Cabot Corp (CBT) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Cabot Corporation First Quarter Fiscal Year 2005, Earnings Results Conference Call.

This call is being recorded.

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

Please go ahead sir.

Thank you David.

Good morning everyone, this is Ken Burnes, Chairman and CEO of Cabot Corporation.

I'd like to welcome you all to our First Quarter Earnings teleconference.

First, in case we have telephone problems, I'd like to let you know that I am speaking to you tonight from Kuala Lumpur, Malaysia.

Over the past 10 days, I've had the privilege of visiting many of our facilities in the Asia-Pacific region.

I spent several days in China visiting our Shanghai plant, attending the formal ground breaking ceremony of our new Fumed Metal Oxide plant in Jiangxi province and speaking with our management team on the progress of our Tianjin Carbon Black plant.

I visited our facility in Altona, Australia and was impressed with the dedication with which our employees continue to work even with the announced closure of the plant.

As most of you know, we operate plants in several of the countries hardest hit by the recent tsunami in Southern Asia.

During my trip, I have been able to spend time at some of these facilities including those in Indonesia and Malaysia.

Fortunately, all of our employees in the region are safe, although some are dealing with the loss of significant numbers of their family members.

Of less importance, our manufacturing operations in Malaysia, India, and Indonesia were unaffected by this disaster.

Our local management teams in these areas are working diligently to understand how we can best help with the needed rebuilding efforts in the hardest hit communities.

Overall, it has given me great pleasure to see the commitment with which the employees in the Asia-Pacific region are working and the strength of the management team in one of our most critical developing region.

Here with me in Kuala Lumpur is Nicholas Ballas, our General Manager of our Asia-Pacific region.

On the phone this morning from our corporate headquarters in Boston are John Shaw, our Chief Financial Officer;

David Elliott our Controller;

Susannah Robinson, Director of Investor Relations;

Bill Brady, General Manager of Carbon Black;

Edi Cordeiro, now General Manager of our Supermetals business;

Ravijit Paintal, our new General Manager of the Fumed Metal Oxide 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 uncertainty, including those discussed in Cabot Corporation's 2004 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 first fiscal quarter of 2005 along with the related supplemental business information.

Copy of the press release and supplemental business information is posted in the Investor Relations section of our website.

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

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 on to a short overview of the business results and will then open the floor to questions.

Last night, the Company reported first quarter earnings per share of 51 cents, compared to 42 cents for the same period last year.

These amounts included 4 cents per share of pre-tax charges and 4 cents per share of tax benefits for certain items and discontinued operations versus 2 cents per share of charges related to certain items and discontinued operations in the prior year's quarter.

For more details concerning certain items and discontinued operations, please see Exhibit-1 of the press release that we issued last night.

We saw strong performance for the quarter in our chemicals business with volume growth in Carbon Black, Fumed Metal Oxides, and Inkjet Colorants.

We also had solid performance in the Specialty Fluids business.

The weak dollar, tight capacity, and higher price benefited both the Carbon Black and Fumed Metal Oxide businesses.

The Supermetals' business results were negatively impacted for the quarter by timing of contracted volumes and lower prices.

The Chemical businesses reported operating profits of 36 million for the quarter compared with 27 million for the same period in fiscal year 2004 and 17 million sequentially.

These increases were driven by increasing volumes and a positive foreign exchange impact.

We continue to see strong volume and tight capacity in both the Carbon Black and Fumed Metal Oxide businesses.

Carbon Black reported a $6 million increase in operating profit, compared to the first quarter of last year and a $15 million increase sequentially.

Volumes in this business increased 10 percent year-over-year driven by broad based growth within the business, particularly in South America and Asia Pacific regions, as well as, increasing volumes from the new global tire contract we signed during fiscal year 2004.

This business also benefited from positive currency translation and higher prices, which were somewhat offset by higher raw material cost during the quarter.

Cabot's Fumed Metal Oxide business reported a $2 million increase in operating profit, compared to the first quarter of fiscal 2004, and a $3 million increase sequentially.

These increases have been driven by strong volumes in both the contracted and non-contracted business, including increases in the Asia Pacific region but were somewhat offset by higher variable cost.

