Cabot Corp (CBT) 2007 Q3 法說會逐字稿

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

My name is Lauren, and I will be your coordinator for today.

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

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

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

I would now like to turn the presentation over to your host for today's call, Mr.

Ken Burnes, Chairman and CEO.

Thank you very much, Lauren.

Good afternoon, this is Ken Burnes.

I'd like to welcome you all to the Cabot Corporation third-quarter earnings teleconference.

Here with me this afternoon are Jonathan Mason, our Chief Financial Officer; Bill Brady, General Manager of our Carbon n Black product lines, Eddie Cordeiro, general manager of Supermetals.

Ravijt 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 materially from those expressed in the forward-looking statements.

A list of factors that could affect Cabot's actual results might differ materially from those expressed in the forward-looking statements.

A list of factors that could effect Cabot's actual results can be found in the press release we issued last night as well as in 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 third 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 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 in the quarter and our outlook for the future and will then turn the call over to Jonathan Mason, who will provide detailed financial results.

We will then open the floor to questions.

Although we have been negatively impacted by oil prices, we are very upbeat with regard to how the company is positioned overall.

In looking at the key points for the quarter, the Carbon Black product lines continued to have strong demand, but we were negatively impacted by Carbon Black feedstock costs during the quarter.

Secondly, fume metal oxide is performing at level records and we are very optimistic about its prospects.

Third, while the inkjet aftermarket segment has not rebounded as expected, we remain very positive regarding the potential for the high-speed inkjet printing area, as it develops to become a significant business.

Fourth, Supermetals remains a tough business facing a weak market and rising ore costs.

Fifth, specialty fluids had very strong results during the quarter and we are increasingly optimistic going forward.

And finally, progress towards commercialization of Cabot Elastomer Composites, after a number of years of development and some promising progress in Superior MicroPowders and aerogels gives us continuing confidence of our ability to create significant shareholder value through the development of new businesses.

Now let me go through some of the details.

First, with the exception of rubber blacks in North America, demand for both Carbon Black and fume metal oxides remains strong and we are seeing significant growth in developing regions where we continue to add capacity.

As a result of the decline in North American tire demand, during the quarter, we announced the closure of our Carbon Black facility in West Virginia.

These types of decisions are never easy as they negatively impact our employees, their families, and the communities in which we operate.

However, the actions were necessary given the market outlook in the region.

I am always impressed with the loyalty and commitment of our employees when faced with these types of situations and the employees at our Ohio River Plant are no exception.

On the positive side, we are close to completing our special Black Sea unit in China and recently announced that we will begin construction of two additional rubber blacks units in China which will increase the capacity of our facilities there by approximately 150,000 tons.

Additionally, in the last call, I mentioned we could be unfavorably impacted during the quarter by higher Carbon Black feedstock cost and this, unfortunately, did occur.

To put some numbers to it, the impact of the time lag in our feedstock-related pricing adjustments and the immediate recognition of feedstock costs in North America unfavorably impacted us by $16 million during the quarter.

This is compared to a positive impact of $5 million in the second quarter, thus a $21 million unfavorable swing.

And, as we mentioned in the press release, given the recent increases in feedstock costs, it is likely -- likely that we will experience an unfavorable lag in the fourth quarter as well.

Second, a key driver in the shortfall in the inkjet colors has been the performance of the aftermarket segment.

The segment remains very competitive and it is clear that it is being impacted by the same efficiency advances that affected the OEM SoHo market, namely the more efficient use of ink in terms of smaller drop size has reduced the amount of ink used per page.

As the aftermarket turned down, however, we have been quite aggressive in increasing our share and feel our position will be stronger as the aftermarket consolidates and recovers.

Notwithstanding these difficulties, the Soho business overall remains an attractive profitable business for us.

On the high-speed side, the bottled -- the debottlenecking of our initial capacity is on track and should be operational by mid-November.

Excuse me, mid-October.

Additionally, we are working with a number of companies pursuing the application of inkjet technology to the high-speed printing market and continue to believe that the -- that this technology is very powerful and that supplying pigments into this segment has the potential to become a very significant business for us, albeit not without risk and investment.

For the second straight quarter, the Supermetals business suffered from lower market demand due to the current electronics industry slowdown and higher ore cost.

Exacerbating the downcycle has been the longer term trend of making capacitors with higher compacitance powder that require fewer pounds of tantalum for the same performance.

We are also seeing growing industry-wide concern about the availability of low-cost ore, in part resulting from the bankruptcy of the industry's largest ore supplier.

