Cabot Corp (CBT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the second quarter 2007 Cabot earnings conference call.

My name is Tanya, and I will be your operator for today.

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

We will conduct question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the call over to your host for today, Mr.

Ken Burnes, Chairman and CEO.

Please proceed, sir.

Thank you, Tanya.

Good afternoon.

This is Ken Burnes, Chairman and CEO of Cabot.

I would like to welcome you to our second 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, Eddie Cordeiro, General Manager of Supermetals -- and Ravijit Paintal , General Manager of Metal Oxides, Jim Kelly our Corporate Controller, Susannah Robinson, Director of Investor Relations, and Brian Berube, our General Counsel.

I will remind you that our conversation today will include forward-looking statements.

Forward-looking statements are subject to risks and uncertainties.

And Cabot's actual results might differ material from those expressed in forward-looking statements.

A list of factors that could affect Cabot's actual results can be found in the press release we issued last night as well as our 2006 Form 10-K and subsequent filings with the Securities and Exchange Commission.

Copies of which are available on our website.

Last night we released results for the second fiscal quarter of 2007.

Along with the related supplemental business information.

Copies of 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 are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations.

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

We will then open the floor to questions.

We are very pleased with our second quarter financial results.

Before I get into the detail, let me talk about the four key messages for the quarter.

First, our Carbon Black product lines once again performed as a high level benefiting from strong volumes and lower feed stock costs.

Second, the fumed silica product line continued its excellent performance based on strong volume growth and it's new capacity in China.

Third, our ink jet colorants product line had a strong recovery from an exceptionally weak first quarter, with volume growth in all market segments and we are in the midst of a significant ramp in volume for the high speed market.

On the negative side, the super metals business had an unexpectedly weak quarter as the unfavorable volume and price impact of the transition from contracted to market base sales was magnified by an increase in costs.

Let me go through some of the details.

In Carbon Black, we had strong volume growth and continued to benefit from our new capacity in China.

As a result of the success of our Carbon Black business in China and our aggressive outlook for the growth of that market, we are planning to build two additional rubber black units on our plant.

We remain optimistic about the volume prospects for growth outside of the North American region, but are cautious about the impact that the Carbon Black demand outlook in North America may have on us.

We benefited during the quarter from lower Carbon Black feed stock costs in the feed stock based pricing formulas in our supply contract, albeit not as significantly as in the first quarter of 2007.

We believe that we have essentially caught up with the feed stock lag and going forward margins will largely be dependent upon variability in feed stock costs.

We were very pleased with the significant improvement in ink jet colorant volumes, both in the OEM and aftermarket segments.

Despite the improvement, the aftermarket segment remains soft and we continue to see price and performance competition in the Soho space.

We are shipping substantial volumes for the high speed ink jet market and are in the process of expanding that capacity rapidly.

We remain encouraged with our new business development efforts especially fluids over the last year, we have been working to expand our market presence which now includes North America, South America, the Middle East, Far East, and Kazakhstan.

Although the timing of the market acceptance in any particular region is uncertain, this geographic expansion is a substantial step forward for the business.

Our aerogel product line continues to work to meet its business developed milestone and anticipates restarting plant operations mid calendar year to serve increasing demand.

We are also seeing encouraging developments at superior micro powders.

Second quarter we began to receive commercial revenue in our security inks market segment which we expect will ramp up throughout the year.

We are optimistic that this segment will continue to grow and that we will generate commercial revenue with another of our new business opportunities later this year.

Although timing of new business efforts is uncertain and is always slower than we would like, I feel very confident about our pipeline of opportunities and the way that we are managing the development of the various businesses.

Finally, the Supermetals business had an unexpectedly weak quarter.

The expiration of our final significant long-term supply contract in December of 2006 negatively impacted both volumes and pricing.

And we began to experience a reduction in market volumes in line with some softness in the electronics market.

Additionally, the timing of certain costs and the unanticipated increases in the number of expenses during the quarter impacted the business performance.

We continue to focus on generating cash in this business through inventory reduction which also hurt profitability somewhat during the quarter.

And we continue to be disadvantaged by our high priced or contracts with Sons of Gwalia that expires in 2008.

Although Supermetals had a difficult quarter cost-wise, we have been largely successful in replacing lost contract volumes with market base volumes and expect the business to be profitable for the balance of the year.

Additionally, we anticipate 2008 results for the business will improve over those of 2007.

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

Thank you, Ken and good afternoon, everyone.

I would like to begin with our Carbon Black product lines where volumes increased in rubber blacks by 3% and 7% when compared to the second quarter of 2006 and the first quarter of 2007 respectively.

Versus the second quarter of 2006, the increase was substantially driven by strong growth in China and solid increases in Europe and South America.

Sequentially volume increased significantly in North America due to the resolution of the Good Year Labor Stoppage that ended in early January.

We also saw a very strong growth in Europe and South America with increases of 10% and 5% respectively.