I'm pleased to report that we've broken ground on both of our -- both our New Fumed Silica Plant in Jiangxi, China and our new Carbon Black facility Tianjin, China and are in the midst of construction of a new Carbon Black production unit in Maua, Brazil.

We are encouraged that our market development activities and investment plans for both the Carbon Black and Fumed Metal Oxide businesses remain on schedule to allow us to capitalize on the continued growth in these regions.

We also inaugurated a technical service laboratory in China to support the ongoing growth in the Asia Pacific region for chemical, specialty chemical businesses.

Inkjet Colorants continued its strong volume and profit growth with volumes increasing 50 percent and revenue increasing 47 percent over the year ago quarter driven by increases in both the OEM and the after-market businesses.

We remain encouraged by the growth we are seeing in this business.

We continue to invest in both R&D and manufacturing and are pleased with the increasing profitability of this business.

During the first quarter of fiscal 2005, the Specialty Fluids business reported a year-over-year increase in operating profits of $4 million driven by increased revenues from completed jobs in the North Sea.

During the quarter, the business completed 6 jobs compared with 2 jobs for the same period last year.

Sequentially, this business saw a decline in operating profit of $3 million resulting from smaller jobs when compared to the fourth quarter of fiscal 2004.

Supermetals business reported a $5 million decrease in operating profits, compared to the first quarter of fiscal 2004 and a $6 million decrease sequentially due to decreased volumes and revenues.

The year-over-year decline was driven by the timing of certain contracted volumes and lower prices, which were partially offset by higher non-contracted volumes.

We continue to make progress in the sputtering targets segment of our Supermetals business and I'm pleased to report the successful start up of our manufacturing facility in Etna, Ohio.

We are currently undergoing internal qualification of material from the plant in advance of customer qualification.

During the quarter, we changed our accounting treatment for revenue recognition regarding to sales of one product to one of our Tantalum customers.

This change was adopted this quarter, will be applied to future periods, and would have impacted prior periods beginning in the third quarter of fiscal 2003.

The cumulative impact of this change is estimated to be approximately $1 million favorable and is reflected in the current quarter's earning.

The Company has not yet completed its assessment of the impact to individual prior periods at this time, but we do not expect cumulative impact to materially change.

Our cash and investment securities decreased by $35 million during the quarter from $264 million to $229 million, primarily driven -- primarily due to an increase in working capital driven by increasing volumes and end-of-year cash management by our customers.

During the first quarter, the Company repurchased approximately 270,000 shares for approximately $10 million leaving approximately 4 million shares to repurchase under the current Board of Directors authorization.

Capital expenditures totaled $30 million for the quarter versus 22 million in the same quarter last year.

We still anticipate spending in excess of $200 million in fiscal 2005, as we had mentioned previously.

Looking forward we are optimistic about the Company's performance.

We anticipate continued strong volumes in the Chemicals Business and believe that we will continue to see tight capacities within our Carbon Black and Fumed Metal Oxide business.

Higher raw material costs are expected to remain within the Carbon Black business, but we believe we should see some relief in the form of higher prices.

We anticipate strong volumes continuing in the Fumes Metal Oxide business and are proceeding on schedule with our market development activities in Asia Pacific in the Fumes silica business.

For the Supermetals business, as we move more of our volumes from contracted to market based pricing, and due to the nature of the electronics market, it is becoming increasingly difficult to accurately forecast this business.

Given the performance of the business in the first quarter and our expectation that the market will continue to strengthen during the rest of the year, we continue to believe that this business could perform slightly below last year's level.

We continue to invest in our new businesses and are encouraged by the contribution that they are making to the Company's profitability.

We believe that our Inkjet Colorants business will continue to see significant increases in volume and revenue.

The Specialty Fluids business continues to show strong growth in North Sea drilling and completion projects, and is continuing its market development work in Saudi Arabia, the Caspian Sea, and Gulf of Mexico.

In the Aerogels business, we are seeing encouraging developments in the market place and believe that we have our manufacturing process positioned to support our ongoing market development effort.

