Cabot Corp (CBT) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Quarter Two 2005 Cabot Earnings Conference Call. (Operator instructions) At this time, I would like to turn the call over to your host for today’s call, Mr. Ken Burnes, Chairman, President, and Chief Executive Officer.

Please proceed, sir.

Thank you very much.

Good morning.

I would like to welcome you all to the Cabot Corporation’s Second Quarter Earnings Teleconference.

Here with me this morning in the room are John Shaw, our Chief Financial Officer;

Dave Elliott, our Controller;

Susannah Robinson, Director of Investor Relations;

Bill Brady, General Manager of Carbon Black and our inkjet businesses;

Edi Cordeiro, General Manager of our Supermetals business;

Ravijit Paintal, General Manager of our Fumed Metal Oxide and Air Gels Businesses; 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.

Forward-looking statements are subject to risks and uncertainties and Cabot’s actual results may differ materially from those expressed in the forward-looking statements.

A list of factors that could affect our actual results can be found in the press release we issued last night, as well as in our 2004 10-K filings, copies of which are available on our website.

Last night, we released results for the second fiscal quarter of 2005 along with the related supplemental business information.

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

For those of you on our mailing list, you 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 to a short overview of the business results and will then open the floor to questions.

Last night, we reported a second quarter loss on $0.84 per common share, compared to $0.54 per diluted common share for the same period last year.

These amounts included $1.46 per common share of charges from certain items and discontinued operations, vs. $0.02 per diluted common share in the prior year’s quarter.

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

I will begin by talking about the supermetals business and the associated goodwill write-off.

As I mentioned in my annual meeting remarks, the tantalum industry has seen a continued movement towards the use of ever-smaller tantalum capacitors in electronic devices, facilitated by the continued development of high capacity tantalum powders, resulting in significantly less tantalum powder being used in each capacitor.

This development, along with the continued high inventory levels that exist in the supply chain is putting significant pressure on the tantalum powder volume and prices.

These adverse market conditions coincide with the expiration of our fixed price contracts over the next two years, and have caused us to lower our expectations about the future performance of the supermetals business.

Our lowered expectations prompted an analysis under the accounting rules, which concluded that the current net book values of the assets of this business exceeded the estimated fair value of the business, which required us to write off $90m of goodwill.

Although this goodwill arose from our Japanese acquisition in 2004, the impairment relates to the whole business and we remain very pleased with our Japanese operations.

We are working hard to improve the future performance of this business.

We are currently in negotiations with one of our labor unions at our Bordentown facility on a new labor contract.

The current contract will expire on May 7th.

If we fail to reach an agreement there, there is a possibility that the union will strike.

We are also working diligently on the Sons of Gwalia ore supply situation, and we are looking for other opportunities within the business to improve its performance.

Notwithstanding the current challenges, we remain optimistic about the long-term performance of this business.

During the quarter, the supermetals business reported relatively flat profitability when compared to both the first quarter of 2005 and the second quarter of 2004.

It is extremely difficult, given the present conditions, to forecast the performance of this business.

For the current fiscal year, we have lowered our expectations for its performance and believe its results could be as much as 20 percent below our previous guidance, which was approximately $70m of profit before tax.

Additionally, we may face added costs should a work stoppage develop in Bordentown.

As most of you are aware, this is the only area of the Company on which we give guidance, due to the uncertainty associated with the business and our philosophy with respect to guidance, we do not plan to give guidance on this business beyond the end of this fiscal year.

We reported solid performance for the quarter within our chemical business, particularly in carbon black where customer demand remains strong.

The chemical business reported operating profit of $46m for the quarter, compared with $43m for the same period in fiscal 2004 and $36m in the first quarter of 2005.

Carbon black reported a $6m increase in operating profits compared with the second quarter of 2004 and a $12m increase over the first quarter of 2005.

Continued high capacity utilization has allowed us to expand our profitability in this business, but we continue to struggle to maintain margins in an environment of high feed stock and natural gas costs.

We are pleased that our geographic expansion projects continue to go well in both Mawa, Brazil and Tiengen, China.

