

Was there any significant change in tantalum powder volume sequentially from the March quarter to the June quarter?

Hold on one second;

I get the number.

About 6 percent.

I guess that was mostly in your Asian business?

Yes.

We've sort of said -- I think we (inaudible) set up the business that bore count (ph) supplies the contract volumes in Asia, is the swing supplier.

Or Japan is the swing supplier.

But I think it's also fair to say a lot of these volumes are in Asia today.

Could you talk a little bit about the renegotiation that you announced last night?

And was that contract coming up at the end of this year?

How do the terms differ from the existing contract going forward?

This is the renegotiate in tantalum?

Yes.

I think you go back and look at the data, we've never really talked about it in-depth, but we've had four tantalum contracts -- three large ones and one of less significance.

This is a contract that expires, I believe, some time in the next 12 or 18 months.

And we have been working with them to smooth out their demand and our supply.

And it's something that we think is of benefit to both ourselves and them, and should help us stabilize the business.

But can you talk about are the volumes less than what they had been historically in terms of compared to the existing contract?

And has there been any adjustment to pricing?

I'd rather not talk about the terms due to confidentiality.

I would say that pricing is of course an issue going forward.

We're going to have to deal with market price condition rather than contracted price.

And we're dealing with committed volumes sort of as a percentage here of their off-take (ph).

Is it fair to say that you're willing to give up some profit on these contracts in exchange for getting over this cliff?

Absolutely.

We have said to you and our customers all along we're willing to give up short-term profit in exchange for long-term stability and long-term market position, and this contract is an indication of that issue.

Is there anything new with the AVX situation?

I think we announced that we prevailed in the summary judgment during the quarter, but other than that there is no new news to report.

There remains pending the final case that AVX brought against us for antitrust violations in the Federal Court in Massachusetts.

But the contracts have been upheld.

On cesium formate, can you give us some help on -- I'm trying to understand what kind of revenue impact we might see in the September quarter from these two wells that are being completed.

I don't really have the numbers.

As you recall, at the end of last quarter we are now booking as it occurs the rental revenue, and not booking until the end of the job and all of the work has been done to do the calculation any sales revenue.

So we booked some rental revenue during the third quarter on the five jobs, but none -- there's more rental revenue and none of the sales revenue.

I guess I don't have the numbers.

I can tell you given what we've seen thus far that it will be substantial.

I may be mistaken, but I thought I remembered that you might be able to get to upwards of $10 million in operating profit for that segment for the fiscal '04 year.

That would seem to be a stretch at this point.

Yes, that would be a stretch at this point.

We've have had slower jobs.

As we pointed out, these jobs have been slower in evolving that we had anticipated.

Okay.

Finally, on carbon black, is there anything -- any comment on what's going on in Asia?

The probability was down on significant higher volumes.

Thanks for asking that question.

We had in the third quarter of '03 a sort of onetime adjustment of our freight and other costs that benefited Asia on a onetime basis.

It was a reallocation of freight and other costs that took place because of the rapidly growing nature of that business.

If we level that out of the system, the Asian carbon black profits grew during the quarter by roughly $2 million.

So it was largely a onetime beneficial event in 2003 that caused the apparent decline in 2004.

If you try to level that, the business profits grew during the quarter in '04.

Thank you.

Al Kaschalk, MDB Capital.

You had mentioned new product sales in the performance products group.

Is there an indication of either profits or revenues as a percentage that those new product sales contributed this quarter?

No, we do not -- I can tell you that they were attractive for us, and that they are higher margin products at the higher end of what I call our special blacks business.

But we do not give out those numbers.

On the status of the excellence program, you added some commentary subsequent to your prepared remarks, but are we looking at perhaps another 50 cents or 40 million program going forward for perhaps fiscal '05 and beyond?

I'd rather leave it as I said, that we're confident that we will achieve the 40 by the end of this fiscal year, and we're going to continue to work on it.

And we have not set an objective or target at that level, but I can tell you that we hope and believe that it would be a material amount of earnings for us.

Would it be fair to classify that at current date that we are roughly 75 percent through the 40 million?

Actually we're above 35 as we sit here today.

Okay.

I on the debt repayments that are due at the end of this year I believe, calendar year, could you remind us what that amount would be?