With that short overview, I'll conclude my comments and open the line for questions, and I will turn it back to you David, to manage that process.

(OPERATOR INSTRUCTIONS) Lawrence Alexander, Deutsche Bank.

Ken, could you give us an update on the negotiation with Sons of Gwalia, it appears there is approximately 40 bidders currently looking at the Tantalum mines, and do you see -- does Cabot want to be an active participant in that process or you prefer that one of those bidders takes the mine?

Actually, as I mentioned earlier about here in the region, and I did stop in Perth and talk to our representative, our advisors in Perth about this topic.

To the best of my understanding the administrator is due to report to the creditors sometime in April.

It is our anticipation although we are not sure that this is the case that at some point in the future the mines are likely to be auctioned to the highest bidder.

As I think we've made clear in the past, we are interested in buying at least one of the mines, and have a wider first refusal under our contract that is secured by a mortgage in the mines.

We do believe that if the mine we are interested is available at an appropriate price it would be a significant strategic investment for us, and we are continuing to stay very closely engaged and in touch with what evolves in the bankruptcy.

Now if they are planning on doing an option in the second half of the year, does that imply that your negotiations with them should be settled by then or do you expect them to try and sell the mine before settling the contract negotiation?

Our negotiation, I guess you would say on the pricing of the renewal on the Wodgina mine is continuing as is the arbitration proceeding around that pricing that I think in London -- in England that we've mentioned earlier.

A little bit hard for me to predict how this is going to all play out.

We would favor of course a negotiated settlement and possibly a negotiated purchase of one of the mines, but there is lot's of competing interests here and its going to be interesting to see how it evolves.

And a second question just on carbon black, to what extent with given high demand and fairly tight oil conditions, what's the point we see North America start offsetting the raw material pressure?

As I think you are aware, well I am sure you are aware we continue to struggle with high feedstock prices globally, but also in North America.

We have -- in North America we have the contracted volumes, the long-term contracted volumes under which the feedstock gets passed through on a 3 month or quarter lag structure.

In the other customers or with the other volumes, we have been successful in getting some price relief to at least offset or partially offset the feedstock increases.

It is -- when you look at across the entire Carbon Black business, it's hard to give you a clean and definitive answer on whether those price movements have enabled us to maintain or increase margins because it varies across the segments and throughout the customer base.

But we are dealing with, I guess, the message I would like to leave, we are dealing with the feedstock cost increases, we have had price relief in the last 3 to 6 months.

Thank you.

Jeffrey Zekauskas, J.P.

Morgan

A few questions, in terms of Carbon Black, there is always sort of a lead or lag in terms of pricing in raw materials, both things being equal because of your contractual terms, should your margins widen in the coming quarter or should they contract because of changes in your raw material margin?

A very hard question to answer.

I can give you the following --

Or is it not knowable?

It is largely not knowable.

I will give you the following structure that will let you -- help you think it through.

With respect to our long-term contracts with the major tire companies, whether our margins increase or decrease during a particular quarter depends on what's happening to our purchase feedstock when compared to the previous quarter contracted or formula price for the feedstock.

If those 2 things move in our favor, our margin expands, if they move against this, our margin decreases and there is a 3-month lag and a complex structure -- complex formula structure.

I think it's fair to say that over any period of time, as we and as you know we have had these contracts in place for, in some cases almost 10 years now, fluctuations -- the expansion or contraction in margins caused by the 3-month lag tends to even out and those, the margins tend to be reasonable over time.

So, I can't really predict accurately how it will work in the next 3 to 6 months because we don't know what feedstock will do in the next 3 to 6 months.

I thought that because there was a 3 months lag, you would have visibility into the first calendar quarter of '05.

We would have some visibility, but I don't think we are in a position to give you that kind of details yet.

Okay and than let me a try a different question.

Your Inkjet volumes are up 50 percent and can you talk about why that is, is it 1 customer, is it 5 customers or 10 customers and what's the order of magnitude of revenues.

I don't know, is the 50 percent increase significant or not significant?

Well, I think and what we find is -- and I should be sure before I answer this question.

Well, let me answer the first part of the question and then second part.

