Cabot Corp (CBT) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2005 Cabot Corp earnings conference call.

My name is Andrea and I'll be your audio coordinator today.

At this time all participants are on an listen only mode.

As a reminder this conference is being recorded for pre play purposes.

I will now like to turn the presentation over to the host of today's call, Mr. Kenneth Burnes, President and Chief Executive Officer.

You may proceed.

Thank you Andrea.

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

I would like to welcome you all to the Cabot Corporation third quarter earnings teleconference.

Here with me this morning are John Shaw, our Chief Financial Officer, Dave Elliott, our Controller, Susannah Robinson, our Director of Investors Relations, Bill Brady, General Manager of Carbon Inc, Edi Cordeiro, General Manager of Super Metals 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 form 10K filing, copies of which are available on our web site.

Last night we released results for the third 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 E-mail list, you received these last night.

Due to a technical difficulty late last night those of you on our fax list may not have received the distribution.

Should you need a copy faxed to you please contact our investor relations department.

If you are not on our mailing list and are interested in receiving this information in the future, please contact our investor relations department: I will now move onto a short over view of the business results and will then open the floor to questions.

Last night we reported third quarter earnings of $0.39 per diluted common share compared with earnings of $0.62 per diluted common share for the same period last year.

These amounts included $0.04 per diluted common share of after tax charges for certain items and discontinued operations versus the third quarter of fiscal 2004 in which there was no impact from certain items in discontinued operations.

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

As I mentioned in my remarks in the press release, we were not pleased with our results for the quarter and under performed our own expectations by roughly $0.20 per share.

During the quarter we were caught on the down side of the carbon black contract price adjustment.

In prior periods our feedstock costs have not risen at the same rate as increasing in crude prices as we have mentioned several times in recent months.

During this quarter, however, our feedstock costs began to return to their historical relationship with crude.

So although crude prices were relatively flat during the quarter, we saw our raw material cost increase substantially.

Which impacted the profitability of the carbon black business by $28 million compared to the third quarter of 2004, and $15 million the second quarter of 2005.

Over all, the chemical businesses reported operating profits of $30 million for the quarter, compared with $45 million for the same period in fiscal 2004, and 46 for the second quarter of 2005.

Carbon black reported a $16 million decrease in operating profit compared to the second quarter in 2005 and a $13 million decrease compared to the third quarter of 2004.

Despite volume gains of 7% over the second quarter 2005, and 2% over the year ago quarter.

A decrease in profitability was due to increase feedstock cost and higher per unit cost of sales resulted from a draw down in inventory.

If anyone would like a more detailed explanation of the inventory change issue, I'm happy to provide one during the question and answer session.

In the approximately 10 year period that we have had carbon black's supply contracts with the type of price adjuster in place, this is the first quarter in which fluxuation of feedstock costs have had such a significant impact on our profitability.

Although we are confident that these swings in our variable margins and thus in our earnings even out over time, we were surprised by the magnitude of the negative impact this quarter and will be looking at ways that we might restructure the price adjustment formula in these contracts to better reflect the current cost of feedstock in our pricing.

I would like to remind you that under the contracts, these costs increases were past through to our customers as of the beginning of the current quarter.

We also need to do a better job following feedstock costs during the quarter which will enable us to communicate any significant trends to you when we have a public opportunity .

I am not happy about surprising you this quarter.

Despite the foregoing, Carbon Black had very strong volumes during the quarter and we remain confident in the underlying strength of the business.

Cabot fuel metal oxide business, reported relative flat profitability as compared with the third quarter of the fiscal year '04 and the second quarter of 2005.

inkjet Colors reported an increase of 29% in volume and 25% in revenue during third quarter of fiscal '05 when compared to the same period a year ago and a 10% increase in volume and a 11% increase in revenue sequentially.

As most of you saw during the quarter, several OEM inkjet printer manufactures announced new printer launches.

Cabot is please to have it's pigment included in two of these printers.

During the quarter, the supermetals business reported $13 million in operating profits compared to $18 million in the same period last year and 16 million in the second quarter of 2005.

Despite the increase volumes, the profitability of this business continues to be impacted by the transition from fixed contract to market based prices.

Additionally, the supermetals business incurred approximately $4 million of incremental costs associated with the labor situation at our facility in Pennsylvania and another million dollars in assumed cost unrelated to our efforts to reduce inventory in ongoing operating expenses in that business.

As I mentioned in the press release, I am pleased to report that despite the work stoppage we are fulfilling all customer orders in this business and our contracts, both by drawing down inventory and by running the plant as needed.

Primarily with management personnel.

During the third quarter of fiscal 2005, especially fluids business reported operating profit of $5 million which was a $5 million increase compared to the same period of fiscal 2004, and a $1 million increase over the second quarter of 2005.

These increases were driven by a higher number of completed jobs in the quarter and an increased number of rental base.

During the quarter, the business completed 7 jobs compared to six jobs in the second quarter of '05.

No jobs were completed in the same period last year.

Capital expenditures during the quarter totaled approximately $45 million versus approximately $23 million in the same quarter last year.

During the quarter the company repurchase approximately 1.2 million shares of which 1 million represent open market purchases costing approximately $31 million.

This brings the total shares repurchase for the years to approximately 1.6 million shares of which 1.3 represent open market purchases, costing approximately $43 million.

Under the current board of director authorization, there remains approximately 2.8 million shares available for repurchase.

