Cabot Corp (CBT) 2005 Q4 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the fourth-quarter 2005 Cabot earnings conference call.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this call today. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Ken Burnes.

Mr. Burnes, you may proceed.

Good morning.

This is Ken Burns, Chairman and CEO of Cabot.

I'd like to welcome you all to our fourth-quarter earnings teleconference.

Here with me this morning are John Shaw, our Chief financial Officer;

Jim Kelly, our new Corporate Controller, Susanna Robinson, Director of Investor Relations;

Bill Brady, General Manager of Carbon Black & Inkjet;

Eddie Cordeiro, General Manager of Supermetals;

Ravijit Paintal, General Manager of Fumed Metal Oxides and Aerogels; and Brian Berube, our General Counsel.

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 might differ materially from those expressed in forward-looking statements.

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

Last night we released results for the fourth fiscal quarter and fiscal year 2005 along with related supplemental business information.

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

For those of you on our mailing list, you receive this information either by e-mail or fax.

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

This has been a very difficult year for us with the rapid rise in our energy costs and the weak market conditions facing our supermetals business.

These challenges and the initiatives taking place to address them resulted in financial performance for the quarter and for the year that was well below our expectations.

Although we are disappointed with the results, we believe that the Company as a whole is healthy and well-positioned to perform at a high level in the future.

As we've discussed previously, the supermetals business is facing the expiration of the fixed-price and fixed-volume portion of its long-term contracts during a period of significant weakness in the tantalum industry.

Today we are seeing prices for tantalum powder in the marketplace that are as low as we have seen in 15 years.

Given the favorable pricing structure that we enjoyed under the long-term contracts, it is clear that the business faces the probability of a very substantial decline in profitability from the levels obtained in recent years.

In addition to pricing pressure, our future raw material position remains uncertain as we remain in arbitration with the Sons of Gwalia regarding the price for which we will purchase tantalum ore under our long-term raw materials contracts.

In response to the deteriorating market conditions, we have significantly reduced the operating costs of this business.

At the Boyertown plant we recently reached agreement on a collective bargaining agreement with the union that settled the labor dispute that began in June.

The new agreement dramatically improves our operating flexibility and efficiently (sic) and combined with workforce reductions has enabled us to significantly lower our costs.

While this has been a difficult and painful undertaking, we are now better positioned to be competitor with lower-cost suppliers.

Due to the increasing competition in the tantalum sputtering target segment and our lower than anticipated rate of market penetration, we decided during the quarter to stop our efforts to manufacture and sell finished tantalum sputtering targets to the end-users in the sputtering target market and focus our efforts on the sale of tantalum plate to the sputtering target manufacturers.

We believe that by doing this we can sell significantly greater volumes of tantalum thus reducing the overall per pound manufacturing costs at our Boyertown facility.

We are currently in discussions with a number of interested parties to sell our plant in Columbus, Ohio.

As part of the various cost reduction initiatives in the supermetals business we have reduced staff and abandoned certain assets during the fourth quarter.

The results include a charge of $15 million to cover these costs.

We continue to look for other opportunities to reduce our costs.

Let me update you on the quality issue.

However, due to the nature of the arbitration proceedings, I am somewhat limited as to what I can say.

As we have discussed previously, in 2003 after extensive discussions with the then management of Sons of Gwalia we exercised our rights to extend our long-term contract to purchase ore from the Wodgina mine, owned and operated by Sons of Gwalia.

The contract contains provisions for determining the price at which we will purchase the ore by agreement or failing agreement by arbitration.

The parties were relatively close to reaching an agreement on price in 2003; however -- and we based our decision to extend the purchase contract on the party's estimated operating cost at that time.

Since 2003 the cost of mining ore at Wodgina has forecasted for the extension period by the current management of Gwalia has increased dramatically.

The increase in the forecasted cost took place after Gwalia entered into administrative proceedings which is the Australian equivalent of reorganization under our bankruptcy laws.

In the arbitration we are arguing over what costs should apply.

If Gwalia prevails in the arbitration we could be burdened with an obligation to buy tantalum ore at well above the current prices for a five-year period.

We do not expect a final decision in the arbitration prior to the first calendar quarter of 2006.

Because of these issues as well as the market conditions that we see going forward, during the quarter in accordance with accounting requirements we conducted an asset impairment analysis of the long lived assets of the supermetals business.

This is an involved process and depends on one view of the earnings capability of the business over an extended period of time.

The analysis indicated that the assets were impaired and therefore should be written down to fair value.

Accordingly during the quarter we recorded an estimated pretax charge of $110 million which is our current best estimate of the required write-down.

The estimated fair values of the assets are still being refined which could cause an adjustment to our fourth-quarter 2005 earnings.

In no event, however, could be write-down exceed the 144 million book value of the assets.

The total tax implication of this write-down on the Company's deferred tax assets and on our tax rate going forward are still being analyzed and will be reflected in our Form 10-K filing in December.

Before these charges the supermetals business reported $7 million in operating profits for the fourth quarter of fiscal 2005 compared to $22 million for the fourth quarter of fiscal 2004 and $13 million in the third quarter of fiscal 2005.

For the full fiscal 2005 the business reported operating profits of 52 million compared to 77 million for the fiscal year 2004.

The other significant issue during the quarter was in the carbon black business which was adversely affected by the rise in feedstock and other energy costs, the increased manufacturing costs associated with our LIFO accounting methodology in North America and the effects of the hurricanes on the Gulf Coast.

To quantify the feedstock effect, despite contracted price increases, the continued rise in feedstock costs cost us $20 million in the quarter; the LIFO reserve was an additional 12 million and the hurricane damage to our plant was approximately $3 million during the quarter.

Incidentally, I would like to publicly thank and congratulate the Cabot employees in North America and particularly at our Canal plant in Southern Louisiana and at our logistics center in Atlanta for their excellent work in getting us back into production as fast as they did and for their efforts in supplying our customers from all over the world during the shutdown period.

During the current quarter we are continuing to experience a negative differential between the contracted feedstock cost adjustment and our actual feedstock costs.

Furthermore, although crude prices have been relatively stable during the last 45 days, we are continuing to observe a repositioning of the relationship between crude prices and carbon black feedstock costs.

We therefore are continuing our efforts to increase our prices so that we can restore our margins to a more appropriate level.

To that end we did announce price increases effective October 1st which should help recover at least a portion of the loss margin.

On the positive side, the carbon black business has increased its volume year-over-year by roughly 4% for the full year, which is a very significant growth rate for this business.

A portion of this comes from our rapidly growing business in China as well as other developing markets.

We are also benefiting on the volume side from the contracts we have with the major tire companies.

This volume growth as well as our position in China leads me to believe that this business is very well positioned to return to a more normal level of profitability once the energy cost increases are absorbed.

We are watching carefully to see if the energy costs will have a long-term effect on these markets, but have not seen anything to date which would lead us to that conclusion.

We are also able to significantly reduce carbon black inventory during the quarter -- although this impacts current profitability, it does help cash flow.

And as we have mentioned previously, it is an area on which we are working hard.

As a result of the issues mentioned earlier, the numbers for the carbon black business were down significantly during the quarter.

