Cabot Corp (CBT) 2007 Q4 法說會逐字稿

Welcome to the Cabot Corporation fourth quarter and full year 2007 earnings teleconference.

The teleconference is scheduled for November 1, 2007, at 2 P.M.

Eastern time.

We will release our earnings announcement after the market closes on October 31st, 2007.

Should you have any questions or wish to be included on our electronic distribution of the earnings announcement, please don't hesitate to contact Susannah Robinson, Director of Investor Relations, at Cabot Corporation at 617-342-6129 or e-mail at susannah_robinson@cabot-corp.com.

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, Teresa.

Good afternoon.

This is Ken Burnes, Chairman and CEO of Cabot Corporation.

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

With me this afternoon are Jonathan Mason, our Chief Financial Officer; Bill Brady, General Manager of our Carbon Black product lines; Eddie Cordeiro, General Manager of Supermetals; Ravijit Paintal, General Manager of Metal Oxides; Fred von Gottberg, General Manager of Inkjet Colorants; 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 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 & Exchange Commission, copies of which are available on our website.

As you heard last night, we released results for the fourth quarter and full fiscal year 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 received this information either by e-mail or fax.

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

I will now move on to the key highlights pertaining to the company's performance for the quarter and the full year 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.

As anticipated, and as you could imagine with oil prices being where they are, we were once again negatively impacted by rising Carbon Black feedstock costs during the fourth quarter.

Despite this impact, which was significant both for the quarter and the full year, we were pleased with our financial results and remain upbeat with regard to how the Company is positioned overall and its financial health.

In looking at the key points, the Carbon Black product lines continue to have strong volumes and perform very solidly given the unfavorable impact of Carbon Black feedstock costs during both the fourth quarter and the full year despite the raw material relief in the first half.

Secondly, fumed metal oxides performed at record levels for the year, and we remain very optimistic about its prospects.

Third, while inkjet colorants experienced a significant slowdown driven by the weak aftermarket, we remain positive regarding the overall business, and particularly regarding the potential with the high speed inkjet printing as a platform for a significant business.

Fourth, supermetal remains a difficult business facing highly competitive market environment and an uncertain ore position.

Fifth, specialty fluids had very strong results in both the fourth quarter and full year and took the first significant steps to expand its presence beyond the North Sea.

Finally, progress in Superior MicroPowders and Aerogel gives us continued confidence in our ability to create significant shareholder value through the development of new businesses.

Now let me go through some of the details.

With the exception of rubber blacks in North America, Carbon Black demand remained strong, and we're seeing significant growth in developing regions where we are continuing to add capacity.

I am pleased to announce that in September we commenced production at our new performance products units in China and began construction of the two new rubber blacks units in China which we discussed with you last quarter.

As anticipated, we're unfavorably impacted during the fourth quarter by the time lag in our feedstock related pricing adjustments and the immediate recognition of feedstock costs in North America.

This negative impact of $14 million for the fourth quarter is particularly striking when compared to the fourth quarter of 2006, when we had a benefit of $10 million.

Looking through this volatility, the fundamentals of the business remain very strong, and the results improve significantly year-over-year.

Despite the fluctuation in results that the quarterly pricing mechanism in our Carbon Black contracts have given us over the past year, we believe that the stability the contracts provide will outweigh this volatility over the long-term.

Fumed Metal Oxides experienced a record year with strong demand and high plant utilization.

As many of you may recall, we were in a situation in this business back in 2006 whereby we had strong and growing demand but were capacity constrained.

The addition of our facility in China in June of 2006 allowed us to grow this business to the record levels we achieved in 2007.

We are once again in a very similar situation.

The business is performing at a high level.

However, its growth is limited without additional capacity expansion.

We are currently in the process of looking at the possibility of an additional facility in China to leverage the strong and growing demand we are seeing in this product line.

Despite the weak quarter in inkjet we continue to be optimistic about the business, in particular the high speed opportunity.

During the quarter, we continued to see a decline in the aftermarket segment attributable to ink efficiency and aggressive OEM action.

After the aftermarket has turned down however, we have been aggressive in the marketplace and feel our position will be stronger as the aftermarket recovers in the future.

On the high speeds side, we continue to believe that the technology is very powerful and has the potential to become a significant business for us in the future.

We recently completed debottlenecking of our initial high speed capacity and are carefully reviewing the timing of future capital investments.

We continue to work with a number of companies pursuing the application of pigment-based inkjet technology to the high speed printing market, as we and others believe the inkjet will proliferate in this segment.