Looking forward, we anticipate continued strong volumes in our core chemical businesses for the remainder of the year.

Carbon Black, we will have higher prices in most of our contracted business during the fourth quarter as we pass through the increased raw material cost we saw this quarter.

Additionally we have implemented price increases during most of the remaining portion of that business.

We remain caution however about raw material cost as our feedstock cost still remains somewhat below their historical relationship to crude.

We anticipate ongoing growth in inkjet colorant and specialty fluid businesses and continue to be confident about our manufacturing and marketing development progress in aerogels.

In supermetals we continue to operate our facilities to meet customer's demands.

It is difficult to predict how long the work stoppage will continue, or any additional cost that will result from the strike.

We continue to belive that this business will earn between 55 and $60 million of pre-tax profits for the years which is in the range of our previously provided guidance.

We continue to actively look for opportunities to reduce ongoing cost within this business that may result in certain one time charges that are not factored into this estimate.

As most of you are aware, this is the only area of the company on which we give guidance.

I'd like to remind you due to our philosophy with regard to guidance we do not plan to give guidance on this business beyond the end of this fiscal year.

Notwithstanding the unusual issues that affected us during the third quarter, we continue to have confidence in the underlying strength of our core businesses and remain excited about the growth potential of our new businesses.

I would like to inform you of a change to our earnings schedule for the fourth quarter of fiscal 2005.

We have moved our earnings release back to November 2nd and associated conference call to November 3rd.

Lastly I know that many of you follow-up with our investor relations department for further clarification on particular items once this call is concluded.

I'd like to let you know that Susannah will need to leave the office for several hours this afternoon to attends to a family medical problem.

She will be checking her voice mail and returning calls but you may not be able to reach her immediately.

Please be patient and know that she will get back to you as soon as she is able.

With that short over view I will conclude my comments and open the line for questions.

Ladies and gentlemen, if you'd like to ask a question, please call star one on your touch tone phone.

If your question has been answered and you want to withdraw please key star two.

Again that is star one to begin.

My first question comes from John Roberts from Buckingham Research.

Please proceed.

Good morning Ken.

Good morning John.

You indicated in the press release that earnings were about $0.20 short of your own internal expectations.

I would guess $0.15 Carbon Black $0.05 handling roughly, should we think about -- all of the things equal should we think about adding $0.15 to the September quarter as you get those price increases to catch up to raw material costs.

John, I love your question.

I love -- let me explain my $0.20 number, we debated that internaly.

If you add 20 to 43, you get above expectations and prior to the -- prior to the feedstock issue, and -- and I think it's fair to say even with a fair portion of the [inaudible] cost, I was hopeful that we were going to produce a number in excess of $0. 60, because we were seeing substantial volume increases, we saw what was going on in cesium formate and we saw what was going on in inkjet.

So that -- that's where I get -- where I got and candidly it was my own personal expectations, where I got the $0.20.

We will hopefully, see return to the carbon black margin level that was in place before the events of this last quarter, what you need to remember that, you know, to some extent, we remain at risk to the fluctuation or -- the comparison between -- or the fluctuation in what we regard as our feedstock cost.

One way that you may follow that is by following the flat 3% low sulfur fuel index which is as you know, John, I think the best indicator of our feedstock cost, the best public indicator of our feedstock cost.

So I'm trying to Avoid your question about giving you any guidance for the fourth quarter, but we do anticipate or hope -- are hopeful that we'll be able to return to more normal levels of profitability in the carbon business during the quarter.

We do anticipate a continued strong volume in the carbon black business.

I know we're going to have moving around about you as feedstock stabilize, you will have a substantially margin snap back.

All things being equal, feedstock stabilize, we will have a substantial margin recovery.

Thank you.

I want to -- there's been an internal debate in the company and I know you and others understand this but I'd like to state it, if you -- if you take a normal margin position and recognize that we fell 15 or so million dollars underneath it this quarter because of the rapid rise in feedstock cost, in the fourth quarter we'd return to the normal point.

We will not recover the $15 million that we lost this year until we enter into a period when feedstock cost decline.

And then we get an unusual positive surprise.

We've experienced both of these in the past but never have this -- anywhere near approaching this magnitude.

Thanks.

I'll get back in the cue.

Thanks, John.

The next question comes from Jeff Zekauskas from J P. Morgan.

Please proceed.

Hi.

Good morning.

In looking through your supplemental information, as I understand it, it said that volumes in carbon black decreased 2% year over year in the third quarter.

Why is that, in the sense that if customers can buy carbon black at reduced prices or at prices that don't reflect the price increases that will come with the contract adjustment.

Jeff, can I go back.

I think what you're looking at in the supplemental information is the volumes in carbon black in North America.

Right, that's exactly right, in North America.

Remember, that our volumes for the entire business increased 7% quarter -- sequential quarter to sequential quarter and 2% year over year.

Right.

I'm aware of that.

So you're just interested in North America volumes.

Right, because in North America that's where you have the highest percentage of contracted business.

Yes.

Well -- okay.

But are you asking could the north American buyers have anticipated this and bought cheaply in the third quarter and loaded up on inventory for the benefit of the fourth quarter; is that right.

I'm wondering why they didn't do that.

Well, the real answer, I think of that, and -- it's an interesting question.

I -- our history in dealing with these price adjustments has been that they have never been a -- had a material impact of the magnitude that we seen this quarter.

