Cabot Corp (CBT) 2006 Q4 法說會逐字稿

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

My name is Tim and I will be your operator today. [OPERATOR INSTRUCTIONS] We will conduct a question and answer session toward the end of this conference. [OPERATOR INSTRUCTIONS] At this time, I would now like the turn the call over to Mr. Ken Burnes, Chairman and CEO.

Please proceed, sir.

Thank you, Tim.

Good afternoon.

This is Ken Burnes.

I am Chairman and CEO of Cabot Corporation.

I would like to welcome you to our fourth quarter earnings teleconference.

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

Bill Brady, our General Manager of our Carbon Black product line;

Eddie Cordeiro, General Manager of Supermetals;

Ravijit Paintal, General Manager of Metal Oxides;

Jim Kelly, our Corporate Controller;

Susannah Robinson, Director of Investor Relations; and Brian Berube, our General Council.

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 the forward-looking statements.

A list of factors that could affect our actual results can be found in the press release we issued last night, as well as in our 2005 Form 10K, and subsequent filings with the Securities & Exchange Commission, copies of which are available on our website.

Last night we released results for the fourth fiscal quarter and full fiscal year 2006, along with the related supplemental business information, copies of which are posted in the Investor Relations section of our website.

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 department.

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 the detailed financial results.

I will then give you our outlook for the coming fiscal year and open the floor to questions.

We are pleased with our fourth quarter financial results and we were able to manage the significant challenge we faced during the year, specifically the volatility in feed stock and energy prices, and maintain the earnings power of the Company.

We made progress during the fourth quarter on our key initiatives, including improving Carbon Black margins, keeping tight control on cost, and maintaining our inventory levels.

During the quarter, rubber blacks and performance products returned to what we would consider a more normal level of operations and profitability.

In the past 12 to 24 months, two key issues have negatively impacted the performance of the business, these being the pressure on our margins from the very high feedstock costs and the unfavorable impact on our profitability as we worked to reduce our inventory levels.

We benefited during the quarter from falling feedstock costs, particularly in North America, and our reduction of inventory levels in the business was largely completed at the end of the third quarter.

During the quarter we faced a difficult task of reducing costs by eliminating jobs in the Company.

Although these actions are never easy, we felt it was a necessary step in reducing the overall costs of the Company, particularly in the Carbon Black product lines.

Although feedstock costs in the business are now lower than they were a year ago, they still remain significantly higher than they were 24 months ago, and we need to ensure that our cost structure is appropriate to allow us to continue to operate the business at an acceptable level of profitability in the future.

Demand for products in all of our businesses remained strong during the quarter.

We were pleased to have our new rubber blacks and fumed silica capacity in China, both operating at or near full capacity.

I am also pleased to announce that in the past few days we've begun to operate our new Carbon Black unit at our plant in Brazil.

The startup of this unit is going well, and we have begun to ship a small amount of commercial product.

We anticipate that this unit will be fully up and running during the second fiscal quarter.

These capacity expansions are particularly important as the developing regions are becoming some of our most profitable.

We are watching carefully the tire and Carbon Black markets in North America.

There have been a number of tire plant closure announcements in the last six months which will reduce Carbon Black demand in the near future.

Additionally, as many of you are aware, Goodyear is in the midst of a labor shortage as they attempt to reduce their operating costs.

The strike had no impact on our volumes in the fourth quarter, but is impacting us currently.

The magnitude of the impact will be determined by the duration of the strike.

As you are aware, we have been developing products for the high speed inkjet printing applications, and have recently completed the addition of a new manufacturing line at our existing inkjet colorant facility to make products for these applications.

In the fourth quarter we completed a set of qualification production runs and have been informed that our materials have been qualified for commercial use.

It is our expectation that the first devices using these materials will be available in the spring of 2007.

We are very excited by the progress being made and believe that the technology is very powerful.

We work with a significant number of OEMs that are pursuing inkjet-based technologies to compete in the copier, multi-function office network printer, and light digital production space.

The inkjet-based devices are expected to have a significant total cost of ownership advantage when compared to traditional technology.

Penetrating these markets has the potential to dramatically increase the number of pages printed by inkjet.

Our efforts are focused on providing next generation colorants that have high print performance with superior print head reliability to serve these markets.

I would caution you that we expect a slow ramp of volumes in our inkjet colorant product line related to the high speed printing market.

In Specialty Fluids we had excellent news during the quarter from Argentina.

The first wells using cesium formate was drilled successfully and is currently being put into production.

In addition, a small amount of our material is currently being used in an existing well for control purposes during a work over.

More importantly, we believe that two additional wells will be drilled in the next six months using our material.

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

Jonathan?

Thank you, Ken, and good afternoon, everyone.

I would like to start with our Carbon Black product lines, as we clearly had a much stronger quarter in the business than we had one year ago and sequentially.

As Ken mentioned, we benefited at rubber blacks and performance products from lower feedstock costs during the quarter, principally in our North American region.

During the quarter, the feedstock cost benefit was approximately $7 million.

This benefit is related to our recognition of current feedstock costs immediately in North America and does not relate to the feedstock formulas in our contracts.

Volumes remain strong in our emerging markets, increasing by 20% in China for the full fiscal year.

Additionally, we saw a less than typical seasonal slowdown in the business and believe that we're seeing a bit of flattening out in the historic seasonality in the business, as the relative importance of China and Asia Pacific grows.

The inkjet colorants product line had somewhat weaker profitability during the quarter, but the full fiscal year 2006 remained solid.

A drawdown in inventory by one of our OEMs, unfavorable price mix, costs related to the new production capacity, and some softening in the after-market business combined to unfavorably impact the results.

As you may be aware, the inkjet OEMs have been quite aggressive at regaining share from the after-market inkjet cartridge manufacturers, and the pressure on this market segment puts pressure on our volumes.

Moving to fumed silica, the fumed silica product line had a strong fourth quarter and full fiscal year with significant volume growth, 20% quarter-over-quarter and 9% year-over-year.

We had strong plant utilization and our new fumed silica capacity in China is operating at nearly 90% of its designed capacity.

While we faced disruptions in hydrogen supplies in the first half of the year due to a significant equipment failure at our supplier's facility, and we have incurred higher natural gas prices during much of the year due to higher energy prices, we were able to more than offset these higher costs, primarily through higher volumes, to improve profitability for the year.

The aerogel product line continued to make progress during the fourth quarter toward improving our ability to manufacture product at higher levels of capacity.

Although volume growth has been slower than we would have hoped, we're pleased with the pipeline of opportunities we're seeing, and are encouraged with our ability to operate the plant at greater than 60% of designed capacity on a sustained basis.