Specifically carbon black reported a decrease of $20 million in operating profits compared to the fourth quarter of fiscal 2004 and a $31 million decrease compared to the third quarter of fiscal 2005.

For the full fiscal year carbon black profitability increased $22 million when compared to fiscal 2004.

Fumed metal oxide continues to be challenged with lower volumes in the electronics segment of its business.

Volume growth in other segments has so far more than offset the continued declines in the electronics segment but has resulted in a negative price mix which hurts the profitability of the business.

We also had an inventory drawdown during the quarter and a small inventory write-off.

Higher energy cost and increased costs as we prepare for the anticipated startup of the new fumed silica plant in Jiangxi, China also affected the business during the quarter.

For the fourth quarter the fumed metal oxide business reported a decrease of $2 million in operating profits when compared to the fourth quarter of fiscal 2004 and a decrease of $4 million sequentially.

For the full fiscal year 2005 the business reported a decrease of $2 million of operating profits when compared to fiscal 2004.

We are very pleased with our progress in the development of both our inkjet colorants and Specialty Fluids businesses during both the fourth quarter and the full fiscal year.

Inkjet continued its steady growth record; volumes increased 29% over the fourth quarter of fiscal 2004 and 9% over the sequential quarter driven by new printer launches year-over-year and steady growth in the aftermarket segment sequentially.

For the full fiscal year 2005 the business reported a solid increase in profitability driven by a 30% increase in volumes over fiscal 2004.

More importantly, we continue to make excellent progress in developing treated pigments to enable inkjet printing to compete with other printing technologies and to penetrate markets with higher volumes or scalable printing applications.

We are very encouraged by these developments and anticipate additional printer launches in the relatively near future which could have a very significant impact on the volume and performance of this business.

As a result of these developments and to be sure that we have sufficient capacity to supply the anticipated volumes, we are currently expanding our production capacity to allow us to produce more than double the volume we currently produce at a total cost of $29 million.

This capacity should come online during the current fiscal year.

Specialty Fluids business also reported strong profitability gains with $7 million in operating profits for the fourth quarter of fiscal 2005 which is a $2 million increase over the year ago quarter and sequentially resulting from a substantial increase in the volume of fluid being used.

For the full fiscal year the business reported $17 million in operating profits which was $11 million over fiscal 2004 due to strong fluid utilization.

I'm also pleased with the progress we made during the quarter at improving our working capital position.

We reduced working capital by nearly $89 million during the fourth quarter of fiscal 2005 and increased our cash and investment securities balance from $161 million to $216 million.

I'm optimistic that this is the beginning of a trend in this area and we continue to look for ways to reduce our working capital.

The company received its favorable tax settlement from the Internal Revenue Service appeals office approved by the joint committee on taxation during the fourth quarter which positively impacted our net income by 23 million or $0.38 per common share.

Excluding this fourth-quarter benefit, the goodwill impairment on the supermetals business in the second quarter and the supermetals asset impairment in this quarter, our effective rate for continuing operations during fiscal 2005 would have been approximately 19%.

We under spent our capital budget for the year by about $60 million with capital expenditures in the fourth quarter of approximately $72 million and 186 million for the full fiscal year.

I would anticipate seeing most of the shortfall flow into 2006.

Combined with the capital required for our recently announced Showa Cabot acquisition and higher capital spending in the inkjet business as we execute on the capital expansion plans to feed growing markets advance, our 2006 capital spending plan is expected to be approximately $250 million.

During the fourth quarter the Company repurchased approximately 260,000 shares of which 131,000 shares represent open market purchases costing approximately $4.3 million.

This brings the total shares repurchased for the year to approximately 1.9 million shares of which 1.4 million shares represent open market purchases costing approximately $47 million.

Under the current Board of Director authorization there remains approximately 2.7 million shares available for repurchase.

Looking forward I am optimistic about the overall health of the Company.

As we move into 2006 we will see our carbon black capacity expansion in Brazil come online as well as our new plants in China for both carbon black and fumed silica.

I believe that both inkjet colorants and Specialty Fluids achieved very important milestones this year and are well positioned to become significant contributors to the overall Company performance in the future.

It is an exciting time for the Company to see growth in our new businesses as well as continued growth and overall good health in carbon black and fumed metal oxides.

We are continuing to do everything we can to reduce costs in the supermetals business and to improve our competitive position.

I believe that the Company is positioned well to perform at a high-level in the future.

Before I conclude my remarks I would like to inform you of a change in our segment reporting structure.

In an attempt to better align our formal reporting structure with the way we manage and think about our business, we will break in our chemicals business into two segments, the carbon black business and the metal oxides business.

You will see detailed financials on this basis beginning with our 10-K filing in December, but in an attempt to give you some clarity prior to the 10-K, we have included revenue and PBT information on the new segments in our fourth-quarter supplemental business information that is posted on our website.

If you have any specific questions on the change, please do not hesitate to contact our investment relations department.

As most of you know, this is John Shaw's last earnings teleconference as he will be leaving the Company at the end of December.

I'd like to take a moment to thank John for his service to the Company and to wish him well in his future endeavors.

I will now conclude my comments and open the line for questions.

(OPERATOR INSTRUCTIONS).

Mike Judd, Greenwich Consultants.

Good morning.

A couple questions.

The first is on Specialty Fluids.

Were there completions in the fourth quarter?

If so, how many?

I think you're aware, this is a complex area for us.

There were actually seven jobs completed during the fourth quarter and I think that is on a comparative basis against nine in the previous quarter.

As I think we've tried to explain in the past, we collect both rental revenue and sales revenue on the material that is lost.

The real issue that reflects the performance of the business is how much of our inventory is being used during a quarter.

And during this quarter, although there were only seven jobs completed, a very substantial volume of fluid was used for significant periods of time on the jobs resulting in the dramatic increase in performance.

I think that is a reflection of the continued evolution in the industry of the recognition of the power of the fluid and its effectiveness when it is used in wells.

As I'm sure you can imagine, we were very pleased with the performance of the business in the fourth quarter and are very optimistic looking forward.

And secondly, on the tax rate, since we're into basically a new fiscal year, what sort of tax rate should we be using for the ongoing business excluding special charges?

As I tried to make clear in the call, there's a little bit of float in that because the accounts and the tax people are still trying to pin down both the precise amount of the asset impairment charge and its tax impact, but it looks to be in the range of 25 to 27% going forward.

But we will clarify that in the 10-K -- we will try to give you a better member in the 10-K.

But the best information I have now and the number that we're planning internally on is right in that range.

Thank you.

Jay Harris, Goldsmith & Harris.

The weather is nice today, Ken, how are you?

I'm good, Jay.

Let's talk a little about tantalum.

Several years ago you purchased the 50% interest in the Japanese operations that you did not own.

My memory says it was roughly $100 million plus assumption of debt or including debt.

Yes, that's correct.

The write-offs that you're talking about, do they include write-downs of your Japanese assets as well as Boyertown assets?

And then as you answer that, would you please describe briefly the focal point of the accounting requirements which may or may not be different from what you perceive to be a long-term profitability outlook for the business under varying kind of assumptions and where do those things differ from each other?

