Cabot Corp (CBT) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Cabot earnings conference call.

My name is Tawanda, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like the turn the call over to Mr. Ken Burnes, Chairman and CEO.

Please proceed, sir.

Thank you very much, Tawanda.

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

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

Here with me this afternoon are Jonathan Mason, our Chief Financial Officer, Bill Brady, General Manager of our Carbon Black product line, Eddy Cordeiro, General Manager of Supermetals, Ravi 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.

Lists of the factors that could affect our actual results can be found in the press release we issued last night, as well as in our 2006 form 10-K filed with the Securities & Exchange Commission, copies of which are available on our website.

Last night we released results for the first fiscal quarter of 2007, along with the related supplemental business information, copies which are posted in the Investor Relations section of our website.

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

If you're not on our mailing list and are interested in receiving this information in the future, please contact or Investor Relations department.

I will now move onto the key highlights pertaining to the company's performance for the quarter and our outlook for the coming quarters and then we'll turn the call over to Jonathan Mason, who will provide detailed financial results.

We will then open the floor to questions.

We are very pleased with our first quarter results.

The Company performed well with strong volumes in most of our businesses, expanded margins due in part to declining energy costs, aggressive cost control, positive developments in our new businesses, and favorable fogn exchange.

In Carbon Black, for the first time in many quarters due to declining feed stock costs, we benefited from the feed stock formula on our contracted volumes, which has hurt us over the past two years.

Carbon Black volumes outside North America, where we were negatively impacted by the Goodyear strike, were strong and our outlook remains positive.

As we mentioned, we remain quite concerned about the Carbon Black capacity demand balance in North America.

The region is experiencing what has historically been an unstable level of excess capacity and we do not anticipate significant demand improvement.

We remain cautious about the impact that this situation will have on our volumes and margins in the North American region.

Our inkjet color product line had weaker quarter due principally to softness in the after-market segment.

We believe, however, that we have come through most of the volume and revenue softness in the SoHo market, and we anticipate modest growth in this segment for the remainder of the fiscal year.

We commenced commercial shipments of products for the high speed inkjet printing market during the quarter and remain quite optimistic about this opportunity.

To that end, we are in the process of significantly expanding capacity in this product line to serve the anticipated growth of the high speed market.

Fumed silica product line experienced significant volume growth year-over-year in all market segments.

Additionally, our new lower-cost production capacity in China was fully utilized during the entire quarter leading to growth and profitability.

And the Supermetals business year-over-year had a significant increase in profitability due to solid volumes and very effective cost control.

At the end of the quarter the last of our significant long-term supply contracts expired.

As a result of this, we face a step-down in profitability for the balance of the year and still anticipate this business making less money in 2007 than it did in 2006.

In specialty fluids we experienced strong utilization of our fluids in the North Sea during the quarter which led to improved profitability.

While we are very pleased with our financial results, as we mentioned in the release last night, some of the benefits we experienced during the first quarter are unlikely to be sustained over the full year.

We believe these issues positively impacted our earnings for the quarter by $0.20 to $0.25.

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

Thank you, Ken.

Good afternoon, everyone.

I would like to start with the Carbon Black product lines.

If I were to step back and pick a key theme, it is that this was a strong quarter in both volume growth and margin expansion.

In rubber blacks volumes grew by 8% overall.

All regions outside the U.S. had solid volume growth compared to a year ago.

For example, China is 34% growth rate shows the benefits both of our added capacity in Tianjin and our strong Chinese market position.

Now, North America was the only exception where the strike at Goodyear lowered our volumes by 15 to 20,000 tons, and demand was generally softer.

In performance products, volumes were lower by 4% year-over-year as many of our plastics' customers delayed orders to take advantage of declining polymer prices.

During the quarter we had margin expansion in both rubber blacks and performance products, with higher prices and falling feed stock costs.

A portion of this was due to the time lag in our contract pricing adjustment which had a positive impact.

Our contract at prices for October, November and December were set based on the higher feed stock costs for June, July and August.

The margin benefit also impacted our non-contracted volumes.

The ink jet colorants product line had weaker performance during the quarter.

Volumes were lower in the product line by 9% compared to the first quarter of 2006 and by 18% sequentially due to the softness in the aftermarket and an expected drawdown in inventory by one of our key OEM customers.

Additionally, increased costs associated with our new product production line, lower production, and a drawdown in our own inventory levels unfavorably impacted the performance of the product line both year-over-year and sequentially.

Turning to fume silica, the product line had a 13% increase in volume compared to the first quarter of 2006.

We had high plant utilization at our new low cost fume silica plant in China and lower hydrogen costs, which combined to increase profitability.

Additionally, several one time expenses in the first quarter of 2006 did not reoccur in the same period of 2007.

Sequentially the impact of lower seasonal volumes was more than offset by lower costs leading to slightly stronger performance.

Profitability of the Supermetals business increased by $5 million when compared to the first quarter of 2006 and by 7 million when compared to the fourth quarter of fiscal 2006.

Lower contracted volumes and lower pricing compared to the same period of last year were more than offset by higher market volumes and significantly improved manufacturing and SGA costs as the business continued to focus on controlling its operating costs.