The Supermetals business again had a solid quarter with strong market volumes.

Now, profitability declined in the business from $52 million in fiscal 2005, to $41 million in 2006, but open market volumes were at much lower prices than those posted under our long-term supply agreements.

Our previous cost reduction initiatives continue to generate significant benefits, positively impacting the business by $40 million during the fiscal year.

The business also made progress in bringing down its inventory levels, having improved its position by $55 million during the fiscal year.

However, this inventory reduction lowered profitability by $1 million during the third quarter and by $10 million for the fiscal year when compared to 2005.

The reduction in profitability in the Specialty Fluids business during the fourth quarter was due to decreased drilling activity in the North Sea.

In particular, we had one large job in the fourth quarter 2005 that was not replicated in kind during this fiscal quarter.

As anticipated, profitability for the full year declined slightly by $1 million as we were not successful during the year at significantly expanding the use of cesium formate drilling fluids outside the North Sea.

Moving back to the whole Company, we had an excellent quarter with regard to cash generation, reducing working capital by $35 million and generating $110 million of cash before dividend and share repurchases.

And speaking of share repurchases, during the fourth quarter we bought approximately 1 million shares in the open market for a cash cost of approximately $32 million.

Our tax rate for net income from continuing operations, excluding the tax benefit and currency translation adjustment, was 32% during the fourth quarter and 29% for the full fiscal year, a bit higher than expected.

At this time we anticipate our tax rate in fiscal 2007 to be between 28 and 31%.

During fiscal 2006 we invested approximately $233 million in capital expenditures.

This included approximately $45 million related to the purchase price and assumption of debt in conjunction with the acquisition of Cabot Japan.

At this time we anticipate our investment in capital expenditures for fiscal year 2007 to be approximately $150 million.

Also, during the fourth quarter we adopted FIN 47 which clarifies the accounting treatment for asset retirement obligation, the so-called AROs under FAS 143.

Among other things, FIN 47 requires us to estimate the costs and lives of potential asset retirement obligations and accrual liability for the cost of retiring such assets.

As is required under the standard, these numbers will be reviewed on a quarterly basis going forward, and adjusted if necessary to accommodate changes in business assumptions and plant life expectancies.

During the fourth quarter we recorded a charge of $6 million related to the implementation of FIN 47.

Additionally, based on current estimates there will be a $20 million liability that will be expensed over the remaining useful life of the assets as required by the standard, under which we anticipate to incur about $500,000 dollars a year in incremental depreciation.

I will now turn the call back over to you, Ken.

Thanks, Jonathan.

Looking forward, given what we have been through in the past 12 to 18 months, we remain cautious about the volatility of energy prices because of the impact they inevitably have on our business.

We are confident, however, that we've positioned the Company well to withstand these types of disruptions on a long-term basis.

The recent decline in energy costs has created a more favorable environment for us, and notwithstanding the issues we mentioned in North America, we believe global Carbon Black demand is healthy.

Our new capacity in China and Brazil will contribute significantly this year and we should see some benefit from the cost reduction efforts we mentioned earlier.

We do face another step down in profitability in the Supermetals business in fiscal 2007 as the last of our significant fixed-price, fixed-volume, long-term supply contract expires at the end of December 2006.

We are confident this business will remain profitable and will continue to generate cash in excess of this profitability, and we will continue to work hard to improve its performance going forward.

Notwithstanding the after-market, the softening of the after-market segment, we remain quite optimistic about the opportunities in inkjet colorants, and we look forward to growing commercial shipments for the high speed market in coming quarters.

The success of the wells in Argentina has made us increasingly optimistic that we'll begin to see significant business for our cesium formate drilling fluids outside the North Sea in the relatively near future.

Finally, we remain focused on cash flow and are optimistic that strong -- that the strong cash flow we've experienced recently will continue, assuming that feedstock prices remain stable.

I would like to thank you all for joining us this afternoon, and we'll now open the line for questions.

And Tim, I'll turn the call back to you.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of John Roberts from Buckingham.

Please proceed.

Mr. Roberts, your line is open.

John is having trouble.

And your next question comes from the line of Mike Judd from Greenwich Consultants.

Please proceed.

Good afternoon and congratulations on a good quarter.

Thanks, Mike.

You mentioned, you were talking about the inventories and that there was some benefit there.

Can you describe just a little bit more detail how exactly you -- I knew you drew your inventories down, but if you could also talk on the raw material side as well as the finished goods side, what we should expect, sort of, going forward?

Well, as you know, with the increase in energy and feedstock costs, we found ourselves having invested a lot more cash in the Carbon Black business about -- starting about 18 months ago.

And starting 15 months ago, we initiated a project to learn our -- teach ourselves how to operate that business with substantially less inventory.

And during the preceding 12 months, and this was largely over in Carbon Black at the end of the third quarter, we reduced the days of inventory in the business from roughly 77 days to below 60 days, I think the actual figure was either 56 or 57 at the end of our fourth quarter.

Now that was a very significant drawdown in inventory, and it helped us offset the increased cash investment resulting from the increased energy costs.

Reducing inventory and selling more than you produce causes you to spread your fixed costs over a small amount of production, and therefore hurt your profitability.

The benefit this year -- in Carbon Black this quarter was not so much of a benefit as the absence of the pain that we experienced in the fourth quarter last year, where that actually cost us, I think, roughly $15 million.

Going forward in Carbon Black, I would be honest with you.

Being quite aggressive in urging Carbon Black to maintain where they currently are, and hopefully take it down further, but I would also tell you that the levels where we are now is pretty low and pretty tight and we have to be pretty careful with that.

So I am not overly optimistic that we'll see any more inventory reduction in Carbon Black in terms of days of sale, and therefore we would not have any negative impact on profitability.

We should, however, see some cash flow benefit going forward because the lower feedstock costs reduces the cash invested in inventory, and as the inventory works its way through the chain over the next three to six months, we'll have less cash invested in the business.

Supermetals is a little bit different.

We're part way through the effort to reduce inventory in that business.

You'll recall, Mike, that we announced an objective of at least $100 million about 18 months ago.

We did 55 this year.

We did about 17 or $20 million at the end of last year.

We still are optimistic that we're going to do another, at least another 40 or 45.

This year that reduction hurt the profitability of the Supermetals business by about $10 million, and if we're successful in taking another 45 or $50 million out next year, we'll continue to experience that negative impact.

We hope to be through that in Supermetals in '07.

Okay.

Then just switching a little bit over to the Goodyear strike, obviously we've had a full month of impact at this point, at least in your fiscal first quarter of '07.