Cabot’s Fume Metal Oxide business reported a $2m decrease in operating profit compared with the second quarter of fiscal 2004 and a $1m decrease compared to the first quarter of 2005.

The results for the quarter were impacted by a write-off related to off quality material.

Our market development activities are progressing in line with the construction of our fume silica plant in Jungshai, China and we continue to feel very positively about this business overall.

Inkjet colorants reported an increase of 18 percent in volume and 13 percent in revenue during the second quarter of fiscal 2005 compared with the same period a year ago.

This business showed a slight decrease in profitability compared with both the second quarter of 2004 and the first quarter of 2005 as a result of increased spending in both operations and research and development.

We continue to be pleased with the strength and versatility of our technology which enables higher quality inkjet printing performance for our customers.

As I have mentioned in the past, spending in this business is driven to a large extent by the activities of our customers in preparing for new printer launches.

Over the next 12 months we anticipate making decisions regarding capacity increases in this business.

During the second quarter of fiscal 2005, the specialty fluids business reported operating profit of $4m vs. $3m in the same period of fiscal 2004 and $2m in the first quarter of 2005, driven by an increased number of rental days during which our fluid was used.

During the quarter, the business completed six jobs compared to four jobs for the same period last year, and six jobs in the first quarter of 2005.

During the quarter, we are pleased to see the use of our fluid in the first large well in the Gulf of Mexico where it performed well.

Meanwhile, we continue to work on market development outside of the North Sea area, including working with companies in both Saudi Arabia and the Caspian Sea on the introduction of [formate] technologies.

Capital expenditures during the quarter totaled $39m vs. $21m for the same quarter last year.

In the coming quarters, we will be focusing our efforts on improving our working capital position within the businesses.

As you will see in our upcoming 10-Q filing, we have built a substantial amount of working capital within the businesses in the first half of the year, and believe that this presents an opportunity for us.

During the quarter, the company repurchased approximately 95,000 shares of which 30,000 represent open market purchases costing approximately $1m.

This brings the total shares repurchased for the year to 412,000 shares of which 300,000 represent open market purchases costing approximately $11m.

Under the current board of directors authorization, there remain approximately $4m shares available for repurchase.

Going forward, we are optimistic about the Company’s performance overall.

We anticipate continued strong performance from our chemical businesses, and believe we will be well-positioned to capture increased market demand in carbon black and [pu] metal oxides.

We remain confident that we will see significant growth in revenue and operating profit from both the inkjet colorant and specialty fluid businesses, as they continue to develop.

We are hopeful that our market development efforts in our air gels business will lead to substantial growth in the coming years, and we also remain optimistic about the long-term performance of the supermetals business, despite the uncertainty in the short term.

I would like to remind you that over the next several months, in connection with our long-term incentive program, you should expect to see certain officers of the Company, including possibly me, selling shares to pay taxes and in some instances, loans associated with the divesting of an earlier award and to raise the cash necessary to purchase new shares awarded to them this year.

Finally, as some of you are aware, we are planning an analyst’s day on Tuesday, June 4 at our technical facility near Boston.

We are excited about the opportunity to discuss our developing businesses and the drivers of profitability for our core businesses.

We are also pleased to offer a tour of our new inkjet colorants facility on the afternoon before the 14th.

There should be a press release shortly with the details and the associated webcast, or you can contact our investor relations department directly.

With that short overview, I will conclude my comments and open the line for questions and return the call to you, Amika, if I could.

(Operator instructions) Our first question comes from Jeff Zekauskas - J.P. Morgan.

Good morning, this is [Sulka Tui] for Jeff.

How are you?

Good morning, how are you?

Not bad.

A couple of questions.

Which portion of the goodwill writedown this quarter was related to the business acquired in Japan vs. your existing business?

The write-off relates, under the accounting rules, the write-off relates to the entire business, but the goodwill was generated in 2002 when we acquire half of the joint venture of the Japanese operations that we did not then own.

So although the goodwill itself arose out of that acquisition, the impairment relates to the entire business.

I would like to be clear as I referenced in my speaking notes that we are very pleased with the acquisition.

