Cabot Corp (CBT) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 Cabot earnings conference call.

My name is Cindy, and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the call over to Mr. Kennett Burnes, Chairman and Chief Executive Officer.

Please proceed, sir.

Thanks, Cindy.

Good morning, everyone.

I would like to welcome you all to the Cabot Corporation's second-quarter earnings teleconference.

Here with me this morning are Jonathan Mason, our Chief Financial Officer;

Bill Brady, General Manager of our Carbon Black product lines, Ravi Paintal, General Manager of our Metal Oxide product lines;

Jim Kelly, our Corporate Controller;

Susannah Robinson, Director of Investor Relations; 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 material from those expressed in the 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 2005 Form 10-K and subsequent filings with the Securities and Exchange Commission; copies of which are available on our Web site.

Last night, we released results for the second fiscal quarter of 2006, along with the related supplemental business information; copies of which are posted in the Investor Relations section of our Web site.

For those on our mailing list, you received 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 group.

I will now move on to the key highlights pertaining to the Company's performance for the quarter and will then turn the call over to Jonathan Mason, who will provide detailed financial results.

We will then open the floor to questions.

Although difficult, the quarter contained a number of encouraging developments.

The carbon black product lines had very strong volume growth in all of our major markets, reflecting the strong underlying economic conditions as well as our strong positions in the developing world, particularly China.

The positive impact of strong volumes was offset by continued pressure on our per-unit margins due to the high energy cost as well as by our efforts to reduce finished product inventory to somewhat offset the increased working capital resulting from the high energy costs.

Without such efforts, the full impact of these costs on our carbon black working capital could have been as much as $100 million.

We are learning to run the business with less inventory in the past, and these efforts will continue in the future.

Our overall unit margins returned to a more reasonable level late in the quarter, and the volume situation in our performance products group seems to be stabilizing.

However, looking forward, we are concerned about the possible impact of the recent increases in energy costs.

Also in the quarter, an event of significant importance was the decision by the International Association for Research on Cancer, known as IARC, to leave its classification of carbon black at the same level.

This review takes place approximately every 10 years, and this decision reinforces our view that carbon black does not cause health problems when properly handled.

Finally, the first two production units at our new plant in Tianjin, China are close to completion and should be online in the next several months.

This will add significantly to our ability to continue to grow our position in the important Chinese market.

Fumed silica had a solid quarter with strong volumes and profitability.

The third-party hydrogen plant in Tuscola, which experienced an emergency shutdown in the first quarter, is back in operation.

We are in the process of starting up production at our new plant in China and will hopefully have commercial sales from that plant during our third quarter.

In the Supermetals business, we continue the challenging transition from fixed-price and volume contracts to market-based arrangements.

We have been successful in winning market volumes to replace lost contract volumes, in large part due to our ability to provide the highest-quality tantalum powder in the industry.

While the volume story is a good one, the combination of lower market-based pricing and higher ore cost is having a significant impact on the profitability of the business.

This transition will be complete and fully reflected in the financial results by the end of fiscal year 2007.

The management team has been successful in mitigating at least some of this impact through continued aggressive cost and working capital-reduction activities.

During the quarter, we resolved our Sons of Gwalia dispute.

And although paying anyone $27 million is always painful, it puts a potentially-onerous sourcing agreement behind us, allows us to reduce working capital and leaves the business in a good position to evaluate our future sources of ore from Gwalia and others.

In the new businesses, inkjet continued to be an exciting story with substantial volume growth and increased profitability.

We’re now in the final stages of completing our new and advanced production line in Haverhill, Mass, and this line should be up and running before the end of the year.

We are also anticipating the induction of several new printers using our pigments before the end of the year.

Specialty fluid had a solid quarter with reasonable volumes and profitability.

However, to date, we have not been successful in procuring significant business outside of the North Sea.

Finally, we are pleased with the progress that our team in Albuquerque is making in their efforts to develop and commercialize several new products.

I will now turn the call over to Jonathan Mason, who will review the detailed financial results for the quarter.

Jonathan?

Thank you, Ken, and good morning, everyone.

It's a pleasure and privilege to be talking to our shareholders and analysts for the first time.

First, for the carbon black segment, the rubber blacks product line reported strong sales volumes in the second quarter of 2006, increasing 8% excluding the consolidation of Cabot Japan over both the second quarter of 2005 and the seasonally-low December quarter.