Switching to performance products, volumes grew by 7% compared to the second quarter of 2006, driven by sales in the plastics segment and by 10% sequentially from a combination of typical seasonality and the delay of plastics sales from the first quarter due to high polymer pricing.

Both product lines had higher unit margins compared to the same period last year with lower feed stock and natural gas costs and net favorable to foreign currency translation.

Combined with the strong volumes, these higher unit margins more than offset the increase fixed costs of our new capacity.

Sequentially, however, lower pricing associated with our contract pricing formulas outpaced the lower feed stock costs leading to lower unit margins.

These lower unit margins almost entirely offset the benefit of the volume growth that I talked about previously and as such a small increase of operational administrative costs led to unfavorable and sequential profitability.

Turning to fume silica.

Volumes grew by 7% when compared to the second quarter of 2006 and by 4% sequentially.

As increased volumes in the silicas and niche segments more than offset declines in the electronics segment.

We benefited from our new capacity Tien Gin province China in terms of both increased volumes and lower costs.

We also had lower hydrogen costs compared to the second quarter of 2006 when hydrogen costs were abnormally high due to a disruption at our supplier's facility at our plant in Illinois.

These benefits more than offset higher costs in the business leading to higher profitability than in the same quarter last year.

Supermetals, as Ken mentioned, they had a weak quarter posting a loss to $2 million compared to $12 million profit in the second quarter 2006.

Lower pricing in volumes from the expiration from our last significant long-term supply contract combined with the impact of a slow down in the electronics industry and unfavorable product mix and unanticipated costs all came together to depress profitability.

Volumes declined by 25% compared to the first quarter of 2007, and by 7% when compared to the second quarter of 2006.

The business generated $16 million of cash from working capital in the quarter and remains on track to achieve its goal of $50 million by working capital reduction by the last half of 2008.

In specialty fluids, profitability decreased slightly from $4 million in the 2006 to $3 million in the second quarter of 2007.

The business maintained its utilization level compared to the second quarter of 2006 at that 13 to 14% level with an increase in rental revenue being offset by a lower volume fluids sold.

Higher engineering and global marketing costs which we have been incurring to position ourselves well globally contributed to the slight decline in profitability.

Moving from the business now to four companywide performance items, let's first talk about costs.

At a consolidated level, the primary driver of increased costs were our new capacity, the weaker dollar, and an increased accrual for variable compensation which more than offset the savings that we are currently achieving from the cost reduction program announced in September.

Second item, during the quarter we generated $55 million of cash after dividends.

The cash generation included a $23 million debt repayment during the quarter and was driven by strong earnings and a $20 million reduction in working capital.

Third item, tax rate, tax rate on income from continuing operations was 29% for the second quarter, and at this time we anticipate a full year tax rate of between 26 and 28%.

And finally, to talk about cap spend, during the second quarter we invested approximately $23 million in capital expenditures compared to $52 million in the second quarter of 2006.

Now at this time we anticipate spending between $150 million and $160 million for the full fiscal year 2007.

This will include work on our new ink jet production capacity to serve the high speed market and our new special blacks unit in Tien Gin, China for which we have received a construction permit after a long delay.

We are planning to begin work on two new rubber blacks units at our existing facility in Tien Gin, China and are considering an additional fume silica facility in China.

Looking forward we believe that the additional units in China and other high value capital projects including energy centers, will increase our capital spending in 2008 over 2007.

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

Thanks, Jonathan.

Jonathan mentioned we had another solid quarter of cash generation.

As a result of our strong cash position and to start addressing the issue of our conservative capital structure, it is our intention to aggressively be back in the market repurchasing shares over the second half of the year.

We currently have approximately 1.5 million shares available for repurchase under the current Board of Director authorization, and additionally we intend to seek authorization for additional shares from the board at their upcoming meeting in May.

Finally, as we typically do at this time of the year, I would like to remind everyone that over the next several months in connection with our long-term incentive program you should expect to see certain offices of the company including myself selling shares to pay taxes associated with the vesting of long-term incentive awards and to raise the cash necessary to purchase the new shares awarded this year.

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

Tanya, we will turn it back over to you, please.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jeff Zekauskas with JP Morgan.

Please proceed.

Hi, good afternoon.

Hi, Jeff.

I guess the first question is on Supermetals.

How is it possible not to make money in Supermetals in the quarter?

Is it that you can't -- your overhead costs are just very high relative to the low level of revenues vis-a-vis the previous quarters?

And as the revenues get back to a more normal level, the profitability picks up?

I would describe it as certainly partially that.

We did -- we came off a strong first quarter and had volumes lower than we'd hoped.

And some of that is attributable to the electronics market.

Some is attributable to a product mix issue that we experienced during the quarter.

Our view is that the volumes will start to recover for the balance of the year and going forward.

We had some cost issues during the quarter.

Not an insignificant one was the accrual on short-term incentive payments.

We also had a some operating issues that we believe will not repeat, and which surprised us.

We are very confident the business will operate profitability and as I indicated we see growth in profitability as we go forward.

