Cabot Corp (CBT) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Cabot Corporation fourth quarter earnings results conference call.

This call is being recorded.

At this time I will turn the call over to the Chairman, President, and Chief Executive Officer, Ken Burns.

Please go ahead, sir.

Good morning, everyone.

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

I'd like to welcome you all to the Cabot Corporation fourth quarter earnings teleconference.

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

Jim Kelly, our director of investor relations;

Bill Brady, our general manager of Carbon Black;

Carol Flack, general manager of our Supermetals business; and Brian Berube, our general counsel.

Before I proceed I will issue an apology.

There are a number of people in the room who are a little bit tired.

We have a mixture of Yankees fans who we've been harassing for the last week and Red Sox fans who are ecstatic this morning.

So we might have a little bit of trouble responding to questions, but Boston is in a celebratory mood, as you can well imagine.

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 our website, www.cabot-corp.com.

Last night we released earnings for the fourth fiscal quarter and full fiscal year ended September 30th along with the 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 are 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 onto a short overview of the results and then open the call to questions.

Last night the company reported fourth quarter earnings per share of 23 cents compared to earnings of 40 cents per share for the same period last year.

Included in the current quarter's were charges of from certain items of discontinued items of 16 cents per share, in contrast to 2 cents per share of income from certain items and discontinued operations in the prior year's fourth quarter.

We are pleased with the performance of the company this quarter as results in most businesses continued to be favorable compared to last year's quarter.

For the full fiscal year, the company reported earnings per share of $1.82 compared to earnings of $1.14 per share for the fiscal year in 2003.

Included in the current year's results were charges from certain items and discontinued operations of 20 cents per share in contrast to charges of 67 cents per share from certain items in discontinued operations in fiscal year 2003.

Overall it was a very favorable year for us with improving volumes and lower operating costs more than offsetting the impact of higher raw material costs and the loss of significant profit from intermediate product sales in the supermetals business.

In the fourth quarter the chemical businesses reported profits of $17 million, which was more than a 50% increase in segment profit compared to the same period last year.

Carbon Black's profits were approximately equal to last year forth quarter's results with stronger volumes slightly lower costs and positive currency effects.

These were offset by earnings impact of inventory change between the periods with the current quarter having a larger decline in inventory and therefore a greater P&L charge than the prior year's quarter.

This resulted from an ongoing effort to reduce our inventories and thus further increase our cash flow.

Overall volume grew 9% compared to the same period in 2003 with all regions participating and high capacity utilization persisted throughout the world.

China, in particular, continues to grow rapidly for us, and in addition we are beginning this to benefit from the volume impact of two previously announced new contracts with existing customers.

In the fumed metal oxide business, volumes increased 14% compared to the same quarter last year as all markets recorded stronger demands.

Our facilities continue to operate at near capacity levels.

Profits improved by $6 million from the same period last year due primarily to higher volumes and improved product mix.

Volumes in the inkjet business were 56% higher than the fourth quarter of fiscal 2003 due to strong growth in both OEM and aftermarket sectors.

We continue to be very exciting about the strength of our chemically treated pigment technology and the its ability to enhance the quality and capability of the inkjet printing.

We continue to invest resources in research and manufacturing capability to support the long term development of this business.

Cabot Supermetals business earned $22 million in segment profit this quarter, which was $5 million less than last year.

The results were driven mainly by the absence of intermediate product sales and a greater portion of the sales being at market prices rather than at fixed contract prices.

These factors were largely offset by a significant increase in product volumes and lower operating costs.

During 2004 we were successful in amending two significant customer contracts for the supply of capacitor grade tantalum powders, extending them through 2009.

The revised agreements provide Cabot significant supply relationships with these valued customers.

We are pleased with the progress that this business has made this year, and we are working to continue to improve our cost position as sales transition from fixed contract to market-based pricing.

The Speciality Fluids business completed nine jobs during the fourth quarter compared to three jobs in the fourth quarter last year.

The business earned $5 million in the quarter compared to $1 million in the same period last year.

In addition to the increase in the number of jobs, the number of barrels of fluid used on the jobs also increased.

We continue to provide drilling fluid for Statoil under the agreement we reached with them last year, and although Statoil and not contractually obligated to use our fluid in future wells, we anticipate significant activity going forward.

Our cash and investment securities increased by $14 million during the quarter from $250 million to $264 million.

And during the the fourth quarter the company did not repurchase any of its shares on the open market.

Year-to-date open market repurchases totalled 1.4 million shares for approximately $46 million.

These year-to-date amounts do not include approximately 470,000 shares re-acquired under the company's long term incentive program.

Capital expenditures total $53 million for the quarter and $119 million for the fiscal year.

Due to our plans to add capacity in Brazil, China, and other rapidly growing regions of the world, we expect to significantly increase our capital program for the fiscal year 2005 to an amount in excess of $200 million.