Which is creating some uncertainty in the industry.

These factors lead us to be quite cautious about the short-term performance of this business.

The tantalum industry is by its nature more volatile than our other core businesses, which brings both greater risks as well as potential opportunities.

Finally, on the new business development front.

As we mentioned in the press release, we continue to be pleased with the progress towards commercialization of our Cabot Elastomer Composits.

As development has progressed, it has become clear that the technology enables as much as a 15 to 20% improvement in some key characteristics of tire performance, which could be very valuable.

We believe this opportunity has the potential to provide in the future as much as $0.50 per share of earnings, depending upon the rate of penetration into tire production.

In aerogel we are seeing some positive progress.

The number of larger more meaningful projects in the pipeline is growing, which gives us more confidence and the plant is on track to restart production in mid-August.

We are still focused on two key areas, daylighting and oil and gas pipeline insulation.

An interesting aside in the daylight area, this year a significant number of projects entered into the solar decathlon that takes place on the mall in Washington, D.C.

will have Cabot Aerogel incorporated.

The Solar Decathlon is a compilation to design, build and operate the most attractive and efficient solar powered homes, and is a leading form for cutting-edge energy efficient technology.

Lastly, although our I realize our progress toward developing new businesses is not always conducive to quarterly earnings calls, I thought I would mention some of the specific opportunities we are working on as Superior MicroPowders that I am excited about.

First, in the last quarter, we began ramping up commercial sales of unique fine particles to the security materials industry.

These materials are frequently used on branded products and bank notes to prevent counterfitting.

Our particles are unique in that they are very difficult to copy and provide fewer detection areas.

We are also seeing some promise in our development of electrocatalysts for fuel cell application.

These catalysts, which are typically combination of metals on cushion supports are part of a system that increase the durability and performance while reducing the costs per watt of the fuel cell.

We are optimistic that we will see commercial revenue in this segment next year.

In addition to these two opportunities, we are also working on materials to increase the efficiency of solar panels and reduce or replace the precious metal used in catalytic converters for automobiles.

Both very large opportunities but further out on our time horizon.

Over the past several months, I have become increasingly encouraged with Cabot's pipeline of new business opportunities and believe that it is now the richest it has been during my tenure.

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'd like to begin by drawing your attention to some additional detail that we provided to you in our supplemental business information this quarter.

Pertaining to the impact of feedstock costs on the Carbon Black product lines.

We felt it would be helpful, as you think about the quarterly volatility in the Carbon Black product lines, to have more detailed information for the past several fiscal years.

We believe that this data also helps to show that the underlying health of the Carbon Black business is quite strong.

But now turning to the results, Rubber Black's volumes increased by 4% and 2% when compared to the third quarter of 2006 and the second quarter of 2007 respectively.

With continuing growth in the important Asian market.

When compared to the third quarter 2006, these increased volumes were the primary driver of improved performance.

Unit margins were roughly flat, as lower raw material costs were offset by lower pricing associated with the timing of feedstock-related pricing adjustments on our contracted business.

Sequentially, unit margins in Rubber Blacks declined due to lower contract prices and higher feedstock costs more than offsetting the stronger volumes.

In performance products, volumes declined by 2% overall compared to the third quarter of 2006, as some low-end product sales in 2006 did not recur this quarter.

It is important to note that the businesses replaced over time much of the low end business with value added products through our plastics Masterbatch channel.

The product line had improved performance during the quarter resulting from favorable pricing and product mix.

Sequentially, total volumes increased by 5% in the product line.

However, the positive impact of these higher volumes and stable pricing were offset by higher raw material costs.

The Carbon Black product lines were also negatively impacted in the quarter by roughly $4 million of nonrecurring costs.

Moving to inkjet colorants, volumes declined by 2% compared to the third quarter of 2006 and by 5% compared to the second quarter of 2007 due to weakness in the aftermarket segment.

Soho volumes declined by 13% compared to the same period of last year and by 11% sequentially due to the disruption in the aftermarket and more efficient use of ink.

We continue to operate our capacity for the production of pigments for the high-speed inkjet segment at its designed capacity during the quarter.

However, strong sales in this segment were not enough to offset lower SoHo volumes and higher R&D and new capacity costs aimed at the future growth of the product line.

Fumed metal oxides continues to perform at a very high level, experiencing strong demand and very high plant utilization across the system.

As a result, year-to-date profitability in the product line is up more than 30%.