If you take out the operating issues and the extra accruals, what would you have made in the quarter?

Little bit hard to say, but it would have been in the two to $3 million range.

And that would we anticipate would be hopefully a low point.

Jeff, a lot of you understood the significance of what I said, we anticipate making more money in '08 than we will make in '07.

You will recall we made 16 in the first quarter.

Again, if I could switch over to ink jet sprinting.

Are you the sole supplier of pigments for the Hewlett-Packard and the high speed printing area?

Or do they source pigments from somebody else as well?

Jeff, I am not able to talk about our particular relationships with any particular customer.

Then if I could just frame it differently.

When there is a high speed printer that is sold, what do the annual ink volumes or how is that meaningful for you?

The high speed printer market as I understand it doesn't really have that many units.

Is that right?

Well, there are -- as I think you are aware there's at least one and other developing customers in the space.

And the equipment is available in the marketplace today.

And the question going forward is how quickly and how significantly it will ramp.

I will tell you that today the production line we have in place is being fully utilized.

We are in the process of debottlenecking it and starting the addition of a second line.

We were adding those capacity and making those capacity additions as fast as we possibly can based on the anticipated demand for the product.

And then lastly when you look at your ink jet revenues, how would you divide them in just very rough terms into sort of OEM aftermarket and then high speed OEM?

We are not in a position to give you those numbers, Jeff.

Thank you very much.

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

Please proceed.

Good afternoon, guys.

Hi, John.

Too bad you couldn't begin the share repurchase program today.

Ken, you said you were caught up with feed stock costs in Carbon Black.

Have you recovered the additional capital costs you were trying to get because of the higher capital you have to have tied up in Carbon Black these days?

Yes.

And we don't have those numbers.

I don't think we released those numbers.

What Bill and his team have done and I'm very, very pleased and proud of what they have done is they significantly reduced the number of days of inventory in a working capital and fixed product and receivables that we have invested in the business.

I don't have off the top of my head the absolute number.

There is a significant drop in days.

I think with the result that before the impact of the weak dollar and therefore the strong Euro and the rest we were close to neutral.

But the weak dollar, of course, puts us a little bit back in the hole because it inflates the value of the working capital outside the United States.

Fundamentally, I think we have done a very, very good job.

Candidly better than I hoped for in drawing cash out of all of businesses which has given rise to the conservative balance sheet I mentioned.

The only other comment I would make is the crude oil price drives working capital in the business and depending on what your starting point is if you start at the $40 per barrel price, three or four years ago, clearly we still have capital caught up in the business.

But we have recovered economically.

In that point, John, I think we mentioned this earlier but we anticipate although the Supermetals business is not doing as well as we would like from a profit standpoint, we continue to believe we are going to take $15 million in cash out of that business this year.

You did it much faster in Carbon Black.

You were talking about super metals being there until the end of 08.

Supermetals is more complex as I think you are aware of the flow of tantalums through the plant is a complex problem.

And you have to line things up pretty carefully to make sure you maximize the sale of the excess inventory.

Carbon Black is really just being tougher on our sales and trying to collect our receivables faster.

And secondly, the March quarter '07 over March quarter '06 ink jet growth was 7%.

It's not really indicative of what you are targeting in the business.

Could you another month ramp like how March '07 was over March 06.

' or how April 07 ' is sizing up over April '06 to give us a run rate how you exited.

We aren't 100% sure if I was going to give you the whole answers I'm not 100% sure now.

Let me tell you what's driving that.

We are still struggling as we mentioned with two issues in the after market one is as we mentioned before an aggressive push by the OEMs to attack the refillers and that has disrupted the market and cut the sales -- cut the volume in the entire market and that's impacted us.

Secondly, as I mentioned, the price is we were under a lot of price pressure in the market and mentioned in a number of publications the OEMs have been very, very effective in reducing the amount of ink in a cartridge you buy.

The cartridges look the same, cost the same, roughly, but have a lot less ink in them which affects our sales.

And then the third factor is the factor that really is in my view is going to ultimately determine the value of this business is the extent of the success of the high speed printing application.

There are as you are all aware of at least one major company out there.

There are others in the space.

And it's pretty apparent to me that it's going to be a big market.

We want to do very well in the market space.

It's a little hard for me to give you a ramp number even if I were willing to give you the numbers, John.

But I am feeling pretty good about it right now.

Thank you.

Your next question comes from the line of Jay Harris Goldsmith and Harris.

Please proceed.

Good afternoon, Ken.

Ink jet colorants, could you share with us the ramp of the magnitude of the ramp in R&D perhaps even the absolute level of R&D expenditures in the March quarter and a quarter a year ago.

I want to say it's up about 30 to 40% in terms of dollars spent.

But I don't have the absolute dollars in front of me.

I will tell you that as we have gotten more confident about what's happening in the business and the technical space, it is encouraged us to spend more money and to try to expand our footprint in the space to become evermore successful.

I would use the phrase that it's our intention to double down if we thought the high speed was going to be successful and we are in the process of doing that.