You will recall that during the last fiscal year, we were successful in getting significant business from an additional OEM and so, a portion of that increase year over year is the incremental business from that OEM, but on the other hand we also see substantial, what I would regard as substantial growth in the other markets or customers that we serve in that business. 50 percent year-over-year growth is exciting and we see no reason why that is not going to continue going forward across the various segments.

It tends to be a little bit lumpy going -- it will be going forward because the OEM volume growth tends to be associated with the introduction and sale of new printer platforms.

And that's so, they -- you know, when into a new printer platform, we get a burst of new revenue that grows and then continues to grow as the printers get into the market and the replacement cartridges get bought.

So, it's not fully consistent over the period, but it's very solid.

I believe, let me do the second part of your question, I believe, Dave or Susannah, we are now in the queue to disclose revenue, don't we, for Inkjet?

Yes, that is correct.

And if my memory serves me, the revenue in this business grew from roughly $6 million to $9 million.

Is my memory right?

That is correct.

Last question is in specialty fluids.

Are you a little behind schedule in tha t-- if I recall, in the fourth quarter, you were working on 9 jobs, now you are talking about 6 jobs.

And some of the information out of Statoil suggest that it's sort of revising some of its own operations downward going into the new year, but I may be incorrect about that.

No, I think you are absolutely correct.

We've -- there are 2 fields or 2 areas that Statoil is developing and in most cases in those fields using our fluids, one of them has been slowed down significantly, not clear to me whether that they -- whether that is due to operational problems, weather or strategic decision by Statoil.

But we have had fewer jobs of that particular field at this current time than we anticipated 6 months ago.

It is our expectation and belief in what we have heard from Statoil that they are about to become active in that field again and that our fluid will be used to complete the wells.

Michael Judd, Greenwich Consultants.

A couple of questions.

In the tantalum business, did I hear you correctly that your forecast was for operating profit to just be slightly below that of last year?

Yes and I want -- thanks for asking that question, Michael.

I want to make sure people understand that, the history of this and we have looked at it pretty carefully, is that in September last year, when we had the special Analyst call about the Supermetals business, we gave you guidance that we anticipated that the -- the formal -- that the results in '05 would be roughly equivalent to the results in '04.

And that was based on what we anticipated to be the results could be in '04.

I think you will remember that we had a stronger fourth fiscal quarter in tantalum than we anticipated and as a result, the results of that business, which I believe were $76 million, were 5 to $6 million above what we had anticipated.

I think it's fair to say that we are -- we continue to believe that the business will perform in that range if it's -- but 76 is probably at the high end of the range.

But -- but the business, we believe, remains solid.

We did have a weaker first quarter and if you multiply the results of the first quarter by 4, you would get the, I think 64 as opposed to 75 or something.

But we see some market strengthening and we believe that the timing issues of contracted volumes, which arose as we repositioned those contracts, will move in our favor in the '05 and '06.

Secondly, this is interesting that you are out in Asia and I just wondered if you'd give us an update in terms of when you think the new Carbon Black and other plants that you are building out there and also the plant in Brazil, when do you think that these plants will be in a position to start up and start actually producing pounds?

The Cabot plant in Tianjin is supposed to be mechanically complete in the first, in the end of January or February of '06 and producing and selling products roughly a month or so later.

The fumed silica plant in Jiangxi province, I think is a couple of months after that, sort of in the early, the late winter, early spring of '06.

And Bill Brady, maybe you could remind us about the Mau�nit.

I think that is the end of this year, but I am not sure.

About 1 quarter prior to the start up of the Tianjin Carbon Black unit.

So, it would be roughly at the end of this calendar year or in our first fiscal quarter of '06.

Yes, October, November '05.

And lastly, what was the reason for the change in the accounting treatment for the one Tantalum customer?

This is a complex issue and I will try to explain it simply, but bear with me for a moment.

Under that contract that customer has the right to return product that it does not believe to be in accordance with the specification in the country.

And pursuant to the contract, we believe and intend to replace any product that is returned and had been doing so throughout the period of time of the contract.

At the end of this last fiscal quarter, we were informed that the customer intended to return a significant amount of product.