$40 million, I believe. $40 million for the year, and I think -- 20 or 25 million in the fourth quarter.

I'm sorry. 40 for the year and what?

20 to 25 million in the fourth quarter.

Thank you.

On the dilution program as it relates to buyback, could you quantify that a little bit more, either in shares or dollars or what the offset there is?

We've been buying, and as I mentioned would plan to continue to buy at least 1.5 million shares, which more than offset any dilution that comes out of our incentive program.

Okay.

Thank you.

I think all the other questions have been handled previously.

Charles Stanford, Babson Capital.

I just have a quick question.

Do you have your depreciation and amortization figures for the nine-month period?

I'm sure we can get them here if you give us a minute.

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

About 98?

Year-to-date a little under $100 million.

Thank you very much.

Jeff Zekauskas, J.P. Morgan.

Good morning.

This is (indiscernible) for Jeff.

Two quick questions.

The first one is how large is your fumed metal oxides business today?

And what's the expectation for profit growth in the segment going forward?

And secondly, were all the tantalum powders (technical difficulty) shipped this quarter, were those all contracted volumes?

Let me answer the tantalum question first.

No, the powder volume this quarter was not all contracted volumes, it was a mix of both contracted and non-contracted.

Powder volumes largely out of our Boyertown facility are under contract and the powder volumes coming out of our Japanese facility are open market sales.

And we have been experiencing a modest but healthy growth in our open market sales of tantalum powder.

It was most of it in open market this quarter?

No.

I don't have the exact breakdown in front of me, but I -- 50-50 or less than that?

More 60 percent contracted; 40 percent open market kind of thing.

I'm not quite sure how to answer the size of the FMO business.

It is roughly 20 percent, 20 to 25 percent of our chemical business.

I did mentioned in my remarks that it is roughly close to sold out of our capacity today.

So therefore, our profit growth is going to come from in the short-term cost reduction activities that I've been discussing.

And in the mid to longer-term we are building a new plant in China and making a major initiative to expand our presence in China and the Far East.

So it's a little hard to give you -- we do not establish -- we do not publish profit growth targets going forward.

But we continue to work on those two aspects of the profitability of the business.

If I can ask one follow-up.

Is the 25 percent in terms of your chemical sales?

And how much would it be in terms of overall operating profits with the chemical equipment?

We will give you the 20 percent, or 20 to 25 percent of chemical sales.

We do not breakdown the profitability.

(OPERATOR INSTRUCTIONS) Andrew Wang (ph), American Technical Research.

I was wondering -- I just want to clarify.

Did you say that tantalum raw material prices are now at $40 a pound?

The open market price of tantalum is a little bit of a confusing number, but the prices we have seen in the recent weeks and months have been in the range of 37 to $40 a pound.

Can you comment on where that price has gone historically?

If you go back into the mid-'90s it was roughly at that level, plus or minus $5.

During the height of electronic boom at the end of the '90s, in 1999 and 2000, a stable price got up in the 80, $90 a pound.

There was at least one sale at $350 a pound.

During the bust cycle, and until recently for the last couple years, it had been in the range of $20 a pound.

And the tightening of the market has brought it back up into the $40 range.

Based on what you're seeing right now from your customers would you expect that price to be down somewhat a year from now?

If I could answer that question, I might be in a different -- I might be in your business rather than mine.

I don't really know.

It's going to depend upon the demand.

Are we going to continue to see strengthening in the worldwide electronics market?

There is a new use of tantalum that we have talked about here in the semiconductor industry that is starting to consume a not insignificant amount of tantalum.

So we have been sufficiently concerned about it that as I mentioned during my remarks we are making sure that we have an adequate supply of the raw material to serve our needs going forward.

But it's a $24 question.

Thank you.

Jay Harris, Goldsmith & Harris.

Just a couple of follow-ups.

You've mentioned a couple of times now in carbon black new performance product successes.

Can you tell us what they are, what the applications are?

I'm going to let Bill Brady do that.

We'd like to do that.

I think you'd be interested in it.

There's some interesting technical work there.

There were two of note.

One is for cable extrusions, carbon black for cable extrusions, which the drive there is cleanliness and smoother profiles.