Interesting question.

The first part, the assets reflect the entire assets of the business which include both Boyertown and Ison (ph).

The second question is -- the answer to that question, as you can imagine, is complex and difficult.

The accounting rules require that when you're concerned about the ability of the business to earn a reasonable return on the assets of that business that you do an analysis and it is analysis based on projections of the performance of the business.

I think it's actually over 20 years, is that right?

I asked an accountant -- they were over 20 years with some assumptions that, as you can imagine in a situation like that, are difficult and challenging to make.

Included in those assumptions are some assumptions about what is a likely outcome in the Gwalia price arbitration, what is likely in the marketplace and the rest.

And inevitably under the accounting rules today you tend to do the best you can in making those assumptions and therefore the analysis, but you also want to be certain that you're moderately conservative.

That analysis indicated that the assets were unlikely to earn a reasonable return which, again, under the accounting rules required them to be written off.

I guess at the core of your question is does this indicate that you don't believe this business is worth anything going forward.

The other way to say that is that when you had $144 million of assets on your books you had a year in which your operating earnings exceeded $100 million.

That's correct.

And now you've come down to $34 million -- at least today -- of assets on the books.

Should we just ratio down those numbers and say that's where you think the basic earning power is?

Remember, there's also -- it's a 20-year calculation, Jay, and as you know, we believe that with the expiration of the long-term contracts and a very weak market we're looking in the short-term at very weak earnings in the business.

I think as managing the asset we continue to work hard to do everything we can to get the business back to profitability.

There's one other factor that you ought to have in your head -- is that when you do the analysis you include the value of the inventory.

And we have, as you know because of our requirements to purchase more ore than the long-term sales contract required, a lot of inventory in that business.

And it's the total assets that get written down.

So I can get the precise number, but -- do you have the inventory numbers, Eddie?

Yes, well in excess of the fixed assets.

Two other questions on tantalum if I might.

Excuse me for interrupting.

But we're working hard and are going to try very hard to have the business perform at a level above what your assumption would be if I could say it that way.

Whether we can do it or not of course we don't know, but we're not giving up.

I had two other questions on tantalum.

You had a business strategy on sputtering targets.

You put money to work within the last couple of years, and now you have turned around and reversed that strategy.

Correct.

Could you please give a little more color as to what kind of brick walls you hit in the marketplace?

Well, I can tell you the whole story.

I was approached by the people who were running the business at the time, and I want to be clear that this was not Eddie or the current management, with a proposal to build a relatively small plant and develop the capability of putting a backing on a tantalum plate and, therefore, make sputtering targets.

Their rationale or their belief was that they could dramatically increase the margin, a per pound contribution, by selling the final target rather than the metal or the plate that goes into the target.

At the time, we had an extensive debate about whether that would have the effect of dramatically reducing our sale of plate and whether we would, therefore, have significant resistance into the sale of sputtering targets.

I, unfortunately, was finally persuaded to go along with their business plan, and with the benefit of hindsight, it was a mistake.

It was a mistake that I made because once we did try to go downstream, you know, what I feared turned out.

We stopped, or most of our plate sales to the industry dried up because we were seen as a competitor, and there was significant pricing movement by our competitors in the sputtering target market.

And we have some penetration, but penetration that is a rate well below we had hoped for, and it rippled back into the Boyertown facility because we were making so little plate for sale into this market, the cost of all of our mill products and even up into the powder and (indiscernible) were affected.

Because as you I am sure are aware, the amount of volume of atoms you put through a total plant like this affects the total cost.

So Eddie deserves all the credit in the world of facing up to this mistake and saying, hey look, we can make this business significantly more profitable much more quickly by stop competing with our customers and being in a position to sell them the raw material.

So the mistake I made, I take full responsibility for it.

We are reversing it as fast as we can.

We are in discussions to sell the small plant we built in Columbus, Ohio.

Part of the charge, that $50 million charge, includes a write-down of that plan to what we think we can sell it for.

Final question, the cost reductions that are implicit in the contract that you've reached with the union -- will they cover, not cover, more than cover the first round of price reductions you expect on December 31st?

Probably not, although that's a -- as you I'm sure know, Jay, there are some moving targets there.

We're losing high priced contracted volume when that contract expires and we have to replace it with open market sales at the open market price.

And as I mentioned, we're seeing today some very, very low prices -- not clear where that will settle out in January.

I would tell you that might give you some frame of reference, at normal production levels in the Boyertown plant the union or the labor settlement that we achieved and the resulting staff reductions and the added flexibility of how we can run the plant, the cost savings flowing from that, if you look at equal volumes in both situations, are in excess of $10 million.

The staff reductions are from -- before we started this the plant was being operated by 210 people, today the plant is operating at somewhat less volume but at roughly 45 people.

So the changes are very dramatic and the plant is a very, very different place.

That does not include -- that staff reduction does not include roughly 25 salaried people who have been laid out of that facility.

We have been, as you know, we've mentioned in the past we felt we needed some very, very dramatic changes in that facility to make sure that we could keep it operating in today's environment.

And I would tell you that the labor settlement, candidly, exceeded our best hopes from where we thought we might end up when we started.

I'll get back in queue.

Thank you.

David Begleiter, Deutsche Bank.

Ken, can you help us, looking at tantalum, how we should be think about the quarterly progression through fiscal '06 with the profits?

Thank you.

As I think you know, David, we don't give guidance.

We're not giving guidance in that business anymore.

And I would also like to make sure everybody understands that when you look closely at the quarterly numbers in the tantalum business for '05, those numbers include some very substantial costs that are not related to the ongoing business.

Specifically we had very heavy security costs and legal costs around the strike and we had some very -- and are continuing to experience some heavy legal costs around the arbitration.

I would tell you, however, that with the expiration of the contract in the end of this calendar quarter we would expect to see declining profitability starting on January 1.

This quarter should be more normal compared to the other quarters in calendar '05, not including the security and legal costs around the labor dispute.

But the real transformation should start on January 1, 2006.

Thank you.

And just can you mention also in carbon black a normal level of profitability.

Can you give us some parameters around that potential?

No, I mean, the answer to that question is no, unfortunately.

As you know, we don't talk about our absolute margins in that business or the profitability.

I will try to help you a little bit, though.

As I mentioned in the speaking notes, in the quarter are we lost $20 million of what can be described as unrecovered feedstock costs.

That includes two portions that you need to understand, a part of that -- the bulk of that actually is incremental feedstock costs that we incurred that is in excess of the feedstock costs that were factored into our contracts that adjust every quarter.

Now the bulk of that should get recovered in time.

But a portion of that -- in the range of 75% -- a portion of that is subject to open market pricing and it would be covered by the normal ebb and flow of price movement.

I mentioned to you that we did increase prices broadly on non contracted volume on October 1st.

I would also I think it's clear from my notes that that should help somewhat.

But because the energy prices are still bothering notes or still impacting us, we're not back to where we think we need to be and are continuing to work on that.

One of the factors that I think I've mentioned before and that people should be aware of is that we have seen during the past six months what we would describe as an unusual relationship between our feedstock cost and crude pricing.