In conclusion, we are pleased with the results we achieved in fiscal year 2004.

They represent another solid step in our efforts to improve our operating performance and position us well to have another strong year in 2005.

In Carbon Black we anticipate continued strong volumes and are working to manage or margins in the face of high raw material costs.

We also continue to execute our strategy of geographic migration as many of our customers move their manufacturing facilities to emerging lower cost regions.

If the fumed metal oxide business, we expect continued strong demand with our plants running at near capacity levels, and we are pursuing our market development and capacity expansion plans in China.

In Supermetals, we are working to improve our cost competitiveness as sales transition from fixed contract prices to market-based prices.

With respect to our new business in inkjet, we are very excited about the potential -- the growth potential presented by our chemically treated pigment technology.

This growth will require our continued investment in research and development as well as manufacturing capabilities.

In Speciality Fluids we are focusing our efforts in being the drilling fluid of choice in North Sea high pressure, high temperature wells and to expend our geographic presence.

We continue to invest cash in intellectual resources to develop our aerogels business and to develop new business opportunities supplying our superior micropowders technologies platforms and core (inaudible).

We continue to monitor these activities closely and are pleased with our continued progress in developing a robust new product pipeline.

Given all of this, I remain very optimistic about the short and long term prospects for the company.

Finally, I would like to note that we announced last evening our intention to close our Carbon Black manufacturing facility in Altona, Australia, due in large part to our law materials suppliers' indication that they would cease supplying us beginning us in September 2005.

This has been a very difficult decision and one that saddens us greatly.

The Altona employees have worked very hard over the years and have operated the plant very effectively in order to support Cabot's growth in the Asia-Pacific region.

Unfortunately this step is necessary, as we have no viable cost competitive alternate for a raw materials supply in Australia.

We are working to de-bottleneck several of our other Asia-Pacific Carbon Black manufacturing plants in order to replace the 45 thousand metric tons of production capacity that will be closed in Australia.

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

I'll turn it back to you, Nancy, if you would please.

Thank you, Mr. Burns. (OPERATOR INSTRUCTIONS) And our first question comes from Jeff Zekauskas of J.P. Morgan.

Hi.

Good morning.

Morning, Jeff.

A few things.

The first is can you analyze the sequential profit change in the chemicals business, especially in Carbon Black from the June quarter to the September quarter?

I guess I'm not quite sure what you mean.

I mean -- what happened to it?

Or why it happened?

So in other words, like if I have the numbers correct, that is you earned $45 pretax in June?

And you earned $17 million pretax in September?

And I was wondering how you get from 45 to 17.

Well, we don't -- as you know we don't specifically talk about those numbers, and so I'm not in a position to confirm or correct your numbers.

I'm not surprised that you have a model that will gives you numbers like that.

I can tell you the factors that influenced the decline.

The primary one, of course, is the sequential -- is the period of the year where we historically and continue to have significantly lower volumes in the -- in the summer months than we do at other times of the year.

As you're probably aware, Europe and other parts of the world essentially close down for some of those months.

So the fourth quarter has historically been our weakest -- weakest quarter.

Offsetting that this year -- excuse me?

Offsetting that this year were -- were historically stronger volumes and lower operating costs to some extent offset by higher plant shutdowns which increases our maintenance expenses.

We -- because of the slowdown in the summer months we have historically scheduled our turn arounds in the summer and that results in a -- in higher planned maintenance cost.

The final and most significant issue relates to the inventory movement, Jeff.

We -- as you know, we've been -- we've been working over a period of time to get as much of -- get inventory as low as possible and thus increase our cash flow.

This year -- this year and particularly this quarter in the Carbon Black business in the face of higher volume and thus the need for higher inventories we actually had a decline in inventory in the fourth quarter, and that impacted our profit by roughly $8 million in the quarter.

Roughly $8 million.

Okay.

Because it's always a little bit puzzling, Ken.

And I'm aware.

That's why we put more data in there.

And candidly, one way to think about it, if you at that $8 million back to those numbers, the fourth quarter was a strong quarter.

It would have been a historically strong quarter, $8 million plus $202 would have put us at $210, well above what the company has ever earned before.

But we made a business decision, I think the correct one, that if we could have an opportunity to take some inventories out and maximize our cash, it was better for the company in the long term.

I think it's the correct decision.

I recognized it penalized earnings by the 8 or 9 cents.

If I could ask just one last question.

Do you think that you're gaining share in the Supermetals business or losing share or maintaining share right now?

You know, that's a very hard thing to answer.

You know, we, as you know signed the -- two contracts with the -- during the quarter which inevitably put us in a strong position with those customers.

We continue, we think, to do very well in the pacific region with our Japanese affiliate, which is operating at or near capacity as we speak today.

On the other hand our relationship with the one customer that we continue to have a dispute with remains less than ideal.

So you know, how it all plays out is unclear.