And I think it's fair to say that both we and I suspect our customers were surprised by the rapid recovery of the feedstock cost compared to crude.

And we -- as I tried to indicate, we were surprised by it.

We feel badly that we were as surprised by it.

We wish -- with the benefit of hindsight, we wish we had been paying more attention and thus, able to sort of at least warn you that the -- warn you that this was going on.

I suspect you'll find that the tire companies are the major customers find themselves in the same position.

Ken, can you remind me why the profitability in the chemicals business tends to be lower in the fourth quarter relative to the other quarters in general.

Historically, it's been the European -- largely the European but also the North Americans summer vacations.

I would point out to you that that trend is at least softening, if not going away entirely because of the increasing importance of our Chinese and South American operations.

And we're not -- if you ask me today to look at volume comparisons, quarter to quarter, we have less comfort projecting that because of the switch in the geographic location of where our business is coming from.

Okay.

And my final question is, at the analyst meeting there was conversation about, you know, making some sort of deal with Haliburton on cesium formate.

Can you update us as to the status of that.

Is it ahead of your expectations or behind your expectations or at your expectations.

You have any color?

Hold on one second.

I'm not sure what you mean by Haliburton.

Remind me.

That is in the meeting, there was a comment made about --

We messed up the casting arrangement.

Yes the casting arrangements.

Excuse me.

I apologize for not picking that upright away.

We -- we're dealing with all the majors in all of the regions.

That is still ongoing.

I would describe it generally that -- that as we have discovered in all of that business, every time we get close to actually locking those things down, the -- the oil company involved makes one last attempt to make sure that this fluid is the best fluid for all of these wells.

Jim was in the Caspian region in [inaudible], in the last three or four weeks.

They are -- they are drilling, I think it is one more well using a different solution because they had the material.

The indications that that solution has failed a number of times in the past and they believe it's going to fail again about you their partners insisted that it be tried.

You've heard that story before.

Uh-huh.

And Jim came away with two things, one, we got away wait a little bit longer before we get the business but more importantly, the target wells are sweet spot wells that are available in that region.

We now believe to be in the range of 800 wells over 10 years.

Earlier indication that I think Jim mentioned was 180 wells over ten years.

Okay.

Thank you very much.

Okay.

My next question comes from Paul Ludwig from Key Banks.

Good morning Ken.

Good morning, how are you.

Thank you, wonderful.

What -- a couple of eye ball questions.

What happened to inkjet profitability in the quarter.

You talked about the revenues that were up 25% year on year.

Do they have any change in their profits because of that.

Yes.

I think it was -- let me give you the precise number.

It was up -- a penny a share versus '04 and a penny a share versus '04 and a penny a share versus the sequential quarters or $0.2 a share versus the sequential quarter.

We did, I want to remind you and I think -- particularly this quarter, it was the case.

We are in the process of trying to advance our technology to enable or participate in a -- in the growth or the penetration of inkjet technology into a number of -- of high value -- high volume markets.

The two in particular, one is the photo inkjet market which is still largely dye.

You may be aware there were a number of photo printers released by the major OEM this quarter, The fall, the late summer and early fall is always the printer release time because they want to get it on the market for the back to school period.

All to our knowledge, all of those photo printers use dyes.

We are working hard to develop pigments, both black and colored pigments, that we believe over time can make higher quality photo prints.

So that's one area where we're spending substantial amount of money, and the second is we continue to believe that not with standing the fact that there have been a number of printers released, black printers released recently using pigments, that the -- the OEM manufactures advertise as having laser quality and laser speed.

We continue to believe that there is a significant further opportunity for the speed of inkjet printing and therefore enabling it to compete in a much higher volume, broader printing range.

And so we have two major research projects going on.

We try to manage our research expenditures against our volume and volume growth and profit, but we as you know in invest for the long term.

We could, today, if we chose, cut drastically back on our research and inkjet would be a very very profitable business for us, but we choose to in invest in the long terms and are spending those profits on research dollars.

And the business that you did increase, was that because basically the market increased or with you getting a larger share of the black pigment market?

we believe we've gotten a significantly larger share of the black pigment market and let me explain.

Both the black pigment market but also as the -- as the industry converts from black dyes to black pigment, we pick up -- we think we pick up shares there.

We, as I said in the notes and I think was in the release, we did, we are the supplier for several of the new -- the new printers using -- black printers using pigments that were released recently.

Thank you.

Second question, you talked about being surprised with the raw material cost increases in carbon black.

Could you explain exactly the nature of the surprise.

You have a purchasing department that's buying these materials everyday, they must have known they were paying more.

How could something so significant have been a surprise?

There's no other answer than to say Mayacopia.

You're right.

The numbers were available.

We watch and we all had an intuitive reaction that the feedstock costs were going up and our profits were going to get impacted.

We also at the same time were looking at the very substantial volume growth and historically, those two things have, at volumes been more important than the feedstock cost increases.

Bill Brady didn't know the costs were going up.

We did not do a good job.

There is -- there's no -- no excuse.

We should have known.

I do want to be clear, we had no control of the impact.

And the only thing that we would have done, if we had been doing a better job and I want to be very clear that we -- I feel very strongly that we should have been doing a better job here.

We had -- I had two opportunities to indicate to the street, one that our analyst meeting in June and an investor meeting I attended in Phillidelphia that this trend had taken place, and if I had known, I would have done so.

I did not know and therefore I didn't do so.

How much did you draw down your inventories.