Specifically feedstock costs stayed down lower and increased their spread in relation to crude at the early phase when crude went up and only recently has our feedstock cost started to return to more normal levels.

So there is a little bit of disparity between crude and our feedstock cost and they don't track absolutely.

So I would generally describe us as being in a hole on margins.

A big chunk of it will come back normally with our major contracts.

We have negotiations coming up with our annual contracts and we have non contracted volumes on which we are working to to restore our margins.

Okay, and last thing.

Just on cesium formate, what's your ability to increase sales next year inventory levels and additional production?

We have no problem with inventory or production.

We're today -- we have, as I think you're aware, a very, very substantial market share in what we regard as applicable wells in the North Sea.

We had during the year -- including one that is ongoing today, several jobs outside the North Sea, one in North America and one in Eastern Europe and we are working hard in the Gulf region and in the Caspian region as well as the Gulf of Mexico.

I want to put in your head three areas, the Gulf of Mexico, Saudi Arabia and the related areas and the Caspian Sea.

Our ability to penetrate into those markets is the next big issue for the business.

But we do have substantial -- more than sufficient inventory to handle any jobs that we see probable in the next 12 months.

Thank you very much.

John Roberts, Buckingham.

Could you talk about the LIFO effect in the quarter, especially in carbon black?

It's kind of hard to imagine digging into LIFO raw material costs that are higher than what you've recently experienced?

John, if you look closely at the trend of our feedstock or 1% sulfur which you're perfectly capable of doing, you'll see a rising trend throughout the fourth quarter.

And inevitably we have been trying to minimize our feedstock purchases, but because the plants are operating at close to full capacity we had to buy feedstock on a regular basis.

And so if you look at the average cost of our feedstock which goes over say on average 45 days that we have in our tanks and the last end gets used first, we get hit.

Maybe I misunderstood it.

Because the way I read it was you were digging into older LIFO (ph) layers.

No, no.

We were not -- I wish we were because that would lower our cost.

We were actually putting in higher LIFO layers.

I misread it then.

Sorry.

Secondly, on the new segment revenue, it looks like both the silica business and the carbon black business were near breakeven during the fourth quarter on an underlying basis and it looks like they probably both had around 7% operating margins for the year.

I always thought of the silica business as being a higher margin business than the carbon black business.

There's a failure of assumption there.

The fumed silica business, with the exception of the cost issues I mentioned -- Jiangxi and the price mix -- fumed silica performed up almost flat, it was down 2 million for the year, a little bit in the fourth quarter.

The reason why you're assuming that is in the new segment revenue the costs that we're expending in aerogels, which you've heard us talk in the past of roughly $20 million, are included in those numbers.

So you can -- and knowing you, John, I know you will, if you take the estimate of our aerogel costs out of those numbers and almost no revenue you'll get a much clearer picture of the silica business.

And you mentioned that silica had a hurricane impact during the quarter. (multiple speakers) is a long way from where the hurricanes were.

No, silica didn't have a hurricane effect, carbon black did.

All right.

Thank you.

Saul Ludwig, KeyBanc.

Good morning, Ken.

The inventory drawdown -- could you tell us what that cost you and are you through the -- are we going to see more of that?

How much more is there to go in terms of the extracting working capital?

In the chemicals businesses, in the carbon black and fumed metal oxide or fumed silica businesses I suspect we're largely through any significant impact.

Of course I will -- to be honest with you, Saul, I'm going to continue to squeeze with all of my ability to see if I can force it down lower.

But particularly with the new plants coming on in China and being in both businesses, I would not anticipate a huge further drawdown in that inventory.

During the quarter, and the calculation is challenging and we have a great debate about how much it is, but it's probably in the range for both businesses combined of $6 or $7 million.

And it reflects, as you know, as incremental operating costs because the fixed costs get spread over a lower volume produced.

And when we -- we actually had an extensive calculation done assuming that you'd produce the same amount as you'd sold, the operating cost on a per ton sold basis would have gone down by roughly $6 or $7 million.

Going back to the question that John Roberts asked about the LIFO effect, I'm trying to understand the difference between the LIFO effect versus your comment that 75% of the $20 million in the feedstock delta between your costs in your selling prices wouldn't the current cost of raw materials be included in that feedstock versus pricing calculation?

It seems like it was double counting to say then there's an additional LIFO effect.

I'm not sure I understand that.

I think that's a fair question.

Let me make sure or see if I can answer it because it's had a major effect on the carbon black profitability.

The contract adjustment -- for those of you who want to get into this in detail, we did put out an 8-K following the last call when this first happened, and I think this is covered in that in some detail, but I'll try to repeat it here.

If you look at prices that we're currently charging under our long-term contracts, currently charging for the month of October, November and December, we use a feedstock price based on the average of the feedstock indices during the months of June, July and August of the previous quarter.

And so in a rising feedstock cost environment that feedstock price determined in those three months inevitably is behind or lower than what you're actually paying.

And it happened for us two quarters now in substantial amounts and, I hope I have made it clear, we anticipate the same thing in the first fiscal quarter of this year.

The LIFO -- and I want to be clear, when feedstock stays flat for any period of time that effect goes away and we are neutral on that issue.

If feedstock falls we get that money back.

And if we've looked at the performance or the fairness or the effectiveness of the contract structure over the ten years the contracts have been in place, it's generally a wash.

This is the most significant sort of out of phase pricing structure we've ever had, but we've also had in the past more moderate ones where one went one way or the other but over a year or two period it tended to recover and flatten out.

And we would expect in the ordinary course that that would happen here.

The LIFO effect sort of doubles up on it because under LIFO we're required to expense the last first feedstock that we buy, last in first out.

And when you're -- the last feedstock that you buy is the most expense stuff that you've ever bought and, on an average basis, is far more expensive than the average cost of your feedstock in your inventory and much, much more expensive than if you did FIFO, first in first out, you get this effect.

Again, this will go away when feedstock flattens and falls.

And the FIFO effect is -- or the LIFO effect, as somebody will know more about this than me, but it was really put in many companies, many, many years ago for tax purposes.

Because you get to deduct currently your high-cost stuff.

We've looked over the years, we have LIFO in effect in North America and nowhere else and we've looked over the years -- if we could ever sort of sort it out, LIFO -- this accounting methodology was in place in this Company long before I joined it.

And every time I ask either the tax or accounting people whether we can get rid of it they roll their eyes and say, man, that's really hard.

Again, it's the first time it's really been a problem, but it is certainly -- internally has always been a confusing issue for us.

I hope to be dealing with you in the future quarters by saying, gee, we got a great LIFO benefit this quarter.

I have my fingers crossed.

A different question.

What was the change in profitability year-over-year in inkjets?

We don't give actual numbers there, Saul, for reasons (multiple speakers).

Just the change, not the absolute number.

I used the term in the speaking notes of substantial.

I would point you to the fact that volume and revenue increased year-over-year by roughly 30%.

Would profits be up from whatever they were at least 30% or were they up more than that?

Profits were up -- I used the term "substantially".

But I do want to take this as an opportunity to point out that we are charging -- let me back up.

I think you understand, we have a solid business today supplying pigments into what we call the SOHO market, the small home and office printing market, the printers that we all have behind our desks or at our desks at home.