The product line, however, was negatively impacted by high raw material costs, resulting in lower unit margins compared to the second quarter last year.

The higher per-unit cost of production from the inventory reduction in the carbon black business that Ken mentioned earlier also unfavorably impacted the performance of that business by 7 million during the quarter when compared to the same quarter of fiscal 2005 and by 12 million as compared to the December quarter.

So, what's happening is fixed costs are being spread over fewer tons of production in the second quarter.

So, in summary, rubber blacks had the benefit of higher sales volumes, more than offset by lower unit margins and lower production.

In contrast, performance products had lower volumes, as we lost some volumes due to our price increases implemented to respond to increases in raw material costs.

Performance products was also unfavorably impacted by foreign currency translation during the quarter.

As a result, the product line reported a decrease in unit margins when compared to the same quarter last year.

When compared to the first quarter of fiscal 2006, rubber blacks and performance products both reported increases in unit and total dollar margins, despite continued raw material cost pressures.

Even within the quarter, March unit margins were stronger than either February or January.

So, we have made some progress on restoring the profitability of this important business.

Turning to inkjet colorants product line, they had another strong quarter with volume increases of 48% over the second quarter of fiscal 2005, primarily from growth in the OEM segment, and 11% over the prior quarter from growth in both the OEM and aftermarket segments.

These volume gains led to strong profitability growth during the quarter.

The fumed metal oxides product line reported strong volume growth in the second quarter of fiscal 2006, increasing by more than 9% compared to both the second quarter of fiscal 2005 and the first quarter of fiscal 2006.

Higher energy costs and an unfavorable product mix offset volume strength, resulting in relatively flat profitability versus the second quarter of 2005.

Sequentially, however, the product line increased operating profits, as volume growth more than offset both higher hydrogen and natural gas prices and unfavorable product mix.

As Ken mentioned, the hydrogen gas supply to our plant in Tuscola, Illinois returned to normal during the second quarter of fiscal 2006, following disruptions at a supplier's facility in the first quarter.

Net of insurance recovery, this disruption cost us 1 million during the second quarter.

We believe that most of the costs related to the incident will be recovered.

Turning to Supermetals, the business reported a decrease in operating profits of 4 million compared to the second quarter of fiscal 2005 and relatively flat profitability compared to the first quarter of fiscal 2006.

These results do not include the 27 million payment made to the Sons of Gwalia, as this payment was recorded as a onetime charge to certain items.

The continued transition of our long-term, fixed-price volume contracts to market-based arrangements and higher ore costs under the new agreement with Sons of Gwalia negatively impacted the profitability of the business year over year.

Although this new agreement results in higher ore prices than we paid under the previous supply agreement, it also affords us a reduced term -- three years rather than five -- and a substantial reduction in our annual volume commitment.

As compared to the December quarter, strong non-contracted volumes combined with the actions taken to reduce costs in this business and also the timing of some consignment volumes under a long-term contract that expired in December allowed us to maintain relatively flat profitability.

We continue to believe that over the course of the fiscal year, we will be able to replace lost contract volumes with open market volumes but at lower prices, as we more fully experience the transition to lower market-based prices during the coming year.

The specialty fluids business reported operating profits equal to the second quarter of fiscal 2005 in the first quarter of fiscal 2006.

While the number of jobs decreased by two from six to four compared to the second quarter of last year, the sizes and types of jobs consumed more fluid.

This increase in the volume of fluid sold was partially offset by lower rental revenues.

Sequentially, higher rental revenues were offset by fewer barrels of fluid sold.

So, switching from our businesses to our balance sheet, our working capital balance increased by 16 million during the quarter due to higher raw material costs and strong volumes, partially offset by inventory reductions in both the carbon black and Supermetals businesses.

Our cash and investment securities decreased by 32 million during the quarter from 135 million to 103 million.

Turning to taxes, our effective tax rate for both net income and net income from continuing operations was 6% for the second quarter of fiscal 2006.

Exclusive of the 27 million payment to the Sons of Gwalia, our effective tax rate from continuing operations would've been approximately 26% -- a more normal level.

Capital expenditures totaled 52 million during the second quarter of 2006 versus 39 million in the same quarter last year.

We continue to anticipate capital spending in excess of $250 million for the full fiscal year.

During the second quarter, there were no open market share repurchases.

Under the current Board of Directors' authorization, there remain approximately 2.7 million shares available for repurchase.