The Japanese facility is operating at full capacity and continues to have very high quality, strong powders for the existing one.

And secondly, can you explain the contract structure of your tantalum operations again?

Which portion of your tantalum business has fixed pricing contract structure?

Which one has variable pricing contracts?

Which portion is non-contracted currently?

Well the contracts arose in 2000 and 2001 and they were entered into between the Cabot activities then which was our Bordentown facility and our customers.

So today, the contracts are largely serviced out of our Bordentown facility, although some powder that is filled under the contract is currently being manufactured in Japan.

The contracts that are relevant to this issue are fixed volume, fixed price contracts and they expire.

A portion at the end of this calendar year and the balance at the end of the next calendar year.

Following that, we have some volume-related contracts at market prices with the same customers.

But the fixed price contracts that were entered into at the turn of the century are running off over the next two years.

And then a last question, can you explain the sequential volatility in the carbon black business?

That is, volumes improved I think 10 percent in the first quarter and I think they improved 1 percent this quarter.

Is it just seasonal or was there some prebuying or are there any other factors?

Well surely there is some volume movement of the type you reference, but the fundamental issue is that we did have, in our non-contracted volumes, some price relief at the end of the last year, beginning of this year, which had an impact on our ability to recover margins that we had lost as the feed stock and natural gas prices rose dramatically over the last six to nine months.

Incrementally, our carbon black facilities, generally on a worldwide basis are operating at close to full capacity.

All regions operated in excess of 90 percent capacity during the quarter, which is close to the sustainable full capacity for those type of units.

Operating at full capacity like that, [inaudible] spread here of fixed operating costs over greater volumes, and therefore improve your profitability.

The only region in the world where we did not have full capacity utilization in the last quarter was the Far East due to Chinese New Year, but as we look at the business today, we are – I would describe us as being capacity constrained in general and running our plants as hard as we can.

How does your running close to full capacity correlate to that 1 percent volume growth?

Did most of the material go to inventory, or?

Well we did build a little inventory during the quarter in that we expect volume growth in the third and fourth quarter, both related to the market and related to some plant shutdowns that we have coming in certain parts of the world, so there was some moderately significant inventory growth during the quarter.

Thank you very much.

You are welcome.

Our next question comes from Jay Harris;

Goldsmith and Harris.

Good morning, Ken.

Good morning, Jay.

Why is the write-off of the goodwill not tax impacted?

Because we are unable to do that under the law.

Well I understand that, but when would you be able to get a tax offset, under what circumstances?

It is a non-cash item, Jay, not a taxable –

Well it was cash you laid out.

You laid out this $90m as part of your acquisition costs.

And now, if the returns are zero, when and under what circumstances would you be able to deduct the $90m from your taxable income?

Well, you raised an interesting question and to be honest with you I don’t know the answer.

We did enquire quite intently of our tax people and the accountants about that issue, but I can assure you that your question is going to give us a little bit more ability to push them back again.

I think the answer may be that for tax book basis, the purchase price is allocated to the hard assets, but I am not 100 percent sure of that.

Well then there is no goodwill.

But – all right.

We’ll go on.

I’ll tell you what, Jay, we will get you a better answer and come back to you.

Okay.

In tantalum would you bring us up-to-date on the sputtering target business and to what extent you are loading your facility and the basic trends?

We opened the facility during the quarter and have made and shipped commercial product.

We have a number of customers who are using the targets as we speak.

Some of the qualification was done prior to the completion of the facility but it is an ongoing activity with our customers.

I would describe us today as being cautiously optimistic about that, both our ability to supply the semiconductor industry and the need for the semiconductor industry for this kind of material.

We have had, I would describe it as a positive customer response.

We are pleased with the facility, I would describe it as an ultra high tech facility.

We built it in a way that would require as little labor as possible and produce the highest quality product that we could.

So, you know, as you know it is always hard to get a new business like this going, but I am moderately excited about the work that has been done – I use the term moderately because I always hope to do better, but I think it is going well.