Sequentially the business benefited from higher volumes including higher contracted volumes which more than offset higher ore costs.

The Specialty Fluids business experienced an increase in fluid utilization from 15% in the first quarter of 2006 and 12% in the fourth quarter of 2006 to 17% in this quarter, which led to an improvement in profitability when compared to both periods.

As most of you are aware, utilization is the key metric we use in this business and represents the percentage of our total available fluid inventory that was used during the quarter.

Now finally a couple comments on our general or consolidated financial statements.

First, we generate 24 million of cash after dividends during the quarter.

This was a solid performance but one weakened by a seasonal build in working capital of $32 million.

Also we made no open market share repurchases during the quarter.

And finally, our tax rate on income from continuing operations was 25% for the first quarter and at this time we anticipate a range of 25% to 29% for the full fiscal year.

Turning to CapEx, during the first quarter we invested approximately $26 million in capital expenditures compared with 49 million a year ago and anticipate our investment in capital expenditures for fiscal year 2007 to be approximately $160 million.

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

Thanks, Jonathan.

All in all we're very pleased with our results for the quarter and believe they point to the fundamental health of the company.

Demand outside North America remains very strong and we are very pleased with our investments in new capacity in developing regions.

Our new capacity in China for both Carbon Black and fumes silica is being fully utilized and we're operating our new Carbon Black unit in Brazil at close to full capacity earlier than we had anticipated.

We have received the required permits and are currently constructing a performance products manufacturing unit in China and are in the process of applying for permits to build two additional rubber blacks units at our plant in Tianjin, China.

We remain committed to our focus on cost containment, safety, health and environmental performance and manufacturing efficiencies.

And to that end, continue to invest in energy centers at several of our Carbon Black facilities around the world.

We continue to be very optimistic regarding the developments in our new businesses and believe that our plans to expand capacity for our high speed ink jet products is good news about the potential for success of our products in this exciting market.

We continue to see gradual progress in acceptance of formates for high pressure drilling application and remain optimistic about the significant potential of this business.

Finally, as some of you may know, I will be turning 64 in several weeks.

Given that Cabot has a CEO retirement policy of 65, I am often asked about succession planning.

I want to assure you that Cabot's Board of Directors is very engaged, focused and working hard on this issue.

There are a number of strong internal candidates and I believe that as part of good corporate governance the Board will also consider external candidates.

There is no particular timetable for this matter to be resolved and I am committed to working with the Board to identify my successor and to make sure that this Company is in appropriate and capable hands before I retire.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jay Harris with Goldsmith and Harris.

Please proceed.

Ken,.

Hi, Jay.

Your raw material costs for Carbon Black came down in the three months ending August, and that set the stages for your contract prices for the December quarter.

What was the decline in the three months ending November and could you express that in dollars per barrel?

I don't have those precise numbers with me, Jay.

I can tell you, I think, that the benefit all of all of that in this quarter when compared to the period ended August was roughly $10 million.

And that, although it is too early to know exactly, we would anticipate if feed stock costs stay roughly where they are, an additional benefit in this current quarter but less than the one that we received in the first quarter.

So some of the $0.20 to $0.25 of benefits that you outlined that were in the $0.79 will repeat in the March quarter.

That's true.

Let me just give you a little bit more color around that.

There are two issues that is we wanted you all to be aware of.

One was the reverse lag, which was roughly $0.10, and yes, you're right, unless something dramatic happens to oil and feed stock in the next couple of months, we'll have some of that benefit in the second quarter.

The other benefit that is clearly nonrecurring is that our Supermetals business had significant volumes in the fourth quarter related to the last quarter of the last of the significant high-priced contracts.

And that will -- that benefit is now gone and will not repeat.

All right.

Thank you.

Those were the two issues.

It is a little bit hard for us to be precise, but -- and so that's why we gave you a range.

We didn't want you to think that we anticipated repeating $0.80 quarters.

Well, it would be nice to think you could, though.

It would be very nice.

I would be the happiest guy on the phone.

All right.

Thanks.

Your next question comes from Jeff Zekauskas with J.P. Morgan.

Please proceed.

Hi, good afternoon.

Just to clarify an answer you just give to Jay, does that mean that in the second quarter you won't sell any high-priced tantalum under the old contract structure?

Under the old contracts there were three very significant contracts that have all expired.

And there was one very small one that continues for a short period of time, but it is small enough to be insignificant in the business.

So we are largely through the benefits of the contracts that we entered into six years ago, I guess.

How much of an operating profit difference does that make in Supermetals this quarter?

It is a little bit hard to know, but it is -- it certainly in the range of more than $5 million.

Is Eddie there?

Maybe Eddie will tell us, right?

Jeff, thank you.

Eddie is here, and he is perfectly willing to talk, but I answered the question the way I did.

Okay.

That's fine.

I am sorry.

No, no, just so everybody knows, we don't give guidance.

Yes.

We have historically given guidance in this business and we, as we said I think two or three quarters ago, when the contracts expired we would stop giving guidance.