Now, with that overview of financial results, I would like to turn the call back over to you, Ken.

Thanks, Jon.

As we typically do at this time of year, I would like to remind everyone that over the next several months in connection with our long-term incentive program, you should expect to see certain officers of the Company, including me, selling shares to pay taxes and in some cases loans associated with the vesting of the long-term incentive award and to raise the cash necessary to purchase new shares awarded this year.

I would like to thank you all for joining us this morning, and we will now open the line for questions and therefore turn the call back to you, Cindy.

(Operator Instructions).

Saul Ludwig, KeyBanc.

A couple questions here.

In the performance products sector, your rev sales fell by 5% in the quarter -- your revenues fell by 5% and your volume was off by 9%, which implied that your price increase was but 4%.

It kind of sounds strange that with only a 4% increase in price, you would have had such a dramatic effect on your volume and the fairly substantial drop in your profits.

Could you comment on why a modest price increase had such a dramatic effect?

Well, I might have to turn it over to Bill Brady or a financial person to give you a precise answer, but I can tell you generally what happened in the business.

The rapidly-increasing energy costs passing through to our costs and therefore in our price increases to our customers resulted in certain customers, particularly at the low end of the business, deciding to take less expensive, less differentiated products in place of what they had been using.

It turned out that we made a decision that we were not going to supply those products at that level and instead gave up the business.

So, the volume decrease was related to the decision to give up a fairly significant volume at the very low end of the performance products product line.

This was offset to a large extent by some fairly substantial price increases in other areas.

I would describe it as not completely making up the full cost of energy increases but making substantial progress.

Just observed in the last month of the quarter, our performance products grew margins -- were at a more acceptable level based on historical performance.

As the quarter ended, we were fairly pleased with how that -- how the six-month period had evolved in terms of preserving the important volume and restoring our margins.

You had the drop in profits that you had in performance products.

Did that cut their profits in half or by 75% or 20?

What was the percentage drop that they experienced in their profits?

I don't have the number.

I need to remind you though -- and it is in the call -- that a significant part of the profit impact in performance products was foreign exchange.

We sell a lot of those products in Europe, and the euro was weaker than the dollar, which comprised 30 to 40% of the drop of profits in the business.

Bill, you may want to answer in more -- Bill Brady is going to see if he can answer in more depth.

Yes, I just wanted to add one thing to what Ken mentioned about the volumes.

One thing that happened as those volumes left us on the low end in the performance products business we replaced them by and large with volumes on the rubber side of the business, which in fact were better margins.

So, it's better trade-up for us.

So, looking at performance products in isolation is a little bit misleading in the context of all of carbon black.

Then one final question that relates to carbon black.

Two parts -- a, how much sales and earnings were added by the acquisition?

And then secondly, is the inventory reduction program and the costs associated with that now completed?

Well, while we get this precise answer on Showa Cabot, I would tell you the answer to the latter question is no.

You know, we've had as you know, 80 to 90% increase in our raw material costs.

As that ripples through the system in raw material inventory, in finished product inventory and in accounts receivables, it has added before any impact of our efforts to offset it well in excess of $100 million to the investment in the carbon black business and in my opinion, is the most significant issue that we're dealing with in that business.

You know, it has added $100 million or more to the net assets of the business.

And at the same profitability level as historical, it has ratcheted down the return on the business.

We have established -- Bill and I working with his team have established what I would regard as a very aggressive program to reduce total working capital, to try to take as much of that $100-plus million out of the system as we can.

Bill and his team made excellent progress this quarter in reducing inventory, which is the issue that impacts the profitability.

We're also working hard in raw material to learn to operate with less raw material and to try to see if we can shorten the period of our accounts receivable.

So, it will continue.

I'm not -- we're not satisfied with what we're able to accomplish thus far.

And we have some what I would describe as aggressive goals going forward.

But, I would hope and believe that this quarter will show you the most significant part of the finished product inventory reduction, which is what affects profitability.

This quarter, meaning the one just reported?

The second quarter just reported.

And then, the Showa numbers?

The Showa numbers I think -- I mean quarter 2, were PBT an incremental $4 million?

Yes.

So, right about where we expected.

We had 1.2 in the first quarter with the partial quarter and 4 in the second quarter.

That part of the business continues to perform very well, and I think it's fair to say that it is exceeding our expectations in terms of when we did the deal.

David Begleiter, Deutsche Bank.

This is James Sheehan sitting in for David Begleiter.