Well, the company as a hole, one of the things we've been mentioning in the past is our effort to reduce inventory.

The company as a hole reduced finished product inventory on a constant currency basis by roughly $20 million.

And in tantalum it was somewhat less than half of that.

Remember that the strike didn't start until June 20th.

Okay.

Thank you, Ken.

Thank you.

Operator: As a reminder, ladies and gentlemen, if you'd like to ask a question, please could he key star one.

My next question comes from Jay Harris from Goldsmith and Harris.

Please proceed.

Good morning Ken.

Good morning Jay.

It hasn't been the best two weeks.

Come back to carbon black raw materials, when, during the month are your purchase costs fixed for that month, is this on a daily basis or is this like a any other commodity we're exposed to where sometimes the prices are fixed on the 31st of the month for the prior 30 days.

No, it's -- as I said previously, and I'll say again, we could do a better job on this than we have been doing.

And in the last two weeks, have been probing that in significant depth.

Let me tell you what -- what we now know and will be doing going forward and should have been doing going backwards.

We buy largely spot.

There are some long term contracts but largely we buy spot.

And we have somewhere between, depending on how good we can get a deal with logist and manage our inventory, somewhere between 30 and 40 days of feedstock inventory in our tanks.

There's no whip to speak of because the feedstock gets converted to finished product in a matter of hours in the process.

So we can, we do have the ability and are putting in place to look at the average cost of feedstock being used, almost on a daily basis.

There's one complexity to it in that North America, the company has been on -- lifo accounting method forever, as near as I can tell, certainly predates my time.

So the lifo adjustment which is roughly a third of the inventory, raw material inventory, does not true up until the end of the month.

So we can, you know, we can know.

And should be -- and should be doing a better job following it.

All right.

But I want to be clear.

There's nothing -- our knowledge on -- if we had the knowledge on June 1st, the only thing we could have done is indicated to you that we were again squeezed by feedstock because we had no ability to pass it through because of the contracts.

Well, that leads to my next question about you before I get there, what I don't understand is I think you, every month you get a P&L statement.

We do.

This could not have occurred in the month of June.

No.

We should have been more -- hindsight is 20-20 as you know, and when we look back at the quarter, we have had in the past a week, months or two in the quarter and a number of occasions, had a very strong third month in the quarter, that leveled it out.

I think we were probably having, you know, the rose colored glasses of optimism here.

You got influenced by the analyst, huh.

I don't know about that.

I -- I think I got influenced or we got influenced by the volume. 7% volume increase in this business is hugh.

Let's go on.

To what extent is -- this is $15 million related to the contracts and to what extent is it related to products not under contract?

Now remember, and this is -- I think you're aware of this.

Others may not have the detail, but we have two types of contracts in place.

Long term contracts with our tire -- largely our tire customers but not entirely, and yearly contracts with a number of other customers.

The formula of pricing adjustment and therefore, you know, the significant portion of the long -- of the $15 million if that's a good number, is -- is with all of those contracted customers which is in the area of 75 to 80% of our total volume sold.

Well, on the annual annual contracts is there is a quarterly adjustment as well.

There is a quarterly adjustment.

One of the facts, just so everyone has this.

On the noncontracted volumes, we had amounts, a price increase earlier on in the quarter that is -- that was effective on July 1st.

Now, you know, price increases are always variable in what percent you get and how much you get and that plays out over a period of time.

But we have, through the contracts and the price increase announcement, we have -- we have taken steps to -- to increase the price to recover this feedstock for essentially, you know, in excess of 90% of the total carbon black volume we sell.

Okay.

Hello.

Here.

Inkjet colorants.

Yes.

If my math is correct, you had almost a $2 million increase in operating income on a sequential basis for a $1 million increase in revenues.

I don't know how you get that.

Well, I thought that we were at a 9 or 10 million quarterly revenue rate and you said that the revenues went up about 10%.

That's a $1 million increase.

Give me 30 seconds, Jay.

I have a chart that was given to me by that business that answers those questions.

You do reveal now your inkjet revenues in your 10-Qs.

We do.

Is there any way you can accelerate that information.

I can find my peace of paper, unless somebody tells me not to do it, I will do so: I'm sorry, I have a stack of paper with all of this information and I'll get it in a minute.

The bottom line here is -- describe what happened sequentially to your operating expenses in that business.

Let me give you the numbers you're looking for okay.

Okay.

Your revenue in quarter three was up -- roughly a million dollars, right?

All right.

And your.

And your earnings were up $0.02 a share which is roughly $2 million operating earning.

Yeah, that's right.

How is this possible.

That's probably in the timing of expenses.

Almost for sure, that's in the timing of the R&D expenses.

Why are the R&D expenses discontinuous, not, you know, not a certain number of dollars per month.

What's going on?

I don't have the answer to the question but we can get you the answer to that question.

All right.

Jay, I don't think it's significant.

I think that you may have found in the previous quarter some start up costs in line or some R&D work.

As you saw in April, when you were there, we're in the process of constantly upgrading that facility.

And in a business that is growing as fast as that is, and with the -- with the varibilty of the products and the products introduces, you're going to have some lumpy expenses.

All right.

Coming back to tantlum.

What was your guidance for the year ago.

55 for 60 with the warning that if we are able to find some further instructual costs reductions, we may take them in the fourth quarter if we find them.

We are hoping very hard to reduce the operating cost of that business broadly across the higher business.