We have, as you've seen, experienced, you know, significant volume growth overall during the year.

So you know, as I look at it, I'm -- I'm very pleased with the performance of the business in normalizing its customer relationships and at least maintaining its share in the industry.

But whether we gained or lost is -- is -- I don't have a good picture of it today.

But the business has performed in the volume level at above my expectations.

I would tell you that.

And lastly, what are you spending the $00 million on in CapEx for next year?

What are the big chunks of that.

We are --

What are the big chunks of that?

There are three big chunks.

There's a new Carbon Black unit in -- in Brazil that has been announced.

There is a new fumed silica plant in China that is announced, and we have in our budgets -- unannounced we're in negotiations -- we think we've talked about it; people are aware of it -- we're working on additional Carbon Black location in China that we expect, although we haven't finalized the arrangement yet, expect to be in construction during this year.

So three major new facilities -- one major new unit in Brazil to serve the market there and two significant plants in China.

We also have some not huge amount of dollars but significant capacity coming in de-bottlenecking in the pacific, which we've been working on because we need the capacity, but which is certainly accelerated by the results of the Australia situation.

Okay.

Thank you, very much.

You're welcome.

Our next question comes from Lawrence Alexander of Deustche Banc.

Good morning.

The inkjet jet business, can you how your R &D spending for inkjet might change year-over-year in 2005?

I mean, does it need to accelerate?

Yeah, I think, you know, it has been -- as that business has evolved and as we have expanded our -- the range and capability of our technology to treat the Carbon Black surface and put more functionality on the Carbon Black surface, we have expanded that technology into broader and broader areas with the inevitable consequence that the spending is going up.

In addition to Carbon Black, which is the black pigment, we are doing significant work now on chemically treating other pigments, the other color pigment that's we purchase and treat, and I hope and believe that that will continue to evolve going forward.

You know, we believe, as I said in my notes, that we have a -- we have a strong and intellectually property protected position in that area.

We believe it is -- it has the potential to be an enabling technology in the sector -- the inkjet sector of the printing business, and we're working hard to take full advantage of it and provide as much capability to our customers as possible.

So I would hope and anticipate that we would continue to see an increase in inkjet R&D as we go forward.

It has steadily increased over the past years, and we're sort of looking for that to continue as we go forward.

Okay.

And in Carbon Black, can you put a rough number around the impacts of the maintenance expenses this quarter?

Yeah.

I can.

Give me one second.

I think the question was rough impact of the incremental maintenance expenses coming around between the turn around.

It's probably in the range of $2 to $3 million.

Okay.

And finally --

I want -- let me make one comment about that.

I did mention in my notes that those plants are operating, around the world most of them, close to full capacity.

We did take advantage of the -- the what we believe is a momentary weak spot in capacity utilization this summer to make sure our plants were in excellent condition so that they could operate at capacity for an extended period of time.

So we may have spent a little bit more this summer than ordinarily because of our -- our expectations of how the market will evolve going forward.

Okay.

And in the Supermetals business, you mentioned ongoing cost reductions as you transition to -- away from the fixed-priced contracts.

Will you need to take any charges next year to, you know, to a step change in the cost structure, or is it incremental?

As we're looking at it today, it is incremental.

We are working to lower the cost of operating our existing facilities.

And they do not involve, as we see it today, any charges of the type that it would ordinarily come.

Okay.

It's a -- it's sort of a learning how to operate those facilities more efficiently, more effectively, and at lower costs.

Okay.

And finally I was a little bit -- I was a couple of minutes late getting onto the call.

Did you address the Sons of Gwalia discussion?

I have not addressed the Sons of Gwalia conversation.

I will give you an update as we see it today.

Generally little has changed since we had the call, I guess 30 or 45 days ago.

For those -- for those of you on the call who may have missed that, Sons of Gwalia is in what in Australia is known as administration, which is sort of our reorganization in U.S. bankruptcy terms.

They are in -- got in financial difficulties because of financial hedges they had in place on their gold business, and it turns out they had committed to sell gold forward that they turns out they did not have the capability of mining and delivering into those contracts.

And it is a serious problem.

We've heard recently that the contractors -- and this is anecdotal and not necessarily the truth, but the feeling in the industry and the community is that the creditors may recover as little as 10 cents on the dollar because of the magnitude of the gold loss.

Sons of Gwalia continues to operate its tantalum mines and is delivering its ore to its contracts in accordance with its customers.

We have been assured by both the management of the Sons of Gwalia and the administrator that that will continue indefinitely.

And that is consistent with their financial needs, because that's their only source of cash today.

It is, we believe, likely that as this plays out that the tantalum assets will be sold.

As with we have, I think, made clear and now is generally known in the mining and financial community, our supply contracts are secured by mortgage.

Our supply contract with Wagina (ph) in particular, calls for a pricing -- has a pricing formula in it that provides a price that would provide Gwalia with a 15% return on its investment.