On rubber blacks and performance products, what do you see as the impact of higher crude prices sequentially and how should we think about that going forward?

Well, I thank you for asking the question because it gives me an opportunity to comment on the other part of the business.

You know, we have been struggling, as everybody is aware now, for the better part of nine months with the rising oil prices.

The encouraging thing that we were -- we dealt with in the second quarter and why I feel positive about the business is that we had largely restored our margins and were benefiting from the strong volumes that are developing in the business, particularly in the rubber side of the house and particularly coming out of places like China and the rest of the developing world.

So, we -- you know, coming out of -- if you turned the clock back 2.5 weeks, 3 weeks when the oil prices were hanging around 60, we had been flat for a while; margins were fine.

We were feeling pretty good.

With the increase that's taken place in the last couple of weeks and I -- probably everybody noted that we saw some relief yesterday -- came down quite a bit yesterday -- we are to some extent back where we were six months ago.

We're going to have -- if it stays there, we're going to have the same lag issue in our rubber blacks volumes.

I would point out that our rubber blacks margin had fully recovered during the second quarter and will have the same problem we struggled with.

Inevitably, we have to look at what's going on in our raw material costs and how that impacts pricing going forward.

So, it's candidly -- although I feel very positive about the underlying health of the carbon black business and its ability to come through a very difficult period like we've had in the last six months, I feel a little bit like Groundhog Day in that we now have to go deal with it again.

Okay.

Now, you had strong volumes in rubber black.

Do you see that continuing or is that a feature of pre-buying?

And also, what do you see as normalized margin in carbon black?

Well, I'm not really able to answer the last question, both from a legal standpoint but also from the fact that our margins vary all over the world depending on the local cost structure.

With respect to volume, I think we feel pretty positively about the volume evolution in the business.

We are continuing to experience very, very solid growth in China.

North America is strong.

Europe has been strong.

I don't -- I have not heard and am not aware of any significant pre-buying.

You may have read that there are supply problems in the large tires, where a lot of our products go.

In the volume side, we're feeling pretty good and don't see any significant softening in the immediate future.

Last question.

On the Sons of Gwalia with the new tantalum contract, those 18% margins from this quarter, does that reflect what you should be earning -- what the business should be earning going forward?

No.

We had what I would describe as a special cause in this quarter in that we had some volumes that had been shipped in the first quarter but were being held by our customers on consignment, which were therefore released to our revenue stream in the second quarter.

So, we do not expect to do as well in the third and fourth quarter as we did in the first and second quarter.

Jeff Zekauskas, JPMorgan.

A few questions, some of them are short answer.

Your carbon black revenues were up 47% in the quarter, and you talked about your volumes being up 8%.

So, does that mean prices were up 39?

Well, I don't have those precise numbers ahead of me.

But, two causes -- yes, prices are up a lot because of the energy costs and the full impact of the adjustment in our contracts.

And secondly, Showa Cabot adds about $50 million of revenue.

Second question is -- so Ken, why is the cesium formate business not performing as well as one might hope?

I mean, maybe a year ago, what we thought is we might get some contracts in Kazakhstan or in the Caspian Sea area.

For various reasons, we haven't seen that.

Can you just sort of describe -- and meanwhile, we are in an exceptionally high oil price environment, which would seem to be favorable to the business.

So, maybe it isn't.

Can you just kind of review in general what is going on in cesium formate?

Yes, no, Jeff, I think it is an interesting question.

And, I will be honest, one that we are working hard on.

I would tell you that the business continues to perform exceptionally well in the North Sea.

We continue to get the vast bulk of the jobs that we think logically or rationally that cesium formate should be used in in the North Sea.

That's encouraging.

It shows us that the fluid works and that in the most-sophisticated, high-tech drilling region of the world, it is used regularly and accepted and performs very well.

That provides -- that business provides the financial performance that you see in the range of -- I don't know -- 18 to $20 million of profit.

And it looks stable.

We're actually seeing some impact on the drilling plans of companies, driven we assume by the high oil cost -- high energy cost.

One of the things that surprises me, as I observe it, is that energy costs today impact drilling two, three, maybe even four years from now because of the difficulty of planning these complex jobs.

And there is a rig shortage -- a deep sea complex rig shortage in the industry.

When I look outside the North Sea, I have been not happy or not pleased with the sense of development when I hear and as we did -- actually, we did yesterday, we go through all of the marketing regions.