Whether -- the reasons for that one can speculate, but we were told that they were planning or tending to return a lot of product.

We had been reserving under the revenue recognition rules a substantial portion of the sales of that product as we went forward.

But, when we were informed of the substantial return the accountants took another look at the revenue recognition rules and concluded that there was a better way to recognize revenue.

And, we have redone all the calculation and we believe that the new method results on an accumulative basis of roughly $1 million of favorable adjustments.

We have not yet finished the full analysis of what impact this would have on a quarterly basis back into 2003.

Just a clarification on that, so just in layman's terms does that mean that you basically book revenues for product that is sold including returns that particular quarter or -- just a little clarification on that, please?

We have historically had a policy of booking, and I may need some help, but roughly half of the product that we ship and get paid for and putting the rest into reserve and waiting until we see what happens.

This new method is going to alter it slightly and my understanding is that it's going to establish a 6-month period during which they can return.

I can tell you that this is an extraordinarily complex and candidly frustrating issue.

We don't believe that it is material in any way to the business or to the financial statements, but the revenue recognition rules with respect to revenue subject to these type of contracts are complex and in my view convoluted.

Thanks, Kenny.

Now, before we leave that -- Boston, Dave, John, and Brian, would you like to add anything?

Ken, this is Dave Elliott, I think you explained IT just fine, so I don't think we have anything to say.

Bill Dison, Davidson

.

I have a group of questions.

First of all with the Inkjet business, the OEM that introduced the new family of printers, how would you characterize the sell through of those printers, that's question one.

Question number 2 is the Aerogel business, you had referenced that you are seeing encouraging signs out in the market space, hoping that you could provide us some perspective as to what those signs were.

And third question is, relative to the Supermetal business, are you feeling that what you saw or are seeing right now is a bit of inventory correction taking place in the market place or in fact are you believing that Tantalum capacitors are being replaced by Ceramics or some other type or are their other issues that we are just not even thinking about there?

Let me see if I can get the 3.

Let me start with the Inkjet.

Based on our volumes, we would -- we are quite pleased with the way the new printer is being received in the marketplace.

A number of people in Cabot have it and use it and it's an impressive piece of equipment.

Aerogels, the main market that we are pursuing is the use of the aerogel insulation material in translucent panels or in the construction market, in both -- interestingly both home, residential market and in the sort of institutional school gymnasium market.

It has taken us a significant period of time to build up contacts in the industry, contacts with architects, etcetera to develop a backlog of interested opportunities.

But, as we sit here today, we are starting to feel some fraction in that area.

We have a number of customers who are aggressively pushing the product, and we are starting to see some orders come in, which is leading me and others in the Company to feel quite optimistic that, that market is going to develop in an attractive way over the next 12 to 18 months.

I guess I would hope.

So, you know, we are starting to feel pretty good about it.

It is still, I want to be clear, it's still a long slog.

I think I have said in the past that our hope and belief is that we will be able to run the plant at designed capacity or above, and that we will be able to sell out the bulk of that capacity to that market here in the next several years and our hope is that, that will get this business to break even and position us to build a full scale plant which would make the business profitable.

The Supermetals business is as ever complex.

It is -- we did have a weaker fourth calendar quarter than I think we had anticipated.

Some of it was due as I mentioned earlier to the timing under which the contracted customers are obligated and are taking their contracted volumes.

We have worked, we have attempted and continued to work with those customers to be flexible, and I would describe that accommodating and friendly, to help them with their volumes and inventory positions, which results in some lumpiness in that business.

Beyond that, with respect to the market, I -- when we look at the weak volumes in the fourth quarter and as we -- as those started to develop, we were starting to worry that we were seeing weakness in the market.

Recently, the indication is that the market will remain moderately robust, at least for the balance of our fiscal year, which may lead me to believe or might lead me to want to believe that the weakness in the fourth calendar quarter was an effort by those customers to adjust their inventories and balance sheet.

But as I think, you know, that market that serves the electronics market is a particular vulnerable market for us with volumes moving up and down very quickly.

Inventories moving very quickly and it's -- we don't have perfect visibility of it.

[OPERATOR INSTRUCTIONS].

with Key

.