Volumes increased by 1% compared to the third quarter of 2006, which strength in both the silicones and niche segments more than offsetting significant weakness in the electronics segment.

Profitability improved compared to the same quarter of 2006 as these higher volumes combined with lower average feedstock costs from our China plant and lower hydrogen costs.

Sequentially, volumes declined 3% with lower sales in the electronics segment due to inventory management.

Profitability was flat relative to the second quarter of 2007 with lower costs and favorable currency translation offsetting the lower volumes.

Moving to Supermetals.

The business had a weak quarter, although slightly better than the second quarter of 2007, posting break-even performance.

The depressed profitability was primarily due to lower pricing and a 28% reduction in volumes from the expiration of our last significant long-term supply contracts.

This was further impacted by higher ore costs compared to the third quarter of 2006.

Sequentially, lower costs more than offset lower volumes and an unfavorable product mix.

On a much more positive note, as part of its focused initiative over the past 24 months, Supermetals has reduced its working capital by $130 million, a significant accomplishment.

In specialty fluids, profitability increased solidly from both the third quarter of 2006 and the second quarter of 2007 due to very strong rental revenues.

The business has significantly increased its fluid utilization rate to 19% in the third quarter of 2007 compared to 9% in the third quarter 2006 and 13% in the second quarter of 2007.

And the business continues to experience significant positive momentum in several regions of the world.

Turning to some corporate specifics, excluding dividends in our share repurchase activity, we had a reasonable quarter in cash flow, generating approximately $24 million in excess cash during the quarter.

Our tax rate on income from continuing operations was 31% for the third quarter, due to a legislative change in the tax rate during the quarter in one of the countries in which we operate.

We continue to anticipate a full year tax rate of between 26 to 28%.

On capital spend, we invested approximately $35 million during the quarter in capital expenditures compared to $43 million in the third quarter of 2006.

We anticipate spending approximately $140 million for the full fiscal year 2007.

We are currently in the process of finalizing our capital expenditure plans for fiscal year 2008 and will update you at the fourth quarter call.

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

Thanks, Jonathan.

For the last several years, you have seen the variability of our results due to increases or decreases in Carbon Black feedstock cost.

Notwithstanding these short-term impacts, we remain Bullish on the fundamentals of the company.

We believe that our core businesses are very well positioned and that our new business present significant opportunity for the future growth of the company.

As we discussed with you last quarter, we are focused on improving the capital structure of the company and one of our tools for doing so is our share repurchase program.

As you saw, we received a new 5 million share authorization from the As we discussed with you last quarter, we are focused on improving the capital structure of the company and one of our tools for doing so is our share repurchase program.

and during the quarter and as of last evening, we have repurchased approximately 1.3 million shares since then, representing a cash cost of $62 million.

In order to facilitate our continued repurchase of shares, we have a 10 B 51 plan in place and will continue to repurchase a significant number of shares over the coming months, which we believe demonstrates our confidence in the strength of the company.

I would like to thank you all for joining us this afternoon, and will now open the line for questions and will turn the call back over to you, Lauren.

Thank you.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Jeff Zekauskas with JPMorgan.

Hi.

Good day.

Hi, Jeff.

How are you.

Okay.

I guess I'd like to start off with inkjet.

Yes.

I remember from one of the presentations that you did in the past that the aftermarket volume of your business is about 20%.

So doing a rough calculation, if 20% is down 40, that means that the residual, that is the other 80%, is probably up something like 7% to 8%?

Is that a reasonable calculation to -- to do, or is there a mistake in my assumptions?

I'm going to get some help in the precise numbers.

Susannah, do you have those numbers with you?

I think -- I think the message is the aftermarket has historically been a little bit stronger, part of that business.

But it is fair to say that the downturn in the -- in the -- in the -- in the business, -- well, I will give you some actual numbers.

In the quarter three over quarter three, OEM Soho was up 5%.

5%.

Okay.

That's helpful.

My second question is in your Specialty Fluids business.

Yes.

You've had a much, much stronger year than the previous one.

Correct.

And -- but there's still some quarterly volatility where the first and the third quarters have been exceptionally strong.

Is -- you know, are we at a new run rate level at 7 to 8 million or, you know, is it likely that we'll still see some quarterly volatility from time to time?

Or is there something unusual about this quarter?

Well, I would -- I would say that we're feeling -- feeling good about this -- the developments in this business.

As you remember, we significantly increased marketing about a year ago.

Our marketing expenditure marketing efforts and we've seen some results.

We have some wells in South America, we have some wells in Hungary.