During the past several months the tantalum industry has experienced two significant changes that created uncertainty in our supermetals business.

First, Sons of Gwalia, the industry's largest tantalum ore supplier, emerged from bankruptcy this summer through the sale of its two mines to a private equity mining concern in Australia called Resource Capital Fund.

The second event was the sale of H.C.

Starck, one of the largest tantalum processors, by its long time owner the Bayer Corporation to a private equity firm.

Uncertainty over these two events has created turmoil in the industry over the last several months.

It is unclear to us what the impact of these events will mean to the industry both in the short and long-term, although it is clear that we are experiencing -- currently experiencing highly competitive conditions.

While the underlying demand for tantalum appears to be stable, we anticipate the volatility we have seen recently will continue and perhaps intensify in the near term.

Our specialty fluids business reported strong results for the fourth quarter and the full year 2007.

The increase in performance was primarily by an increase in drilling activity in the North Sea, but we also started to see significant progress in our efforts to expand our geographic presence.

During the year, drilling activity outside the North Sea accounted for six of our 31 wells and for more than 15% of the revenue in this business.

This is exciting progress, and we're pleased at the steps we took during the year to expand our marketing efforts appear to be paying off.

In the last several weeks we have had very encouraging news from the Far East and anticipate being in at least one well in that region in the very near future.

In the new businesses we made meaningful progress in reducing the unfavorable impact from Aerogel during the fiscal year and successfully restarted our manufacturing facility during the fourth quarter.

We remain confident that we can continue on this path and capitalize on the market opportunities for this unique protocol in the coming years.

In Superior MicroPowders, we continue to be pleased with the progress being made in several of our business development activities and have two opportunities that are positioned to generate commercial revenue during this fiscal year.

Finally, we continue negotiations with a major tire company regarding commercialization of our new CEC technology.

Although this has been slower than we anticipated we remain excited about this technology and continue to believe that it will bring significant value to the shareholders.

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

Thanks, Ken, and good afternoon, everyone.

I would first like to give a bit more detail on the financial results for the specific businesses, and then I would like to highlight for you some of the key corporate financial issues that occurred during the fourth quarter.

First on the businesses, rubber blacks volumes increased by 3% when compared to the fourth quarter of 2006 with continued growth in emerging markets, but declined by 2% due to typical seasonality when compared to the the third quarter of 2007.

For the full year, volumes were strong increasing by 4% compared to 2006.

Overall unit margins declined during the fourth quarter when compared to the fourth quarter of 2006, more than offsetting these volume gains.

Lower pricing associated with the timing of feedstock related pricing adjustments on our contracted business more than offset higher unit margins on our noncontracted business during the quarter.

Sequentially, lower unit margins in rubber blacks due to feedstock costs increasing more than selling prices and the lower seasonal volumes combined to unfavorably impact performance.

Switching to performance products, volumes increased by 4% as compared to the fourth quarter of 2006 due to strong growth in our plastics segments.

In addition to stronger volumes, performance product results improved due to higher unit margins from price increases and a favorable product mix.

Sequentially, total volumes were flat, which reflects strong demand as we did not see the typical seasonal downturn in the product line.

Unit margins declined when compared to the third quarter of 2007, primarily due to higher raw material costs.

Moving to inkjet colorants, volumes declined by 12% compared to the fourth quarter of 2006 and by 14% compared to the third quarter of 2007, as the aftermarket segment continued to be weak per Ken's comments.

Although we had year-over-year growth in both the OEM and high speed segments, this growth was not enough to offset the lower aftermarket volumes and our continued investment in the high speed segment.

Fumed Metal Oxides performed at a very high level during fiscal 2007, experiencing strong demand and very high plant utilization across the system resulting in record profitability.

Volumes in the fourth quarter were nearly flat, decreasing by 1% compared to the fourth quarter of 2006 with declines in both silicones and electronics more than offsetting growth in the niche segment.

profitability for the quarter declined slightly compared to the same quarter of 2006 as an improved mix was offset by scheduled plant shutdowns that occurred during the quarter.

Sequentially volumes increased 6% due to strong sales in the niche segment.

Profitability was slightly lower relative to the third quarter of 2007 due to scheduled plant shutdowns that occurred during the quarter.

The Supermetals business in contrast had a weak quarter when compared to the fourth quarter of 2006 due to lower pricing and volumes from the expiration of the last of our significant long-term supply contracts in December of 2006.

This was further impacted by higher ore costs.