When you talk about the, you know, the electronics industry and as your customers either took or didn't take contractive supplies.

But when you look at the outlook, what specific segments or indicators do you follow most closely to help you forecast how you are going to do in this business?

Well, the immediate information that -- I think it's fair to assume the most important to us is the information we get from their customers about their capacitor inventory and capacitor bills.

We do collect that from our customers, we get a variety of information, some of them more helpful, some of them less helpful.

We also spend a fair amount of time trying to look at the customer -- the demand for the Tantalum capacitors down in the electronics industry, associated with cell phones, computer builds, automobiles, and there is a -- we have an analyst who produces a report on a monthly basis about what's going on in the areas that Tantalum capacitors serve.

And we try to develop reliable information.

One of the problems is that a Tantalum capacitor does not go in most cases directly from our customers to the end user.

It goes through a number of distribution channels, and the inventory flows in those channels are very, very difficult, I think for anybody, but particularly for us to sort out.

Do things like -- if we get a lot of data that is available from semiconductor

or book-to-bills, that semiconductor equipment, are those relevant or are those too distant from your business to have any help if you will in forecasting what the future might be like?

We look at all of those.

The report that we all get on a monthly basis has all of that data, and more in it.

And it is helpful, but not always perfect.

Lawrence Alexander, Deutsche Bank.

Just one follow up, on the Cabot Superior MicroPowders, I notice that R&D spending in that business is picking up.

Would you briefly discuss the 3 to 5 year outlook, how you are thinking about the energy materials and printable electronic and application?

Which one you favor?

Where the R&D is going?

How we should think about that?

Yes. 3 to 5 years, it would be a little bit hard to predict, I can tell you what was focusing on, and where we hope and believe we can create new business opportunity.

The first, and I think it is fair to say probably the most exciting today is this printable electronics.

I think as you and others are aware, there is significant belief in the industry that over time, more and more of this, of the electronics components will be produced using printing techniques, largely inkjet printing.

That is going to require inks, and particularly particles in those inks that have very unique characteristics that serve the particular market interest that is being focused on.

Examples are RFID tags, which is I am sure something that people have heard about.

There is a lot of -- it's a very, very broad and deep market.

We are working hard in that segment, we're working with a number of customers or potential customers, who are focused on this.

We had some small amount revenue, we hope, we are working hard to try to capture in that segment a position, a strong position in producing materials for that market.

And we believe that the SMP technology gives us a reasonable platform and significant promise to do that.

I do want point out that everybody that has looked at this market believes it is going to be a large and very complex market.

We are in the future, and we are trying to position ourselves that to be a significant player.

The energy materials is intriguing, it's a little hard to know precisely where it's going go.

We are working on materials that have an application in fuel cells and also in hydrogen generation market and believe we have some catalysts and solvents that could play a significant role in that going forward.

It is however, as I am sure you are aware, a complex and long term market, and there is lots of different views about how it will develop over time.

Again, we are -- we have reason to be optimistic that the particles produced in the SMP technology, and the capability that the scientific staff there has to design and produce particular particles with multiple chemistries on them is we think attractive and interesting.

But it's -- this is R&D, this is not development, this is research, and I can't promise you that we're going to produce another inkjet business next week, but we are working hard on that.

Further increases in the R&D allocation to this business over the next 3 to 6 quarters or should it be stabilized at the current run rate?

I guess I would like to tell you that I hope so.

Okay, do you understand why I say that?

Yes.

I say that because we would increase investment in the business if we get to believe that there is a real attractive business opportunity that we are trying to pursue.

And so if that emerges, we would like to be spending more money to create another new business that we think can create shareholder value.

Thank you.

And having no further questions at this time.

Mr. Burnes, I will turn the call back over to you for any additional closing comments.

Thank you very much everyone, I appreciate your being with us.

I would like to reiterate that we did feel pretty good about the quarter and we feel good looking forward as to what's going on in Cabot.

Look forward to seeing you in 3 months and I hope you all have a good morning.

I hope you are not all buried in snow in the North East.

Thank you.

Thank you everyone for your participation in today's conference call.

You may disconnect at this time.