And we're -- we have a lot of very encouraging prospects in other parts of the world, including the Gulf Coast, the Middle East, Kazakhstan region and now even in the Far East.

The seasonality is, -- I'm sure to some extent related to weather patterns today and (technical difficulties)

Thank you for your patience, we seem to be experiencing some technical difficulties.

(technical difficulties).

Thank you for your patience.

Your conference will begin shortly.

Hello?

You're now connected back into the main conference and we will resume with Mr.

Zekauskas' question.

Sorry.

We had a technical problem in our conference system.

How much of my answer about --

So what I heard, Ken, is I heard the part where you talked about drilling in Hungary.

What I was saying is that -- let me start again then.

As you know, we -- we substantially increased our spending levels at the -- in the market area and we have seen two things develop.

One, we've had some significant activity in South America and in Hungary.

And I would tell you that we've got a lot of encouraging prospects and interest in the rest of the world, particularly the Gulf of Mexico, some distinct possibilities in Saudi Arabia.

We're feeling much more optimistic about Kazakhstan and we have marketing activity going on that we're pleased with in -- in the Far East.

Having said that, the seasonality of the business inevitably relates in the winter season in the North Sea where a significant portion of our volume still comes from.

Yes.

The inevitably lower drilling activity in the North Sea in the wintertime than we do in the other parts of the year.

And that's helpful.

Just, lastly, there was an $8 million positive inventory adjustment in Carbon Black, what was that?

Down -- less inventory this quarter than we -- than we consumed -- than we produced.

One of the issues that we're struggling with in that business is inventory management from two perspectives.

I'm going to take the option of your question to give a little color.

Please.

Thank you.

Raw materials side, as you may remember when we last had an oil shock we dramatically reduced the number of days of raw material inventories that we hold.

That saves us a lot of cash and working capital, but with the benefit of hindsight, it also reduces our ability to soften short term the swings in oil and feedstock prices because we have fewer days of inventory on -- we have to buy more frequently.

So that's one side.

We also felt that we were -- we were very aggressive in reducing product inventory and we're been working in certain parts of the world to rebuild some of that inventory to make sure we were not missing sales.

And what you see on that $8 million is the result of our efforts to re -- to rebuild on inventory to have an appropriate inventory on hand to cover sales opportunities.

Okay.

Thank you very much.

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

Good morning -- good afternoon, Ken, and everybody.

Good morning, Saul, how are you?

I'm doing great.

Listen, we've got to get a couple numbers straight here.

In the Carbon Black -- in your supplement you said that the raw material costs were down by $24 million but your selling prices were down by $27 million, so that would imply that there was sort of a negative $3 million spread between the change in raw material costs and the change in selling prices.

How does that relate to the $16 million negative number that you put on the table?

Well, I think you're looking at a number of -- let me -- let me try to answer the question and then get some help if I do it incorrectly.

I think in the numbers you're looking at, you're -- you're -- remember, there are three things that impact this area.

One is the -- the -- what we call the LIFO cost calculation.

The second is the lag in the feedstock cost adjustment in the contracts.

And the third is the ebb and flow between -- in our margins that aren't covered by contract.

Now, I think the -- I'm sure the 16.5 on a comparative basis refers to the -- to the movement in the LIFO and the contracted lag and does not try to deal with the ebb and flow given by -- resulting from market conditions versus price and margin.

Now, having said that, I don't know whether Susannah or Bill you want to give a more specific answer.

I think you've left us confused.

Yes.

I think that -- Saul, this is Susannah.

There are two things that you are looking at that -- that lead to the difference.

The $16 million is truly the -- the lag on the contracted business and the LIFO only.

The 24 and 27 you are talking to adds the complexity of the Carbon Black reporting segment as opposed to just the Carbon Black product line.

So it deals with price increases or decreases in inkjet as well as the other pieces.

And the $16 million is solely a lag, not the sought business.

So the $16 million relates to, uh, Carbon Black material only, Rubber Black?

Carbon Black.

Carbon Black.

Carbon Black is mostly Rubber Blacks, but the LIFO picks up some performance products.

Was there any LIFO impact?

There was no mention of LIFO impact in the discussion.

We used a new term at the request of our accountants that I -- in the move of telephones I've lost my notes.

Susannah, can you remind me what it was?

We didn't use LIFO --

It is the immediate recognition of the raw material costs based on North American accounting.

So there is a combination in that whole chart, Saul, that you're looking at, there is a combination of lag and LIFO put together because that's truly the raw material impact associated with those contracts.