Sequentially, higher volumes and slightly lower costs were more than offset by an unfavorable product mix leading to a roughly flat comparison.

On a positive note, Supermetals reduced its working capital by about $37 million during the year, thus far exceeding its original multiyear target.

In Specialty Fluids, profitability increased solidly in the fourth quarter of 2007 when compared to the fourth quarter of 2006 due to an increase in rental revenues and a higher number of wells that utilized our fluid.

profitability was flat relative to very strong third quarter 2007.

The business maintained a fluid utilization rated of 12% in the fourth quarter of 2007, flat with the fourth quarter of 2006 but down from a strong 19% in the third quarter of 2007.

Moving from the business to some corporate specifics, during the year we repurchased approximately 4.6 million shares on the open market at a cash cost of approximately $190 million.

Approximately two-thirds of the repurchases were funded from internal cash generation with the remaining one third taken from cash on hand and a modest increase in debt.

These share repurchases benefited earnings per share for the year by $0.01.

We also benefited during the quarter from the reduction of our operating tax rate from 27% for the first three quarters to 25% for the full year and from the release of certain tax reserves.

The lower tax rate benefited us by approximately $0.04 per share in the fourth quarter and the favorable settlements of various tax audits by an additional $0.07 per share.

The lower tax rate was due principally to geographical earnings mix.

Finally, on cap spend, we spent approximately $62 million and $146 million during the fourth quarter and full year 2007 respectively in capital expenditures compared to $44 million and $236 million in the fourth quarter and full year of 2006.

At this time, we anticipate spending approximately $225 million for the full fiscal year 2008, an increase over 2007 principally due to our Carbon Black China expansion and energy centers.

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

Thanks, Jonathan.

I want to reiterate that we are very pleased with the improvement of our financial results for the fiscal years and believe that the underlying fundamentals of this company are very strong.

We remain encouraged with the potential for our new businesses to significantly increase shareholder value.

Given my impending retirement, you will notice that I will direct some of the questions that you ask today to the appropriate business leaders.

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

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Laurence Alexander with Jefferies.

Please proceed.

Good afternoon, Ken.

How are you doing?

I am very well, Lawrence, yourself?

Pretty good.

First question on Specialty blacks, can you discuss the multi-year trend in unit margins and what the year-over-year impact was either in Q4 or in 2007?

We certainly can.

That's a wonderful question for Bill to answer.

Let's see.

Multi-year, if we go back a few years, we have built the average unit margins steadily over that time, particularly in the past year where we kept pace and maybe even outdid a bit the oil pricing increases.

So it has been quite healthy.

And if we look at the margin, I think the second part of your question was the total margins year-over-year.

It is higher year-over-year due to both the volume increase and the unit margin.

Do we have a dollar impact for the year to put perspective on it?

Yes.

I think that's a legitimate -- Susannah, is that a legitimate question?

I think so.

Please give a rough change.

Quarter over quarter?

Year-over-year or just for Q4.

Q4 year-over-year is about $5 million improvement.

Perfect.

Ken, just one other question on the Specialty Fluids.

The $7 million run rate, do you think that's a sustainable -- sort of new base level heading into next year.

I of course don't know.

I would tell that you one of the experiences -- one of the learnings of being in this space with this business is that that predicting when a particular well is going to get drilled and when it is going to need our fluid is virtually impossible because of the vagaries in the industry.

I just don't know.

I would tell you that as we review the business, there is substantially broader momentum across many parts of the globe.

I mentioned the business that we appear very close to getting in the Far East to indicate that.

My sense is that we may have come through some sort of a transition point, and hopefully we're going to see much more significant use of the fluid going forward, but I really can't give you any good predictions.

As you know, Laurence, we don't give guidance in any event, but to be perfectly honest, I just don't know because of the timing irregularities in the business.

And lastly one more if I may on the few missed [log sides], how much was the hit from the plant shutdown, and would that occur next year or is there similar maintenance planned next year?

I would remind you all that plants, chemical plants need to be shut down and turned around, i.e.

maintained in depth on a fairly regular basis somewhere in the range of every 12 to 18 or 24 months, so it is a regular cost of our business and occurs episodically throughout the year.

Having said that, I don't know, Rob V., if you have a number that would give us?

We don't really have a precise number on that, but --

Nothing unusual?

Nothing unusual.

It is a regular cost of the business, but unfortunately it does not happen at the same time every year.

We try to extend the period before we turn around the plants to the greatest extent possible consistent with the need for high reliability.