In the $14-15m reduction in expectations for tantalum operating earnings this year, what are the elements that contribute to that?

Is there a drag on tantalum earnings due to this start up of sputtering targets?

What are the other elements that go into that?

There is a portion coming from that, there is a portion coming to the expenses associated with the union situation in Bordentown, there is some lower open market pricing, and we are concerned about the volume issues in the non-contracted area.

I did mention that the Japanese facility is largely sold out, but the market conditions in general cause us to be cautious.

But I would tell you Jay, as you know or others who follow us, predicting, projecting this market as it goes forward for six or 12 months is very hard.

Have you projected yourself in terms of being able to shift the customers in case there is a strike?

We have done the best we can to position ourselves in the event that we are unable to reach agreement with the union.

We have some inventory that we have built and we hope to get an agreement with the union, but if that falls we will work to operate the plant to the best of our ability.

I presume though, from your comments, that the bulk of the inventory accumulation during the March quarter was in carbon black.

Well I would describe it as in both places.

One other question on carbon black and then I will get off.

That is, if you were operating at capacity, in effect, during the March quarter, normally the rubber industry takes more volume in the March quarter than it takes in the December quarter.

What would a short – how did they fill their requirements?

Well there are a bunch of interesting questions there, but I think it is fair to say we are not entirely sure of the impact.

First of all, I should tell you that as I’ve mentioned in my response to an earlier question, we are anticipating a significant spurt in volume in the coming quarters and have used the last quarter in particular to position our manufacturing facilities to produce at a higher level.

So although we are operating capacity, that is together with some shutdowns and turnarounds throughout the system to expand capacity to do some debottlenecking, to really position us for what we anticipate will be a more substantial market as we go forward.

The other thing that is going on in the industry, Jay, which is interesting is that somewhat to our surprise we are seeing more large tires for truck and bus and off-road vehicles and the large SUVs being made in North America, Europe and Japan, in the developing countries, more than I think we or the tire companies anticipated.

That trend is putting pressure, capacity pressure, on ours and the industry’s capacity in the developing world.

The small passenger tires continue, we believe, to migrate to the low-cost regions, and thus our facilities in Brazil, in Indonesia and in China are operating at high rates, and as you know we are expanding there as rapidly as we can.

There is, we think, an intriguing and positive volume evolution taking place here, and we are trying to position ourselves to take advantage of it.

You probably can’t go any further, but you leave me still wondering how a traditional first to second quarter volume gain, historical volume gain of let’s say 4-5 percent was satisfied when your operating rates didn’t change very much going from the December to the March quarter.

Jay, there is one thing that is a significant and ever-increasing significance in our volume and that is China and the activities around the system to feed China.

China experienced – China’s slow quarter, slow period is the Chinese New Year which took place in the quarter, so when you see a break from a traditional volume evolution, which is fair, you are seeing an increasing influence of the Chinese New Year shutdown which impacts really significantly China but also Indonesia, also Malaysia and other parts of the Pacific Region.

China is becoming, as you know, a big part of our business.

We have 120,000-130,000 tons of capacity on the ground there that is operating full out.

We are shipping product into China in significant quantities from other facilities in the Far East and are building another 100,000 tons in China.

So China is changing the mix a bit for us.

Thanks very much.

Our next question comes from the line of Laurence Alexander - Deutsche Bank.

Good morning, Ken.

Good morning, Laurence, how are you?

Pretty good.

On tantalum, I guess the first question is, how do you think about the operating leverage you have available as the contracts roll off to offset the likely tantalum [cliff] in terms of restructuring, how are you thinking about what steps you might take and what potential savings you might be able to get to help offset that?

Well as I mentioned, we are in the midst of a labor negotiation where we hope and are attempting to get the ability to operate the plant in Bordentown in a more efficient fashion.

I would describe the discussions to date as having been positive and constructive.

It is a little bit – I am not in a position to predict how that will come out, but we are working hard to be able to operate that plant on a significantly more efficient basis which would improve I guess, in your terms, our operating leverage.

We are looking broadly throughout the business on other, what I would describe as cost reduction activities to see if we can lower the cost of operating the system.