In the Caspian or the Kazakhstan region, you could understand what happened.

We still believe that we were in the game and could get business there in the future.

But, we didn't get it in the first three or four wells, which we hoped to get it.

Similarly, in the Gulf -- the Arabian Gulf or that region of the world, we were hopeful that we could get some business there and haven't gotten it.

We do believe we're getting much, much closer to some significant business in the Gulf of Mexico.

But, we continue to struggle as we have throughout the history of this business on the high price and the barriers that creates in persuading new drilling mud engineers to use the product.

And, we're struggling with it.

That's helpful.

If I could ask just a couple more short questions.

My recollection is that the tantalum business has about 40% of its volumes still contracted at high prices.

And for the most part, those agreements will expire at the end of the calendar year.

Is that roughly correct?

And when they expire, what will the general level of prices do in that whole operation in some kind of numeric terms?

First of all, we have one significant contract left, and the number is roughly 20%, not 40%.

That contract expires at the end of this calendar year.

We have -- turning to the other side of the question, what's going on in the market?

As we have talked before, we have experienced -- we're experienced.

Although, we've seen some -- a little bit of relief coming out of our [Japanese] operation -- the lowest per-pound price of tantalum powder that we have seen in my history in the Company, and that goes back to 1989.

The industry is -- the supply industry is in a little bit of state of disruption.

As you may have hear (sic), our major competitor, which is owned by Starck -- owned by Bayer, a company called HC Starck is up for sale.

You know, we're all struggling with these low prices.

We have had the benefit for the past five years of our contracts and our competitors have not.

We hope and believe we're seeing some increase in the use of tantalum.

The quality and the capacitance of the powders continues to climb up, which I think in fairness increases their competitive advantage and usage as a capacitor in miniature electronics.

So we're moderately hopeful that we're going to see some price improvement here over the next period of time.

But, it is clearly a difficult time in the tantalum industry.

We feel very, very fortunate that we were successful in resolving our Boyertown Union situation and taking as much of the costs out.

And, the business has done an excellent job thus far this year in reducing its working capital.

It's taken $43 million out of its working capital in the first six months.

So, we're seeing a lot of cash flow coming out of that business, and we are working hard to see if we can reposition it to be successful.

My last question is on the inkjet business.

In that, there were sort of two puzzles in the quarter.

The first was that volumes were up 50%, but revenues were only up one-third.

So, does that mean that there's a 17% negative mix or 17% lower pricing?

And then second, on a more positive note, the economic effect of the volume growth was to raise Cabot's earnings by $0.04 a share, which comes out to about 3.7 million pretax and 3.7 million is greater than the revenue increase.

So, I was hoping you might help me with those two puzzles.

Well, we are, as we had mentioned before, in the midst of transitioning from what we would describe as development or R&D volumes to pure commercial sales with some major customers.

And, you could describe that as a price reduction I guess.

But, I think in fairness, it is just the ongoing commercialization and the maturation of the business.

We do continue we believe to maintain and enjoy solid profitability in the business.

Profitability grew substantially during the quarter.

Volumes were high.

But, I don't think that -- I think you'll remember, Jeff, that people started to notice the same trend in the first quarter.

It continued in the second and may continue a little bit further as we get fully commercial with these new products.

Remind me of your second question.

The second was that the operating profit increase was larger than the revenue increase in the quarter.

And I was wondering why that was the case.

Well, it wasn't.

I don't know quite where you are getting that number.

I'm quite sure that's not the case.

We are probably getting some benefit of scale, as we fill out our production units and use those units fully to the extent -- and so therefore, we get some benefit of cost.

We are trying to sort out the number question that you're asking.

Jonathan, do you have an answer?

Your answer was correct.

Profit -- there may be some rounding there, but profit was less than the revenue (multiple speakers) --

Profit was less than revenue.

But, as you know I think, Jeff, this is a solid, solid business, particularly at commercial production.

And without the burden of R&D, this is -- we make appropriate profits in this business.

John Roberts, Buckingham.

Can you talk about sequential month-to-month improvement -- or maybe Jon did -- about the carbon black business having higher margins in March than it had earlier in the quarter.

Can you talk about April relative to the quarter average or something like that just to calibrate how far behind on raw material costs you have gotten?

Don't know yet.

I would tell you that we don't -- we're just starting to collect data on the purchases of feedstock and how they've been impacted by the last couple of weeks.