Thank you.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

Please proceed.

Good afternoon.

Where I would like to start is with raw materials in China.

Are your Carbon Black feedstock costs in the United States comparable to what they are in China in that we hear now of all kinds of fuel cost increases in China, and I can't tell whether that affects your feedstocks or whether it doesn't affect your feedstocks.

I will see if Bill can give you a specific answer.

I would tell you, though, in general in China we use a substantial amount of coal tar.

Coal tar.

Which is a product separate from the oil industry and therefore although it trades in pricing somewhat consistent with it, it is not the same as the hydrocarbon or the oil difficulties that the Chinese economy has.

Bill may know the percentage, but we use much, much more coal tar in China than we do any other part of the world.

Bill, maybe you can --

I think Ken answered the key part, and the key part is that the majority of our feedstock use in China is coal tar which is driven by different forces than decant oil here in the U.S.

If you look at the curve of feedstock behavior here in the U.S.

relative to China, they look quite different actually.

So is it fair to say that your margins are wider in China in Carbon Black than they are in the U.S.

and western Europe or narrower or about the same?

It depends on which margin you're talking about.

Choose one.

If you go all the way to the bottom line net margin, they are better in China than they are in the United States.

Secondly, Ken, I was hoping that you could expand a little bit on your impending retirement and what the timing of that might be and what it means for Cabot and what the succession plans are?

I would tell that you the Board of Directors of the company has been working on this for the last number of months, and I am aware that they continue to spend a great deal of time and energy on the issue.

I am very hopeful that they will -- that that process and therefore the succession issue will draw to the close -- draw to a conclusion in the very near future.

I would tell you that I am very, very comfortable that the management team that is in place in this company is fully capable of running this company as well as well or better than it has been run in the past, and whoever the Board chooses, whether it be an inside or outside candidate, will have an easy time stepping into my position and will sure have the full support of the company.

This has been sort of an awkward time for all of us, and I think we're all pleased that it appears to be drawing to a close, but I am not concerned that it will be in any way disruptive to the company as we go forward.

So all things being equal, we would expect to hear that a new CEO will would be named before the end of the calendar year?

As you are all aware that is an issue in the Board's control and that I am not in a position to comment on because it is a decision and an action that the outside directors of the company take.

Let me repeat.

I know they're working very hard on it and spending a lot of time on the issue, and I am very hopeful that it will draw to a conclusion in the very near future.

And then if I could just ask a final question, Supermetals, you started off fiscal 2007 with a very strong quarter, and then the Company really didn't make much in the following three quarters.

So how does one think about next year with all the various uncertainties -- you've brought down your inventories, you've cut your costs.

Is that something that's going to deliver a benefit or the markets are so uncertain that you can't really measure that very easily?

Can you talk -- you said you were confident about the state of the business.

What about Supermetals?

If I had -- I will have Eddie give you specifics and just give you the perspective and a little bit of history here.

Supermetals is our tough business today.

I would not try to sugarcoat it.

I would remind you all that in my 20 years in the Company this business has been the most cyclical, and it seems to go through phases where it operates at around break even, and then the market -- some event takes place, the market recovers or straightens itself out, and the business becomes healthy again.

And as you know, Laurence, we've done quite well in the business in terms of overall performance in the last six or seven years.

We're clearly in a cycle.

The industry clearly is in a down cycle, and there are a lot of significant uncertainties both in the market and the competitive position and particularly in the ore, that will in my experience will get resolved here over the next six to twelve months.

And we're in a down cycle in the industry.

It has happened before.

My own sense is that it will pass, and you come back here in some period of time, I don't know, 12 to 18 to 24 months, and this will be a business earning a decent return.

But there is today and going forward certainly in the short-term a significant amount of uncertainty and like the Specialty Fluids business, if we had -- we do not have the ability to predict the performance of the business today.

Now, with that, let me give it to Eddie and see he wants to add any color to it.

Jeff, I think Ken hit on all the key points.

You did mention the first quarter of 2007 and of course you know we have some customer contracts that we were still operating on, and I am sure you can see for the last three quarters we have been running at roughly break even levels.

And as Ken said we're looking at a fair amount of turmoil, significant ownership changes in the industry, and it is unclear what direction these new owners will take.

So the market itself we see as reasonably stable right now, but we are seeing quite heavy competition.

I think we'll see that for the coming several months.

Is it fair to say that you expect this business to operate at a break even level until further notice?