It is a little hard today to predict how that will impact us, but I am optimistic that we will be able to make some changes in the business that would help us.

And should we expect perhaps another broad-bush cost and productivity initiative, similar to the one a couple of years ago?

I really, it is a little premature to predict that accurately.

I will tell you that we are looking hard at it.

I would love to be able to find something of that magnitude, Laurence, because it would position us strongly for the future, but I guess I would describe it as premature.

But I would tell you that we are looking hard at it.

It is very hard in today’s world to compete in a core manufacturing facility from the United States and Japan and we are trying very hard to be creative and upfront so that we can preserve the jobs and the facilities.

With your metal oxide, could you give a little more color on the decline in volume in that business?

I don’t think it is significant.

We did have one write-off which impacts that.

We had a moderately significant failure in the production of some fumed silica in one of our plants that we had to write off.

It was an operating error that cost us a fair amount of money.

We also have an interesting phenomena, the demand for our products and our customers’ products in the Far East is growing substantially, and there was what I would describe as a supply chain issue of making sure there was enough of one of our customers’ materials that is necessary in the mixing to use our material, because they couldn’t buy what they needed or couldn’t get what they needed into the Far East and China in an appropriate timeframe.

They didn’t need our fumed silica as we anticipated.

I am quite confident, we have looked quite closely at that and talked to everybody, that is a short-term aberration and will correct itself.

As we look at the business, and I have said this in the past, our existing facilities are operating at close to full capacity.

We have very little leverage to grow profitability, and when we get a little bit of hiccup like that it is a downtrend as opposed to washing out in volume growth.

We will not see, we don’t think, a significant additional volume in the business until the new plant in China comes on in roughly a year, I guess.

So about a year when it comes on.

So the business is operating where it is operating and when we make a mistake, which we don’t like to do, but I am afraid we do every now and then, it goes right to the bottom line.

Fair enough.

And can you address quickly the raw material pressure?

Particularly how it is playing through in carbon black, if you are beginning to see any relief there or any leveling off?

Well, it is a problem for us.

As you know, we use a lot of oil-based product in our feedstock and we buy a lot of natural gas to fire our reactors and the prices have been difficult.

In the contracted portion of our carbon black business, we experienced the benefit or harm of what we call the lag in the formula adjustment.

Our prices adjust on a three-month lag basis so if prices are going up, we are always behind.

If prices are going down, we sort of catch up.

Recently we have been behind, although we might have seen a little bit of pick-up in the second quarter.

The industry did get some price relief three or four months ago which helped our non-contracted volume substantially, and generally with the capacity utilization being at the levels they are, it has been easier to pass the price increases through to our customers.

So it is an issue for us, it is a constant struggle, but we’ve had the benefit of high capacity utilization which has helped us.

Finally, on Sons of Gwalia has your public stance changed with respect to possible involvement with a bid for the Wodgina mine vs. looking for alternate supply?

Well I don’t think so.

I would tell you that Sons of Gwalia is still in bankruptcy and we are in the process of preparing our various submissions to the arbiter around the pricing of the Wodgina contract.

I guess I would describe the last three months, there has been a lot of internal work trying to prepare us for that, but very little movement either on the bankruptcy or the long-term structuring of those assets.

We continue to work on that in an effort to see if we can find a satisfactory solution for everybody.

I would also acknowledge that very little has happened in the last three months.

Thank you.

Your next question comes from the line of Sal Ludwig;

KeyBanc.

A couple questions.

First, on the carbon black, if you had not built that inventory, if you had sold everything that you produce, what would your volume have been up, rather than the 1 percent that you did report?

I am not sure I have that detail.

I would hazard a guess, another 2-3 percentage points, but I don’t have the detail.

As you indicated, Ken, tire production, particularly the large tires, is booming all over the world and tire plants are running pretty much full out.

If your volume was up only 1 percent, who do you think is getting the business, because they need more carbon black to produce these, particularly larger, tires?

Well I would have to, and I don’t have the data in front of me and I am not sure we make it public, but remember this is a region by region issue when you look at the 1 percent you are looking at the total business.