And in addition, in the event the mines are sold, Cabot has a right of first refusal.

We have given notice of our intention to extend the Wagina (ph)contract, and we failed to reach agreement with Gwalia about the pricing, and under the terms of the contract, the exact application of the pricing formula will now not determined by arbitrators based in London.

We do continue in conversations with Gwalia and the administrator around the pricing, and it is possible we could reach agreement without resorting to arbitration.

We have given -- we did not exercise our right to renew our contract with Green Bushes (ph), in that we did not feel we needed the ore, and Green Bushes (ph), we believe is a more expensive ore body to mine and deliver material than Wagina (ph) and we believe is we think the lowest cost ore body in the world.

We -- as this goes forward, we anticipate being a participant in any possible sale of the mines.

Because of the existence of the ore contracts with Gwalia during the past three or four years and the fact that the contracts provided that we buy -- we were required to buy more ore than we were consuming during the downturn, we currently have significant ore inventory in our possession.

Little bit hard to be precise, but it's -- it could be as much as $75 million worth of inventory.

One of the things that has occurred to us is that if we could buy Wagina (ph) at a reasonable price, we would be able to reduce our ore inventory by that $75 million and then have much better control of our ore inventory and lower costs.

So we're going to play this out going forward.

We will, you know, do our best to -- we will, of course, have adequate ore supplies but more importantly we will do our best to take advantage of whatever occurs to see if we can get lower cost ore going forward and are actively engaged in monitoring the situation.

A little bit hard today to predict precisely when it will play out.

If I had to guess I would say in the next six to nine months.

And just to be clear, you have the right to first refusal on the contract -- if Wagina (ph) comes up for sale, do you get any extra concessions because you were an FT investor in the company?

Are there any other clauses are in the contract that would reduce the purchase price or for you?

Let's be clear.

We have a right of first refusal on both mines until the end of 2005.

Our right of first refusal on Green Bush's (ph) will expire with the expiration of our contract at the end of the 2005.

Our right of first refusal on Wagina (ph) will, we believe continue indefinitely, and incidentally, that contract is evergreen in nature.

We have the right to renewal essentially indefinitely, and our mortgage will survive any bankruptcy proceeding.

That's the good news.

We don't believe, although we've certainly struggled to figure out if there is a way to do it, that our equity position gives us any advantage in the bankruptcy proceeding.

But I can assure you that our lawyers are working hard to be as creative as possible.

Thank you very much.

Thank you.

Our next question is from John Roberts of Buckingham Research.

Good morning, guys.

Morning, John.

I apologize if I'm a little groggy, myself.

I had bets on the Sox.

Ken, you had your strongest tantalum quarter in the year in a quarter in which chemical and other U.S. based capacitor guys had their weakest quarter of the year.

Could you talk a little bit about the business away from them?

I think you have told us before that EPCOS and NEC are other significant customers, but tell us maybe what we should watch since obviously watching KEMET in this space is not the right thing for us to follow your business.

No, and John, we've talked about this before.

And I did mention earlier, you probably heard that the Japanese facility is operating at or near close to capacity.

Which is, you know, I think an indication that that we're seeing strong demand and strong, strong markets in the far east.

As we've talked before it was -- it was clear that during, the downturn the Japanese producers were operating aggressively, you know.

And they all bought all of their volumes under our contracts and largely our facility -- our Japanese customers were seemed to be healthier than our western customers.

We've heard the same information you heard in the announcements about the questions of the -- that KEMET and others are experiencing about what the market looks like.

So I would describe us as watching and waiting and being a little ambivalent about what we see in the marketplace.

Would you call it regional -- the market as regionalized.

The trouble I have that is the market has historically not been very regional.

You know there's been a little bit of regionalization in Japan and increasingly in other parts of the far east, but KEMET, and as to the best of our understanding, KEMET and Vishay and also AVX have sold globally.

Right.

So you know I -- I can't without scratching my head.

Okay.

On Carbon Black I imagine part of the sequential decline was just a little bit of widening in the price lag versus raw material costs.

Well, there's certainly a little bit of that.

But I would tell that, and if anybody digs into the oil prices, we have not experienced, until the last couple of weeks, the kind of pricing increase in our feed stock that we've all seen in the crude markets, and makes -- you know, as we've watched that evolve, it makes you wonder what's going on in the crude markets.

Now, that is, to some extent, you know, started to play out in the last couple of weeks.

We've seen a sort of a spike up in high sulfur and low sulfur fuel oil the last couple of weeks.

But, yes, there is some margin squeeze going on there that -- that we don't -- you know, under the terms of the contracts we don't have the ability to pass on for three months.

The other thing that I -- that I should tell you on that, John, is that over the last several months we have -- we have announced across all of the chemical businesses price increases that are -- that are an effort to recapture the lost margin from the energy price increases.