Jeff, it is hard for me to answer that question without giving you guidance, and I think as Ken said it is very hard for us quite frankly to predict how exactly it is going to turn out.

Let me put it another way.

Why should the business get materially better over the next six or nine months?

Why should the performance of the business get materially --

Let me try to help you.

We're not going to give you guidance.

I think it is fair to say that there is nothing immediately on the horizon that would indicate that the underlying business conditions are going to change in the next six months.

I would just remind you, however, that in a number of times in the past that I have been in the Company, we've been in this situation, and an event of significant -- of magnitude did occur that did change the business performance, whether it is in ore supply, whether it is in market demand, whether it is in competitive position.

And we are trying to position ourselves to be on top of any of those possible events, and to react appropriately if they occur.

I just don't know what's going to happen.

It is a very unclear picture.

It is as unclear today as we've ever faced in my 20 years.

That's helpful.

Thank you very much.

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

Please proceed.

I guess first congratulations on your Red Sox.

Hey, thanks, John.

How about that?

Are you rooting for the Patriots this weekend or no?

I have two sons born in New York and growing up here, so.

Ken, because it's the end of your fiscal year, you report a week later than I think you do the interim quarter.

You've seen October at this point or at least the flash reports.

Can you give us any directional guidance on how the Carbon Black business or business overall is October versus what you had in the September quarter?

I would tell you that you can see this as well as I can.

You see what is oil today, I haven't looked in the last couple hours, is it $95 the last time I looked?

Higher.

That's not pretty, but I would at the same time tell you that volumes are solid.

We see no -- somewhat to my surprise because I do wonder, I do worry that a $95 oil price is going to start to affect the broader economy, but at this particular moment we don't see any negative impact in our business.

How about performance blacks in particular?

Because when we went through the hurricane period a couple years back and you had a similar sharp run-up in feedstock costs, I thought it was the performance blacks that suffered some demand destruction as the prices went up relatively quickly.

I think that is correct, and thus far and you of all people know, John, it is always history is no indicator of the future.

Thus far I would tell you during this very difficult period of feedstock rise probably the most difficult that I have experienced in the last eighteen months I am very, very complementary to the job that Bill and Sean Keohane who runs that business for Bill have done in maintaining both their volumes and margins.

And I think they've done a great job and I believe will continue to do so.

So I want Bill to give you some color on the numbers.

I was just going to add one other thing, John, to what Ken mentioned.

With the run-up in oil and of course our prices in the performance segment -- you remember a year or so ago when this happened and we moved our prices.

We lost one of the low end segments.

When I say we lost it, it went from specialty blacks to commodity type --

I remember that.

That is one thing we continue to keep our eye on.

The next -- will it affect the next lowest segment of performance products?

So far you haven't seen that?

We have not seen it yet.

We keep a close watch on it.

Lastly, I appreciate the extra detail you seem to provide every quarter, and like now that you put the supplemental information right into the main release.

If you look on that table where you've got the margin effect of the price lag effect by quarter for each of the past three years.

Yes?

Last quarter was a $16 million lag.

That's the third quarter of fiscal '07.

When I look at pricing sequentially in Carbon Black, the next table down in that release, you had $15 million favorable pricing in Carbon Black, sequentially fourth quarter versus third quarter.

Shouldn't that have been more -- shouldn't you have recovered the $16 million lag and then got some incremental pricing on the noncontract business that would have been a bigger pricing impact?

That's a question that I'd really have to think about.

Bill, can you answer?

I can add a little bit of color.

One thing first of all, John, on that table, the quarter by quarter table, remember that is lag plus LIFO effect in North America on profitability.

That's one factor.

Your question about sequentially on rubber blacks, pricing was higher for sure in both contracted and spot but variable cost increases were even higher.

I appreciate that.

The table says this $15 million of sequential benefit to revenue from pricing and given that you had been $16 million behind last quarter and you saw more cost increase during the current quarter, I think --

I think we have the answer to your question.

We think, and we reserve the right to check this after the call, and Susannah will give you a call.

We think the $16 million was $8 million lag and $8 million LIFO.

All right.

So there is $8 million that was already on by then.

Yes.

Really the number you ought to be thinking about is $8 million.

$8 million plus.

Okay.

If that's not a reasonable number, we'll correct it afterwards.

We think that's the answer to the question.

One more table next quarter.

Thank you.

Thanks, John.

Our next question comes from the line of Jay Harris with Goldsmith Harris.

Please proceed.

Good afternoon.

I keep on forgetting it is the afternoon.