Historically, the people who buy that business, when they see a spike like we've had, stop buying until they are sure the prices are durable.

Yesterday, I'm sure will cause them -- I'm sure the people, who do this both in Paris and Atlanta, are sitting there looking at their screens as we talk, trying to figure out what they think is going to happen in the next couple of weeks.

So, I don't know yet what's going on to our feedstock costs, and it will be another week or two before we know that.

I am really not -- I'm not at liberty -- I wish I were -- to talk to you about pricing, but I can't under the legal requirements.

My General Counsel will kick me quite hard if I try to.

Secondly, Gwalia has always been the low-cost source of tantalum ore in the world.

You know how much your cost per unit has gone up with the new contract, but is it the case now that it's not the low-cost source in the world when you adjust for local risk, Ken?

No, I think there's something very interesting going on there.

If you look closely, you will see some language, either in the speaking notes or in the -- actually, it might have been in the press release.

We are working hard to try to sort out tantalum raw material supply.

Once again, it sounds almost like a step back eight or nine years to where we were when this all started in the late '90s.

Gwalia today appears to be not the low cost but the high cost.

Is that because of the step-up in your contract, or has their cost actually grown?

No, it has nothing to do with our contract.

Based on what we believe, what we hear is they have had a -- the bankruptcy caused them to lose their mining contracts.

When they went out to reposition their mining contracts, they ran into an environment, which I think is fairly well-known if you get into the mining industry, a very, very substantial cost increase because of shortage of trucks, shortage of equipment and the rest.

So, they had to reposition their whole mining cost position.

There is also some indication that the ore bodies are not as good as we all thought.

Now, whether they were mishandled as that company spiraled down into bankruptcy or what, I cannot tell you.

But, we're pretty comfortable that the Gwalia ore bodies are not as attractive as they were 10 years ago.

And, that has caused us -- one of the reasons why we were willing to make the payment is that we dramatically shortened the contract and dramatically reduced the volume that we were required to pay in an effort to put us in a position where we could go out again, study the entire tantalum ore supply and see if we could position ourselves with a competitive advantage.

We are in the process of doing that.

Just one minor issue is the Australian dollar has also been very strong.

That doesn't help Gwalia's competitive position.

I was also going to ask whether or not you gave up your mortgage rights on the mine.

But I guess that's irrelevant if it's a high-cost mine.

I think that we did.

In order to get it settled, we gave up on all those rights.

It is -- appears to be -- you never know with the kind of information we have.

But, it appears to be a high-cap cost mine.

As we looked at available tantalum supplies, it wasn't -- does not appear to be particularly attractive today.

The only thing -- let me just say one other thing.

I do believe that as Gwalia comes out of bankruptcy, which I understand hopefully will take place sometime this summer, those assets will get sold.

That will be an interesting event that we will pay close attention to.

(Operator Instructions).

Frank Dunau, Adage Capital.

Yes, the press release made mention of something that I don't quite understand and then you commented on it in the Q&A about -- I'll just read this thing.

It was talking about Supermetals.

It said, "The timing of revenues associated with consignment values under a long-term contract that expired in December allowed us to remain relatively flat profitability sequentially."

I know that is just the last part of this.

But what was that all about?

What happened is that under the contracts, a particular contract that expired on December 31, 2005, we had shipped volumes -- high-priced volumes to the customer that were held by that customer on consignment and therefore not recognized in revenue in our first quarter but recognized in revenue in our second quarter when the volumes were released from consignment and used.

Okay?

Do you know how much that was in dollar terms or how big a hit or impact was that?

I don't off the top of my head.

Furthermore, under the terms of the contract, I'm really not allowed to comment.

Does somebody have a number for depreciation for this quarter for it and last year's first quarter and fourth quarter?

I'm just trying to figure the trend there.

We will get that.

People are working as they speak.

When they get it, we will give it to you.

Jeff Zekauskas, JPMorgan.

I guess just one short question.

Maybe I worded my question on tantalum incorrectly.

You were kind enough to say that higher-priced tantalum material was 20% of the volume.

I guess I was wondering whether that was 40% of the revenue or what percent of the revenue is the higher-priced tantalum volume?

People are trying to do a little calculation.

We're trying to keep your guys on their toes.

They are on their toes.

I'm about to get the depreciation number.

We have it on a year-to-date basis, and you can take about half of this for the quarter.

So, in 2005, our depreciation was 70 million; in 2006, 61 million.