The guidance we're going to give is that this business is going to be less profitable in '07 than it was in '08, and that we will earn a substantial portion of our profits in the first quarter.

You did substantially better on a sequential basis in Metal Oxides.

Yes.

In profitability.

What's behind that, Ken.

I think there are two things, two substantive things.

You remember last year's fourth quarter was a tough quarter.

Yes.

We had a hydrogen plant contractor who provides the hydrogen to us, and that impacted our cost structure and volumes.

So that is one impact.

And we operated smoothly this quarter.

The second issue is that we had strong volumes in the business, aided particularly by the new plant in China, which was operated at close to full capacity during the full quarter and has a very low cost structure.

So this is sort of a sustainable level of profitability for you in Metal Oxides?

Well, again, without giving guidance we feel very positive about where that business is and where it's going forward.

Lastly, can you discuss sort of the supply and demand issues in Carbon Black in the United States and how you think that might play out over the next couple of quarters?

I would love to.

First of all, I would like to make sure everybody understands that today, although it varies up and down depending on the exchange rate if you measured dollars, approximately 20% of our rubber blacks business is generated in North America.

One of the significant transformations that has taken police in the Carbon Black business over the last five to ten years is our increasing strong position in the developing part of the world, particularly China but also Brazil and Indonesia and the rest.

So North America is only 20% of the total rubber blacks volume.

In that market what we have been seeing, and I think is generally well known and was certainly reflected in the recent labor dispute that Goodyear came through, is a continued and candidly accelerating removal or decline of tire-making capacity in North America with the result that there is excess Carbon Black capacity in North America.

As we look forward, and this is something we pay close attention to in every region on a constant basis, we do not see any reason to believe that more tires will be built in North America and that therefore we'll see an increasing demand in North America, and we therefore continue, as we always do, to look closely at the capacity in our system and in the Carbon Black industry in general.

So it is 20% of our business.

It is the one weak segment of that business.

The rest of the business both in PP, in the performance products and the rest of the rubber blacks region, all are doing very well in terms of volume and capacity balance.

But we have this one relatively small chunk of the business that is under pressure, and we're experiencing that pressure.

We're experiencing margin pressure in that segment.

Okay.

Thank you very much.

Your next question comes from Saul Ludwig with KeyBanc.

Please proceed.

Good afternoon, Ken.

Hi, Saul, how are you?

Doing great, thank you.

How much did the Goodyear strike cost you, you think, in earnings?

Well, we would -- you guys are getting very good at asking me questions.

I will tell you, we think it impacted us in terms of 15 to 20,000 metric tons during the quarter.

What does that mean in terms of earnings per share?

Don't know the number and wouldn't give it to you if I did off the top of my head because it would disclose what's our profit per ton.

Yes.

Okay.

You said that these two items, the lower feed stock costs and the Supermetal business help you to the tune of $0.20 to $0.25 a share, so let's just sort of take the midpoint, $0.22, which is about $22 million pretax.

Didn't you say earlier that about 10 million of that would have been due to Carbon Black and about 5 million would have been due to Supermetals.

Where are we missing something?

Well, I tried not to giver you a very good answer and I tried to provide a range on the 20 to 25.

We took the mid-point.

I understand what you did and I understand you converted my Supermetals number to a particular number which I tried not to give.

Listen, this is an imprecise science.

The lag is a little bit imprecise because the cost of our feed stock and the precise impact of the volume in Supermetals isn't precise.

What the message that we tried to convey to you is that the Company before special items earned about $0.82, somewhere in the range of 20, maybe a little bit more of those pennies, cents, are probably attributable to things that we think are not recurring and that we tried to create an impression that the earnings power of the company during the quarter was in the range of $0.60.

Uh-huh.

That's the message we hope to leave with you.

I would -- .

And that $0.60 would be based on a normal margin in your rubber black business without any help from a positive lag?

That's correct.

Okay.

Great.

Remember going forward it is hard to predict where that will be based on both feed stock costs and price movement.

Right.

Now, in the back when we were talking about this $0.20, $0.25 a share, and you said 5 million was due to Supermetals, so Supermetals made 16, if you took off the 5, you'd be down to 11, let's call it 10.

You've always said this is going to be profitable.

It sounds like you're saying that going forward it is probably something less than 10 and more than zero on a quarterly basis.

I think that's a good -- that's funny, Saul, you articulated my range better than I did.

We try to help out here.

You're a very good guy.

In this spread, the swing in the Carbon Black business you talked about $4 million negative first quarter to first quarter swing of $4 million on fixed costs and $8 million negative swing on inventory, and other items.

I wonder if Jonathan can give us a little color on what those were and how should we think about those items going forward?

Well, I will talk generally about the 4%.

That was on our --

Core $4 million.

$4 million on the cost line.

There is a couple things -- year-on-year, right, you're talking about?

That's what you want to hear, Saul?

A couple observations versus a year ago, we have more capacity online in Carbon Black specifically.

We have a full quarter of the consolidated results of [Shoidenko] in Japan that we bought in early November of last year.

We have our new line at Maua, new facility at Tianjin.

Those are all in that cost number.

So they're going to be there for the rest of the year?