Can you give us sort of some scenario analysis of, I think, if it -- say if it were to end as of November 1, sort of what should we be thinking about versus it ending at the end of November versus the entire quarter?

How should we model that given those three different scenarios?

Well, I can help you a bit, Mike, but as you know, we're pretty careful not to put ourselves in the position of giving guidance.

As I mentioned in my notes or in my talk, we are experiencing today some reductions in volume from Goodyear because of the ongoing strike.

And I know probably less than you do about how long it is likely to go on.

I can tell you that to the extent it goes on for the short-term, we'll have volume reductions, not a huge impact in our business, but it will be notable, and we'll call it out.

Over the mid to long-term we get into a different phase, and we've been in these situations before, and it really relates to the tire sales.

I think what's going on today in North America is that inventory is being drawn down, but I think it is also fair to predict, and this has been the case in the past, that the tires get built and sold, and what happens is that Goodyear makes them outside the country or other manufacturers make them inside or outside the country, and the tires get built, and the Carbon Black gets consumed.

To some extent, to the extent that those tires get built in areas other than North America, where we have a more significant market share, like China or Indonesia or even Brazil, it tends to benefit us in the mid to long-term.

It also is beneficial to us, as you know, in that time frame because, candidly, we tend to make more money per pound of Carbon Black sold in China than we do in the United States.

So, I can't really project where the Goodyear strike will go.

It will have an effect on our business in the short term, but the tires are going to get built and sold over a period of time.

That's very helpful.

Thank you.

Your next question comes from the line of John Roberts from Buckingham.

Please proceed, sir.

Hi, trying again here.

Can you hear me?

Yes.

Hi, John, how are you?

Good, Ken.

Your guidance on the tantalum business is remaining profitable.

Didn't know if you might narrow that a little bit, because all it excludes really is losses in business.

I would use the term solidly profitable, John, and I want to -- let me help you a little bit.

You will recall that when we first entered these contracts, we started to worry about the clip, and I will be honest with you.

I was pretty sure that when they finally ended, we would be in a loss position.

As you know, we use the proceeds or a portion of the proceeds we got from the contracts, earned from the contracts, to buy the full -- the other 50% of show at Cabot Supermetals that we did not own, and today we have the fully combined business.

The business is going to be -- it is going to make a solid amount of money.

It will get hurt by the inventory drawdown that I mentioned earlier, but we'll see a decline in profitability, but I would be very, very surprised if it is anywhere near break even.

We're going to make us all a lot of money in that business.

More importantly, we will generate a significantly more cash than the profit would indicate, and as you know, Eddie has made his commitments to me that that will be the case.

And then, secondly in your comments on the high speed copier type application for inkjet, you indicated you're working with several OEMs in that application.

I have only seen one OEM really with an announcement for something coming out in the near term.

Did I miss any other OEM announcements of similar type offerings?

Well, there have been a couple that I am aware of.

I saw in your note earlier that you understand one of them.

As you know, John, and we said before, we're not -- we don't believe it is appropriate to comment about specific customers that we do business with, but I think the publicity that we have seen and others have seen in this space indicate the potential of this space for the inkjet printing capability.

And so we are very excited about it and look forward to a successful business in the future.

Okay.

Thank you.

And your next question comes from the line of Mr. Jeff Zekauskas from JPMorgan.

Please proceed.

Can you talk about your rubber black volumes for the year by region?

Yes, and I will have to get something in front of me here.

I just got handed the piece of paper.

Yes.

North America year-over-year was roughly flat.

It was down 1% in the quarter, and that is consistent, I would tell you, with the general condition of the North American market until we started to see this downturn that I mentioned earlier.

The North American tire builds and the current consumption has been flat for the last three or four years, but it -- and that has surprised us, as we've indicated before.

But I think it is quite clear if you follow the tire industry, that that's going to change to some extent going forward.

South America, we were 1% up year-over-year, 4% up in the quarter.

We're sold out and had very little -- because to some extent we had the problems with units.

So there was not much opportunity we had there.

Europe, we had 5% growth in the year, up 7% in the quarter.

That growth comes largely from growth taking place in central Europe.

Our plant in the Czech Republic and, I guess, our plants probably largely in Ravenna serve that market, and that's been a very strong market for us.

Asia Pacific, the numbers are a little bit confusing in that they're down 4% for the year and 4% for the quarter.

To some extent that's comparing apples to oranges because in '05 we operated the plant in Australia for the full fiscal year, and I believe only operated it for 10 or 20 days in '06.

So if you look at -- if you took that out, I think we probably showed actually some nice volume growth in the remaining plant that we operate out there.

And finally, China was up 20% year-over-year, 18% in the quarter.

I would tell you, Jeff, that today China is -- looks like it will be close to 20% of our total Carbon Black volumes in '07.

It will be roughly in the range of 2/3 to 75% of our North American market, and will be very, very profitable.

We believe we have a very vibrant business in China, and it is doing very, very well.

What percentage of your revenues in Carbon Black was it in 2006?

Remember, revenues and profit are different things.

I do remember that.

Okay.

And in the Carbon Black business in particular, it costs us a lot more to produce a ton of Carbon Black in North America than it does in China.

So revenues are actually lower in China, and our margin, our variable margin per ton is lower in China, but it is offset at the cost line.

Having said that, I don't have in front of me, I don't think, the revenue numbers, and we don't -- we would give you those in the Q, I believe.

If I could ask a question to John, what was cash flow from operations for fiscal 2006?

For the total year we had a --

I am sorry, I couldn't hear?

I will give you qualitatively what happened, and then we'll get you the exact number.

First half of the year with the higher feedstock costs, despite the progress that Carbon Black and Supermetals made in reducing working capital, we had a very weak first half of the year.

And then, since say, June, just in the last four months of the year we would have come close to $150 million of cash flow before dividends and share repurchases, but cash flow from operating activities for the full year, $262 million is what we're showing.

Off line if you want the exact -- to be sure I get the exact definition, Susannah and I would be happy to talk to you off line.

That's what we're showing for cash provided by operating activities.

Okay.

And just as a last question, thank you for that information.

If you're a North American customer or if you're a global customer in Carbon Black of Cabot, you see that raw material costs have come down, and there is always a little bit of a contractual lag.

So is it the case that your customer base may be delaying a little bit before replenishing their Carbon Black inventories, in order to take advantage of some of the contractual changes that might come?

I don't -- there could be some of that, Jeff, but generally, and over the last, I would describe it at 15 years, which is about 15 -- five years short of the time that I have been in the business, we've seen our customers get very, very sophisticated in inventory management, and there is a lot of just-in-time inventory deliveries.