That's for the six months both periods.

One sort of special effect there that you ought to be aware of is that, as I think most of you know, we wrote off the value of most of the tantalum assets at the end of the fiscal year.

However, because of the way the inventory flows into the revenue stream, we had very little benefit from the reduction of inventory up until now -- reduction in depreciation because of the write-off up until now.

You'll start to see more of that benefit in the quarters ahead.

I don't think -- they are still -- we're back to you, Jeff.

I think if I give you that number, I am going to give you the price.

I don't think I can do that.

Okay, because -- well then, without being so specific, like -- is 40% a silly number?

I really don't want to answer the question.

As we've made clear all along and you can see by what has happened to us as one -- as the previous two major contracts expired, they are not insignificant events.

We have one left, which is at the end of this calendar year.

So, I guess maybe to follow up on Frank's question, if the depreciation charges for the six months are down 9 million, so I guess that would mean that they are down 18 for the year.

If we tax that at -- I don't know -- 75%, I guess that means that your earnings per share benefit is about $0.20 this year from lower depreciation costs?

Well, let me just -- I think I'm going to give you some numbers, which we've given before, but will help you to try to sort this out.

We have in the last -- well, we started working on it about 15 months ago, maybe a little bit longer anticipating this problem, undergone a major cost reduction effort throughout the tantalum business.

Our operating costs, our production costs are down in the range of 15 million.

Our SG&A is down 20, and our depreciation during the year will be down about 8.

That is not the full benefit that we will see next year.

So, we have taken -- and I want to be clear -- we continue to work on this.

I continue to pressure Eddie and his team -- Eddie Cordeiro and his team to see if they can do more.

We're going to end up having taken in the range of 40 to $45 million of running costs out of that business in an effort to maintain its solid profitability.

But, it's hard work and that sort of goes to -- we did that, we started that 15 months ago because we saw that we were not going to maintain the pricing as the contracts ran off.

That help you, Jeff?

It does.

Saul Ludwig, KeyBanc.

Two other couple little ones.

Very often LIFO charges sort of bite us unexpectedly.

Jonathan, how do you see -- you know, it's hard to forecast, but as best you can, what do you see coming in the third and fourth quarters as LIFO charges -- at the Company?

I don't know.

I really don't want to answer.

I don't know.

We haven't forecasted LIFO charges.

Certainly, the impact of oil prices, whether they stay high or go back to 60, would have an impact on LIFO.

Let's just say they stay where they are.

We are in the midst of looking at different scenarios with different oil prices as we speak.

So, I don't want to give you a bad answer.

I think you can assume however that oil stays at $72, which it seemed to be last night, we've got some LIFO development in the rest of the quarter.

If it goes back down to 60, it's probably neutral.

Is that fair?

That's right.

That's about fair.

I think that's right.

Even though there was no LIFO charge in the second quarter.

That's because we had four months of roughly flat feedstock costs.

Next question is -- in cesium formate, why was there more product sold?

I thought the only time you sell it is kind of when it gets destroyed or used up in the drilling process and they have to pay you for it.

Was there actually outright sales of cesium formate, other than related to getting less back than you leased out?

No, there were no outright sales of cesium formate.

Okay then finally, just in the last month, Michelin has announced that they are going to close a tire plant in Canada.

Bridgestone Firestone announced they are going to close a tire plant in Oklahoma City.

Continental is, as sure as I'm talking to you, going to close the plant in Charlotte.

When Goodyear gets done with its labor negotiations, it's likely that we will see maybe a Goodyear plant close.

These are all North American facilities.

Might you have to think about closing one of your North American carbon black plants, as that volume of tires that they are going to take out -- all these reductions are going to reduce tire capacity by more than 10%, much as you've done in other places when demand for carbon black has decreased?

What is your observation on that, Ken?

Well, we watch the same announcements you do.

I would add to the analysis or to the thought process that what's going on in the gasoline prices, we are inevitably going to see smaller cars purchased in North America and therefore smaller tires.

The small tires have been increasingly manufactured outside the United States in Europe and Japan, leaving the big tires manufactured here.

We are watching it closely.

Historically, I would remind you that other than the cost of closing capacity, this movement has largely benefited us because the tires no longer manufactured in the United States tend to be manufactured in places where we have very strong positions.

And, you see our -- the rapid growth we continue to experience in China -- is a particular example of that.

I think our volumes were up 33% year over year.