Yep.

They're going to be there for the rest of the year.

The accounts will start to look good later in the -- better later in the year because it will be apples-to-apples then.

On the inventory change?

One other observation on the fixed costs is that in this quarter versus a year ago the dollar was 10% weaker, and given the proportion of our business that's outside the U.S., specifically in Europe, that also drove costs up.

It drove profit up, so that's the favorable -- overall favorable exchange rate.

Got you..

So there is some exchange rate noise in there.

Inventory, I don't have as a good or succent an answer.

I will have to look a year ago what happened and this year what happened on the inventory change.

Bill, do you have the numbers there?

Well, generally speaking we built more inventory in last year's first quarter than we did in this year's first quarter.

I think that's the differential that we see in the numbers with regards.

Historically we've always experienced two things, one is an inventory, an aggressive inventory drawdown by our customers at the end of the quarter because most of them are calendar year companies and they want to make sure that their inventories in good a shape as possible.

And we also start to experience what we've come to understand as the pre-Chinese new year build of inventory in the Far East.

So the inventory build is to be expected, but it was less this year than last because outside of the United States the volume was so high.

Two other quickies.

It sounds like your teeing us up for closing your Carbon Black plant in the U.S.

Is that a likely -- a probable event this year and if you did that, what's it cost you to do it?

Saul, I am glad that you don't have to take orders from our General Counsel.

Let me repeat the answer I have given before.

We constantly review the capacity demand balance of our Carbon Black business all over the world in every region.

We are in the process of looking at that closely in North America and there is a capacity excess in North America today that we believe is difficult.

Got you..

Finally, what was the swing in op income in inkjet first quarter to first quarter, was it down 2 million, 3 million, $4 million?

What was the delta, not the specific number?

It was not insignificant and the business did not perform anywheres near that it has in the past or we will -- we believe it will in the future.

Could it have been 4 or $5 million negative swing?

I guess I am not at liberty to give you numbers, but it could be significant.

Okay.

Great.

Thank you very much.

Your next question comes from the line of David Begleiter with Deutsche Bank.

Please proceed.

Thank you.

Hi, David.

Hi, there.

Ken, can you update us on your thinking of the high speed inkjet printing opportunity?

Well, as I tried to indicate in the speaking notes, we remain very, very optimistic and excited.

We are operating the line we built last year and off that line we had our commenced commercial sales this quarter.

We are in the process of debottlenecking the line and starting the work to build a second line.

I will tell you that they're both significant increments of expansion, additional capacity, and we're feeling a little pressure to make sure that we have that capacity ready as the market develops.

So we're -- I am not at liberty as you know to talk about customers or specifics, but I think you need to understand that we're very optimistic that that is going to be a very important business for Cabot in the months and years ahead.

How long would it take do you think to complete and then load the second line?

Well, I can tell you complete.

Loading, of course, is outside of my control and it is very hard to predict.

Complete is a full second line looks to me to be about a year and six months, maybe a little less.

The debottlenecking is in the range of six to seven, maybe eight months from today.

And I would tell you that we feel that we're going to need the second line by summertime of '08.

Fair enough.

Ken, just in Carbon Black, given your new plants in China and Brazil, how much of the business now is under long-term contract or formula-based arrangements?

Well I don't think there has been any significant change in terms of total volume of our Carbon Black business under long-term contract, roughly 50%, Bill, is that about right?

Of the total, yes.

Of the total and that remains the case.

The new -- the new lines are -- not all of the volume off those lines, in fact most of our contracts are in the developed regions and the developing regions are mostly spot volumes.

Lastly on specialty fluids, any sense of utilization this quarter, where we're tracking towards?

No, no.

I would just remind everybody that that business has been and continues to be volatile.

I am -- one of the great learnings of having my job in this business over the years is getting to understand how unpredictable drilling and completion activity is for the oil industry.

One of the issues that happens to us quite frequently is that we either get in a hole and there is a mechanical failure and we stay in the hole for longer than we thought or we're about to go in the hole and there is some sort of upset on the drilling rig and we don't get in the hole when we thought we would.

At the level we're at, and it was as you know very solidly profitable this year, this quarter, it is very hard for us even for us to predict accurately what we're going to get next month.

And, Ken, lastly, by the time you exit Cabot, hopefully a long time from now, will this business still be a part of Cabot in your view?

I think it depends on where it is.

I hope you heard that the metric we use that we mentioned earlier in the notes about utilization, we had a growth in utilization from I think either 12 or 14 to 17% this quarter and you see the impact that has on profitability.

We firmly believe that over time we will be able to get utilization up certainly closer to 50% and the leverage is significant.

We continue to believe that cesium formate is the best drilling fluid for certain drilling and completion activity.

We're very excited and pleased with the developments we've had in Argentina and see further business coming out of that region.

And we continue to work hard in the other regions of the world.

Tying where we think that business will be fully valued and my retirement date is something that I am unable to do.

But we certainly -- I personally would be very strongly in favor of holding onto this business at least until it is fully valued and then seeing what happens.

Is that number still above $1billion dollars in your view?

You can take any number.