There is quite a bit of consignment sort of kicking around the system.

There may be a little bit left, but I don't see that they have an awful lot of opportunity to shorten their inventory periods in Carbon Black.

They also don't have much storage capacity.

Okay.

Thank you very much.

Your next question is from the line of Bob Goldberg from Scopus Asset Management.

Please proceed.

Hi, Ken.

Hi, Bob, how are you?

I'm doing well, thanks.

A question on Carbon Black.

Your operating margin for the first nine months of fiscal '06 was about 5%, and it improved in the fourth quarter to just under 7.

I am just trying to understand where the margin is today based on the drop in feedstock costs, and what the outlook is for fiscal '07, to try and get back to what I think you talked about in the past as a normalized margin for the business of closer to 10%.

There is still a big gap there.

Just trying to understand the ins and outs of trying to restore that margin.

Well, it's funny.

We've had a lot of debate internally about how to best describe this.

And the best thing I can do for you is draw two lines, draw the top line which is what I assume to be our price, and then the bottom -- the line under that is our feedstock costs.

Okay?

And in the fourth quarter with the lower feedstock costs, we had a drop.

Now you only saw the benefit of that drop because of inventory flows and accounting FIFO versus LIFO in North America, where we have LIFO.

And feedstock dropped in the last month of the quarter, so we had a -- we sort of recovered margin in North America in the fourth quarter.

But in the rest of the world because of FIFO accounting, we did not see benefit from the lower feedstock costs in the quarter, and would anticipate seeing it in the first and second quarter as that inventory works its way through the system and gets sold off.

There is in addition, Mike, what you're -- excuse me, Jeff, what you're aware of.

Sorry, Bob.

Bob.

I apologize.

Trying to draw this chart in front of me, Bob.

There is the additional impact on this of the lag in our contracted volumes, and we will have a low -- we will have feed -- we'll have a price in the fourth quarter based on the month of feedstock costs of June, July and August, that controls our pricing in the first fiscal quarter.

So we'll have a lag benefit during the quarter.

Now -- so there is sort of three issues there.

There is LIFO, there is FIFO, and there is the lag.

And on top of that, you have to make an assumption that prices and feedstock costs are going to be our market conditions, I should say, and feedstock costs will be stable throughout the rest of the quarter.

Does that help you at all?

Let me ask it more directly.

Are -- assuming that feedstocks stay where they are, which of course is not the right answer, but just assume feedstocks stay where they are for the balance of the quarter, are there conditions in the market such that you would have a 10% or so operating margin irrespective of the accounting issues?

I mean --

We anticipated the question, and with the advice of counsel I think the appropriate answer to the question is, if you assume stable market conditions and feedstock costs staying where they were, we would anticipate a further expansion of margins in our first quarter.

Okay.

I appreciate that.

Let me just ask a little bit more detail on it.

There are other issues involved here.

You have a cost reduction program, I think of $20 million.

We do.

Wondering when will that just start to flow through.

And also the -- you've had quite a few expansions in China and in now in Brazil.

What kind of impact do you think those will have in fiscal '07 versus fiscal '06?

Well, we targeted a cost reduction program that we anticipate will benefit the entire Company, primarily in Carbon Black by $20 million in cost reductions during the fiscal year.

Now, it won't be level for sure of 5-5-5 and 5, but if -- but we took a bunch of the costs out September and [inaudible] coming out as we speak, so it will -- we'll see some benefit in the first quarter.

That new capacity of course will be significant, the two new Carbon Black units in China are up and running at full capacity, and that alleviates a lot of costs that we're bearing last year, and in addition gives us some nice new revenue.

And then the unit in Maua that I mentioned in my talk will be up and producing substantial revenue probably in the second quarter.

So yes, we should see some benefit from those activities.

Can you just remind us, kind of, two things, one is the capacities of those new units, and also, were there any start up costs during fiscal '06 related to those units?

Yes, there was, in both cases, and the capacities that -- combined capacity in China is 115, I believe, 110, 115,000 tons, and Maua, 50,000 tons.

And can you give us some idea of the start up costs that were included in the results in fiscal '06?

I don't have that number in front of me, but it was certainly in the multiple millions of dollars.

I would estimate off the top of my head in the $5 million range.

Combined?

Combined.

Okay.

Thanks.

Appreciate it, Ken.

Thank you, Bob.

Sorry for getting your name confused.

No problem.

Your next question comes from the line of Mr. Jay Harris with Goldsmith & Harris.

Please proceed.

Ken, to add my name to the list of the confused, but before I state the question, I want to thank you for expanding the flow of information, and I don't want that to be blamed on the confusion.

Normally when you go from the September quarter to the December quarter, your Carbon Black volumes increase.

Correct.

And then they increase sequentially through June.

Correct.

Alright.

Will we -- could I use the term history historically, Jay?

Alright.

And because of China, that's changing.

But also because that we called this out in the press release this August, which has historically been a very weak month for us, this year was not primarily because of China, but the rest of the world was pretty strong, too.

Well, I wanted you to put -- the first question, was I wanted you to put the strike and the volume you're losing while the strike goes on, into appropriate context with a sequential change in Carbon Black volume on a worldwide basis.

Well, I don't really know how to do that, Jay.

Certainly over a month or two if that's the duration of the strike --

Well let's just assume the strike lasts the whole quarter.

You talked earlier about tires being supplied from elsewhere in the world.

Can we assume that your volume will be sequentially up even if the strike lasts the whole quarter?

Or is it the size of the volume that you're not getting, sufficient to offset the normal seasonal patterns?

That's a very hard question for us to answer, but I would tell you that I would be surprised if the volume sequentially was not up in the fourth quarter, notwithstanding the strike.

Okay.

But, listen, Jay, I don't know.

I don't know how long the strike will last.

I don't know what the tire inventories are.

I don't know what the production will be.

But remember we have the two new units in China that sort of cover us, and the Maua unit will be selling product during the quarter, so it would be -- I would be very surprised if volumes were not up.

And I would tell you that other than North America, the demand position picture for Carbon Black in the rest of the world is really quite strong.

Okay.

Let me say first of all that you know less -- you don't know as -- what you don't know is less than what we don't know.

That is true.

All right.

Now --

But we're also not in the business of giving forecasts, Jay.

Well, I understand.

That's why I set the parameters for the question.

Given the fact that your North American price reductions -- cost reductions in purchase materials for rubber blacks occurred in September, and won't be addressed in your contracts until January 1, and I guess that's somewhat true around the world for Carbon Black, should I assume, or I guess I want to assume, that whatever margins you report, assuming no change from now to the end of the year in Carbon Black and derivative product pricing, which is a bad assumption, that you're likely to produce a margin structure in Carbon Black which is unsustainably high over the long-term?