Cabot's overall volumes because of that have been increasing quite substantially.

So, we do watch that.

We pay very close attention to our capacity to make sure that we keep it as full as possible.

But, it's an ongoing effort and has been for you know the 19 years I have been here, and I'm sure it will be for the foreseeable future.

Then just finally (multiple speakers), one of the long-term --

Could I just point one other thing?

There is some contrary information in that Toyo is in the process of building quite a large tire plant in North America.

Right, that plant is up and running and it's going to get bigger; you are correct.

Finally, just on the concept of shareholder value, which is I think an underlying theme -- long-term theme of Cabot, now as you reported, your earnings have kind of flattened out.

Stock price has sort of stagnated.

Do you think to meet the goals of shareholder value enhancement, you need sort of help from the gods in terms of -- it's not in my control.

It's the external world that it's all about.

Or are there things that Cabot is going to do to make life for its shareholders more pleasant than it has been let's say over the last few years?

That is a fascinating question.

I certainly would like and the Company would benefit from some help from the gods in the energy costs.

I do believe, as I mentioned earlier, that the carbon black business, absent the rapid rise and ongoing rise in energy prices, is substantially stronger today and has the potential to earn substantially more money than it has in the recent past if we can get through this disruptive period and get to some stabilization, not too concerned about the level as much as the fact that we are always behind in the eight-ball in catching up in our margins.

That's driven, not only by the fundamental strength of the business, the contracts we have with our major customers, but it particularly by the position we have in China and elsewhere.

That's a very -- we think -- a very valuable position.

So, the gods could help there and give us some stability in energy prices.

I think the business is stronger than it has been in a long time.

I do believe -- continue to believe, continue to be excited about what's going on in inkjet.

You see the volume growth remains solidly profitable.

If we can maintain that and if we can get the next generation of pigments -- our pigments used the way we anticipate, we think that business is going to start to have a significant impact on our earnings.

The one area where I am concerned and I think it was you who answered the question is about cesium formate.

I am disappointed that we have not seen the penetration outside the North Sea.

I don't know whether that's a benefit of the gods, but we are working hard on it.

Finally, I would say that as I've said before, I am as positive and encouraged as I have ever been about the depth and strength of our pipeline of new products and new opportunities coming elsewhere -- coming from the Company that we have not started yet to talk about in any depth.

So, I don't think -- I would love some help from the gods on energy prices.

Other than that, I think the Company is pretty strong.

I think we should start to show some shareholder value improvement.

John Roberts, Buckingham.

I've got two follow-ups on carbon black.

I'm not a truck analyst, Ken, but hasn't there been some pre-buying of heavy-duty trucks in advance of new emission regulations?

And do you think that may be pulling through truck tire volumes that's benefiting your carbon black business?

I don't think something like that is significant enough to have an impact on our volumes.

You are also aware there was an article in the front page of the New York Times a couple of weeks ago about the tire companies' inability to supply the big construction tires.

Those things, I don't know if you are aware but they take a lot of carbon black.

But, I don't know.

So you don't think that's an issue?

Yes, I don't think it's a major issue.

And then secondly on the performance black side, how much is maybe color related, where the customer has some discretion in terms of how dark he wants his gray to be or whether he wants another color?

Because other colors haven't gone up in price probably nearly as much as carbon black has.

Carbon black at these levels -- I guess you could try to make ink out of iron oxides or something.

But, we are still very low cost compared to that.

What I think you're going to start to see is -- some of you who may be aware -- that in certain parts of the world, when you pick up a newspaper, the ink rubs off on your hands where in other parts of the world, it does not.

That factor is largely related to what we call a low rub or oil-pelleted carbon black, which is more expensive, higher performance.

That's the business that by and large went to the low end of the commodity.

Okay, but you don't think there's been a lot of demand destruction over on the performance side from the high price?

We have not seen that.

It's an interesting -- that's another thing we're looking at pretty closely.

But, we have not seen anything.

The people, who are deep in the business, tell me they are not worried about it.

Cindy, anything else?

There are no other questions in the queue at this time.

Mr. Burnes, I will turn it back to you for any closing remarks.

Thank you, everybody.

Thank you for your time.

I look forward to talking to you at the end of July or beginning of August, and I hope we have some better news.

Thank you very much.

Thank you for your participation in today's conference.

This does conclude the presentation, and you may now disconnect your lines.

Have a wonderful day.