And then the second was one in automotive windshield sealants, which has a lot to do with exotrapy (ph) and those kind type of properties.

So they're both successful.

As you probably know, the really important thing in this business is that we have a continuous flow of these products so that the attractive margins that the business has overall is sustainable.

To the extent you hear us keep talking about them, that's good.

It sounds to me like these are attributes which the manufacturers of the sealants or the cable extrusions materials are reaping.

Correct.

These are process advantages?

Correct.

Do we yet have an aerogel manufacturer process of its scalable to full commercial plant?

I have been told by my friend (indiscernible) Charlie Gray (ph) that we have a scalable aerogel manufacturing process.

Does that mean that starting in the fourth quarter we are no longer burning money in that semiworks (ph) facility?

That's a question of the market.

We've got a few pieces of equipment that have to be upgraded in that semiworks facility.

But I'm told at that facility, which was designed for 10,000 cubic meters, will have the capacity of somewhere in the range of 17,000, 18,000 cubic.

So we're operating in it, and making product, and selling.

The issue now, the next issue for us as you know, is the market going to develop at a pace that we find acceptable.

We're encouraged, but as I think you've been with us a long time, these things take a long time.

I actually had a meeting a couple of days ago with the guy who is running the business, and he is quite aggressively optimistic about it today.

But we have, by and large we think solved the operating problems and now we're hard work at the marketing problems.

Has the engineering for a commercial-scale facility been completed or started?

There's some work going on it, but we have not spent a significant amount of money.

We're waiting for a little bit more enthusiasm or receptivity in the marketplace.

I take it your comments about capital spending for '05 do not include any money for commercial facility.

There's a very small amount of money in there, but nothing substantial.

Thank you.

Very good quarter.

Bill Dezellem, Davidson Investment Advisors.

I also wanted to follow-up relative to the aerogel.

From discussions with customers in the marketplace, it's very clear that the product is really well-received.

However, price is the primary issue.

And I'm presuming that with higher volumes you can bring prices down.

So really the question is what is the strategy or strategically how are you approaching this issue of price versus volume versus near-term profitability versus getting the product accepted in the marketplace?

Great question.

I hope to give you a clear answer, but it's a complex problem.

In my view there's two competing issues that we're facing.

We appear to be the only company that has the capability of making this product in quantity at a reasonable cost.

There is one small competitor that makes very small quantities of it.

It's a startup company that is making small quantities in a certain fashion, but they do not have the ability to make it at high volumes.

We've got two competing things.

We would love to find a large customer who would enable us to baseload a large facility, which would give us the advantages of scale and enable us to sell the product at a reasonable return, a reasonable profit to us, and what the customers would find to be a more attractive price.

On the other hand, given the uniqueness and the attractiveness of the product, we do not want to give away price or value at an early stage until we have truly established what the value and use of the product is.

And so we're sort of caught in that bind.

Our current thinking is that we will in a relatively short-to-mid timeframe at a minimum sellout the semiworks plant which would make the business profitable.

And that we would then be in a position to decide whether we want to build a large plant and lower the cost or make it a very, very high-end specialty product.

We think the value attributes of the product open up the high-end specialty product opportunity.

We also think at scale it could be of sort of -- not a commodity product so to speak, but a lower-cost high-value product.

So we're trying to work our way through that as the market develops.

But it is true that at scale we can lower our cost of producing the product substantially.

Did we hear you correctly that originally the plant was targeted for 10,000?

I didn't catch the units, but 10,000 units and now it's actually to where you can do 17 or 18?

We have the capability -- I tried to answer the question capably.

The plant was designed to produce 10,000 cubic meters of the product.

We measure -- the units are volumetric.

We believe that with some relatively small amount of capital investment -- debottlenecking really investments and sorting out the process problems we've had -- that the plant as it sits today could be expanded for not very much money up into the range of 18,000 cubic meters.

And at 10,000 cubic meters can this business be profitable or do you need to get the incremental volumes of around that 15, 18 to make it profitable?

Of course that depends on pricing.

But at the price -- the pricing we have in the market today, and we're selling some of this material -- at 10,000 it was targeted to break even.

At 18 it starts to make a modest amount of money.