Well, isn't the LAG and LIFO sort of one and the same?

No.

They are two different things.

LIFO is the -- the LIFO adjustment that hits us in North America because of the accounting methodology that exists there.

The LAG is purely the difference between actual prices in -- in feedstock and what we actually incurred in feedstock costs.

Okay.

Saul, I know you'll probably -- haven't had enough time yet.

We intentionally put some more detailed information in the supplemental portion of the release to help you understand this issue.

And if you plot that out over time, you can see its impact on the profitability of the business over time.

Got you.

Now, in the comments that you made about the performance products, I think the interpretation that I had is that their profitability would have improved versus last year in the third quarter but may have been level with that of the second quarter.

That's just about correct.

Okay.

Then in terms of the inkjet, did that business swing into a modest loss because of the factors that you discussed and -- or at least on a delta over -- whatever they made last year, did they drop 2, 3, $4 million dollars?

The business remains profitable.

I think there was a minor decline quarter to quarter, but the business remains profitable.

I did say in my notes that we continue to believe that the Soho business, which is both the aftermarket and the OEM Soho is an attractive profitable business.

And the -- the quarter -- third quarter to third quarter drop in profits would have been in the, what, 1,$2 million dollar range?

Very small dollars.

Okay.

So that would be 1, $2 million is okay?

Sounds about right?

Well, I -- remember, Saul, I have refused to answer your question.

I gave you an approximation, but beyond that we're not -- we're not in the business of giving out those numbers.

Okay.

What happened on a swing year over year to your expenses, I guess, would be the right word in aerogels and Superior MicroPowders separately?

Well, aerogels is expenses I think are in the range of being flat and its performance is up a big -- its burn rate on an earnings basis is down a bit because we've had some -- some revenue and -- and the rest.

Superior MicroPowders we're probably spending on an annual basis it 3 or $4 million more than we did last year because we are -- we are increasingly encouraged by the results, as I mentioned, particularly in the two segments we're getting -- one, where we have revenue and the second we -- we're -- we believe we'll shortly have revenue.

So they would have had a million less earnings in the quarter than a year ago based on that statement?

In that range, yes.

And aerogels would have had the same loss this year as they had last year.

Maybe a little bit lower.

A little lower loss.

Together those two might have been a wash.

Okay.

One's minus -- plus a million, one might be minus a million.

Not a huge amount of money.

Okay.

And two other things.

You said in explaining the -- the swing in the Carbon Black sector that you had $8 million more in fixed costs.

Now, when you build the new Carbon Black plant in China, of course you're going to have more fixed costs but you wouldn't think that would be an explanation for a profit change because you'd be utilizing that new facility.

But why -- why --

That's --

Was the $8 million in fixed costs carved out as an explanation for part of the swing in the profitability?

Well, maybe we give you too much information.

I point out three things that drive that number and it was significant and we wanted to call it out for you.

One is the new plant at Tianjin, which is a new plant that we spent 65, $70 million on and therefore have a lot of fixed costs.

We have the new unit in -- in South America that is fully on-line.

And then, finally, there's a significant element of foreign exchange there as we translate those foreign currencies to U.S.

dollars.

Okay.

But which have gotten some earnings and product and sales out of those facilities?

No doubt about it.

But we -- we pay very close attention to our costs.

We try to hold our costs flat.

Notwithstanding the fixed-cost increases.

The Ohio River activity is an effort to reduce fixed costs in some other place, so it's something we try to manage very carefully.

And then, finally, on the share repurchase, there was -- it was previously discussed as to the methodology we would use to repurchase those shares.

I guess -- should we assume that because you've purchased 1.3 million shares so far that these are going to be largely open market purchases versus a tender or Dutch auction or something like that.

I think that is a fair conclusion.

We have looked at that very closely and looked at -- looked at the -- the implications of the various type of share repurchases candidly it was our concern within the last -- we had a board meeting where we talked about this at length about two weeks ago.

It was our concern about the impact of oil prices that we'd certainly seen in the last three to four weeks as I'm sure you are aware that led us to continue the open purchase rather than try to be more aggressive in that, oil prices, if they continue to rise, put a crimp in our cash position that we wouldn't want to put the company at financial risk as a result.

Well, with today's stock price you got a great opportunity to buy it cheaper.

Well, we hope we -- we do -- as I mentioned we do have a 10 B 5 plan in place and of course I have not talked to the treasury department but we certainly believe the stock price presents us at least a buying opportunity.

Thank you very much, Ken.