If I owned it, that would be my target.

Remember, that's a personal view.

If I owned Cabot, I would be sitting tight until we're making a lot of money.

Thank you very much.

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

Please proceed.

Afternoon, Ken.

Hi, John.

I reiterate Jay's comment that a few more $0.80 quarters before your retirement would be nice to have.

There is three of us who would think the same.

Your looking for a $0.50 target from each of the two major new product areas, so you can annualize things out to close to that rate maybe before you get out.

Be nice.

We're working on it.

Just to pin you down a little bit more on the tantalum business, and I know Eddy, you said, is in the room.

The prior two quarters were 9 million in operating income and I assume this final contracted customer wasn't buying a lot during then, otherwise they wouldn't have had the catch-up demand in this current quarter.

So why wouldn't those be representative profitability quarters for a post-contract environment?

No comment.

Okay.

The wording in the press release about high speed inkjets says printing.

It doesn't say copier.

Is there anything in the semantics there?

No.

High speed printing would encompass high speed copier?

I think you can look at the -- a wide variety of various printing applications including copying.

Okay.

And then finally, the weakness in performance blacks was attributed to lower plastic demand because plastic prices were coming down and customers were pulling off, but I think you've had four quarters in a row now with down volumes in the performance, Carbon Black area.

Are you sure that it is the plastic year-end inventory reductions in customers holding back on price or is it the excess rubber black capacity coming over into the performance area and causing some problems there?

That was certainly an issue we had in the first part of the last fiscal year.

And I think we talked about it when there was a transfer of what we would describe as performance products, volumes, for one particular segment into excess rubber black.

It is something we've watched.

I think when we dig and analyze the numbers, remember the performance products line includes our master batch business.

In the master batch business the volumes have historically fluctuated very, very substantially when we see significant movements in oil prices because they rippled through into the polymer pricing.

It is something we're looking at, John.

I actually -- I think we were and remain pretty positive about where performance products volumes are seem to be headed.

You note that we're in the process of building an additional product line in the Far East for that business.

It is something we're watching.

I don't hear a lot of concern.

We did have the problems we had at the beginning of the last fiscal year, but since then things have been, I think, pretty good, I think pretty solid, and we anticipate that continuing.

Okay.

Thank you.

Your next question comes from the line of Mike Judd with Greenwich consultants.

Please proceed.

Good afternoon, Ken.

Hi, Mike, how are you?

I am doing well, thanks.

Just a couple of questions about volumes in your Carbon Black business.

I think you mentioned that there was some end of the year inventory destocking and that you're expecting after the Chinese new year for volumes to pick up.

As I look here at some of the futures prices for fuel oil and resid oil and things like that, those things seem to be indicating that those prices should be heading back up as we get into the mid-year or so.

And I am just trying to get a sense from you whether you think that these potentially higher prices here are going to cause customers to come back into the market soon and begin restocking on Carbon Black?

Well, we certainly anticipate that happening in the performance products area, particularly in our master batch segment of that business.

That will happen I am quite sure.

In the other segments of the Carbon Black business my own guess is that although there may be some relatively short-term inventory swings because of oil, by in large the industry has learned to minimize its inventory already and there is not a lot of room for that.

We're all watching oil prices because of the impact on margins and prices.

But I don't -- other than in the performance products group I don't expect a lot of impact from oil price movements on inventory and therefore volumes.

Our capacity outside of North America in rubber blacks and our capacity in performance product is relatively fully utilized on a global basis.

We're feeling pretty good about that going forward.

Thanks for the help.

Thank you.

Your next question comes from Bob Goldberg with Scopus Asset Management.

Please proceed.

Good afternoon.

Hi, Bob.

Hi, Ken.

Using your assumption that the underlying earnings for the quarter was $0.60, I know you don't like to get pinned down and you certainly don't want to give guidance, but can you just help me understand the moving parts as we look out into the March quarter because the $0.60 basically takes out all the reverse lag benefit and presumably takes out all the excess profits that had been in the tantalum business.

So as you look out into the March quarter, which seasonally I think has been a better quarter than the December quarter, at least historically, and of course you have the benefit of, I assume, better volumes in North America as the Goodyear strike impact has gone, I am just trying to understand the --

Let me without giving guidance or giving numbers, let me tell you the moving parts that we watch closely and that might help.

As I think it was Jay, but I am sure, pointed out, there is likely to be some reverse lag benefit in the second quarter.

We don't know how much and it is not for sure.

But based on what we see today, if things stay steady, it would be less than what we experienced in the first quarter but still some.

We do expect, as we've made clear, and I think it was Saul who put the right kind of range around it, to see a significant decline in profitability in the Supermetals business because of the expiration of the last long-term contract.

But that's already in the $0.60 number.

Yes, I am just telling you what the numbers are.

Yes.

We expect, as we made clear, a pick-up in inkjet profitability that we anticipate being significant, as I mentioned earlier.

We think the Fumed Metal Oxide business is solid and at least stable.

We're very optimistic about that business.

And we're a little bit unsure about what will happen in the cesium formate business because of our inability to predict when jobs will takes place.