Well, I would refer you back to the explanation that I am sure was unartful that I tried to give to Bob Goldberg's question.

You do have -- you're right.

With the non-contracted business in North America, because of LIFO, we had a margin expansion in the fourth quarter.

In other parts of the world in the non-contracted business, we will have a margin expansion in the first quarter because of the feedstock cost reductions.

And then there will be in the fourth -- in the first quarter there should be the benefit of the full lag, which is a one time event.

You're right.

It is unsustainable in that it is -- what it really is is a recapture of the loss that we experienced in the lag over the last 15 months.

And -- but in the margin, all things being equal as you say, the margin should expand, a portion of it should be sustainable, all things being equal, and a portion of it should be unsustainable because the lag is one time event.

Is there any way you can describe to us, either in a relation to historical quarters or future quarters as you generate them, what a normal margin structure ought to be?

I --

In other words, if the contracts that you have signed are designed to accomplish a goal, what is the norm under that goal?

But those are numbers that we have not and are not at liberty, under the confidentiality provision of the contract, and for competitive purposes cannot and will not give out, because they -- what they're doing, I am sure the lawyers would throw something at me because I am signalling on price, and -- but more importantly it is fairly sophisticated, as you can imagine, highly confidential competitive information.

But if you go backwards over a five-year period, can you pick out a period that was closer to normal?

Or is the business inherently getting more profitable sequentially because of the movement in volume to areas of the world where you would expect to exceed the historical norm in gross profits?

I hope and believe that the latter is the case.

It is interesting when you -- when I look at the numbers you asked me to disclose that I am unwilling to, it is interesting to look at it.

We start with revenue.

We take feedstock, and that produces what we talk about at margin, and then we look at our costs, what we measure in the costs it takes to convert a ton of -- to convert oil into a ton of Carbon Black.

And those costs differ across the world in a dramatic fashion, and we -- and I -- we've talked about this before, in the plants and capacity we're building now, we're building very, very large units in the developing world at very low costs, so we have very low depreciation costs.

We're making very, very effective and efficient use of the byproduct energy, and we're getting conversion costs that are very, very low when compared to the costs of what it takes to -- similar costs in -- in North America and Europe and in Japan.

So there is clearly a fascinating movement there.

On a per ton basis, China is among our most profitable operation in the world today.

So -- now, I observed that.

You've been with us, Jay, as we made those, and the difficult years that we made those investments, and they're finally start to go pay off in a big way.

I have to ask myself going forward whether the customers are getting -- going to get smarter and get more aggressive in trying to take that profit away from us.

So that's a trend that we certainly pay attention to.

But we -- it is a little hard for me to answer specifically to the Goodyear strike or North America, but when I look at the trend, the loss of a ton of volume in North America, assuming that as is the case, that we have larger market shares in places where the tires are produced and that we make more money on a per-ton basis, is generally helpful to us if you don't take into account the cost of closing the capacity in the developed region.

But you're absolutely right.

There is a fascinating evolution taking place.

I believe we're as well or better positioned, I would actually say better positioned to deal with this in the years ahead than any of our competitors, and it is something we manage and work on every day in the business.

At the rate the RMB has been declining and appreciating in value from -- I've forgotten when they started -- from 8.5 to the dollar, not it's 7.87 to the dollar.

Have your engineers been able to offset that higher exchange rate with engineering improvements, and have you kept the same relative cost advantage per ton of Carbon Black in your new capacity?

New capacity we just opened in China on a per-ton basis, not withstanding two things, the increase in the RMB and also the increase in construction costs in China, I think you're probably aware of the cost of steel and other things, that capacity was by far the lowest, or the the least expensive on a per-ton basis than anything we have ever built in the past.

All right.

I will get back in queue.

Thank you.

Your next question is from the line of Mr. David Begleiter from Deutsche Bank.

Please proceed.

Thank you.

Hi David.

Hello Ken.

Ken, given the non -- your non-contract Carbon Black business, given the demand tightness in the world, can you discuss your views on further price increases or does the does your presence in China and the inherent competitors there dictate that you be more cautious on raising prices?

There is a simple and direct answer to the question, David.

No, I cannot.

I am sorry, I cannot.

That is -- but would be one of the worst things I could do with respect to antitrust laws.

Understood.

But given supply/demand economics, why shouldn't we expect prices to rise for the non-contract business in '07?

David, I really cannot talk about it.

Understood.

Sorry, I just can't -- I can't say anything in response to your inquiry.

Sorry about it.

So on the Carbon Black margin issue, still, it is one of the lower margin products in the chemical arena.

What precludes this product becoming -- from doubling its margin?

Is there a market structure here that precludes it from being much more profitable in the future?

David, my lawyer is waving his arms and saying, please, Ken, say nothing.

One last easy question.

Aerogel, Nanogel, it's still incurring large losses.

Will you make a decision in '07 on its future?

Listen.

That's [inaudible].

I am glad you asked the question.

We mentioned at the last call that we were going to get more aggressive and make some significant commitments or make significant milestones with respect to what was going on happen to that business.

We did two things or three things.

We have significantly cut the burn rate for '07 from where it was experienced in '06.

We're spending a significant amount less money.

I think we spent about $21 million in '06.

And we will spend substantially less than that in '07.

We also committed the business to solving its production problems, and I think in the notes you heard us say that the business has been successful in operating a plant on a reliable basis at -- in excess of 60% of its design capacity.

And we're pretty optimistic that we now can operate the plant going forward and can build a full-scale plant if the market conditions warrant.

And then finally, we've set some milestones with respect to market penetration and volume that will play out, hopefully successfully, during the course of the year.

So, yes, we have both cut the burn rate, we've made significant progress in the operating side, and I remain -- we set a very aggressive target about volumes for the year, and a month into it I am feeling pretty good.

Very good.

Just one more thing on fumed silica, given the very high utilization of your new Chinese plant.

What's next on the capacity front?

Well, that's something we're working on.

Maybe an opportunity for a second plant in China, but we're looking broadly at the issue.

Is fumed silica profitability higher in China or is it higher in the U.S., similar to Carbon Black profitability?

It has some of the same construction and operating cost benefits as it does in the U.S., but the key issue is the cost of the feedstock or the raw material that is used, and that's a -- it is not an oil-based product, it is a silica, and the pricing of that varies around the world.

So it is a very complex question.

We do have what we regard as a favorable position in China today, whether we can replicate it is not clear.