Thanks, Saul.

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

Hi, Ken.

Hi, Mike, how are you?

I'm doing well, thanks.

You mentioned -- and thanks, by the way, for providing that additional detail on the leads and lags with the feedstocks.

I just want to make sure I understood what you were saying about the fourth quarter.

I thought you said that again, the difference between the second and third quarters was 21 because you had a plus 5 and a minus 16.

Were you saying that the difference between the fourth quarter and third quarter was going to be a negative variance?

Or did you just say that the number for the fourth quarter could be a negative number on an absolute basis?

Let me -- let me answer this -- let me answer this.

First of all, we -- given the volatility that we've experienced in the -- we went through one period of time, we appear to be in another with high and volatile energy prices.

We determined to give you that information in an effort to make it easier for you to understand how the business is truly performing over time and the impact of these -- of these -- of these swings.

We will continue to provide that information on a -- on a going forward basis.

The comment I made about the fourth quarter is that given today's oil price, which I see at $77, at least it was a couple hours ago, and what we know about the average cost during the three-months ended June 1st -- or May 31st, we have another lag coming.

You need to understand that oil price falls to 65 in the next -- what is it, the beginning of -- the end of July, we've got two more months in the quarter, falls back into the 60s, the lag may disappear.

But if -- assuming that oil stays where it is, we have a lag problem.

We would have a lot less, I think, somebody correct me if I'm wrong here, of a LIFO adjustment because this -- you know, we don't have the rising cost problem.

We get a lot of questions about this.

We tried to give you information that would help you do the kind of guesswork that we do.

You can look at -- you know, you could run the oil -- average oil prices for the three months ended March 30 -- I mean May 31st -- May 30th, I guess, and -- you know, estimate an average price of feedstock and then compare it to what the average cost might be in the quarter and see the lag yourself.

Okay.

So what you're basically saying is that 21 -- you know, differential, which is a pretty high level of differential, you would -- you would -- there would still be a negative differential in the fourth quarter but perhaps it wouldn't be as large; right?

I don't have it again because I moved away from my material.

I don't have my material in front of me.

That supplementary information tells us what it was in the fourth quarter last year, which was 10 perspective.

Did I read that right?

It's 10 perspective but the -- the actual difference between the two was actually 17 perspective.

That's right.

So, you know, you can plug in what you think the number's going to be for the fourth quarter of this year and come up with a differential yourself.

Okay.

And just one last thing.

In terms of actual purchases during the quarter of raw materials, that's another issue that I would imagine that you're -- your departments are basically, you know, purchasing ahead of price increases and things like that.

Is there something we should be thinking about there in terms of obvious inventory management on the raw materials side?

Well, I mentioned earlier -- and I wanted everybody to understand this.

I think that -- this was one of the risks we took when we -- we shortened the number of days of inventory.

We have historically -- and it's something we've thought about over the years -- maintained a fairly high level of inventory -- feedstock inventory so we could be smarter more opportunistic buyers.

So if we saw -- we felt we were looking at a spike in price that would only last two or three weeks, we could stop buying and then come back into the market.

With fewer number of days of inventory on hand, we've restricted our ability to do that.

And that's a trade-off against cash consumed at the high level of oil prices and inventory management.

I would tell you that given what we see happening and the -- the magnitude of the impact this quarter, which -- it really surprised us and came mostly in the last month of the quarter, causing us to -- will cause us to take another look at the appropriate balances there to make sure we're optimally positioned.

Okay.

And just -- maybe a comment for you.

I know you get this question every time you meet with investors and people question why you don't basically hedge some of your raw materials.

But to some extent we all knew how to model this -- this particular situation.

And I think many of us did.

But for whatever reason, I think that -- you know, still we're somewhat surprised and -- I mean, it's quite frankly it's a miserable day in the stock market today, but having said that, your stock is -- is, really down a lot.

I mean one of the obvious reasons is because of these surprises that occur from time to time and I realize that we should have a longer term perspective, but it just seems like some things could be done that would help mitigate some of the volatility here.

Well, listen, we don't disagree with our disappointment with the volatility and the surprises.

Oil moves very, very quickly.

We've all seen that.

We are at the -- sort of the point of that and it impacts us very, very substantially.

You will see in the chart how much benefit we had in the previous three quarters because of this.

We do, however, look at it -- we'll continue to look at it closely.

We have spent a lot of time trying to figure out -- trying to figure out if we could effectively hedge with some other mechanism of contract.