So if you take the $0.60, there is some unsure numbers, but there is some positive opportunities and negative opportunities.

Does that help at all?

That does help, but seasonally shouldn't there be some pickup in volume from the December quarter to the March quarter, especially in light of the fact that you had the Goodyear strike during the summer?

In North America there should, because of the absence of the Goodyear strike, there should be some pickup in volumes.

The question there is how weak is tire production and therefore the volumes.

Seasonally, historically, the second quarter has been stronger for us across all of our businesses than the first quarter, although Chinese new year, because of our growing position in the Far East, is a more significant issue.

But historically volume has been stronger for us even with that in the second quarter than the first in both Carbon Black and fume silica.

So, yes, we'll see what happens, but I think that's something that we certainly are aware of.

And were there any further developments?

You talked positively about the cesium formate and pursuing opportunities beyond the North Sea.

Anything more you can talk about there specifically?

I would tell you that I think a bunch of things happened that lead me -- give me more confidence that those markets will develop in the not too distant future.

But too many times in my job I've created false expectations, so I am not in a position to tell you that we're going to get business in any particular region at any particular date.

I will tell you that based on what I see going on in the market, what I observe of the use of lower density formates in these markets, leads me to be more optimistic.

Let me explain that.

There are three formate products, cesium, potassium and sodium.

Potassium is an increasingly used drilling fluid.

It is penetrating into the markets that we are trying to penetrate into with cesium.

We're actually in the business of selling potassium formate and have made some sales into these regions.

That is generally an indication that the people who make these decisions are coming to understand the benefit of formates versus oil-based fluids and therefore is generally a positive indicator.

We're seeing more of that.

I am feeling better.

Again, I cannot and will not predict.

When it happens, I will tell you, and I believe it will happen.

Thanks, Ken.

Your next question is a follow-up from Jay Harris with Goldsmith and Harris.

Please proceed.

Ken, I couldn't help but enjoy your comments and I can't imagine Cabot on a conference call without you.

Tantalum.

Tantalum.

Have you guys been able to figure out what the purchaser of Starks business, what value they placed on the Stark tantalum business?

Jay, we've been thinking about that question, for those of you on the line, Jay asked me that question a month or so ago and I told him that we would be in a position to give him what wisdom we had and I asked Eddy to be prepared to answer that question, so Mr. Cordeiro, if you can answer the question.

Well, Jay, as I guess you are aware, Stark was for sale for quite some time.

And in the last quarter the sale was actually announced.

It hasn't closed yet, as far as I understand.

The tricky thing for us is that the tantalum business, as we understand it, comprises probably only a quarter of all of H C Stark.

So it is hard for me to interpret much into what the buyers were thinking specifically about tantalum.

They have a number of other metal assets, some which are growing quite quickly.

I think you're probably quite aware of the molybdenum business, which is experienced very high growth rates through, in particular, applications in the LCD panel industry.

We view it obviously as a positive sign that the business was sold and sold for what was quite a high price, but much more than that I am not sure we can really interpret.

Let me just add one thing to Eddy said.

I don't know what way it is cut, but it is an interesting indicator.

Those of you who have been with us for awhile, and I know you have, Jay,remember that when we first entered into the long-term contracts, our market share in the powder volume went from 40 to 45% way, way up, I don't know how high, but it got way up because the market was down and we were selling -- .

Maybe 70 at one point.

Maybe.

I've heard higher numbers.

As you know, we were very concerned that as the contract expired we're going to be a position of losing substantial market share.

In fact there was some fear in the early years that the people, the customers, would be so annoyed at us that they would take all of our volume away and we would be in bad shape.

Fortunately, and I give Eddy and his team great credit for this, as that has happened, it is apparent that we actually end up with a more substantial market share in the powder segment of the tantalum business than we had before the contracts entered into.

And that tells me that if you look at the tantalum business, Cabot has a very strong position in powder but Stark has a strong position in both the oxide and metals portion of the business.

And it is a little hard for us to know precisely how strong and profitable those segments are.

One interesting thing that I would like to put in your head is contrary to our fears of losing market share in the powder segment because of the contract, we actually think picked up market share, most of which comes through, although our Boyertown facility is doing well, through the acquisition of the Japanese asset that took place during the contract period.

I think the business is doing well given its market condition where it stands.

Well, you answered the question the way you said you would answer the question the last time we chatted.

I would like to turn to inkjet, inkjet colorants.

Over the last few years matching the research inputs of a key customer, maybe a group of customers, you've stepped up your R&D efforts at a variable rate.

Yep.

It is very difficult to put numbers on the earnings or cash flow of a business when one doesn't have any idea of how the operating expenses are going to be managed.

And I wondered if you've reached a point where you can share with us some sort of a relationship between revenues and operating expenses going forward and if you could briefly comment on what happened to the operating expenses in that business in the December quarter I would appreciate it.

I am not quite sure whether I can fully answer your question, but let me try.

We did have the problems or the volume short falls in the SoHo market that we anticipated and that we talked about on the last call.

The OEMs in that segment continue to be very aggressive against the producers of knock-off cartridges and that has disrupted the market and had an impact on our volumes in -- across the segment.