We do have the labor issue which is aimed at cost reduction.

Edi and his team are looking broadly everywhere else and I hope they're successful.

Is there any limitation to the Boyertown fiscal out put as a result of operating plant with supervisory personnel?

Does it have the same out put capacity as when it was fully staffed.

Well, no.

Today, it is not operating at that rate.

No, I understand that, but I'm asking could you?

No, on the contrary, I think one of the -- one of the issues that has evolved throughout this is an interesting one.

We as I think you're aware, undertook to -- undertook the labor issue in an effort to significantly increase the productivity of that plant.

In that we felt that if we could -- we could cause significant changes in the work rules, that we could have a significant impact on productivity and therefore cost.

I will tell you that during the month in which we have been operating the plant with management personnel and without any restrictions caused by work rules or labor practices, we have been able to find productivity opportunity significantly in excess of what we expected.

Okay: That's an interesting bit of information that wasn't requested but useful.

I saw -- I saw your question as an opportunity to make a point.

Well, can you answer the question?

In other words, if you were not reducing inventory of finished products, could you satisfy all customer needs.

And could we run the plant at full capacity if we had business that required it?

yes.

Absolutely.

Okay.

Thank you.

Operator: My next question comes from Steven McBoil from Lloyd Abbots.

Please proceed.

Thank you.

First, can you confirm that your carbon black side your contracted business is about 50 percent and can you inform me as to what your mechanism is on that contracted business?

Are they all standard, three month lag basis.

I'm a little bit -- I want to be clear in your first question.

You confirmed that our contracted basis is 50 percent of our volume.

That is your question?

Yes.

What percent of your volumes in carbon black are contract versus noncontracted and then within the contracted, how does the actual mechanism work?

With -- there are two types -- excuse me.

There are two types of contract long term which we would generally define as in excess of one year but there are few of those long term contracts and they're probably in the 3 to five year range and they're in the range of 50 to 60% of total volume. 40% of total volume.

And then we have annual contracts with a signifcant group of other customers that brings the total contracted volume, subject to feedstock adjustment to the 75 to 80% range of our total volumes, right?

okay.

The mechanism of the feedstock pass through is that there is a price index called plat 3% CRUDE.

I could give you the precise name, it's published on a daily basis, and that formula is used as the proxy for feedstock with our customers.

That pricing index and at the end of the quarter we take the average plat for the quarter and apply that through the pricing formula and adjust the cost, adjust the price that was paid in the subsequent quarter.

We get a average feedstock cost, over -- from the price index and apply that into the formula and the price adjust depending on what happens to the plats average.

And that new price would then apply fully for the following quarter.

Fully for the following quarter effective in this case on July 1st.

Okay.

For all shipments and taking place during the quarter.

That adjusted price applies.

Okay.

And then curious as to the price index itself, how that literally increased through the quarter.

This is the issue that -- that got us.

Historically, and we been using this index and as you can imagine, following these prices for many, many years.

And one of the things we've done in the last couple of weeks is look carefully at grass of the relationship between plat 3% and crude.

And historically, over a long period of time, you know, plat 3% has traded in the range of 70 -- around 70% of crude.

And for reasons that I -- honestly can't explain to you.

When crude went up roughly nine months ago, a year ago, plat stayed down.

And the -- and the -- the relationship between plats and crude actually got as low as just around 40%.

Plat stayed flat.

And if you graph it, you can see crude going up and then staying in the 50 to $60 range.

Plat staying where it had been before crude went up.

And then during this quarter, start ing just before this quarter, plat started to recapture its historical position ever 70% of crude.

So we, the carbon black industry and people who use plat and it's a broadly based fuel, had had the benefit of historically low prices until this quarter.

And so, this quarter, it finally caught up with us.

I had indicated, you -- I'm not sure whether you heard it.

I had indicated at least several times in the past, that this abnormality was taking place and we were not sure what was going to happen going forward.

The thing really surprised us is the rapidity in which plat has reestablished its historical relationship.

If you look at the plat graph, you'll see a very, very sharp rise.

If you look at a percentage increase, if you plot the percentage of plat versus crude or West Texas intermediate, it's really a startenly graph and you can see what happened to us.

Okay.

And then to -- you -- you indicated that the -- the feedstock remain somewhat lower relative to historic relationship to crude.

So I guess the question is to a comment you made earlier, the 70% being historical relationship, that is where it is today or does it continue to trail that historical level?

That's a very hard question to answer.

I could go get you or you could go get today's prices.

They're available publicly.

It has -- at some points in the last months, been well above the historical relationship.

I looked at some data showing it up near 80% of crude.

We may be, because of feeling badly and burned what happened to us this quarter, we may be exercising a little bit more caution about what's going forward, but it's something that we're being very cautious about.

I have found it over the 18 years I've been in this business to try to predict these things to be almost impossible.

And the way, I never -- we have worked very, very hard over the years to get a way out of this by finding a proxy for our feedstock cost that would able us to hedge all of this so we could sort of smooth it all out.

We've never been able to do so.

The trading -- it never trades in a consistent pattern.

And so, you know, it's a risk and I describe it as a risk in the business.

What really caught us this time is the tremendously rapid increase in plats which is we've never seen in my 18 years in the business.

But I guess the thrust of the question is, that gap relative to the historical relationship you view.

It is today much closer to what we would regard the historical number.

Okay.

But, is the historical number realistic any more?