As I mentioned in response to another question, that 1 percent was influenced more than historically by the situation in China and the Chinese New Year.

I believe though, in general, that there is a capacity issue in the regions of the world where the large tires are being produced.

As you know, we and other people in the industry have closed capacity, we closed the plant in Spain a few years ago and have had until recently a constant examination of our capacity levels in North America to see if we should close capacity there.

A development, I take it you’ve heard about it from the tire industry, is causing us all to reconsider that and looking for capacity in the developing part of the world.

We are also seeing, one of the interesting things is Japan, which is in the same mode in terms of the size of tires that they produce, has got a flat and fixed capacity for carbon black and it is not going to change.

We are seeing, we are participating in the importation of more carbon black into Japan.

So the market, I think it is adjusting.

There are some strains in it, there are some discussions going on with major customers.

But I guess we would describe it as seeing an opportunity to strengthen our business in the months ahead.

Are any of your competitors, as you assess the competitive environment, adding a carbon black capacity at a faster rate than is Cabot?

No, I think just to the contrary, because of our significant capacity additions in China and in Brazil, we are adding capacity significantly faster than anybody else.

You are probably aware that we have two global competitors, [Degusa] and Columbia, Columbia has been for sale, it is being marketed and to the best of our knowledge there are no capacity additions going on there.

I am not aware of any significant capacity additions that [Degusa] is working on except a possible one in Brazil.

Thank you.

A question about tantalum, we think about the longer term issue with tantalum, maybe there are two issues that will affect demand.

One is, how many capacitors are needed which may be difficult to predict, and then there is how much tantalum is going to be used per capacitor.

You allude to the fact that we’ve seen smaller capacitors and less tantalum powder in each capacitor.

What is the loss of business based on the lower utilization of tantalum per capacitor?

How much is the detraction there affecting ultimate demand for tantalum?

This is, I take it a public forum, so I am going to give you some perspective there, but as I do so please remember our caution about forward-looking statements.

What we are all trying to do is make projections about what is going to happen to tantalum consumption going forward.

Historically, tantalum powder consumption has grown in the 6-10 percent range through the cycles.

Tantalum is a very attractive material, it is unique and it is valuable.

What we believe today, and this is a projection and of course we could be wrong, but what we believe today is that once the inventory situation in the industry settles out, that we are going to be dealing with slower growth of tantalum consumption.

We do not anticipate an absolute decline, we do not anticipate flat, but we are looking at slower growth of tantalum consumption in this market.

Now we believe that the industry, because of the inventory that exists, is going to take a dip here in the next 12-18 months which is what caused us to re-examine the goodwill under the accounting rules.

But our best view of the market, which is why we remain optimistic in the long term, that it will continue to grow, albeit at a slower rate.

I guess the question I am trying to get at is – I will just make up some numbers because I am not familiar with the details – but if in 2004 a tantalum capacitor used 5 grams of tantalum, what is going to happen to the utilization?

How many grams is it going to take in 2005 and 2006 just due to the technology change in the nature of the tantalum capacitor?

Oh boy, you know, I could answer the question in 15 minutes and I would rapidly run beyond my technical capability.

First of all –

Could Edi help us out here?

I am going to give you a little bit of help.

Edi might be able to help.

Let me try and then see if Edi can help.

Remember, the tantalum capacitors are made in a variety of different shapes and sizes.

And when we say the move to smaller sizes, we are saying that the product range is moving to smaller sizes.

There are still some very large tantalum capacitors made and utilized in the market.

It is clear that the industries, both ourselves and our competitors in Germany, have been for a long time developing powders that provide higher capacitance for lower volume, and have enabled the development and use of smaller tantalum capacitors.

But what goes on in the industry is a very, very complex issue because it involves not only tantalum capability but also the capability of aluminum and ceramic capacitors and the whole issue of board design and how that is going to evolve over time.

Edi, I don’t know if you want to say anything else?

No, I could just maybe try to say in different words what I think Ken is saying, which is there is a large mix of capacitors out there.