And that's where our volumes are coming from.

Our costs reflect the cost to support that business, both technical and production, as well as develop costs for the high-speed or scalable printing application that we're working on.

And I mentioned to you in the notes that we're very optimistic.

I would describe myself personally as excited about that development.

I believe that we are well-positioned to see very substantial volume and -- volume growth and performance out of that activity in the not too distant future.

The technology is developing very, very well.

The pigment is performing very, very well.

And I believe that this is going to work and have a very, very substantial impact on major segments of the printing industry.

We believe that we are very well-positioned for that.

So I can tell you that prices were up -- profit was up substantially, but there is a -- the fact that we're spending R&D and development dollars on the high-speed printing application and charging it to the SOHO numbers would lead you I hope to believe that the profits were up maybe not quite as much as 30%, but up substantially.

Okay.

And then on aerogels, was the expense of supporting that business year-over-year flat, down, up?

What was the financial impact of that effort?

Roughly flat.

We had a little bit of revenue but nothing to speak of.

We continue to make progress in the plant in Frankfurt.

We're up over 50% in terms of being able to operate the capacity.

We're pleased actually today, as this business has rolled forward I've gone through -- for a six-month period I'd be worrying whether we could sell what we make or whether we can make what we can sell.

And as you can see, that's sort of an inevitable problem when you're trying to develop an entirely new production process and a new market.

Today I'm feeling very, very confident about the particle and its marketability and I'm feeling better about the production side, but the production side is the one that I hope to get completely pinned down and behind us this year.

Is the loss net reduced a little bit in '06?

It was about the same.

So this year it will be the same as last year?

Excuse me, in '06 we should hopefully start to see it come down a bit.

Great, thank you, Ken.

Andrew Milgram, Epic Asset Management.

Thanks for taking my question.

I was wondering if you could put a little more color around your negotiations with Sons of Gwalia and specifically you referenced a decision possibly coming down by the end of the coming quarter.

Are you really waiting for a decision by the arbitrator or is there a possibility for a settlement outside of that?

No, we have been and continue in discussions with the administrator of Sons of Gwalia in an effort to settle this.

And I'm moderately optimistic.

The first quarter of '06 date was An attempt to give you some perspective of when we think the arbitrator might decide.

I would tell you that that's a very, very hard date to deal with.

There's some possibility he could decide before the end of the calendar year and there is also an indication from him that he won't decide until the second calendar quarter of 2006.

But I would tell you that we are and have been in discussions with the administrator.

Because of our excess ore inventory position and the possibility of generating cash out of the supermetals business I could be persuaded that it would make very good sense for us to settle at a reasonable basis.

So we're working hard on that.

What are the issues that divide you?

Dollars -- money.

If you could've been -- I don't know if you know the other side of this, but he's got a couple of mines which really are the only assets in the bankruptcy estate.

He's got a bunch of debt holders who are trying to get as much money as they can from the assets.

He also has, we also have the whole issue that I think everybody is aware of that I hadn't commented on is that we have some rights in accordance with our contracts for rights of first refusal and the rest that have an impact on all of this.

And the negotiation is trying to position it all and we'd like to settle for less and he'd like to settle for more.

And so we're dancing.

But I personally when I look at it I think it would make good sense for both parties to settle on a reasonable basis and I'm optimistic that we can get there.

Great.

And then looking more broadly at demand for tantalum, can you give us a little more color?

Some of the tick (ph) data has suggested that there's still strong demand and we're hearing anecdotally from you and maybe others that there is some slowing in demand.

Can you reconcile that?

I would not tell you that we're seeing a slowing of total demand.

Volumes in terms of powder or tantalum atoms being sold, it's flat to up a little bit and we might actually be seeing some signs that volumes are picking up.

The pricing in the industry is the real issue.

The pricing of tantalum capacitors has come way down and the capacitor manufacturers are struggling.

As I think you're aware, our competitors have been struggling for the last five years because of our contracts.

We were supplying the vast bulk of what the industry needed and so they had very little volume available and therefore had to exist with very low pricing.

And as our contracts expire I would hope that we see -- I would hope that we'd get some volume pickup and maybe a little bit more pricing power.

But looking at it today, as I mentioned, we're seeing very, very low open market prices.

I think you need -- and I have in my head and I listen to the projections that I'm hearing in the numbers, it's an unusual market today because of our contracts.

It's not really a full open market because we have a sill (ph) mostly expiring at the end of this year and then finally at the end of next year.

A big chunk of the volume going into the business is at a price that sits by contract and not by market.

It is a little confusing to us today.

Low prices I would describe as steady to moderate volumes.

And how that plays out growing forward is very, very hard to predict as you can imagine.

And you can understand when you see that scenario why when we do the net present value of the business, particularly with the inventory, it's pretty hard to convince yourself that it's worth $300 or $400 million.

And when you look at your position in the market, are there -- would you characterize yourself as maintaining share, losing share or gaining share?

The real issue there, and I'm sure you understand this, is will we be able to have reasonable relationships with the customers as the contracts run off and will our historic share in the 45% range, 40 to 50 for both Stark and ourselves and then 10 to 15 for the Chinese competitor.

Right now I would tell you that I think that's probably going to work out okay.

We have the ability to work our way through the anger that these people -- with our customers, they've been paying us too much for too long by being competitive on price.

What we're actually seeing when you look at our business today is small loss in share in powder, but that's inevitable because we had at certain periods of time upwards of 70 to 80% share and capacity share is only in the 40 to 50 range.

But at the same time we're seeing some gains in share in the overall mill business and the step we've taken in the sputtering target is aimed at further improving that because the tantalum plate for sputtering target comes out of our mill business.

I'm moderately comfortable today that we're going to get through the contract expiration without losing anything off our historic share.

We continue to believe, and I think the industry would confirm this, that the Aizu, or Japanese plant, and our Japanese employees produce the best powders in the world and those powders remain in very, very high demand.

It's a fluid situation both where the market is going to go and how the contract expiration is going to affect our share, but it's something we've been worried about since the day we entered the contracts.

I had hoped that we'd have a stronger pricing environment as the contracts ran off, but I do think that we're going to be able to work our way through the volume side of this and maybe we'll get lucky on some price.

Good.

It was particularly interesting to hear that you think the volumes are -- or the volume of powder is firm (inaudible).

I think that puts you in a good position.

Listen, I want to be clear with everybody.

You just heard a forward-looking statement and there's a lot of moving parts.

Thank you very much.

Jeff Zekauskas, JPMorgan.

I just have a few questions of clarification if you would.

Is the book value of the tantalum assets now 144 million or is it 34 million?

The book value of the physical assets are now roughly 34 million.

Included in the total asset calculation is the physical asset, the plant and etc. and the inventory.

Right.

Now if I remember (multiple speakers).

I want to go back and make sure people understand that.

For the total asset impairment analysis, the physical assets and the inventory are included together.

So we're not saying in this right off that we think the total business is worth only whatever -- I guess you accountants should make sure I'm saying this right -- is worth only 34, but 34 plus the inventory value.

So the inventory value -- total inventory value I think is in excess of $200 million and it also includes receivables.