And as we sit here today, because of the trading patterns of feedstock versus oil, we have not been successful in finding something.

I would -- and I hope people do recognize this.

If you go beyond -- if you -- if we can all think beyond a quarter or two, we continue to believe that the Carbon Black business is a very, very healthy business.

Volume is very strong.

We're operating at -- with very high capacity rates around the world.

We feel the business in China is doing very, very well.

We're adding a lot of capacity there.

I think the reduction -- capacity reduction coming out of the Ohio River will have a positive impact on us going forward.

These are frustrating times for all of us.

They are difficult for us to project, as they are for you, but we're working on it.

Thanks for the help.

And your next question comes from the line of Jay Harris with Goldsmith & Harris.

Hi, Jay.

Ken, you've entered a new era of increased complexity.

Let --

I'm not sure you've gotten to the point of getting an award yet but you're getting close.

Trying to give you more information, Jay.

Well, I can't see the forest anymore.

Anyway, let's talk a little about Carbon Black and feedstock costs.

Can you provide us with an estimate based on -- I'm looking at my machine now, crude oil is $75 a barrel.

Based on your price increases on July 1st, what does that mean economically for the fourth quarter?

If we just averaged $75 a barrel.

The way -- the best proxy I can give you is to go into that machine you have and average crude, the best proxy is actually 3% sulfur plats and average it for the three months ended May 31st and then take a guess of what you think it's going to average in the July 1st to September 30 quarter.

I understand what you just said.

Have -- given the fact that there have been refinery outages in the United States, how is this caused you, if at all, to change your purchasing pattern geographic mix of raw materials, and has it caused any change in the selling price of your raw material, the oil that you buy, the spread between that and the -- and the price of crude oil?

It certainly had an impact.

And how durable and significant an impact it is is yet to be determined.

The outages in North America have clearly had an impact on our raw material costs in North America.

There is also underway, we think, a longer term trend with less of this material being sourced or available on the Gulf Coast of the United States and more of it being available in other parts of the world.

And that certainly has had an impact, some positive, some negative.

Net net negative impact over the last couple of months?

Certainly net net over the last couple of months.

I don't think we think it's -- that's a durable issue.

Okay.

I think that the -- in our business, there's a couple of particular refineries that have problems.

It will come back on stream and sort of level out the market.

All right.

Change of subject.

Inkjet colorants.

Yes.

What can you say about the ramp for the high-speed printing market?

Well, I can get -- the only thing I can tell you -- I can give you some information from our own sales.

And what I would describe as a -- some personal experience and some anecdotal stuff.

First from our sales.

We continue to be largely sold out with our existing capacity.

And are under pressure to bring on the new capacity as soon as we can and it's -- hopefully will come up around the 1st of October.

And in the meantime, we're limping along in terms of meeting demand.

And to what extent that is impacting the pipeline filling in our customers areas is -- I can give you only anecdotal information.

On the anecdotal information, one fact, we have the equipment installed in our office.

Got it installed a week and a half ago, and -- although I had seen it in prototype, I would tell you that I am -- I was particularly pleased.

It's staffed, it's excellent copying, it's an easy machine to operate, it's versatile, and it's -- and it's appealing.

How did it compare in price with what you replaced?

Well, in terms of -- I think -- what we know.

And it's a little bit early.

The price per page will -- will be in the range of what we anticipate it will be when we made the purchasing decision.

Part of that depends on how much color versus black gets used.

If you use a lot of color, the economic case becomes very, very attractive.

I did hear -- I had a long talk with a customer/employee who installed the equipment because I figured that would lead me to get some sort of inside information about one of the lower level guys in the company.

So he told me two things.

He said, look it, we love the machine.

We don't have a customer who has a problem with it.

We've had problems getting enough machines.

And one of the big problems we have is getting enough ink to service the machines.

Okay.

So you guys -- the opportunity and the bottleneck.

I think -- that's anecdotal.

I can't -- I don't know.

But, you know, you just try to -- in a situation you try to pick up information everywhere you can.

Right.

As I sit and look at it today I remain as encouraged and optimistic.

I would tell you that it's going to be -- it's quite clear it's going to be a very competitive challenging space.

I believe it will be a big business 5 and 10 years from now.

And we're doing everything we can to have a very strong position in that business.

All right.

Change of subject.

The optimism that you -- that you reflect with respect to CCM form 8.

Backing up a -- a rise in performance for the June quarter.

Yep.

What -- how tangible are these opportunities?

Are they more tangible now than they were a year ago?