Thank you very much.

Your next question comes from the line of [Craig Thomas] from SAC.

Please proceed.

Hi, Ken.

Hi, Craig.

Would you walk me through what are your current plans to deploy co-generation assets at your existing Carbon Black plants in order to reduce energy costs in '07 and '08?

Well, we do have a substantial amount of capital dedicated to that in our '07 capital budget, and we'll have coming on stream, Bill, one or two of those during the year.

Is that fair?

Right.

We have another four or five on the drawing boards.

They are, Craig, as I think you may be aware, there is opportunity to make better use of the tail gas, to sell it, to make steam or to make power.

But there have been many instances in the Carbon Black plant where Carbon Black facilities have entered into power sale contracts or steam sale contracts that required them to operate the Carbon Black plant not withstanding the market of the -- for Carbon Black and the businesses ended up in the power business not the Carbon Black business.

So we're being cautious.

One of the rules we have is that we don't build new capacity without a very, very favorable energy utilization program in place.

We have that in the new facility in China.

We have it in Shanghai, and we're working broadly around the world to improve our efficiency in that area.

And what -- I had a quick follow up.

If you were to retrofit the entire fleet, what do you think you could pull out in costs in terms of energy spend?

Oh, boy, I could get you the answer to that question in terms of what we could do to reduce our purchased electricity costs.

That's a number that would be in the system, and I don't have it off the top of my head.

Going beyond that requires a detailed analysis and negotiation with somebody who would purchase the steam or electricity in the region of the plant.

That's the key element of any energy project that is more than just producing it for yourself, and that's what we work hard on to make sure we do that in an appropriate fashion.

Ideally you would like to be able to sell it to somebody where the portion of the energy that you're selling them is a very small portion of what they totally consume, and you can -- they don't need it when you don't need to operate.

And so we're working hard on all of those issues, Craig.

Great, Ken.

Thank you.

Your next question comes from the line of Mr. Steven Schwartz from KeyBanc.

Please proceed.

Hi.

Good afternoon.

Good afternoon, Steven.

Carbon Black, North America.

Can you give me an idea of what your capacity utilization is for this year, and the year we just finished, last year, and then for the most recent quarter?

Hold a second.

I have Bill Brady here.

Do you have that number in front of you?

I don't have the exact numbers but generally it has been in the low 90's in the past year, and in the fourth quarter, it deteriorated some, primarily because of the Goodyear -- I'm sorry, the fourth quarter has been in the low 90's.

As we go forward, because of the Goodyear situation and the announced tire plant closures, that's going to deteriorate in '07 seven and I believe into '08 as well.

Can you give me an estimate of that, what you think it might be? 5%?

No, no, no.

Excuse me for interrupting, Bill.

So, we don't -- we would not estimate that.

That's a market situation that depends on what percentage of -- what our market share is and --

Come on, Ken.

Let Bill talk.

Thanks.

Okay, onto the next question, inkjet.

I think Jonathan answered this, but in the replacement market that's because non-OEM cartridges are taking share?

Is that right?

That's why you're seeing the weakness?

No, no, no.

Historically the non-OEM cartridges have been taking share from the OEMs, and as I think you're all aware, we have been able to sell our colorants in all directions.

And candidly, our ability to do that is what sustains the business during the ramp up period of the OEMs.

Appropriately, in my view, the OEMs have in the last six months or so started to get very aggressive in trying to enforce their intellectual property against the people who do this, and that has disrupted the -- what we call the after-market sellers.

And the OEMs are trying to, candidly, shut them down or prevent them from selling knock-off cartridges.

And that has disrupted, caused a lot of confusion and uncertainty in the market, and as a result the whole volume picture is into somewhat a state of flux and uncertainty.

My sense is that it will settle out here in the next six months or so, and our position at the OEMs should be -- should help us as that does settle out.

Okay.

So your comments in the release, then, in other words, it is kind of a pendulum that swings back and forth.

Well, yes, it is -- if you look a the history of this business from the OEM perspective, when it started they were -- we all bought the OEM cartridges for our printers.

And then as the knock -- what I call the people who knock-off the cartridges got more and more aggressive, and we started to see more opportunity to go into a office super store and buy a cartridge for an Epson printer that wasn't made by Epson.

And as that happened, the printer manufacturer finally said, hey, we have to stop this.

Because they historically have made the bulk of their money selling replacement cartridges, and so they're out there doing what they need to do.

Candidly, I am surprised that they -- it didn't happen five years ago.

It is perfectly predictable and, candidly, appropriate thing for the OEMs to do, and I think it will help the industry over time.

And then just to confirm something based on a statement you made, for this inkjet copying opportunity that gets rolled out next year, it doesn't sound like you see the benefit of that until '08.

Is that correct?

Well, we anticipate seeing some volumes into that segment in -- certainly in '07.

The issue, however, that I think we've been clear about is that because of the importance of this initiative to the OEMs involved, we anticipate that you'll start to see machines using this technology during '07, but that we won't see an aggressive and rapid ramp of the sale of those machines until the market channels and service and related activities have been stabilized, and the companies are very, very comfortable that they've got reliable machines.

This is in a very important initiative for the printer manufacturers, and our anticipation is that they're going to go slowly, and I think it is an appropriate thing to do.

So somebody earlier, it might have been John or somebody, said look, I understand you don't see significant volumes until '08.

I think that's right, but we would see -- we anticipate commercial sales out of the new operating line in '07.

Okay.

And then, in October I attended this [rep] expo, which is the industry trade show for this, and talking to a number of people there, I got different answers about the arrangements for pigment suppliers to ink producers.

Can you talk a little bit about what your arrangement is with these OEMs?

Do you have any sort of exclusive lock on the business and if so, how?

No.

I wouldn't describe us as having, quote, an exclusive lock on any business in this segment other than through our technology position.

We believe today that we have the leading technology that is one of the enabling factors in this high speed printing application.

And the challenge, two challenges in the business is to -- one is to hope that this initiative, printing initiative is very successful, and if it is, to at least maintain our technological advantage and maintain the business.

That -- one of the issues that you've seen over time in the inkjet business is very, very heavy R&D spend compared to revenue and profitability, because we're making a significant bet on the future.

We believe that this printing technology will be very important in the years ahead, and we want to continue to be the technological leader in supplying colorants or pigments into this space.

And if we can be successful in doing that, we think this will be a very successful business.

Okay.

And then just one last one, and this is regarding Argentina and cesium formate.

Utilization rate, barrel utilization rate in '06 and then for '07, what kind of impact could Argentina have?

Please don't tell me that that's forecasting and you don't do that?

No.