Where one is seeing a lot of the growth in the actual units is in the very small capacitors, those are the ones that typically go into small electronic products.

Those capacitors have shrunk quite dramatically over the last five years or so and we expect that with higher and higher capacitance they might shrink some more, but that there is still quite a large market out there for very large capacitors in different applications.

I think the numbers that Ken gave you are our best perspective on how we think that will develop with respect to the usage of tantalum powder over the next few years.

One caution on this, it has been an excellent question.

I would urge you all to remember that the electronics industry is a hugely complex and diverse industry, present all over the world and trying to get an accurate view of how tantalum capacitors are going to be used in that industry is very challenging.

Thank you very much.

Next is Frank Randall of John Levin and Company.

Thank you.

That was my question exactly, you have already answered it Ken.

Thanks, Ken.

And our final question is a follow-up question from the line of Jeff Zekauskas.

Yes, I have one follow-up question on the [inaudible] it is the increase in rental days with [inaudible] related to difficulties in drilling some of these holes in a region?

Can you just generally describe how you think the contract was settled or performing, was it ahead of expectations or in line or is it performing worse than you expected?

Well first of all, it is very hard to give you an easy way to track that business based on number of jobs, because each job is different, each job has its own complexity and we generally get paid based on the number of days that the fluid is used on the job.

In a number of cases, we have seen situations where an operator has had problems in a well totally unrelated to our fluid or the activity in which our fluid is engaged and as a result our fluid stayed in the hole for an extended period of time, which increased our revenue.

I find it very hard to project anything based on number of jobs going forward.

How do you best analyze the business?

Do we worry about – do we track the number of holes you complete or is it more meaningful to look at rental days?

It is just hard to tell.

I think the way we look at the business, and I agree with you, it is hard to tell.

We believe, and I think it is reasonable to conclude this, that we have a very active and loyal customer base in the North Sea.

We don’t get what I would describe as 100 percent of the jobs that we think our fluid is suited for, but we get a very, very substantial percentage of those jobs.

The next evolution in the business, I think, will be the expansion of the use of the fluid in significant quantities into Saudi Arabia and other areas in the Middle East, and also I hope into the drilling activity that is about to take place in the Caspian Sea, in that region.

We are in active discussions in both of those regions.

We’ve learned that you can’t predict when these things happen, but we believe that the industry, although still very unhappy with our price, recognizes that the fluid in certain wells is extremely valuable and will over time get used and that the slow growth that we have seen in the business will continue.

If we could get significant business in either the Middle East or in the Caspian Sea we would see a significant spurt in activity.

With respect to the [stratoroph] situation there are two fields that the fluid is being used in, one is called the [Kadipiorn] and the other is called the Christian Field.

The fluid has been used as both a drill in and completion fluid on all of the [Kadipiorn] wells, they have gone extraordinarily well.

They have been drilled and completed on or ahead of schedule and they have, as I understand it, production in excess of what they anticipated and everybody is delighted.

The Christian Field has had substantial difficulties in drilling in general, and they are way behind schedule and so we have not had the volume there that had been anticipated.

We just finished our first completion on that field and the anticipation is that we will get further, additional completions in the months ahead.

But as you think about the business, you need to understand that drilling these large, deep wells in the ocean is an extraordinarily challenging and unpredictable activity.

Trying to predict when we get revenue and how our fluid is used is very hard.

I would describe us, on that business however, as being very optimistic and comfortable that it will be a significant business for Cabot in the months and years ahead.

The only issue remains timing.

The fluid works.

Thank you for the update.

Okay, are there any further questions?

At this time, gentlemen, there are no further questions.

Amika, thank you very much.

If the lines are still open, I would like to say one thing.

During my remarks I misspoke, the analyst day is not June 4th but June 14th in the Boston area for those of you who are interested and we hope to see as many of you as possible there.

I thank you all for your presence here today and your attentions.

We will do the best we can to resolve our uncertainties around the tantalum business.

Thank you very much.

Once again, ladies and gentlemen, we thank you for your participation in today’s conference.

This concludes the presentation, you may now disconnect.

Have a great day.