I would like an update -- I would like to hear a discussion on the profile of the Carbon Black business since your capacity has come down in western Europe, your capacity build in particularly in China.

And what percentage of the rubber black business is now covered given these capacity changes by these multiple year contracts that govern your quarterly pricing changes?

I am going to give you a general answer and Bill will give you specifics.

As you know, Jay, you've been with us a long time.

We have been I think appropriately aggressive in moving our capacity to the places where we see tires being built, and we as I am sure you're aware, we believe we have seen and continue to see and believe we will will see it in the future that more and more tires are being built in the developing part of the world largely because of cost issues.

And that includes China, Indonesia, Thailand, Brazil, and by and large we've seen a reduction in tire capacity in the developing part of the world.

Unfortunately, today particularly in North America, we've seen projections that tire builds in North America will decline over any period of time at the average of 5 to 8% a year.

So there is no doubt our rubber blacks business is moving.

20 years ago it was very dependent on North America and Europe.

It is now much, much more dependent on China and South America.

And candidly when we look at it I think we've been very fortunate that we foresaw that and relocated our capacity.

It has been an expensive and painful process, but we still have what we think is a very attractive business.

I think it is going to continue.

The profile of our business has changed a lot.

Bill might be able to give you some numbers.

Jay, on the rubber black volume under contract that has this quarterly formula, it is between 55 and 60%.

It used to be, what, mid-70s?

No.

It never was that high, but it was certainly maybe 60 or maybe low 60s.

But the dynamic that we have happening is that as places like Asia and China grow in volume, at the expense of North America, those regions are less under these contracts than --

Why is the range so large?

Why isn't it just roughly 60%?

Why did you say between -- you said 50 and 65%?

55 to 60.

Okay.

55 to 60.

Okay.

Let me give you one other piece of color on that, Jay.

I think it is fair to say, particularly in the Far East, that the major tire companies who dominate the industry in the developed world are not as strong.

What does that mean?

That means that our contracts have historically been with the major tire companies, and their global contracts serving their global needs.

But as other tire companies develop and grow and expand in China and Indonesia, they have not -- although I think we talked to them, they have not signed up to contracts.

Because they're in one market and spot market and they feel they can deal with it.

So as they grow in consumption, the volume of our -- percentage of our volume covered by contracts declined.

I appreciate.

That's one of the reasons I asked the question.

What about sort of a current picture of the distribution of your capacity by these regions and where will that be when you complete your current intended construction schedule in China?

I will put you in the ballpark, Jay.

China is up to 15%, 15 to 20%.

15 going to 20.

Asia is up around 20.

Europe is closer to 30, 25 to 30.

South America about 12, and then North America is at about 15 to 20.

And is it safe to say that in Asia Pacific, China, and South America that with some frequency which I will ask you to describe get costs passed through into your pricing for Carbon Black?

Yes, that's generally right.

I would say some of the major tire customers who have operations in those regions would be under the same quarterly contract, but generally you're right.

With what frequency do you change pricing with those customers in those regions and not under contract?

Either monthly or quarterly.

And what have you done with those customers for the December quarter yet?

We had a price increase in both the spot rubber black markets around the world and the performance products business on October 1st.

On your contract covered rubber blacks given the current price of crude oil what -- assuming it doesn't change from now to the end of the quarter, what kind of margin penalty will you have compared to the $14 million which you experienced in the September quarter?

Well, I can't give you that specific guidance, Jay, but as you know --

(inaudible) certain the way I asked the question.

Maybe you ought to ask the question again, Jay, to make sure we all understand it.

Let's assume crude oil stays where it is today.

Yes?

For the rest of the quarter.

Yes?

Your selling prices under contract are where they are for the the rest of the quarter, right?

That is correct.

We know what our --

What will be the margin squeeze?

We do not -- historically we haven't given out that information in advance.

We show you the lag at the end of the period of time because the feedstock -- actual cost of feedstock is not the same as the numbers you look at in the newspaper.

That would be competitive information.

We just as soon keep quiet if we could.

Right.

Did you buy much raw material in advance of the quarter to cover more than a normal period of production?

I understand you have the ability to buy a month in advance.

I can tell you generally how we think about that rather than disclosing what our actual buying pattern was two weeks ago.

One of the issues that this company has faced and continues to face is the working capital cost of the Carbon Black business.

I think it is fair to say that every $10 of oil price increase adds in the range of $50 million to our working capital account, and that's a very significant investment in the net assets in this business.