I will talk about that.

Argentina is not -- it is not a huge revenue jump or use of barrels jump, at least not today as we see it.

I think what it is and why we're so pleased and excited by it, is it's the first very sizable substantial endorsement of this -- of the efficacy, the value and use of this product outside the North Sea.

Here we headed in a well, and the well was very, very successful, the customers very, very happy.

They immediately said, can you give us some more of this stuff?

We're having a problem over here in this other well we're trying to work over.

We gave them some -- I forget the precise number of barrels, and they put it down in the well, and it is working well, and then they said, we have got these two other wells.

Can you get ready to do those wells at all?

It is the kind of market penetration opportunity that we've been anticipating, and has been slow to come, and -- but it is very exciting.

There is a lot of high pressure applications in the South American region, and the fact that it is being used by this particular customer in this region is a significant event.

We're also seeing, as I've said, more and more acceptance and interest in using this stuff in other regions in the world.

So out of 100 barrels in inventory for the quarter, how many did you typically have out?

Again, a utilization rate in percentage terms?

Oh this -- not any substantially different than last year.

I haven't -- don't have the precise numbers in front of me, but I suspect it is in the 15% range.

Okay.

Which would be a slight improvement?

It may be.

But no, I don't -- listen, if that's the case I don't mean to indicate that.

Remember, last year we had an extraordinarily large well that was drilled in the North Sea in the fourth quarter.

The material was a large well, and it was in the hole for a very long time because it was performing so well, and they did a lot of testing and working on the well, so that sort of, candidly, overstated the profitability of that business.

We were -- the forecast in the -- for the year utilization rate, and I haven't seen the final numbers, was in the 12 to 13% range.

But I mean, I think as we've said all along, the business is a nice little business today, making a nice amount of money, not costing us anything, but it has huge upside potential if we can get it used more broadly.

And the exciting thing to me is that for the first time we got a significant oil company in a significant region of the world where there is significant high pressure wells that used it and loved it and want to use it again.

That's the kind of market.

But hat's what happened to the North Sea when we first broke in.

And so I am very pleased with what happened in that business this quarter.

That's great.

Okay, thank you, Ken.

Thank you.

Your next question comes from the line of [Mr.

Frank Delano] from Energy Capital.

Please proceed.

Alright, I've got a few questions.

Just on the -- back to the inkjet.

And on the copier, even though you had commercial sales, you have got, whatever, you have got costs associated with it.

Would that be a negative number in terms of profit for the year?

I mean, would it be a drag on everything?

Well, the high speed pigment or colorant production line that we built, constructed, and operated in '06 had been a significant drag on profitability in '06.

In '07 I don't really know because it is not clear to me to what extent the volume will evolve.

As I indicated a few minutes ago, we're quite confident that we're going to see commercial sales off that line.

Our seeing commercial sales off that line in this year, how fast it ramps and to what extent it remains -- it will contribute this year is a little unclear to me at this point.

Would it at least be fair to say the drag in this fiscal year will be less than the one we just completed?

You will see for sure a pick up in '07 compared to '06.

Okay.

And I am still a little unclear about the inkjet after-market.

Was it just an overall disruption of the market or was it something having to with whatever part of the market you supplied was losing share at least temporarily, or --

No, let me try again.

I think -- I'm not 100% sure of this, but I will use it as an example.

I think if you go into Office Depot you can buy an Epson or Cannon or HP or Lexmark OEM branded cartridge.

You can also buy, and I am not 100% sure of this in Office Depot, but I know in other stores, you can buy an Office Depot branded cartridge or a cartridge produced by Jonathan Mason Inkjet Inc.

And they're what we know as the after-market producers.

They either -- they collect used cartridge and refill them or in some cases they make knock-off cartridges, and it was an effort to penetrate into the sweet OEM space.

And inevitably, the people who did that, whether it be whoever, my friend Mason in business, he or those companies appeared to be or may have been violating intellectual property owned by the OEMs.

And they were hurting the OEM sales.

I was told that one of the OEMs had lost as much as 40% of its sales to what we called the after-market, and appropriately the OEMs said, look, we shouldn't allow this to happen.

It is violating our intellectual property.

And they started to go out and go after these companies.

Kind of like the record companies going after the Internet knock-off people.

And it has -- and it had a perfectly predictable impact on the market.

I think it is fair to say that the weak companies who were violating intellectual property are getting knocked off and getting kicked out of the market, as they should.

Are you -- within that market are you supplying everybody?

We have historically supplied our commodity products to lots of people.

We do not supply our high-end valuable technically complicated products to anybody but our OEM customers.

But we're not alone.

Everybody who makes these kind of products, sells into this market.

And the strong sales in Carbon Black that you were talking about in August, have they continued forward into September and October or was August like an anomaly?

Well, sales have continued, certainly in September, at that level or maybe even a little above.

August has historically, for the Company, been a very weak month largely driven by Europe which tends to shut down in August, but also in North America, a lot of vacations.

For reasons this year I think related to China, but as I said, in other parts of the world as well, August wasn't as weak as it might have been, as we anticipated, which was very positive news for us.

Okay, thanks.

And I ask -- actually one other thing.

I think this was just like the first call in a long time we actually spent most of the call on Carbon Black.

Is that good or bad?

I don't know.

I don't know.

But it is back to the future, you know.

It is back to the future, I agree.

Thanks.

Thank you.

Your next question is a follow-up from the line of Mr. Bob Goldberg from Scopus Asset Management.

Please proceed.

Hi again.

A question on uses of cash.

Yes.

You're going to have lower capital spending --

Yes.

This year, and presumably if we believe the Wall Street analysts, you are going to have somewhat higher earnings.

Yes, if you believe believe them.

If you believe them.

And you're still drawing down inventories.

Yes.

So presumably you are going to have more cash flow to spend.

There is a scenario which is fairly easy to draw that will generate a lot more cash in '07 than we did in '08, and we'll have a lot of cash.

So you already have about $190 million in cash on the balance sheet, so --

That's correct.

A couple of questions.

What's the appropriate level of cash to hold on the balance sheet?

And what are the uses of the excess that's over and above that appropriate level?

Great question.

Thank you for asking.

Let me take it in two parts.

The appropriate level of cash has been the subject of a great amount of debate within the Company.

We had actually received four or five years ago, when we were in a similar position, I think you will remember, we had a long discussion with our board and there was a strong sentiment of the board to be more conservative than, I think, management had intended to be, and maintain somewhere up in the $200 million, this sort of free cash or debt capacity for, quote, a rainy day.