I would describe it as a reasonable return on the capital invested in the plant.

I want to be clear, though; we hope and believe that this is -- that we're going to have one, two, three large-scale plants in the future, and that this is going to be another core business for us of significant size and profitability.

And that we would be very disappointed if it only -- we only had this small plant, even if it was sold out.

I want to be clear that we've answered to Jay's question and your question we're not now running the plant at either 10 are 18,000 cubic meters, in large part because we don't have the market for it.

That is helpful.

Thank you.

Michael Judd, Greenwich Consultants.

A couple of balance sheet questions.

You gave us the cash balance which was 185 million.

Can you give us the short and long-term debt numbers, please?

Give me a minute.

And I hope you understand that the cash balance in my head is roughly 250 because we made a decision to try to improve the return on the cash invested by investing in high-grade investment securities.

And that money is available to us if we need it.

So the total amount of cash and short-term receivables -- sorry, short-term --

Short-term investments.

(multiple speakers) 250 million.

Roughly 250 million, and we paid off some debt and bought all that stock.

We have long-term debt including current notes payable and overdrafts -- excuse me -- long-term debt of 536.

I guess (indiscernible) is 25 for a total of 561.

I think I gave you that right number.

So 561.

Great.

Thanks a lot.

Bob Goldberg, Gopus Asset Management.

Can you talk a little bit about the price cost dynamic in carbon black; whether you have seen any squeeze or expansion sequentially from the March quarter to the June quarter and how you expect the raw materials versus pricing to play out over the next couple of quarters?

I would describe it has been generally flat over the past three to six months.

That's an interplay, as you know, between what happens to the oil prices and what happens to our market dynamics; what happens to capacity utilization.

It has not been dramatic either way recently, and we would not expect any significant issues moving forward.

Have you seen any change in the relationship between crude oil and the feedstock that you buy?

Or has it been fairly stable?

That is a complex question.

As I think you know, we have not been able to find -- one of the issues in our business is whether we could hedge the carbon black feedstock, and we've never been able to find an appropriate proxy in the oil markets for carbon black feedstock.

They move in odd patterns in our view.

I would describe it as sort of business as usual.

We have seen some interesting geographic moves over time.

It used to be that the lowest cost carbon black oil was bought on the Gulf Coast.

That's no longer the case.

You can buy it on a more global basis and a cost-effective basis.

The other issue that impacts it, if you really want to get into it, is the problem of low-sulfur feedstock.

We are increasingly buying more low-sulfur feedstock which is more expensive than 3 or 4 percent sulfur.

So that's an issue that enters into the equation.

But it's a little bit hard to describe.

It's a complex thing that gets managed everyday is the best way I could tell you.

My last question is you have talked for some time about looking at your North American operations to see if there was any restructuring activity that was needed.

Have you made any progress on that, any decision?

We continue to work on it.

I would tell you that we continue to work on the capacity and positioning ourselves for something if it is appropriate.

That's sort of on where our capacity is located and the capability of our capacity in our various plants.

The other issue that is intriguing is what's going to happen in the North American market.

You may be aware that Toyo (ph), a Japanese tire company, has under construction a fairly large tire plant in North America which is counterintuitive to us.

So here's some new tire volume, new volume for tire carbon blacks coming into North America.

It appears as we observe the market that what may be happening is that lower cost, smaller passenger tires are leaving -- are not being manufactured in North America or Europe or Japan really, and are going to China, Indonesia, India, Brazil, etc., but that the higher value, larger size truck and SUV tires continue to be manufactured in the Western world or in the developed world.

So I would describe us as in a period cautiously observing.

We had volume growth in both North America and Europe during the quarter.

So I'm not sure how it's going to play out.

We're watching it closely and trying to position ourselves so that we're able to take advantage of whatever happens in the next months and years.

What is your capacity utilization in North America?

Probably close to 90 today.

Close to 90 percent today.

Got it.

Thank you.

It appears we have no further questions at this time.

I would like to turn the conference back over to Mr. Burnes for any additional or closing remarks.

Thank you very much.

Thank everybody for participating.

I hope to be able to sit here three months from now with equally positive news.

Thank you all.

This does conclude today's teleconference.

We would like to thank you for your participation.

You may now disconnect.