We have and Bill and his people, if you look at the days, you look at the 10-K where these numbers come out, if you look at the days of working capital -- that has gone down significantly over the past couple of years as we've gone through this period of time.

In fact, until the most recent price run-up, our reduction in working capital in the Carbon Black business had by and large covered the increase resulting from the increased price in oil, which I candidly was very pleasantly surprised the business was able to do.

We're not able to do that going forward, and we're now having to invest more money in the business.

We do -- the guys who buy our feedstock, the second part of the question, the guys who buy our feedstock try with the best of their ability to make projections where they think pricing is to go and to buy oil at the best price possible within a relatively short to mid-timeframe given the working capital constraints and the storage constraints and the shipping constraints.

It is a very complex logistical question.

One other question, somewhat related.

You talked about reducing $30 million worth of tantalum inventories during the course of the fiscal year.

Yes.

When I look at your balance sheet and looking at inventories, accounts receivables, and accounts payables, and consider that to be sort of the net of those three to be a hard working capital kind of number, it looks to me like you've invested in excess of $90 million more during the course of the year.

Should we assume this is all related to Carbon Black?

Well, it is largely -- a couple of things.

It is largely related to the price of oil that I mentioned to you a minute ago.

All right.

Think $50 million per $10 of oil price, and so you can offset that with tighter inventories.

Eddie and his business I mentioned has more than met their commitment on inventory in working capital that we made to you a couple years ago.

The other area we have some more inventory in the FMO business with the third plant, fifth plant I guess is fair to say.

And I think we may have built a little bit of inventory in cesium formate this year.

In terms of dollars, it is what it is.

In terms of days, I think it is a better story today than it was twelve months ago.

In terms of the cesium formate inventory, was that done intentionally or were there projects that you thought you would have to gear up for that the timing has been stretched out?

We have been running the cesium formate plant here at full capacity in quite some time in anticipation of having to be in a position to serve multiple geographic markets.

A classic example of that is what I just mentioned earlier in the Far East, where we believe we're about to -- well, actually the fluid we believe is on the rig as we speak, and we believe we have the potential of a fair number of jobs there.

That requires that we have available in the the Far East close to the the location a fair number of barrels of inventory that splits our inventory into smaller piles and puts more burden on the inventory.

We have been concerned in trying to build some inventory in the business to cover the anticipated growth in the revenues.

Ken, as usual you do a fantastic job.

Appreciate it.

Thank you.

Thank you, Jay.

Our next question comes fro the line of David Begleiter with Deutsche Bank.

Please proceed.

Thank you.

Good afternoon.

Ken, in FMO can you grow earnings next year given your capacity constraints?

Sure.

We certainly can't grow it by a huge amount.

I think it can grow from two reasons, a little excess capacity and we're looking at a few debottlenecks that gives us some capacity.

There is also what I believe are very exciting opportunities in what we call the niche segment for higher value, higher margin products.

And maybe -- Rav, you can give a little color to that.

We're working very hard on expanding what we call our treated product portfolio.

Those are essentially let's just say higher chemistry fumed silica and fumed metal oxides compounds which allow us to earn a higher margin.

A lot of our effort in fiscal '07 has been to try and grow the business in '08 through greater penetration of those products, given that we don't have too many opportunities to expand our base hydrophilic capacity in the near term.

That's helpful.

Thank you.

Ken, just on Aerogel, what did it lose last year and what is the cause for your renewed optimism?

The numbers are that it hit earnings by a little over $20 million, $22 million in '06 and $16 million in '08.

It is cash burned '07 -- excuse me, its cash burn was from about $16 million to $12 million, I think, and we see both of those numbers continuing to come down in '08.

Two reasons for optimism.

One is I think we have set a couple of targets at the beginning of the year.

One was we needed to convince ourselves we could make the stuff reliably, operate the plan we have at Frankfurt.

And we met that -- we met that relatively early in the year and because of the demand we actually shut the plant down for a couple of months and then restarted it this summer, and it has been running very, very well ever since then.

The other of course is the market evolution, and although it has been slower than I like, slower than I hoped, we actually had a significant review of the business yesterday.

I came away very optimistic and continue to believe this is going to be as a great product in the future.

Timing is frustrating, but I am -- I remain very excited about the possibilities.

And lastly on cesium formate, did your utilization rates drop from 19 to 12 sequentially but your revenues stay flat sequentially?

Remember we had a discussion about that and I am glad you asked the question.

Utilization rate talks about how many barrels of the fluid are used in rental applications during the period.