I think it would be helpful going forward if you could have that magnitude number available on these conference calls.

We will look into that, Jay.

It's a reasonable request.

Your comment about the value of the business caught me a little by surprise because I guess two Junes ago when you had your analyst day and you review this business and it's potential, there were various segments much beyond high speed printing, which you presented as affording Cabot the opportunity to build a business of significant size relative to the current, then current revenue base of Cabot corporation.

Why are you just, maybe you didn't mean to, but why are you limiting the upside of the business to high speed printing at this point in time?

Well, I certainly don't mean it to do that.

I continue to believe in the absence of high speed printing and in the absence therefore of the R&D dollars that are being spent in this, this is a very attractive business.

Solidly profitable making a noticeable -- I don't know if significant, but material contribution to Cabot's earnings.

We are in the midst of what I would describe as an unusual or somewhat chaotic phase in the traditional Soho space.

There is a lot of things going on.

I mentioned the lower volume of ink in the cartridges.

You're probably all aware that Kodak has recently entered the space and is selling its cartridges for a lot less money than the traditional OEMs.

And the whole -- the confusion or activity in the aftermarket.

I continue to believe it's an attractive business but it's hard to know how to will settle out and how it will play.

What about the other segments that you mentioned, let's say two years ago?

We were working in those.

The two that I would remind you of, you are probably aware of is one is the photo and is that continuing to grow.

It's continuing to become a more prevalent and this is the business using ink jet printers to print your pictures.

And the other one that is developing is sort of what we might call the industrial space.

And that is using ink jet printing technology into other printing applications, labels and the whole bunch of things and that space is growing rapidly as well and I don't mean to create the impression we aren't trying to play in all of those spaces.

Change the subject.

(Inaudible) Characterize the outlook today.

Well listen, as you know and anybody who has been with us for awhile we have been remarkably unable to project when activity will actually take place.

I will tell you that just a brief overview of what we are seeing today, we continue to enjoy the position we have enjoyed for a number of years in the North Sea.

The fluid continues to get used and get used very well.

Very successfully.

Additionally, we have not insignificant business in South America.

And we recently had some -- worked on some wells in Hungary, which may surprise you a bit.

They are land base wells that have concluded that cesium formate is the best material for the application.

That leads me to -- it creates some confidence that the effort we have been undertaking for awhile to break out the North Sea will be successful.

We were also spending and we mentioned this earlier, we broaden our marketing expense and we now have marketing resources on the ground in the Gulf of Mexico, in the Middle East, and in the Far East and are covering Kazakhstan and South America from either the U.S.

or Great Britain.

You know, when I look at the possible jobs and the application coming out of those marketing opportunities, you know, I feel better.

I mentioned to you about a year ago we were uncomfortable with what we were doing there.

Today I feel better and I can't promise anything but I think something is going to break here pretty soon.

How long will Norway sustain its volume?

Everything we know is that it's certainly five years.

Well, everything we know is that it's certainly five years.

Okay.

A long time.

The point is, particularly in the North Sea as we understand it, there are two things.

One is that most of the oil and gas yet to be developed in the North Sea is in formations that favor the use of cesium formate and secondly there is an interesting feature about these business, the wells that you drilled in or completed get worked over to me at least surprisingly quickly in terms of time and when they -- you know, use them to drill or complete, use cesium formate to drill and complete use cesium formate to do the work over work.

We are seeing not an insignificant amount of the business.

I think the business is very attractive, again it's a very attractive business financially, it's got a great return on investment and all that.

We would just like it to be a lot larger.

Cc, are we within two years commercialization?

I of course have no way of guaranteeing that, but I like it.

I see it in your annual report for the first time.

That's why I ask the question.

I think we mentioned before we are in the midst of a very, very significant tire testing and the results to date have been very, very encouraging.

We are actually one way to put it into context.

The limiting factor of the space of the volume of tire testing that the customers would like to do is the capacity of the plant we have in Malaysia.

Thank you very much.

Your next question comes from the line of Saul Ludwig with Key Bank.

Please proceed.

Can you hear me?

I can hear you fine Saul, how are you?

Good, thank you.

In your outlook statement in your release the words there sent shivers through the market.

Maybe help us put things in perspective.

You know, your contract pricing is set now for April, May, June quarter and yet feed stock costs at least thus far in April have risen probably to a level higher than your contract pricing was based on.

If today's input costs were to stay the same through the balance of the quarter, which of course none of us can predict, but in that theoretical "what if," how much of an impact would it have on your Carbon Black business so that we could think about the impact in a more rational way.

Let me try giving you the answer this way.

I actually sat with one of the guys in the business and we got talking about precisely the same question about the range of oil prices, which we think we would be able to sustain and stabilize the margin and in the $60 to $65 we are not badly hurt.

If today's input costs were to stay the same, wouldn't your profitability decline from the second quarter to your third quarter?

A little bit in terms of margin.