Exactly, which is the next line of questioning is, to the extent that you might restructure the price adjustment. formula in these contracts, what is the current thought there.

How might you change the mechanism going forward.

You recognize that any -- any such change would require, you know, the consent of the customer.

Yes.

But the oblivious thing you could do, if the logistic burden isn't too significant, is to adjust monthly.

Uh-huh.

And therefore, you'd moderate the swings.

The other thing, I think, you know, that everybody has to recognizes, you know, we get caught in the wrong side this quarter, you know, just as well if we could get caught on the right side of it going forward.

And if you plot this as we have done over annual periods, it's a wash, you know, it's just not, you know, when you look at it over any extended period of time, if I sit with the purchasing director of one of our major tire companies and show this plot and the swings around it over a period of three year contract, nobody wins, nobody loses.

So, you know, I -- I feel badly, I don't like the fact that we lost the $15 million, I'll be happy if and when we get it back, but at the end of the day, you know, I'm a long term investor.

I don't believe this has any impact on the value of the company.

Right.

I appreciate that.

One last question.

You made mention noncontracted business that you had announced the price increase.

Perhaps you could answer how -- to what extent do you have to further increase price to make up for feedstock increases, again, on the noncontracted business, and as we look out through the year what that lag if he can't may be.

I can tell thank you we're -- that we're working on that.

We're trying to understand that.

And that price increases relate both to cost and to capacity utilization.

But my general counsel is telling me if I answer that question he'll cut my head off.

I can't do that because that's a -- in the anti trust laws that would be signal to our competitor about what our pricing plans are.

And I really can't answer your question.

I apologize.

Fair enough.

Maybe then one last question.

The tantalum inventory, where does that stand today.

I understand you said about half but dollar.

Two types of inventory and I can get you the dollars probably before we get off the phone.

I don't have them right in front of me.

We worked down, finished good and work in process inventory during the quarter, but particularly because we shut down a chemical unit that produces a preliminary material, the first material that we use in the plant, we did build some raw material inventory during the quarter.

But I think that the number, we have not made -- the real area of opportunities in the supermetals business is the raw materials area and we are working hard on some plans to see if we can capture some significant benefit there.

We did not do anything of substance in the quarter on raw material.

We did work down -- work in progress and finished goods by somewhat under $10 million.

Okay.

Thank you very much.

You're welcome.

Operator: The next question is a follow-up from John Roberts of Buckingham Research.

Please proceed.

Ken, you indicate that'd all the photo printers announced recently were dyes, so that would imply that the new H. P. high speed photo smart printer is dyed based.

I believe so.

Okay.

That's all I needed to know.

Operator: My next question comes from Laurence Alexander from Deusche Bank Securities.

Please proceed.

Hi Ken, how are you.

Pretty good how are you.

I wanted to check on a couple of things.

First with the inventory work downstairs that you've been -- that you've been doing over the last few quarters, is there any reason to expect season able acceleration in the next quarter, next couple of quarters?

Are you going able to -- or should we just assume the current run rate.

That's an interesting question.

I -- I need to answer it by business.

As I -- as -- I believe that today the -- way call the -- the working capital opportunity or inventory opportunity in F. M. O. is minimal.

I think that business has done an excellent job and they're largely sewed up.

Supermetals, the raw materials that we talked about, the current labor situation and the way we're running the plant indicates to me that during this quarter, we will draw down finished goods and work in process inventory in supermetals.

And in carbon black we started it this last quarter and it will continue at least in this quarter if not into the future.

We had some carbon black in particular, we had the special causes of wanting to build inventory, to seed new units that are being constructed in Brazil and in China and so those -- that has taken place, and our purpose there is to -- to be able to open, start up those units substantially filled with existing business.

And those units are starting to come on in the beginning of next calendar year.

So we would expect to start to work off that inventory over the next three to six months.

Thank you.

Is there a -- a chance that you would have a significant change in your long term contracts within the next few quarters or is this more something you need to look at but the contracts don't give you the flexibility to change.

I don't -- I would not anticipate anything substantial significant in that time frame.

These contracts are, you know, have turned themselves into and I'm very pleased with them, long term relationships.

Well, you know, at the appropriate time, have quiet discussions with the appropriate customers to see if they have any interest in smoothing these things out.

They today are looking at everything received significant benefit this quarter, but they are also smart people they know it will go the other way at some point in the future.

The trade off is whether you want to get closer to current pricing and incur the incremental administrative burden of adjusting every months or some other way or leave it where it is.

Fair enough.

We'll start those conversations.

There's a reference in your notes in the release to establishing a wear house.

Yeah.

How significant is that?

Do you do this on a regional basis or is this your first warehouse outside the U.S.

No, no, no.

We've had existing -- warehouse is the term we use, but you need to think about it as a yard where we store the fluids adjection to or near the dock where it's loaded onto the boats in the North Sea and in the Gulf of Mexico.

Inventory, we don't have a lot of inventory, as you no, and that inventory in particular is expensive and we like to keep it at a place where we think it's likely to be used.

We currently have yards that are active in Aberdine, Scotland and two in Norway to serve the oil business.

We also have a small quantity in the Gulf of Mexico which serves one large well and hopefully will serve more in the future.

Starting or maintaining an additional source of inventory in is an indication by the business that they are pretty optimistic that they are going to see some use of that material in the next 3 to six months.

You -- I've actually been reading in the general press, the issues surrounding the Saudi Arabian and other Gulf oil reserves.