We anticipate that coming to an end and stability, some degree of stability returning in the not too distant future.

We actually have kind of used this period to be very aggressive in that space and to try to pick up more volume and more share going forward.

The operating expenses are -- there are two major chunks.

We have, as I think we've talked before, built capacity in excess of demand to be sure that we did not short important customers in a new space.

We believe we're getting very close to commercial use of those products in a significant way, and when and if that happens, we'll be in a much better position to gauge the ramp speed.

But I hope you understand we are being conservative in our spending both in capacity and in operating costs to make sure we never find ourselves in a position where we're the bottleneck or we short the market in what we hope and believe will be a rapidly growing market.

Now, that period hopefully will line out here in the next, I don't know, twelve to eighteen months, and we'll all, you as well as us, have a much better sense of what the potential for the -- for that particular opportunity looks like as it becomes public.

The R&D issue is -- remains the same.

I tell you that when we look at the business and we look at what is going on in that space, we see broader and broader opportunity for the use of our technology in more sophisticated, higher-volume printing opportunities.

And it requires -- to capture those opportunities requires continued and expanded spending in the R&D space.

We are in the process, just about to start construction of a new research facility for that business in our laboratories in Billerica and we continue to expand spending there because we are very, very optimistic that this is where -- we may be at the starting point of a significant new printing technology.

So as I think we talked about -- .

Do you lose the opportunity by slowing down the rate of investment in the pipeline?

Absolutely.

Why?

Because these, if you look at like any of these things, the various printing companies, the OEMs, make decisions about particular pieces of printing equipment and they just keep coming at us.

There is this opportunity, this opportunity, and you have to spend and develop technology, specialized technology for each separate opportunity.

And our philosophy today, has been in today is that we believe we have a technological advantage in the space and we're going to keep our foot on the accelerator to see if we can take as much of the business as we can as it grows and develops and maintain and if possible expand our technological position.

You could, as we've said before, approach it differently.

I think we could if we said, look, we just want to harvest what we have today and take all the spending out and start making money that you would notice in a significant way in our earnings statement.

It would look good in the short-term, and maybe I would reach yours or John Roberts history of making an $0.80 quarter, but three or four years in I personally would regret it because I think we would have missed what may be a very, very substantial opportunity for this company.

Are you anywhere near close to coming to a corporate decision that leave the profits where they are, operating income where they are and expense away the incremental gross profits to maximize the position of the business looking out five or ten years?

I would tell you that every decision, spending decision that we have made in that business, both in capacity and R&D, is based on the opportunity we see going forward -- two things, based on the opportunity we see going forward and the availability of the intellectual resources to do the work.

That business has not -- .

That's the limits factor in other words.

That's right.

There is no financial limiting factor in that business.

Specialty fluids.

On a consecutive quarterly basis you're reporting your revenues up $5 million and your profits up $5 million.

There must have been some incremental costs associated with the incremental revenues.

Are they that small?

Well, I keep telling you people that this business has immense leverage and that there is a fixed cost of operating the business that is essentially fixed where we're in the process of expanding that a bit, spending a little bit more marketing resources in the developing part of the world or in the world we hope to penetrate, but when we get a big job where the fluid is utilized for a long period of time, the costs are virtually incremental costs are virtually zero.

This is why that utilization factor is so important.

Now, it is not always that pure as it appears to be and I suspect there is some, there may be some confusion and a little bit of rounding in those numbers, I don't know.

But, Jay, it is certainly the incremental operating cost of an extra 20 days in a hole might be 1 or 2% of the revenue but not a lot more.

Well, I was thinking of when you have the opportunity to open up a new theater of operation.

When and hopefully when and if we come to you with a new theater, we have some like an Argentina today, we have some operating costs.

We have people on the ground supporting the activity.

We got more sales activity.

But in the North Sea if you got a big new job the incremental operating costs are very, very small.

One last question, and that is -- .

Let me just say one thing.

I hope that helps you understand the leverage potential in the business.

No question it does.

Okay.

No question it does.

Your inventory position, what did you drawdown during the quarter?

How much of your inventories are still considered excessive?

I am going to get Eddy to answer the specific question in Boyertown or Supermetals where I would tell you that we continue to believe that we have inventory drawdown potential -- I think we've certainly mentioned 100 million in the past and we made substantial progress with that last year.

In the other businesses, we drew down a lot of inventory at the end of the fiscal year.

And although we had some build this year this quarter, which is to some extent seasonal, I think we're operating pretty tight in those businesses.

So let me get you Eddy to give you the answer in Boyertown in Supermetal.

I think the potential, Jay, going forward is probably in the range of 50 million, but that would be beyond -- that would not be completed this year.

It would happen over the next let's say 18 to 24 months.

All right.

Thank you very much, gentlemen.

Thank you, Jay.

Your next question is a follow-up from the line of Jeff Zekauskas with J.P. Morgan.

Please proceed.

Ken, I have been meditating on that line you have in the press release about the positive impact of declining feed stock costs on our rubber black contracted business will be weaker unless Carbon Black feed stock prices continue to fall.