But remember we are experiencing very attractive volume growth and if that will continue, you know, I think we have a chance of having stable results, but it's also fair to say that as the oil price moves, it could restrict -- it could squeeze our margins.

At the current level it would be off a little bit is what you are saying?

Yes, what can I say?

I am trying to predict what's going on in the difference between oil and feed stock pricing.

Pricing they (inaudible).

Let me finish.

I'm also trying to predict for you what's happening in terms of customer and competitor behavior.

But all things being equal, you know, it could be all right.

Over on ink jet, you have the one plan who is now operating increasingly full that produces product for the high speed, that's a different facility, right?

Or a different --

It's a different production line.

Different production line.

If this production line were to be operating full speed ahead without any hiccups and testing and so forth, what would be the revenue capacity if you were operating full out?

Then if you are doubling that with the new facility, would that double the number that you are going to give us?

I do not believe we are in a position to give you the revenue number on that capacity.

Which planet are we on?

20 million?

30 million?

50 million?

Let me try answer your question this way without helping you too much.

We have a production line that I think we have given the volume of production, have we?

Maybe not.

We are in the process of adding 50% to that capacity and then I think it's fair to say at least doubling it again.

And assuming that we get those -- that capacity added and that second (inaudible) capacity if thing goes as we hope would come on early next summer, the revenue generated off that production line would be very noticeable in Cabot's total revenue line.

North of $100 million?

Noticeable.

All right.

It would have to be over 100 for it to be noticeable.

Your own conclusions Saul.

Okay.

In the Supermetals business, you talked about volume being weak in part because of the electronics industry.

All the indicators that we monitor don't suggest that electronics industry is about ready to get better any time soon.

Have you in your outlook comments for super metals have you made some assumption about the electronics industry because it seems as though it's getting worse before it gets better.

Let me ask Eddie Cordeiro to answer that question.

Hi, Saul.

Yes, we have taken that into account for our outlook going forward.

But, I have to tell you I'm seeing the same things you are seeing.

It does give us some concern, but we are watching it carefully and we have it in our internal forecast and we were still optimistic that things will improve in the next coming months.

Good to hear.

Finally, talk about expenses that you alluded to unexpected expenses in I think in Supermetals and expenses in general.

You had the big charge taken last year in the fourth quarter.

What are we seeing in the way of unexpected expenses?

Why are they sort of unexpected and what's likely to happen going forward?

I don't know if Jonathan could shed some light on that.

Let me try and then Jonathan and Eddie can do it.

We took a charge and reduced head count to reduced expenses of timber.

We are tracking that against our plans and by and large we are on track to deliver those savings across the business.

What we experienced this quarter at a very high level, a number of things including the fallout.

First of all, the dollar.

When the dollar weakens, our expenses incurred outside of the United States go up.

It's just because of translation impact.

That's been a not insignificant number of dollars.

Secondly, we generally accrue our short-term incentive compensation throughout the year, and based on the performance of the company in the first half of the year, we have increased that substantially over last year.

If you think last year at this time the company was performing very, very poorly and we had, I believe no accrual for short term incentive last year at this quarter, this year we had what we would regard a reasonable incentive.

Thirdly we had a couple of things, each costing us a million dollars that are, I guess one is unique and one is sort of unusual.

The unique issue is that we had a million dollar insurance charge related to a workers compensation injury that took a workers compensation case that took place in 1979 relating to a piece of equipment that the company sold in that time frame and for some reason it's just coming to us now and it was -- we had to put some money in our captive insurance company.

And then finally we -- this quarter again for reasons that maybe Jonathan can explain, accrued the entire director compensation costs for the year instead of spreading it out over the full year.

So those were sort of unusual costs.

They were all taken together and there was quite a lot of money.

We also in Supermetals had a few costs that we talked about earlier that we do not believe we will be repeating.

I look very closely at all of this and I did not see anything in the cost structure that led me to believe that things were too far awry.

Thank you.

Look, Ken hit the high points.

We have been tracking the cost reduction program.

We estimate at the full run rate we will provide $20 million of annual benefits.

We thought for this year we would be up -- it wasn't immediate but we would be up in the $15 million plus range.

We were getting those sort of savings.

We are in the year-to-date basis in the $6 to $8 million year to date savings.

That benefit has just been swamped by when we go through the costs, first the facility cost, new facilities, two new facilities in China, a new line in Brazil.

Second, Ken mentioned FX.

You look at the Euro, the dollar is weakened quarter versus a year ago quarter.

10% for versus the Euro.

But it's been a wider, broader weakness than that.

You look at the key Latin America currencies that we had in Asian currencies and it's been about 5% on average.

So you add that all up.

And that is sort of a $6 million hit year to date and then the other expenses that Ken mentioned.

Just finally, Ken, with regard to aerogels and superior micro powders, which are both nonrevenue at this time and expense, there was a lot of talk you were going to dramatically reduce aerogel's losses this year.

I don't know about the superior micro powders.

What's happened in the first half of the year, losses this year versus last year and is it going to get any better in the second half of the year?