And as we understand it, what is going on is that the wells that were easily drilled and pumped out are running out and although they're still very, very substantial volumes of gas and oil in the region, they increasingly exsist in -- in drilling zones, high pressure, high temperature, deep requiring extended reach drilling that are much, much more -- are much closer to what we would call our sweet spots and we believe and we've been working hard on it.

We believe there are a large number of sweet spot opportunities for us in Saudi Arabia and in other parts of the Gulf.

And we've been working on it for quite sometime we have very solid business relationships there and we finally conclude that'd we wanted to be in a business to respond quickly when the first call comes.

And so we moved the volume of inventory to .

We are not too far, we think, and this goes back to the question that somebody asked me earlier about Haliburton.

We're not too far from doing the same thing in the casting regions.

And as we've learned over times, these things don't happen so they actually happen but also they seen -- both of these areas seem to be getting forever closer which is an exciting evolution for us.

And lastly, just one quick question.

Can you discuss the volume trend in your carbon black for the industrial, the specialty industrial application, was most of the volume that you saw this quarter, was that the black, if you could discuss what's happening in the higher margin.

I will tell you that -- I'm going to have to get Bill to give me some help.

I think both in tire volumes and in special blacks or P. P. P. G. business, we had very strong volume.

In the automobile trend, Bill in the industrial do we have good volumes.

What was the question.

The specialty side of the business was very strong, if you look at quarter on quarter comparisons.

The tire business was fairly strong.

The weakest of the three was the industrial products, the nontire rubber and we pretty much saw that all away the world to be a week segment.

But the specialty high ends has been all year and continues to be quite strong.

Okay.

Thank you.

I'd like to go back.

Again, I'm not sure who answered the question, I might have misspoke when I answered about our ability to run the Boyertown plant.

I think the specific question somebody pointed out to me, can the supervisors run the plant at 100 percent of capacity.

The answer to question is no.

Is no, but our supervisors and other management personnel are running the plant today.

If we were going to run that plant or need to run that plant at 100 percent of its design capacity, we would probably need some -- either temporary workers or contractors to help us out.

We are -- I do want to say that I think the management personnel and supervisors in particular who are running that plant and everybody running it for the last month, month and a half have been doing an extraordinary job.

We've got excellent quality we've had no safety or environmental incident and I'm very very proud of the work they've been doing.

Operator: My next question is a follow-up from Jeff Zekauskas from J. P. Morgan, please proceed.

Hi Ken, one last thing.

If I understand the carbon black contracts, they move according to your average raw material inflation or deflation during the quarter.

So it's also relevant is what your raw material costs were sort of on the last day of the quarter for going into the new quarter.

That is with they higher than the average or lower than it is average or near the average.

Because that will -- that will affect how much you may be able to get back or not get back in the next quarter.

Wait a second.

It's the average of our -- of that plat index during -- during the quarter.

Right.

So where was the plat index on the last day of the quarter relative to the average during the quarter?

I believe the answer to that is that it's higher and I believe that, you know, you know, that gets you into trying to project what the average is for the next quarter.

Right.

And so, you know, back to the -- to the question of somebody trying to get -- trying to help us figure out precisely what's going to happen next quarter, you could take the position that if plats was higher on the last day of the quarter than the average, that we're already behind.

Right.

But, you know, we could, today, be ahead.

Right.

Okay.

I appreciate it.

And the way I'd like -- the way we think about this and the way I'd like you all to think about this is that to think about trying to do something fair with your customer on this issue.

And I understand and you know we certainly learn to our great pain, that this -- the way this mechanism works, we can get caught at the wrong side or the right side of a very rapid swing and have sort of an unpleasant or very pleasant quarter.

I wish it was very pleasant than unpleasant.

If you look at these things as relationships and you looking for something that is fair and reasonable for both sides, I got to believe that these are pretty good things.

And as I mentioned in my notes, you know, we've been -- we had these in place for ten years.

It worked pretty damn well.

Not complaining about the contracts, I was just trying to understand them.

I understand the job of trying to predict next quarter's earnings get complex.

You can do it, though, Jeff, if you think about it.

That plat index is available to you.

No, no, we have it.

You can do it.

Okay.

All right.

Thank you.

Thank you.

Operator: My next question is a follow-up from Paul Ludwig from Key Banks.

Please proceed, sir.

Did you say what the revenue was for carbon black in the quarter?

No, but we don't give the total revenue, we give revenues for chemicals in the quarter.

Don't you someplace give revenues for carbon black in one of your supplemental.

One of the statements we may and revenues were $375 million.

Okay.

So the 375 would have been up -- up a good percentage and with volume up, only 2%, you had a good price increase in the quarter.

No, volumes were up quarter to quarter, sequentially 7%.

But year over year.

Year over year 2%.

And revenues were up -- were up like 13% year over year.

Oh, yes, we've -- there's been some adjustments in our favor over the last year and we also had, I think you may remember, a -- a price increase on all volumes or noncontracted volumes and that would include the annual contract at the turn of the calendar year, at the -- sort of at the end of our first fiscal quarter.

But we could say, if your revenues year over year were up 13%, and your volumes were up 2% year over year, the difference was either currency or price.

And in this case, it was mostly price.

Okay.

And so that price increase would have been in the neighborhood of 10%.

Are we going to see, based on what you did on July 1st, so this already happened and done, it's not a projection of what's going to be, were your prices increased another 10%, 12%, what was the magnitude of the price increases that went into if he can't July 1st.