Do you mean the absolute level of impact or do you mean the rate of improvement of impact?

I think, although somebody may correct me, I think we mean and if we put it in numbers, we've said that it had about a $10 million impact this year.

This quarter.

And that although we would anticipate current conditions being -- remaining stable for a period of time going forward, we would anticipate a lesser impact next quarter.

But we would anticipate an impact.

So all things being equal, you're saying all things being equal, the direction of margin is down?

In our contracted business, because buried in the margin in the contracted business is the impact of what we've come to call the reverse lag.

So in our contracted business our margins in that business this quarter were expanded by $10 million as we recaptured the loss that we experienced during the period of feed stock rising.

Yes.

Now, next quarter, all things being equal or stable, I think is a better term.

Right.

We would anticipate a further recapture, a further benefit from that, not as great as $10 million.

So if you're over earning, for lack of a better term.

I don't really like that term.

Forgive me.

If you're more prosperous by 10 million, that would mean that sort of the normalized margin of the business, excluding raw material changes and geographic shift over a longer period of time, would be about 9% because that's -- 2% is 10 over 485.

Is that right?

Well, I don't have the numbers -- .

Or conceptually is that right?

Without talking numbers and without projecting or giving you any numbers, yes, if the margin I think was 12% this year, between 11 and 12 this quarter, it is overstated on a sort of a steady stake basis by roughly $10 million.

So it may be overstated next quarter by a lesser amount, but remember that when you're looking at the margin in the Carbon Black business there are two parts.

The 50% that is subject to this feed stock cost formula adjustment and then the 50% that is-- that ebbs and flows based on feed stock cost and pricing.

Well, if the 50% of contracted business of higher margin or lower margin than the non-contracted business?

Well, I guess the answer to the question is no comment, but I will give you a little color on that.

I appreciate that.

Yes.

Most of the contracted volume is in the rubber black segment, although there is some in the performance products segment.

Are there any larger global contracts that are coming up for renewal and -- over the next twelve months?

I do not believe we have one -- one expiring at the end of this year?

That's right, there is one global contract that expires at the end of this year.

At the end of '07?

End of '07.

End of '07.

And then lastly, is the -- is the profitability of the Chinese operation relatively good already or does it take time, for various reasons, for the profitability to get at the level that you're looking for?

I will tell you that relatively good is not a reasonable description.

Okay.

If I could convert the entire Carbon Black business to the profitability level being earned by our new capacity in China, I would be a happy man.

Okay.

That's very clear.

Thank you very much.

That business, that plant opened up fully sold out and earning a very, very nice return.

Okay.

Thank you.

Your final question is a follow-up from the line of Saul Ludwig with KeyBanc.

Please proceed.

You've said that 50% of your Carbon Black business was under long-term contract.

If you were just answering that question as respect to rubber blacks, not performance blacks, what percentage of the rubber blacks revenue is under contract?

About 60%, Saul.

All right.

And in performance products, I remember last year not only were you having volume problems, but when you tried to raise prices you lost a lot of business and you ultimately walked away from your least profitable business and while you have lower volume, it was selling less but enjoying it more, so to speak.

From the first quarter of last year to the first quarter of this year, what happened to the profits of the performance products?

Was that a positive swing and a meaningful positive swing?

Well, I would remind you in the first, I am not sure how far I going to give you an answer to the question, but I would tell you that we had not quote your term walked away from that low end business in the first quarter of last year.

That happened at the end of the first quarter and the beginning of the second quarter.

So what happened to the performance products profits year-over-year, Ken?

I don't have a precise number, of course, nor would I give you one, but I think due to the richer nature of the product line and the expansion of margins that the business is doing better.

Even with a lower volume?

Even with the lower volumes.

And the final thing is I looked at the tire production in the first calendar quarter, which will be your second quarter, compared with the fourth quarter calendar quarter of '06.

And tire production in North America was down, in part because of the Goodyear strike, 30% from what was in the Jan/March period to the October/December period.

It would seem logical that you will have an increase, a meaningful increase in volume, because also first quarter is when tire companies build the product for the spring selling season, that you will have an increase if we kind of think that production went from 100 to 70, you will have a substantial increase from the 70 but probably not as much as the 100 because of some other capacity that it was taking out?

That of course would be very nice news for us, but I would -- you know this better than I do, Saul, that decline from 100 to 70, again your numbers to some extent reflects some of the impact of the Goodyear strike, et cetera, but it also reflects what's going on in the whole area of North American tire production.

Correct.

We've had a Firestone plant taken out and a Michelin plant taken out, so we've had some capacity reduction that won't be there in the first calendar quarter of '07 that was there in the first calendar quarter of '06.

It should be a little bit better, but it is not 100%.

Got you.

Thank you very much and we'll look for good news coming forward.

Thank you.

Thanks, Saul.

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

Thank you, everybody.

We've enjoyed the call and we hope to be with you in three months with the equally positive news.

We'll keep our fingers crossed.

Thank you.

Thanks, Tawanda.

You're welcome.

Ladies and gentlemen, that concludes the presentation.

You may now disconnect, and have a great day.