We have -- we have reduced the spend rate in the aerogel business on an annual basis by $6 or $7 million base on from 21 down to say 14 or 15.

And that is in place and we are experiencing that.

You know, our hope and as you know we are headed for a big milestone of that business at the end of this year, about that we will start to see significant revenue generation coming out of the business in the next six months.

So that business is on track and thus far meeting their commitments for the year.

Of course, I would be delighted if we started to see more revenue coming in.

Superior micro powders is spending approximately the same rate, maybe a little bit more than it did last year.

We have two or three -- I guess three very exciting business opportunities we mentioned one of them, a securities ink where we are actually experiencing commercial revenues and which we expect will ramp throughout the rest of the year and we have another one that we believe will have commercial revenues before year end.

So as I mentioned, I am very pleased with where we are, particularly in the new businesses.

I think we have an excellent pipeline.

Thank you very much.

Your next question comes from the line of Lawrence Alexander with Jeffries & Companies.

Please proceed.

Good afternoon, Ken.

Hi, how are you?

Very good.

First question is going to be on the Supermetals business with the Sons of Gwalia contracts.

When the contract rose over in 2008, how much of a benefit, all those being equal, would you expect that to give you?

Well, of course, that depends on the then ore price.

I would tell you based on the ore price that -- and this is an estimate, of course, what we would experience today, we believe that is impacting profitably by about $15 million.

Okay.

And so that would show up back half of '08 and then more completely in '09?

It's a calendar year contract.

And I guess secondly in Carbon Black, you give us an update on industry utilization rates and possibility of smaller competitors shutting capacity in North America.

Any sign of movement there?

We have not seen anything.

We believe that you smooth the impact of the Goodyear strikeout that the operating rate is probably in the low 80s in North America which is as I think we talked for awhile is not a particularly attractive rate for the industry.

The rest of the world on the other hand is operating well into the 90s.

And we see nothing on the horizon that would lead us to believe that is going to change.

And finally, you mentioned on sort of the swing in hydrogen costs for fumed metal oxides, presume is that large enough to be material?

Well it (inaudible) I don't know if you remember, but when we had the hydrogen problems with our supplier a year ago that caused us to incur multiple million dollars of incremental costs I think, and so when you are in the business of calling out the changes in profitability as we are, that is one of the things that sits up pretty high in the quarter.

But that issue is largely behind us.

Thank you.

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

Good afternoon Ken.

How are you?

Thank you.

On Supermetals once you extract the cash and working capital and you rollover the Sons of Gwalia contract, what's the long term attraction of remaining in this business?

That's a great question and I would tell you it's a question with particularly with respect to that business that we constantly reexamine.

Today from where it is we knew we had to get through the contract expiration and then through the ore situation.

And the question is, can we produce -- will it stabilize as a business that is attractive in terms of earnings and cash.

I think so.

There is a whole bunch of question around the business today with respect to ore supply, security of ore supply, and to what extent tantalum will continue to be a valuable and valued metal.

I'm inclined to think it will and I'm inclined to think that as we work our way through these issues this will be an attractive business for the company.

The plant we have in Isu, in Japan, the Tantalum powder plant is an extraordinary plant and does very, very well.

It turns, I would argue it's one of the best things we did getting control of that plant.

And it gives us a very, very strong base in the capacitor market.

The operation in bordertown has been and continues to be challenged by the weakness in the industry.

Eddie and his team are working hard on finding ways to reduce the cost of operating that plant even further.

You know, we have done a lot of that over the years.

It's a complex intriguing business.

Over, if you average it over the last ten years it's been a pretty attractive business for Cabot.

I think it can be going forward, but It's something that we constantly examine.

I do believe that we are seeing the bottom here this quarter.

And I believe you will start to see increasing profitability going forward.

I didn't mean to cost Eddie his job, either.

And last thing on especially fluids, Ken, is there any desire before you leave the company to finalize a solution for this business?

Well, sure.

You like to buy it for a lot of money?

Listen, I don't know.

It's an intriguing question.

As you all know it's a business has been for the past three or four years a business that as a stand alone business when you look at the investment and the return and the cash flow, a very attractive business.

Has it met our expectations in creating the significant shareholder value?

Quite clearly not.

Will it going forward is a question that we continually examine.

I continue to believe that we will penetrate into other markets of the world and the leverage available in the business because of the fixed cost structure is so large, that if you double the usage, double the revenue, most of the incremental revenue goes to the bottom line.

So we penetrate into one or two other of these major markets and double the usage of the fluid, even up to 30% of capacity.

It starts to be an attractive business.

I'm resisting any notion that my retirement should cause some significant event in the development of these businesses so I can go out looking better than I otherwise would.

We continue to pursue the strategy that we have pursued for awhile to make sure we capture the most value for the shareholders over the long term.

Understood.

One more thing, on aerogel, when would you expect this business to be break even?

Well, the objective that has been agreed between the business and me and the rest of the company is that they need to convince us that they will get to break even -- they have the ability to get to break even.