I get some help her.

What was it, John or Bill.

The contract price adjustment. 10 to 15% range.

Absolutely.

Your numbers are about correct.

And finally.

Now wait.

One thing you need to understand is the price increases that are -- that are noncontracted, they're never -- never absolute.

Based on the contract.

Okay.

On the contract, the number is 10 to 15% range.

Got you.

And then finally, the -- you talk about the selling and administrative cost were up 7 million bucks in the quarter after being kind of flattish in the first half of the year.

Was all of that 7 million basically charged to supermetals.

Are they the ones that felt the brunt of that SG&A increase.

No, carbon black -- Bill Brady sitting here scalled at me putting his finger to his heart he eats most of our cost increases.

It says increase was permanent due to budget and increases in certain incremental cost of the labor situation at supermetals.

Well, that's -- that may be a misnumber.

There's a big Sarbain-Oxey cost in there.

This was the quarter where we incurred a lot of Sarbain-Oxey cost.

That $7 million increase, would you say most of it got charged to the carbon black and contributed to the carbon black results in the quarter.

I would say somewhere in the range ever 60 to 70% got charged to carbon black.

And what's going to happen going forward with the SG&A.

Are we going to continue to have increases.

Are we going to return to what we saw in the first half of the year with many minimal increases.

We're working very hard not only to have minimal increases, but to have decreases.

We have some -- some issues kicking around that I find very frustrating that are somewhat outside of our control.

The -- the total accounting fees that we're incurring this year are up very, very substantially.

We also are spending a fair amount of money defending ourselves on these carbon black price fixing litagations.

In our view has no merit but is costing us several million dollars.

But we're working hard on our cost.

I mentioned that Edi is working on-- trying to do some dramatic things in the supermetals business and we're working throughout the other business.

It's -- I would -- I would -- one think of caution there, we are in investing and trying to grow our management capability and depth in China.

Not very expensive in terms of salary dollars but we're in investing a lot of money in China.

We have a very high degree in confidence and respect for the people who manage our business in China but we're, in the next year and a half or two years, are going to double or triple the size of that business and we're trying to build an appropriate infra infrastructure there.

So with the investment in China.

Coming up to your fourth quarter which may be even higher on Sarbain's cost, you know, building the situation in supermetals, why wouldn't we see a similar increase in SG&A in the fourths quarter.

What would work against the pressures that you just clearly annunciated that's pushing them higher.

I'll answer those, those are fair points you raised.

I think I would answer the question the way that some of the people who work for me would answer it.

I tend to be a pain in the neck about these matters and squeeze to the greatest degree I'm able to.

Okay.

You're going to squeeze better in the fourth quarter than the third quarter.

I'm going to try.

Okay.

Thank you.

Thank you, Paul.

Operator: My next question is a follow-up from John Roberts from Buckingham Research.

Please proceed.

I think we lost John, he went to another call.

Operator: Mr. Roberts, your line is open.

My next question comes from Mike Andrew, from Bright Water.

Please proceed.

I had a question about the sons, that cancelled negotiations.

Yeah.

And wanted to get some clarity on the timing.

And if that contract for your supply of tantalum was going to change at all going forward.

And if it did change, how would it change.

The issue is, we have the contract but I think this is -- we've said this before, we have the two contracts [inaudible] that expires the end of this calendar year, one for the [inaudible] and the second for the Green Bushes mine.

We chose to let the Green Bushes contract expire and we indicated our intention to renew contract.

And we are in the process of -- we are in the process of having have been discussions with to see if we can resolve the pricing issue before we go to arbitration which is scheduled to be in late September or the early fall.

What is the pricing issue?

How much we pay.

And are you negotiating with sons of [ inaudible] right now, are you discussing with the bondholders of the company.

We have -- in the last month, been clear that the sons of administrator who has had control of the situation for more than the last year is now under significant pressure or involvement from the debt holders.

Aren't the debt holders trying to change the pricing structure so they receive more favorable terms.

I can't honestly tell you that.

I can tell you that we have not been able to make the progress in -- in the negotiations with -- with the administrator because of what has been -- what has been described to us as interest of the debt holders in -- in the process.

Okay.

It has been frustrating for us, and, you know,, not clear to me that it is useful for the sons long term value to behave this way but it is what it is and we have not been able to make the progress that we anticipated.

When it expires at the end of the year, where do you all continue to source the from or if it does prior to negotiation.

No, we have a -- we have the right and the obligation to buy a significant amount of quantity of from the mines of sons of after the exoneration of the kurpts contract.

We have formally renewed that contract and the -- we need the detailed provisions coming out of the negotiation or price provision. but we will be obligated and they will be obligated to sell it to us and we will continue to have the rights on that mind that are incorporated in our contract.

All right.

Thank you.

Operator: Ladies and gentlemen this concludes the answer and question for today's call.

I will now turn it backs to Mr. Burnes foreclosing remarks.

Andrea , thank you very much.

Ladies and gentlemen, I thank for you your attention and excellent questions.

Ones again we feel badly about what happened in the quarter.

I permanently do not believe that it has any real impact in the long term value of that company.

I think we feel that the company is doing well and look forward to stronger results in the future and I hope to have a more ples ents news for you in future quarters.

Thank you very much.

Operator: Ladies and gentlemen thank you for your participation in the conference this does conclude your presentation.

Good day.