Right.

So is the number that you just quoted correct?

That is if you add the inventories plus the book value plus the receivables it's around 200 million?

No, no, no.

It's more than that and I'll give you an approximate number here in a minute.

Eddie?

Here it comes, Jeff, right now.

It's in the range of 300 and -- actually it's in the range of $350 million.

350.

So all things being equal --.

After the write-off.

After the write-off.

So all things being equal, 350 million is the net present value of the future cash flows of this stream over a 20-year period?

Now you're really pushing me.

Does somebody in the room have a better answer to that?

What you're asking me to do is verify the accounting principal.

Jeff, the only thing I would say is that's directionally true.

But understand, over 20 years we're making a number of assumptions and predictions on how the market would evolve and, as Ken mentioned, on a pricing, raw materials and cost basis.

So it's our best look at it.

But when you actually sit down and do the calculation your mind starts to spin with all the assumptions you've got to make.

And Jeff, there's just one other major issue that you ought to have in your head as you think about that and that is in that calculation is an assumption of the potential cost of Gwalia.

And I mentioned that in my notes, you know.

There is a result that could come out of Gwalia that could have us buying ore at above the open market price of ore.

So again, these are just questions of clarification.

So did you just say that what you did is you changed your estimate for accounting purposes of what you might pay for the ore in the future and use that in part to write down the book value of the assets?

No, I would not say that.

I would say that we were required under the accounting principals to make reasonable estimates of what the various issues that reflect on the performance of the business and that then under the accounting rules produces a number, and if that number is less than the fair market of those physical assets you are required under the accounting rules to write down those assets.

And I hope -- the reason I corrected you is that I don't want anybody to believe that we went to the accountants and asked them how can we write down the assets because this is something that we were -- didn't necessarily want to do it, but the accounting rules require us to do it.

No, I was just asking something simpler which is that I was just asking whether a change in the value of the -- a change in your estimate of the value of the ore costs in the future was a factor in the write down or whether it was not a factor in the write down.

Jeff, it was one of several factors.

Okay.

Is there a tax benefit when you write all this stuff down on a cash basis or is there no tax benefit?

There is a tax benefit.

So this gets taxed at call it 35% price?

There is a tax benefit if you -- and I think the speaking notes go on the website don't they, Susanna?

Not typically, but we can make sure that (multiple speakers).

We can do that.

But one of the issues that is still being tried to pin down is not only whether it's 110, it could be 115 or 105, there could be some range, it all depends on appraisals and the rest.

That's being pinned down.

The other thing being pinned down is the precise magnitude of the tax write down and what impact that will have on our tax rate going forward.

Because the write down goes into what is a deferred tax asset; i.e., a deduction you can take in the future when you generate income to use that deduction.

And so, if we can justify that, what happens is that that goes on the balance sheet as a deferred asset, it reduces the write down from 110 to a number that I think currently in this estimate is about $70 million from an after-tax basis and that $40 million goes on the balance sheet and is used to offset actual tax payments in the future and therefore the cash comes back to us when we reduce our future taxes.

And again, just to clarify -- just a couple of more issues on this.

So when we have the investor presentation in June, we weren't -- at that point in time we weren't writing down the tantalum assets.

Now, is the reason that we weren't writing down the tantalum assets in June because we examine our assets at the end of fiscal years and so we take the action appropriately, or was there something in the tantalum market that changed between June and today such that we would write them down now, but we wouldn't write them down in June?

Eddie may correct me, but I think there are two things significantly that have changed.

We're seeing significantly lowering prices.

The price discussion is picking up for the price commitments for next year and we're seen very low prices.

The other thing that changed, Jeff, is our decision to back away and not believe the projections we were seeing on the sputtering target market.

So those two things gave us a completely different view.

We also of course are getting as the arbitration -- the arbitration has started in the meantime and that gives us a better estimate of what we think we may have to pay if we lose.

So three things drove us to redo the calculation.

Now, I'm not asking you for your prices for wire and powder, but in general in the market today, what are the prices for powder and wire as you see them?

Let me have Eddie answer the question, Jeff.

Jeff, it depends obviously on the grade of powder, but we see prices in the 150 to 200 range, as low as 150, obviously for higher end powders higher than 200, but that's sort of a range of prices.

You've been very patient.

So this is just the very last question.

But, Jeff, let me just add one thing to rolling context for people -- and you may understand this but for the people who are listening -- you may remember that when we entered into the contracts the price we were talking about for similar powders was $500.

I do recall that.

I know you understand that, but I'm sure there are people listening and that will help them understand the magnitude of this issue that we're struggling with.

So the final question has to do with cesium formate in that the results of the cesium formate business on an operating profit basis this year have been very, very good.

But they've really varied quite a lot by quarter.

Correct.

So when you look at the quarterly performance which do you think is the most representative quarter of the state of the business that evens out different extraordinary leasing terms or you sold more volume in a particular month?

In other words, as an outside observer it's very difficult to just get a sense of what the normalized level of profit is this year.

Well, the first answer of the question which is the normal quarter, I have to say none of the above.

Okay.

There is a little seasonality in the business today in that drilling activities, although they continue in the winter in the North Sea, are inevitably impacted by the weather and the rigs.

We're on some jobs where the floating rigs -- anchored to the bottom but floating -- and when the weather gets too bad and the waves get too big they shut the rig down.

So there is a winter seasonality, but more apparently we're dealing with very large chunks of revenue coming out of jobs that are scheduled or take place at the full control of the oil industry or the oil companies.

In an attempt to give you some frame of reference, I hope and believe that the level of activity we're seeing in the business today, which largely comes out of the North Sea, is a reasonable level of activity.

I hope we can grow it some, but a reasonable level of activity for the North Sea to generate.

We see going forward -- we look at one of the things about this industry is that you have a significant amount of visibility about possible jobs or improbable jobs and you start to work on them and you know you go through the sales effort and they take place -- I don't know, as early as -- maybe as early as four to six months, but more likely 12 to 18 months later.

So you have visibility about that and we can look today at a list of possible or probable jobs in the North Sea and it leads us to believe that the level of activity you see is something that we should be able to sustain.

But the thing that we're working on that I mentioned earlier is trying to get it used in other appropriate wells in the Caspian, in Saudi Arabia and related or surrounding areas and in the Gulf of Mexico all of which have what we believe to be wells where our fluids should be and can be economically used.

And as I mentioned earlier, the challenge of selling an oil company, you know you would think that if we convinced the people running a big well in the North Sea for Shell or BP or Texaco, you'd think that when they had a similar well in the Caspian or the Gulf of Mexico of course they'd use it again when they get extraordinary results.

That unfortunately turns out not to be true.

It's not the way the companies are run and you've got to resell an entirely different group of people although they work for the same company.

And we're in the process of doing that.

I think one thing that we have satisfied ourselves and I think the industry is that the stuff works and should be used in these kind of wells.

But the industry, as you may know, is hugely conservative.

They're very resistant to change and it's a tough sell.

Thank you very much.

Bill Defidlum (ph), Titan Capital Management.

We have a group of questions.

First of all, relative to your comments in a couple different places with the inkjet market.