They need to convince us that at the end of this year and they need to be at break even run rate at the end of the following year, is that right?

Maybe a year and a half from then.

We are working hard on that.

As you know, we need to reduce the burn rate down here to a point where it's sustainable today.

The key issue we were working for David, is to be convinced at the end of this year we will generate the revenue to make this a successful business.

Thank you very much.

We will report on that incidentally.

Thank you.

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

Please proceed.

Good afternoon, Ken.

Hi Mike

I guess there was an interesting article in the Journal the other day about WTI not being a very good benchmark for crude.

Some of us anyway use WTI as a way of think being your input costs.

Is there a better way to think about that?

Bill, you want to answer that question?

Well Mike, I think probably a better indicator would be (inaudible) 3 %.

Okay.

So along those lines and I think Saul certainly went over this before, but it looks like prices are or costs are definitely heading up here and have been for since mid first calendar quarter.

And if I understood your comments, it sounded like you were still getting -- you are still either increasing prices to your customers or those price increases basically finished.

And so I just want to explore again this idea that margins would be flattish sequentially.

It sounds like margins should actually contract.

Yes there is some feeling that margins will contract in the business if feed stock stays in the mid-60s where it is.

We hope to be able to cover or more than cover that through the volume growth we are experiencing.

But yes we watch those indiceses the same way you do and we have a little bit of the information, we also have what we are purchasing a (inaudible) with.

We have not -- there has not been any significant pricing movement in the business in the last roughly six months, Bill, right?

And then in terms of pricing, have there been any changes in terms of the amount of the business that is fixed in terms of contracts versus floating?

Bill?

Not significantly Michael.

But one thing I would point out is that as our volumes grow in Asia and China, and they are proportionately higher than they are in the mature regions of the world, we have much less under contract in those regions.

So over time it does shrink due to that.

That's really the only thing that we have going on.

And how does that input affect the timing of being able to push through higher prices as let's say an example where oil, which is a commodity traded globally where prices are moving up?

Well, it increases our ability.

You know, we have the ability to increase the spot price, the market on the price on the spot market any time.

So to the extent that -- and we do so.

But it also puts us on price pressure when the market goes the other way.

So you mean basically reduces the lag time overall?

I would describe it as reducing the lag time.

Although that's really not what it is because remember the price is the price and the prices are disconnected to the raw material price in the spot -- in the volumes that are not under contract.

It's just one of our costs and the price is the price.

Thanks for the help.

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

Good afternoon, Ken.

Hi, Bob.

Can you give us some sense, Ken, as to the magnitude of the seasonal increase in Carbon Black volumes as we go from the March quarter to the June quarter , obviously of the absence of the Chinese new year and probably some seasonality in the developed markets and June quarter.

Trying to understand what kind of volume improvement you are looking at to overcome some of the feed stock

The big switch would be the, I guess two things I would mention.

One is we don't have Chinese new year which impacts us in China and increasingly all over the Pacific rim other than Japan.

That's a positive.

On the other side historically the March quarter has been the strongest quarter in terms of volume in the business closely followed by the June quarter.

The two strong quarters of the company have historically been March and June, yes March and June.

I think Chinese new year may be switching June to be the strongest quarter and we will see as it plays out.

This quarter, this March quarter had a little bit of a special effect in that the Goodyear strike was settled in January.

So it put some volumes -- there was some pickup in volumes in the quarter that ordinarily would have been in the first quarter.

The seasonality in the business because of the same point that Bill was making, because of the increasing importance of the Far East is clearly changing.

You may remember that historically our weakest quarter was the fourth quarter, the summer quarter and last year it was stronger than we had ever seen before.

We are watching the volume trends with curiosity as well.

It's different than it has been traditionally.

Having said that, we see nothing that would lead us to believe that the June quarter shouldn't be in the same range.

How is the operation in Brazil, new plant in Brazil doing and is that fully operational now?

It is fully operational and I believe the unit is Bill, 80, 90%.

?

Doing quite well.

Mostly sold out.

Operating excellently.

When is the next increment of new supply coming on then around the world?

Well, in Carbon Black we are in the midst of construction of a performance products unit, what we call a special blacks unit at the plant in (inaudible) was the plant that we had a little bit of difficulty getting the permitting for but the permits have been received and the plant is in construction and comes up at the end of the summer I think Bill?

September or October.

September or October.

That's a special blacks unit, not a lot of volume but attractive product that we are anxious for, the next big one would be, we were working to develop two new large rubber blacks units at the plant at Tien Gin.

We have some preliminary approvals, we are waiting final approval from the Chinese government and hopefully that will come on stream in the summer of '08.

And lastly you continue in each release to voice your concern about North American demand and just wondering what your time frame is to make a decision on whether you need to rationalize more capacity.

I got kicked by my lawyer.

We constantly examine capacity balances and rationalizations and will be doing that as we go forward.

I hope you are kicking him back, Ken.

As you know, Bob, I'm pretty good at that.

All right, thank you.

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

Please proceed.