They are more tangible now than they are -- they were substantially more tangible now than they were a year ago.

Particularly in -- in certain parts of the world.

And can you give us some indication of the magnitude of -- of the opportunity relative to what you're doing now?

Well, you need to understand that nothing -- I've learned that nothing in this business is sure until the fluid's in the home.

But having said that, there is one particular reason in the world where we have been told we have been specified and that the material will be used and that work is underway to deal with all of the logistics problems thereof.

And if that develops as the customer is telling us it will, it will have a substantial impact on the volume of material used in the business.

Starting sometime next year?

Well, as you and I have gone through this, that's what the projections are today.

But I don't make any promises.

I understand.

Coming to Elastomeric Composites.

You highlighted it in your annual report and now you're focusing on it on a conference call.

What has to be done before this becomes a commercial operation?

As we have indicated, you know, and you're right to point out that we have been increasingly vocal about this opportunity.

And I hope you noted today that I put it intentionally in the category of a new business that we thought could have a substantial impact on the value of the company.

What has gone on is that our customer has done substantial significant testing and has proven to, I think, himself and us that the mixing protocol that is used in this material produces a far more -- a far stronger, far better mixture of the Carbon Black with the rubber and therefore a better performing compound and that with mixed -- in -- used in at least some tire applications, has improved certain parts of tire performance, important tire performance by as much as 15 to 20%.

We have been in conversations with -- with the customer how they plan to commercialize it and what the economic terms between us are.

We hope and believe we are very close to agreement on that.

If we reach final agreement, there would be a period of time where they finish their development and -- after which they would -- they would -- we would start making the material and producing it in tires.

How we precisely get paid and what the value is in the final phase of discussions.

But if it goes as we hope and believe it will, it has the potential to be a very significant part of our business going forward.

Does this require a significant time expensive capital investment?

I do not think so by us.

But maybe by your customer?

The current thinking is that it would be a license that they would manufacture.

And -- so would you like to leave us with the notion that this is something that comes together within a two-year period?

Or shorter.

We hope by the time we're next on the call with you to have a definitive agreement signed and behind us.

And within the next couple of years to be firmly in the construction of a plant to make the stuff.

Okay.

The forest looks a little clearer now.

Thank you.

I do -- although we are very excited about it -- Jay you've been with us long enough to know that if we can improve tread wear or rolling resistance or whatever in certain tires by 20%, that that's a very significant transformation in the tire industry.

Where we are is we think we're there and we're trying to -- trying to get it on the road.

There's good and bad news here.

The bad news is that these things take time and you got -- you got to finish all the testing and then you got to build the plant and start making tires.

The good news is that once you're in, you tend to stay in and it tends to be significant.

At one point you had the concept that the implementation of these techniques would enable Cabot to provide the early processing steps to the rubber company of the manufacture of rubber.

Does the -- the technique involve this company, is that the same, or did I hear you say that you were going to license the customer to perform all the steps by him?

We own and operate a small plant where we're making this compound in Malaysia today.

Right.

And that plant is operating at full capacity to provide material, for which we're getting paid, to support the testing of the material.

In terms of commercialization, it's not a hundred percent clear yet how it will go.

But if I had to guess, it would be that we would -- we would license rather than manufacture or spend the capital to build the plants and that the plants would be integrated either with the customer's tire plants or their natural rubber plant.

But I want to be clear.

Not done yet.

What would you hope to achieve in terms of a royalty or license fee relative to what you could have achieved had you been operating this first-stage rubber manufacturing facility yourself?

Well, that gets into a question without -- without dealing with numbers.

One of the things that became -- has become obvious as we've worked on this is for us to make the specific compound that any tire company is going to use is to start to be in their business space.

Because each of their compounds are unique.

And they have unique designs and recipes for those compounds.

And so I think we've concluded that we're better off not being competitive or trying to take away a part of their business but to let them manage that -- that end of the business.

I think that's probably as far as we should go at this point.

Thanks.

Thank you very much.

And your next question comes from the line of John Roberts from Buckingham Research.

Hi.

Good morning -- good afternoon.

Can you hear me?

Hello?

A lot of background noise, John.

Hello?

Can you hear me now?

?

Mr.

Roberts, your line is open.

Lauren.

Yes.

His line must be experiencing some technical difficulties.

That was our last question in the queue.

Okay.

Maybe -- should we wait a minute on John or should we end it, Susannah?

Okay.

Well, thank you very much, everybody.

We hope to have better news in the next quarter and look forward to talking to you then.

Lauren, thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.