First you had mentioned that there are new OEM printer models that are coming that you think could be significant.

And secondarily, you've referenced that you feel like you're getting close or the OEMs are getting close on high speed printing to compete with some of the existing technologies out there.

Would it be fair to put those two comments together and believe that they are in fact one in the same?

I think you could reasonably assume that, Bill.

All right, thank you.

Let's shift then to carbon black if we could, please.

And one of the things that we've been wondering is if there in fact is a structural change that's taking plays relative to your feedstock, and I don't understand this all that well, so I'm going to pose the question and I'm interested in your response.

But the idea is that your feedstock essentially comes from the bottom of the barrel of a barrel of crude oil.

And today as the value of a barrel is worth more that that provides additional incentive for the refiners to in fact utilize more of the bottom of the barrel, refrac it, run it through the refinery and try to get more of the molecules that can turn into gasoline, diesel and other products which ultimately would lead to less supply of your feedstock with the same level of demand and therefore just a higher price for the underlying feedstock.

Just a fundamentally structurally different scenario.

Would you walk us through how you view that and where we've gone wrong in some of our basic assumptions?

I would start by saying that we're in a period of volatility and it's unclear where it's going to settle.

But my intuition and what we observe I don't think would support that conclusion.

And I'm not sufficiently technically knowledgeable to really get into this.

But my understanding is that for years the refineries have been taking out all the high-value stuff that they could and that there may be some minor improvement in their process that would allow them to have some minor pick up, but not in a major structural way.

We're not seeing a shortage of material.

We haven't seen any fundamental shifts in the availability of supply.

There are some significant shifts going on.

It used to be the cheapest place to buy this stuff was on the Gulf Coast of North America, the Gulf Coast of the United States.

That's no longer the case I think largely because so much more of the crude is being recovered and processed outside the United States.

The other thing that may be confusing to you is that we are seeing a change in the last six to nine months in the relationship between the bottoms and crude; i.e., there used to be sort of a narrow band that that traded in.

For reasons that I don't fully understand, that band dramatically expanded when crude started to go up.

Dramatically expanded and we and the whole industry, everybody who uses this stuff -- which there's a lot of bunker fuel and number six fuel oil that roughly comes out of the same market.

We all benefited, the whole industry benefited.

And what we've been seeing for the last six months is the bottoms recapturing their more traditional level of pricing compared to crude.

Going forward, I don't know.

It's something we watch very carefully.

We, as you know, try to hedge -- try to protect ourselves from this with the contracts and that's worked pretty well for us.

The other factor that of course plays into this is if there is a transformation, if we're going to be dealing with more expensive raw material, can we pass it on?

I feel pretty good about that.

That's always something that's hard to predict.

But by and large we at least, and I think the industry, is fairly fully utilized today.

And as I think we've seen it broadly in the chemical industry -- I was told, I haven't read it yet, I was busy last night, the chemical week reports that other chemical industries are experiencing a lot of pricing power.

I don't know whether we'll have that but we're going to try.

So I don't -- you know, it's something we have ahead of us.

We've got work to do to recapture our margins and all of these things enter into it and we're working hard on it.

That's helpful.

And then allow me to shift to Sons of Gwalia for a moment and the issues there.

Do the purchase volumes relate to one of the mines or both of the mines?

Just one, just the Wodgina mine.

We in an effort to get better control, start to consume our excess inventory when we exercised our write to renew we did not renew our contract on Greenbushes and, as of the end of this calendar year, we will stop taking any material from Greenbushes.

And is it a correct recollection that of those two mines Wodgina is the one that you would have an interest in purchasing if you could come to a conclusion on price whereas the Greenbush line that you did not have an interest in?

That is a correct recollection and that question gives me an opportunity to make sure everybody understood what happened to us here.

I mentioned this in my notes.

We made the decision that you just asked about, i.e. to exit Wodgina and give up Greenbushes on the basis of information that we were provided by Sons of Gwalia at the time which indicated that Wodgina was the least expensive, most promising ore body.

With the events that I described about the cost evolution and the arbitration that's taking place I'm not in a position to tell you what I know or think about that because I don't know very much.

And it has been very hard for us to get visibility.

We do still have the rights we have on that mine and I could I suppose envision a scenario where it would be appropriate to purchase at an appropriate price.

But because of the cost evolution or the apparent cost evolution we are in the process of looking again more broadly at where tantalum should come from.

And so in fact if you were to purchase the Wodgina mine that would resolve this whole issue, but you would then be stuck with the question of what is the cost of product just to simply mine it given that those numbers seem to be changing.

That's just right, Jeff.

At the end of the day, although it might be worth our while for us to put some capital and secure the supply, at the end of the day the important thing is how much the raw material going into the front of the process costs.

And that's a complex -- that has become -- has always been a complex problem and with the arbitration and the price evolution it's become ever more complex.

Understood.

Thank you very much, Ken.

Jay Harris, Goldsmith & Harris.

I'm perfectly willing to answer anybody's questions who has questions.

We don't have to cut it off at any particular time.

Go on.

I'd like to do some housekeeping on the balance sheet issues.

I'll try to help you.

Cash?

Including some investment securities, $181 million of actual cash and $35 million of investment securities and I regard them all as cash.

So $216 million at the end of the fiscal year.

Inventories?

Don't have that precisely in front of me.

We'll look it up.

Go on, Jay, give me some more.

Total debt?

Total debt, I had that and did not bring that with me.

I'd like to get it here so we don't have to wait until you file your 10-K.

No, that's fair.

We're going to give it to you here in a second, I think we have both numbers.

Total inventories in the Company are 495 compared to 482 at the end of the last fiscal.

And as you all think about that number, remember that a big chunk of our inventories are in carbon black feedstock oil and it's much more expensive.

I think in terms of units our inventory is actually down.

And what were those numbers on June 30th?

Do you have that?

I don't have that in front of me.

We'll see if we can get it.

What do you consider normal for inventories?

In other words, the 495 under normal conditions should be what?

I what hope to take at least 100 out of that, probably more.

And remember, most of that comes out of tantalum.

Well, I think a month or so ago you were talking about trying to reduce inventories by 100 million (multiple speakers) and then you took some out already in this quarter.

Still aggressive, Jay.

I believe that one of the alternatives that we have under consideration for the tantalum business during this weak market period is manage it aggressively for cash.

And there is a lot of -- as I hope to come clear in this conversation, there's a lot of inventory tied up in that business today, mostly raw material but also to some lesser extent in WIP and I continue to push pretty hard on that.

I certainly would have a target over time of at least another $100 million.

Just in response to an earlier question, did you indicate there would be a cash benefit in this fiscal year from the write-down or just a cash benefit going forward?

Going forward.

Going forward.

All right.

With volume -- change of subject.

With volume up 9% consecutive quarterly in inkjet colorants, I guess the answer to no earnings increases is the stepped up R&D for the high-speed or rapid drying (multiple speakers).

There is some stepped-up R&D, but I did not say there was no earnings increase.

In fact I said there was a substantial earnings increase.

What I did say that it was not be 30% that volume increased.

I heard that, but maybe I (multiple speakers).