And, you know, it's a -- to a large extent it has been successful, but as you know, with price increases in the chemical business it's an ongoing effort, and you know, the price tend to move almost on weekly basis in some of our spot markets.

But we have had some price increases, and we're working hard to make sure we -- we can maintain our margin throughout this period.

And then lastly, should we prepare ourselves for the comps getting much more challenging in the silica business?

You've been ruining in fumed metal oxides, you know, low teens year-over-year volume comps for a year now.

Did you say costs, John?

Comp.s.

Year-over-year volume gains.

Oh, yes.

Absolutely.

Because we're sold out.

You know, we've had -- you know, we've had a two or three year period in both significant growth in both the volume and profitability in that business.

We're we're close to being sold out across the entire system.

And, you know, our next significant piece of -- piece of capacity is the China capacity which comes on and you know 12 to 18 months.

We do have some small capacity that -- that we can add to, you know, sort of de-bottleneck and more efficient use of our plants, and we continue to pursue both in the Carbon Black and fumed metal oxide business in particular the cost initiative we talked about.

But I'd certainly fare to say that our ability to show the kind of profit increase in the fumed metal oxide business going forward, at least for the next year or so, would be much, much more difficult than it has been in the past.

Okay.

Thank you.

We will now go to Bob Goldberg of Scopist Asset Management (ph).

Congratulations, again, on the Red Sox.

The curse is gone.

The curse is broken.

I had a couple of questions.

One on tantalum.

I am just trying to understand the outlook for the next couple of years.

Obviously there is a shift of market share among your customers favoring the asian producers at the expense of the domestic producers.

But you have a lot business, obviously, with domestic producers, and that is where there seems to be some excess inventory.

I did notice that KEMET's inventory was up in the quarter.

I'm just wondering how this -- how you think this plays out with the -- with the contracts or some of the contracts set to expire over the next year or two.

And maybe you could comment on where pricing is for these market-based sales versus what you are selling under contract and the trend in pricing on the market-based sales.

I should qualify anything that I say that it is, you know, to some extent, speculative because we find it a confusing situation, and we don't -- don't really quite know what how to accurately predict what's going to happen going forward.

The factors that we think about I would tell you one is, you're right.

We have these contracts running off over the next, I guess it's 27 months now -- the next -- next nine quarters.

And we have, as you know, worked to put different type contracts in place to ensure that we would be able to maintain our market share at a minimum.

The other -- a second issue is the -- is the -- is the market share movement or location of the consumption between the far east and the western world.

That -- that, you know, has been our -- that issue has been around for a while, and we observe it.

We're not quite sure how it will play out.

A third factor is the extent of the use of tantalum capacitors.

I think we've talked before that tantalum capacitors compete in electronic equipment with ceramic and aluminum capacitors.

That the tantalum industry with the shortage that existed back in the two years in the '99/2000 period certainly hurt itself with electronic designers because certain people were unable to get tantalum capacitors.

And there was a design out phase that hopefully is now slowly being reversed.

Ask and then finally for the tantalum producers side, there's the issue of sputtering targets and the semi-conductor factor and what impact that will have on the tantalum market.

We have noted, we've been told we've seen the shortage -- the softness that the western producers are experiencing and predicting.

We saw the KEMET announcement -- I think it was at the beginning this of the week or last week.

And that's consistent with our knowledge.

How it evolves going forward, Bob, I -- I don't know.

I'm optimistic that tantalum remains a very, very attractive material in electronic applications, and that as the industry settles down and prices, you know, stabilize at what we would regard as a low level, that the industry will recover and get -- get strong again and take an increasing share of the electronic markets.

And I would hope to see that start to stabilize over the -- over the next couple of years.

Pricing, without giving you absolute numbers, yes, the open market pricing is below our contract pricing by a significant amount.

And you saw, if you analyzed our numbers, our average pricing, as we mentioned, went down this year because we had a much greater percentage of our sales in market pricing than we did under contract pricing.

Now the pricing going forward is a little bit hard to predict.

So some extent is depends on availability of ore.

This -- which a significant influence will be the strength of the semi-conductor market and the health of the basic electronic industry.

I don't know if I've helped you very much.

I don't really know what else to say other than we're -- we are aware of all of those factors.

We monitor them closely.

We do believe, as we look forward, that we will be a lot stronger if we can continue to reduce our cost of production but lowering our ore cost and also lowering our operating costs, and we're working hard to do that.

And we're hopeful that we can make some dramatic changes in the months and year as head on that score.

I think you've understood that the Gwalia presents an opportunity for us.

And we're also working hard in our plants.

Ken, do you believe that the shift to Asia -- the shift to the business to Asia is structural in nature, in which case the domestic producers might really be handicapped for some time and might not be able to work down their inventories to a sufficient degree even if there is some industry recovery?

Am I overstate ting there or --

I don't -- I don't -- you know, it's not a -- it's not a regional business in terms of sales.