First, I wanted to correct Jay if he is listening that CEC was actually in the 1998 annual report first, I think.

You are a great historian, John.

And Ken, you used $0.50 as a threshold contribution to EPS for a new product being considered significant.

Yes.

And I thought ink jet originally was targeted for that threshold from the Soho market alone.

Yes.

Would that be the case given the change dynamics in Soho?

Well, I keep trying to hold Fred (inaudible) to that objective, and I think he continues to work at it.

But the market conditions are tougher.

But I would also remind you that when we head that objective and we are looking at that market, the high speed market did not exist.

That's okay.

It would be new and incremental.

It is new and incremental and we certainly continue to believe that the business combined has the potential of earning more than that.

Thank you.

Your final question comes from the line of Jeff Zekauskas with JP Morgan.

Please proceed.

I want to clarify some of the, I guess some the discussion.

In your answer to Saul's question, Ken, did you say essentially that so long as oil remains somewhere between -- I don't know, $60 and $65 a barrel, and so long as Carbon Black has some reasonable amount of growth, the operating margin that you will receive in Carbon Black is more or less what you registered in the first and second fiscal quarters of the year.

That is somewhere between say 11 and 12 1/2%.

Oh boy, I don't like to get pinned down here.

That's had a very hard question to answer precisely.

I would tell you that I tried to answer the question I did in that at what point are you going to have stable pricing, and able to maintain the business.

You need to understand that there are a whole bunch of variables that impact those numbers.

A very complex one that is hard to predict at all is what we call the LIFO reserve which hits us because we have LIFO accounting in North America, and that is unpredictable thing.

It is based on what happens to our last purchases at the end of the quarter.

And those numbers ripple through the margin numbers.

So feed stock cost movement at the end of the quarter can impact the margins, you see.

Then you have the issue of the lag.

We have in these contracts this question of which way the lag is moving, favorably or unfavorably.

And these things all wash through the numbers.

Generally I would tell you that we are, other than North America, we are optimistic about the volume situation in the business.

And maybe the feed stock recently today has been at the upper end of our comfort range.

Somewhere in that area we think the business can continue to perform reasonably in our terms.

But it's a very hard thing for us even internally to know and I would tell you that we have long and rancorous sessions trying to get our own forecast at a level that we are comfortable with because these things move in such unpredictable ways.

I wasn't trying to pin you down on a quarterly number.

But order of magnitude, the Carbon Black margin last year was about 5%.

And this is -- 2006 was sort of the last year of this tremendous inflation and oil prices that occurred over a multi-year period.

It took a long time for your prices to catch up.

And so the force of my question is, in a ballpark way would your margins in Carbon Black remain above 10% in any normal operating environment that looks like the one that we are in now?

So your margins really, this quarter are 12 1/2 and what I'm trying to say is if you smooth out the LIFO and smooth out some of the other issues you are talking about, are you now in a different level of profitability than you were before?

Or can you dip that back down to seven or eight as the timing of these things, different occurrences take place?

I would say that we hope and would like to believe that we are in a different level of profitability and we are working on trying to maintain it.

Ability to tell you we are going to maintain it is, of course --

Right.

Yes, I guess I would answer the question, yes, the last two quarters have been nice quarters in the business.

And we are working as hard as we can to stay in that space.

Let me let Bill comment because he is the one that has to deliver this.

Jeff, I want to put one other factor in.

And another really key factor in determining prices and margins is industry utilizations, somewhat independent of oil prices.

That's got to be put in the mix as well and as Ken described earlier most of the world today is in pretty good shape.

And if I could just ask one final question of clarification.

In the ink jet area, when you bring new capacity on, when you talk about expanding your pigment capacity if that's the right word, 50%, does the capacity come on incrementally?

Or is it the case that the capacity is built and then you have 50% more?

Or is it done in increments of five-tens?

How does it work?

I would tell you that with the new line that we are operating, it's been a little incremental as we have lined out the new line and got products qualified coming off the new line and that is largely done and that line is now producing at or very close to full capacity.

We would anticipate that the new capacity would come on assuming we do our job well and build it right and start it up right.

It it would come on by and large in a chunk.

And when would the chunk come on?

Forgive me.

The first chunk which adds 50% to the current capacity comes on this summer.

It's a debottlenecking activity.

The big chunk which it doubles the then volume comes on a year from now and that's a whole new line.

And then the last thing is when you talk about volume in Carbon Black, are you talking about pounds or metric tons?

Or are you talking about something else?

That's an interesting question because the other thing we ought to say, back to your question about margins, is the impact of the dollar.

Yes.

But, no, we talk about tons.

We talk about volumes -- volume of products sold not revenue.

Okay.

So thank you very much.

It's very clear.

There are no further questions at this time.

I would like to turn the call back over to management for closing remarks.

Tanya, thank you very much.

And everybody on the call, we appreciate you being with us.

We hope to have another strong quarter coming forward and we look forward to talking to you then.

Thank you.

This concludes the presentation.

You may now disconnect, and have a great day.