It is interesting, the feedstock problems and the ripple effect that it had in the inventory was the, sort of, a worst scenario rainy day, in that we put a lot of cash into the business.

If you look forward and that was coincident with a very heavy capital investment period in China in particular.

And cash went down, I think, at the beginning, some point at the beginning of this last year in the range of 130, which was still very comfortable, but was down a lot.

And we're back up now close to 200.

And I agreed that if conditions remain the same, we should have another very positive cash year.

I would tell you two things.

As you know, we have over a long period of time been very aggressive in returning cash to the stock holders.

We reported we bought 1 million shares in the last quarter.

We've always bought at least the number of shares to offset the dilution in the long-term incentive program, and one of the uses high on our list would be returning even more of the cash to the shareholders through share repurchases or otherwise, and I would tell you that certainly includes a look at the dividend.

The only other thing that I want everybody to be aware of is that we continue to be very, very aggressive and pleased with the position we have in China.

And there is a scenario that we're looking closely at of continuing to invest heavily there and increase our capacity there, both in -- primarily in Carbon Black but also possibly in fumed silica.

And those investments, to the extent that they develop during the year, are not in the $150 million capital budget.

So I -- and I can't -- there was nothing specific today, but the notion when you look at the performance of the business in China and what's going on in China and what's going on in the rest of the world, particularly when we see what's going on in North America, the opportunity to further strengthen our position on a global basis in the Carbon Black business and in the fumed silica business is pretty attractive, and we're looking closely at it.

So we have some investment opportunities, but anything above what is reasonable at that level would -- we would work hard to return to shareholders through share repurchases or dividends.

Of the $150 million capital budget for fiscal '07, how much of that would be maintenance versus growth?

In the range of 100 is maintenance capital.

Let's see, the projects we have in growth is that we have a new inkjet laboratory facility being built.

We have the energy investments that were being asked about earlier, is the big one.

There is some de-bottlenecking activities taking place around the world as well.

And lastly, do you have any time horizon for completing the existing share repurchase authorization?

To be candid, we thought we were being pretty aggressive at the beginning of the current quarter or the fiscal quarter when we concluded we were going to buy a million shares to offset dilution.

Turns out that we probably could have been more aggressive.

We certainly are in the process, as we wrap up this year, of looking at all that issue again, and it is one of the issues we're going to be talking to our board about at our next meeting.

Okay, great.

Thank you, Ken.

Your final question is also a follow-up from the line of Jay Harris from Goldsmith & Harris.

Please proceed.

Ken, I would like to hear you sort of outline in qualitative terms what the issues are in terms of growing R&D in the inkjet colorant business.

Let me ask you some subsidiary questions that you can reflect on.

One, will we get to a point in time and when is that, where R&D will move up at the same rate as SG&A?

Are there a whole host of unexploited opportunities where you have potential customers ready to move forward, where you think you're going to be as aggressive in raising your R&D over the next year or two as you have been in the last two or three years?

Give us some color on all of these things.

Excellent question, Jay.

I would tell you over the past five years with the benefit of hindsight, I think we have probably under spent in R&D in the inkjet colorant division.

We made a decision back then that we were going to focus very intently all of our research resources at a spending level on what has turned out to be the high speed printing market, and I am very pleased that we did that.

There were other opportunities that have -- that are turning out to be equally attractive that we did not fund, that I wish we had.

But inevitably you have to make judgments about level of spend and investment versus return and profitability.

We use the term in this Company that came from my predecessor, in that these new businesses, when they get to the right point, have to remember to pay their Christmas Club dues, which Sam used to say, remember, you have got a stockholder, you owe them something.

And those are very hard judgments.

I would tell you today that I have primarily -- and I -- if you'd talked to Fred von Gottberg, he would tell you he hears this from me too often.

You better darn well be spending everything you possibly can to maintain or expand our position in high speed printing.

That's your primary objective.

He comes at us, and we consider on a regular basis other opportunities of significance we see in the business.

I remain, and I think you know and people have heard me before, a fairly passionate believer that inkjet printing is going to be in very, very important printing technology in a far greater space, printing space than it has in the past, and one of the enabling technologies that will drive that, will be the quality of the pigments, the colorants.

And I think our attachment technology is very, very powerful and our ability to expand and build off of that is a significant opportunity.

Having said all of that, those are judgments you make on a regular basis, candidly, every time we sit with the management team there, and hopefully we're going to get -- we're going to be very excited about the machines when we see them.

We're going to feel that this business is going to take off, and that will fuel our spending appetite.

But I would tell you that there is plenty of opportunity for more spending, but we inevitably have to balance the opportunities with the so-called Christmas Club obligation.

Looking backwards, have the operating earnings grown more rapidly, significantly more rapidly in line or something else with the revenues?

Until this year, I think.

It is an interesting question.

Until this year where we had the, particularly, the burden of the new line, they have tracked pretty well.

With revenues?

With revenues.

And everything else being equal, do you think that's the way you would like to see the business evolve going forward?

Before you answer that, if inkjet colorants was a much larger percentage, a majority percentage, maybe the totality of a publicly-owned company, one could argue that you should expense away, once you're profitable you should expense away your incremental gross profits to maximize your market penetration as these new markets opened up.

How close can you come to that?

Do you want to come to that, or do you think you would rather run the risk of avoiding, ultimately, great market penetration in some of these unexploited opportunities?

I think I understand your question.

And I think I would answer in the following way: my own personal view is that I would double down, and what I mean by that is I would take all of those profits and double down the R&D spending, because I think -- continue to believe that there is an opportunity 10 years out that the Cabot's colorant business could be a huge, huge and very important business.

And to get there, you got to double down, and you got to double down again in the R&D spending, and make sure that you not only maintain, but you expand your lead and build an impregnable position.

So I would -- my own personal view would be to double down, and think of it in a 10-year time frame.

There is inevitably earnings pressures, and the need to earn for Wall Street next quarter and next year, that are offset by that, and at a more fundamental level, to be able to double down, you have got to maintain technical expertise, i.e., you have got to continue to be the leaders, and that's over any period of time an human resource issue.

Can we be smart?

And we worry about that a lot.

But Jay, you and I, you have been with us a long time.

I look back on the Cabot Micro situation, and I want to make sure that Cabot Inkjet remains the dominant color technology leader in the space.

We'll do everything we can to do that.

To continue.

Thank you.

Thank you.

At this time I would like the turn the call back over to Mr. Ken Burnes for closing remarks.

Tim, thank you, and everybody on the line, thank you.

It has been a pleasure to be with you today.

It has been a while since we had nice news and a positive call.

We look forward to others in the future.

And thank you all for being with us.

Thanks for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Good day.