You know, tantalum capacitors can ship all over the world, and, by and large, the western producers are now making their capacitors in low cost areas.

You know KEMET has big facilities in Mexico.

AVX makes a lot of capacitors in Eastern Europe.

And so that confuses me.

It may be that the Japanese and AVX were willing to be much more aggressive in pricing than Vishay and KEMET over the past few years.

And that led to a market position shift, but I don't -- you know, we're not privy to any more information than you are.

So we're a little bit confused about it, to be honest with you.

Okay.

And Carbon Black, where are margins on the non-contract business relative to the contract business?

Is there a lot of, like, catch up still to go in terms of -- you mentioned you are putting through price increases?

Where are we in terms of the margin restoration process?

Well, I don't -- I'm not quite sure how to answer on the term catchup.

I would tell you that, you know, managing margins in a period of volatile feed stock costs is a challenging situation.

We -- we are -- we are better positioned to do that today because we seem to be in a period of the cycle where Carbon Black capacity is a little bit constrained or at least more constrained that has been historically.

I mentioned our plants are operating, you know, at close to capacity, and I think that's largely true for the industry.

And that gives us some pricing leverage, or some maybe I should say ability to pass through the costing increases we're experiencing.

It's a very hard question to answer precisely, bob, because, you know, we operate all over the world in many different Carbon Black markets with varying margins.

The contracts stabilize both ours and our tire company's margins.

And lock in a margin and we all as, you know, we all agree to live with those margins, you know, for an extended period of time.

You know I -- I guess the final thing I'd say is that the prices we experience in the -- in the developing regions tend to be lower than we experience in the western world or the developed regions.

But we also have the benefit of lower operating costs there.

So our -- our profit margin is -- is better than it might appear when you first look at it.

All right.

My last question kind of it on the asian Carbon Black market .

Are you seeing any or do you expect to see any impact from the slowing automobile sales in China?

There's been some press on that recently, but I don't think I've seen it on your business yet.

We have read the same thing you have, and I can tell you we have not experienced any softness in our Carbon Black sales.

We continue to run the plant there at more than 100% of its capacity.

We're importing a lot of product, and as I mentioned earlier, we're working as fast as we can to get another sizable plant up and running to serve that market.

We continue to see that.

It's one of our most successful businesses today, and we continue to see that as a very attractive growth opportunity for us.

Okay.

Thanks for the help.

George Tarvisian (ph) of Tarvisian Group (ph) has the next question.

Hi, Ken.

How are you?

George, I'm not going to take your question.

For those of you else on the on the call, George has a dispute with the company that has gone on for 20 years, and we don't -- no longer talk to him.

Nancy, could you cut Mr. Tarvisian off, please.

We will now go to Mr. Alan Cashock (ph) of NDB Capital.

Good morning, Tim.

Good morning.

Ken, if you could elaborate a little bit on the capacity issues for plants coming on line.

You indicated 12 to 18 months.

Is that for all of the plants?

Or how should we be thinking about the online of those plants?

I'll give you some specifics.

I guess the a Brazilian capacity expansion is probably the closest to completion, and I would say towards the end of this fiscal calendar year -- in the -- about 12 months from now.

Okay.

And that's a new unit at the existing plant outside of San Palo in Brazil.

And it's a 60,000 ton, so it's a big, big unit.

That's as big a Carbon Black unit that we or anybody else builds.

The fumed metal oxide plant in China is a little bit -- we'd hope that it would be -- would be on line and producing again at the end of 2005 -- calendar 2005.

Its construction schedule is tied to the construction schedule of our Chinese joint venture partner because the the facility is located across the fence and uses a raw material that they produce, and we ship back them a raw material that they use.

The chloride atom circulates around the plant.

If I had to give my best guess today, it would probably be in the first calendar quarter of 2006.

And I hope that the new Carbon Black plant, assuming this we can get it finalized and agreed upon, which we're targeting for in the next short period of time, would be at roughly the same time.

Okay.

And the two -- little over $200 million, I guess, is you what said, or at least you said above.

I said somewhat above.

If we look out beyond then with what you've just shared, how much more in CapEx related to these specific facilities should we see in, say, fiscal year '06?

Let me add one CapEx.

Significant capital expenditure that again we're contemplating in the year and is in some of those numbers and that is an additional inkjet facility.

Okay.

We have the need, which is an encouraging step I would tell you.

We're -- you know, in a business like that you'd need to make sure you always have surplus capacity to serve your markets.

We have a new process that is being developed and used by one of customers and we're going to looks to me like we might have to spend another chunk of capital toward the latter half of this year on inkjet, which is in that excess $200 million.

I would say that, again without having looked at the precise numbers, that as I would hope that in the plants that we're talking about, 2005 would be the highest spending year, that the bulk of the capital would be spent in this year.

We'd have some flow over into the beginning this of fiscal 2006.