There was a multiple million dollar increase in earnings.

Maybe I misread the supplement --.

On a year-over-year basis a multiple million dollar increase in earnings year-over-year.

When Saul was pushing me on that I did not (multiple speakers).

Well, we had -- in the fourth quarter of '04 -- of '05 versus the third quarter of '05 you had a volume increase of 9% in inkjet colorants and no increment in earnings per share.

That's correct and, remember, I went into with Saul the issue of the development expenses.

Give us some color as to when the relationship between revenue gains and earnings will swing more positively, when there will be a leverage relative to revenues rather than shrinkage?

When do you think we'll get there?

Part of me tells you I hope I never get there.

And you and I talked about this before, but let me explain for others.

The business today is very profitable.

We are spending a lot of money trying to make it more profitable, trying to make it much larger and more profitable.

And one of the issues that we have discovered in this type of business is that your ability to keep it growing and keep it powerful depends on your ability to win, to maintain your technology lead.

You've heard us, Jay, and everybody has heard us talking over time about high-speed printing.

The description of that that we're hearing in the trade are also scalable printing, and that's using inkjet printing in broader and higher volume applications than the printers that sit behind our desks.

I think anybody who goes into this market, anybody who follows some of these printing companies, those are all well-known terms and not a surprise to anybody.

That's a big, big, big potential market.

Much bigger than the SOHO market.

There is an additional market that a very large number of the printer manufacturers are doing and that is known as the photo market.

We are also working in the photo market.

I would hope five years from now that we would have a major chunk of SOHO, a big position in high speed and be the best in the photo market.

And my own personal philosophy and the philosophy of this Company is if we see an opportunity like that and we think we can take our technology there and capture a competitive advantage we're going to keep our foot on the accelerator because it leads to continuing growth and value creation and if -- I believe that if those things take place as I hope the inkjet business is a very, very large profitable business.

So yes, we are spending money.

Yes, I do believe you will start to see a flattening out of that relationship as the volume grows and becomes greater in terms of the R&D expense.

But what I really want to leave in you is that we think we have a very strong technical position in an existing market, a very strong opportunity to take a very substantial position in a very important market.

Does that help?

It does.

I guess we'll just revisit it quarter after quarter.

I'm sure we will.

Thank you very much.

But please, we may have had a flat quarter profitability wise, but year-over-year the business grew its profit at very attractive levels somewhat under the 30% we saw in volume because the development -- but the businesses -- we make good money on the products we sell.

Let me put it into more context, better context.

You've got an extremely high gross margin business.

We have really (multiple speakers).

Pharmaceutical industry level gross margin.

We have appropriate margins for the technology we sell.

All right.

And yet your -- the way you've been running the business for the last two years your R&D has been increasing at a very high rate of incremental revenues.

Correct.

And at some point in time those relationships shouldn't be that way.

The R&D, if you're growing your revenues 30, 40% a year at some point I would think your R&D ought to be growing in that range, not necessarily 50% faster than revenues.

At that point you could start to get a lot of leverage because operating expenses start to come down with volume.

I think that's right and I hope.

My question basically is where is that point in time?

Let me describe it by the business segment.

We could today show you numbers in the SOHO market that would prove your point.

If we broke out numbers for SOHO and high-speed and color your point would be absolutely valid.

The revenues in that business have grown do the point where the relationship is doing just what you say it's doing.

I hope and believe in the not too distant future you will see similar revenues develop first in the high-speed market.

They are hopefully going to be much larger than what we see in SOHO.

But I would caution you the technology is complex and difficult, but I believe if we can get a similar position in high-speed and the high-speed or scalable printing for inkjet does what we believe it will in the industry that the same thing will happen and similarly for color.

But as you of all people, Jay, pointed out to me when we spun Cabot micro out, if you're going to capture the full potential of a business like this you've got to keep your technology advantage.

And I -- as long as I'm running this company we're going to keep our foot to the accelerator if we think we can develop powerful technology that gives us a real competitive advantage.

At the risk of pulling the rug out a little under you, do you have the debt numbers now?

I do have the debt numbers right in front of me.

Long-term debt 2005 September 30, 463 compared to 506 September 30, '04.

Thanks very much.

John Roberts, Buckingham.

Let me correct one thing, Jay.

If you're still listening, that excluded the current portion of 72 at '05 and 8 at '04.

Some of our long-term debt has gone current at the end of this year.

If you are unsuccessful in our negotiations with Sons of Gwalia and then have to pay higher ore costs for five years, accounting wise do you take a charge at that point or an above market cost and then --.

We do not know.

It's a perfectly fair question.

You will recall that our customers did that, but I'm not sure.

Remember that we said that some of those numbers have been factored into our analysis and every time I ask the accountants that particular question they tell me that they're not yet in a position to answer it until we've got the number.

So I don't know.

And secondly, your position in the current spot tantalum prices as being unsatisfactory.

So I assume your competitors are leading those prices down, not you, but feel free to comment on that.

Why do you have to sell at those prices?

Let me back up and talk about the spot, and then I'll come back to the last question.

The spot market in the tantalum industry is very funny.

Generally it's very small.

It various relative to the ore that is consumed in a year, the amount traded in the spot market is a very small volume.

So although today, if you went to the spot tantalum market and bought 10,000 pounds you could pay $30, if you tried to go in and by 1 million pounds you couldn't do it.

So what the actual price of tantalum ore for significant consumption is a confusing number.

So that's one question.

I think the second question you were asking, why do we sell at those prices, we're selling powder.

So as the spot market becomes more developed, you're not a small player, it's not a fragmented market like many commodity chemicals are.

And so I would assume you have some ability to trade-off volume versus price.

Let me make sure I'm understanding your question.

When you're talking about spot are you talking about spot for ore or spot for powder?

Spot for powder.

Oh, excuse me.

So you weren't talking about ore prices.

Sorry.

But your prices to your customers and how you think about the trade-off between.

That's a complex question.

Like the cesium business.

Yes, but we also had the fixed cost of the plant.

And to the extent when you're in a business like this you look at the total volume that's going to be consumed and you do a trade-off between whether it's worthwhile buying volume at a low price and therefore utilizing your plan and spreading your cost over volume or not buying that volume.

There is the game in a commodity business and that is why you always want capacity to be fully utilized.

That is the game.

Usually the game in a fragmented marketplace is you take any volume you can.

In a concentrated marketplace usually the trade-off favors going for price, not volume.

It does and as you probably -- you've been with us a long time.

We have tended in our industries to be the price leaders.

Certainly have been regarded the price leader in carbon black, we certainly were the price leader in the tantalum industry.

And the only thing I could say is the contracts run-off, we're in the midst of figuring out how to best position ourselves on that trade-off.

It's not easy.

Not easy.

Thank you.

At this time, sir, there are no further questions in the queue.

I would like to turn it back to you for closing remarks.

Gentlemen, thank you very much.

The only thing I could say is that I hope I have much more pleasant news in January.

But I appreciate all your questions.

We will continue to -- Susanna Robinson will continue to be available if you have additional questions.

Thank you.

Ladies and gentlemen, this does conclude your presentation.

At this time you may all disconnect and have a wonderful day.