But just to put one of the other thing in range is that we think the steady state capital investment that needs to be made into our plants to maintain their condition is in the range of $120 to $130 million.

So we spent $120 or $119 this year.

We actually hoped to spend about $130 but we didn't get it all spent.

So this is an incremental $100 million in these four facilities that we're looking at.

Okay.

If I may follow on, though, with the inkjet comment.

What should we -- I think it's great news on the surplus capacity comment.

But when we should -- we be looking for over the next 12 to 18 months in that particular business?

Well, we hope and believe that we will continue to experience -- I guess continue to experience the growth that that I mentioned in my -- in my notes or in my comments.

I think that the -- it's an interesting business.

I mentioned I think we grew revenues by I think it was 53% year over year.

And it's starting the business is now starting to have a significant impact on our bottom line.

We are -- we have the inevitable challenge of a business in an evolving technology industry in that we need to continue to invest to maintain and increase our position so that we don't sort of flatten out and start to fade away.

You know, it's clear to us that inkjet technology generally is going to be an increasingly important technology for the world in general, not only in the sort of office and home printing, but it's going to expand -- we believe it will expand more rapidly into other aspects of, you know, printing -- commercial printing but also into a lot of other areas.

When you look at the money we are currently spending both in the inkjet printing business and in Cabot Superior MicroPowders developing technology and pigment that's will be used in inkjet printing, we believe it's close to a transformational technology.

And so I guess my point is we would hope I would hope to be able to continue to show you the revenue and profit growth that we have shown in the last couple of years, that it will start to be a significant part of Cabot, but we also plan to continue to invest in, you know, intellectual resources and capital resources to make sure that we hold onto this wave and ride it for as long as we can.

Because, you know, this is a -- we believe a huge long term opportunity for Cabot, and we want to take full advantage of it.

So I would -- I guess the short answer to your question, I hope that you will continue to see revenue growth, profit growth, but also significant growth in intellectual investment R&D technology that will temper the profit growth.

Should we see or look for any partnerships or joint ventures or, you know, new customers.

Well, we've mentioned our, you know, some of our customer relationships in the past.

I think it's appropriate to stay away from that.

Yep.

But we are, of course, dependent upon the our customers to continue to evolve this technology.

We hope and believe that we are -- we are -- we are valued partners for that.

Okay.

We would hope to grow with them.

All right.

My final question on speciality fluids, I think we had around 23 completions/applications for the fiscal year.

Yep.

How should we be thinking of going forward for '05 and perhaps '06?

I guess I'd say two things.

One is I've learned as we've struggled to develop this business that it is unpredictable in that, you know, our fluid is used in -- in wells that never fall -- never occur on schedule.

An example is that we -- we were close to being used in a well in the North Sea not too long ago, and not nothing to do with us the drilling company had a terrible problem with the well and looks like they're going to have to cement it and close it down and start all over again, which can going to defer the use of our fluid until later.

Notwithstanding the unpredictability of the business, we are optimistic that we're going to see significant growth in the use of the fluid this year.

The Statoil relationship is, we believe, solid and we'll see more activity there.

We're also optimistic that we're going to have some business in the gulf of Mexico and hopefully in Saudi Arabia.

And so we hope and believe that we'll show solid increase in volume and use of the fluid this year, and thus profitability.

So -- go ahead.

I'm sorry.

We think that business as well may be an an inflection point that is starting to be significant.

You noted the profits in the fourth quarter.

Absolutely.

And at these levels, I guess it would be safe to say that the complex drillings would -- would be places that the drillers would look to do and use your fluid.

Yes.

Yes I think that's fair, but I -- again I've learned I complacent predict I what goes on in the oil industry.

Right.

Thank you very much.

You're very welcome.

Once again, it's star one to ask a question.

And we will now go to Jay Harris of Goldsmith and Harris.

Good morning, Ken.

Good morning, Jay.

Two questions.

One on tantalum.

It occurs to me the way you described the the (inaudible) situation that there seems to be a different emphasis than there was I've got to say three or four years ago in terms of acquiring ore for processing, and -- and I wondered if this was related to a shift in business strategy, the business cycle, or something else that we're unaware of.

Well, let me -- if I understand your question, and I -- and if I do I think it's fair.

Three, four, five years ago and historically we have been significantly concerned about availability of -- of supply.

Right.

And our ability to get enough material to serve our raw plants and serve our customers.

We're confident today that with the -- with the Wagina (ph) resource, which we have, we think, secure rights to 100% of.

And our tantalum -- our own tantalum mine in Canada that we have secure access over a long term of to sufficient material to -- to -- to fulfill any demand, reasonable demand that we can anticipate.

And with that, our emphasis naturally turns to can we get it at a lower cost?

And if just simply, Jay, it's perfectly simple and obvious equations.

If we could take the $75, $100 million that we currently have invested in excess inventory, use it to buy Wagina (ph), and therefore get the material at a cost that avoids the 15% return on investment, we've lowered our cost of material by a very significant amount.

Well, I'm not arguing with that as a business decision.

I -- it just occurs to me that you need less of the available supply of ore today in the world than you thought you needed three or four years ago.

No, no.

I'm sorry.

There's probably an assumption that may not be clear.

I think the numbers had you in your head assumed that we were -- and these are probably -- I'm not sure whether they're public numbers or not, particularly significant.

We were buying roughly half of the material that we're buying from Gwalia came out of Wagina (ph) and half game out of Green Bush's.

What has occurred in the development of Wagina (ph) is that Wagina (ph) has the capacity -- the resources and the capacity to supply more than twice of what we have historically been buying.

Well, that would suggest to me that -- that we're not going to get a shortage again at some future point on the horizon because the Green Bush capacity is available to replace the diminished supply out of (inaudible).

Well, I would -- I -- we think about that as, you know, continually, and I can -- tend to agree with your conclusion, although I would also point out that although Wagina (ph) has the capacity or the capability of Wagina (ph) is perceived to be larger today than it was five years ago.

Green Bush's is more difficult because to even maintain -- as we understand it, even maintain the output of Green Bush's requires significant capital investment and an underground shaft, which will be required capital and be expensive.

And secondly there have been no new ore supplies developed in the last five years, and tenslag (ph) has continued to be consumed.

So although my own personal view is that I tend to think you're right, that we do we do not have the ability strategically to rely on an ore shortage to margin our margins, it is not 100% clear.

Now, you've heard us talk increasingly about making sure we had the best cost in the event that we're competing with lots of ore available.

But, you know, there's lots of moving parts here, Jay, and it's, again, not 100% clear about where it's going to come out.

Well, your interest in sputtering targets, which would be, I presume, an above average margin part of your Supermetals business, I wondered if that ha lowered your interest in -- in a small manner in participating in the capacitor end of the business.

Oh, I don't think so at all.

All right.

You know the sputtering target market is a new market; it's an attractive market.

If you believe the -- semi conductor industry, you know, in the next five to seven years it could be consuming as much as 15 to 20% of the tantalum available in the world.

And that would have a significant impact on all aspects of the market.

Both the, you know, the available ore and as -- as the prices get squeezed on the capacitor market.

But, you know, the opportunity to participate in a market -- a rapidly growing, you know, attractive market like that is -- is something you dream about in our businesses, so we're, of course, very interested in it.

I don't want you to take any impression that we're any less interested in the core capacitor powder market.

It's core to us.

We believe we've performed very well in that market and from a technology perspective.

We have excellent facilities and plan to be aggressive participants in that market.

And one other question and I was a little late getting on the call.

You may have covered it already.

When do you expect the volume growth in inkjet colorants to reflect at least a similar growth on the bottom line?

I know you're expanding your R& efforts incrementally all the time, but do you expect we'll be in that position in fiscal '05?

Or do you think it will be '06 or later?

Let me make sure I understand your question.

When we -- when do we expect the volume growth.

Well, your earnings growth has lagged your volume growth in that business.

That's true.

And I'm just asking you when they pull even.

When they pull even?

In other words, you're running a business as an R&D effort and your because you see a goal out there that's out there future years, and I am just wondering at what point the volume growth starts to reflect itself in bottom line growth?

Well, we're seeing attractive bottom line growth today.

The business had a volume growth of 53% year over year.

And you know, we would hope that that kind of volume growth would continue and reflect in revenue growth, and it is now of a size and substance so that if that happens for a couple of more years it's ding -- in the revenue and profit will be an important part of Cabot.

Having said that, I want to emphasize, and you of all people will understand this, that it is very important for us to spend in the technology area sufficient resources -- and I mean money and intellectual capital -- to maintain and if possible expand our technological advantage.

This is an ever evolving field.

And as you know -- you know of any of us, if you don't continue to spend and continue to maintain your excellence, you're going to wake up one day and you'll have sort of fallen out of the next introduction.

So I fully believe that this will continue -- hope and believe that this will continue to require significant R&D expenditures.

Notwithstanding that, Jay, I can assure we don't -- we're not really at liberty to talk about the actual numbers, but it is today a not insignificant part of our check Cal earnings.

It is a less significant part of our chemical revenues, but we're starting to see, you know, solid revenues coming out of this business.

Well, and the impression I got from the press release was that the growth in earnings contributions was considerably less than the growth in revenue contributions and maybe that's the wrong impression.

That is the wrong impression.

Okay.

Thank you.

There are no further questions at this time.

I'll turn the call back over to you, Mr. Burns, for closing remarks.

Nancy, thank you very much.

And I appreciate everyone's attention and questions.

I enjoyed the call.

And we're all going to go see if we can get some sleep after the last couple of weeks.

Thank you very much.

We thank you for your participation is today's conference call.

The call is now concluded.

You may disconnect at this time