Revenue comes from two sources, rental rate and lost material, i.e.

sold material.

The way we account for things is that we recognize rental as it occurs during the period so that we could have a job that starts on the first of September and ends on the second of October.

We would get 95% of the rental rate in the fourth quarter but the sales revenue wouldn't come until the first quarter.

So the number of utilization, although interesting, is not dispositive because of the way the thing flows through.

and the other variation is certain jobs we lose more, sell more material than others, and this quarter we happen to have some timing issues that led to that utilization rate but also more material that we sold.

So the revenue was flat, and the profitability was flat even though utilization was down.

Thank you very much.

Our next question comes from the line of Alex Mitchell with Scopus Asset Management.

Please proceed.

This is Bob Goldberg sitting in for Alex.

Hi, Bob, how are you?

Good, how are you, Ken?

Good.

A couple of themes I wanted to explore -- one has been discussed in great detail on this call, and the other one hasn't.

The one that hasn't is inkjet, and I just wanted to get your thoughts on pace and development of inkjet, which has certainly been disappointing in the aftermarket, but I wanted to get your thoughts on the HP situation and further developments to commercialize the technology and where you stand and when we might see start to see some financial impact.

I will turn it over to Fred for specifics in a minute, but let me give you an overview of how I think about it.

We had a tough year in the aftermarket, really a tough year in the entire SOHO market that came from two things.

There was a significant technological evolution or change in the business that we were partially -- at least partially involved with or responsible for that enabled the inkjet printer that you have sitting on your desk to use far less ink because of a significant reduction in drop size, i.e.

I don't know, Fred can give you numbers.

But each drop of ink is much, much smaller today than it was previously, which reduces the total volume of ink to get the same number of pages printed and therefore reduces our pigments, the volume of pigments we sell.

That was one issue.

The second issue that we talked about is there was significant pressure throughout the aftermarket from the OEMs as they fought off or fought against the manufacturers and sellers of the replacement cartridges because it was starting to significantly impact their business.

That resulted in a substantial reduction in the aftermarket volume.

Now, I am actually -- and Fred can talk to you about it, but as I watched it, it hasn't been a pleasant period of time.

It has been what I would regard as a significant bump in the business.

But if I step back and look at the OEM segment, both the sales to the OEM companies themselves and the aftermarket sales, I continue to believe that is a very attractive business for Cabot and will be going forward.

Not 100% sure how long the aftermarket downturn will continue, but it is a nice business with reasonable margins, and we have a very strong position in it.

The second part of the business is the high speed printing business.

We remain extraordinarily optimistic that that is going to be a significant business in the future.

I am not at liberty to comment on any particular customer, but we are selling a lot of product and working with a lot of different companies as that particular segment develops.

This has been a tough year.

The development of new businesses is never smooth, but I continue to love the business and think it will be important as we go forward.

Fred, you might want to add whatever.

Thanks, Ken.

Bob, I think Ken covered most of the points that I would have made.

I do want to say that on the high speed side, we were actually fairly pleased with the performance in fiscal year '07 in the high speed segment, and the growth exceeded our expectations.

It is too early at this stage to know how specific launches are going.

There is a lot of uncertainty this early on in any particular launch, but all in all I think in the high speed segment we see more and more people investing in the segment.

We see inkjet being regarded more highly for that segment as well as digital being more important.

I think it is very positive for the business going forward.

The other hinge in the aftermarket Ken explained the reasons why it was down substantially year-on-year.

We're focusing on future, and we believe we have positioned the business well for the future and when and if the aftermarket recovers we hope to participate in a disproportionate share in that recovery.

Would you say that fiscal '08 is going to be another year of development and investment in the business and that it is really fiscal '09, fiscal '10 where you start to see some financial payoff from the high speed business and some stabilization in the aftermarket?

Bob, it is very difficult to predicted, and virtually impossible to say exactly what's going to happen.

However, we will continue to invest both in R&D and in capital to ensure that we're well-positioned for the growth in the business, and that's been our mantra over the years and was responsible for the reduction in profitability in fiscal year '07.

And depending on the circumstances next year we will continue to invest in opportunities we think are worth investing in.

Those opportunities will take multiple years to actually come to fruition.

You have a capacity expansion, don't you, in high speed?

Market?

We actually just completed a debottleneck project in the high speed segment, and we are reviewing and working closely with our customer on a second expansion, and that will be based on making sure that we meet our customers' requirements.

We're working together with them on the exact timing of that expansion.

But how long would it take the first expansion to be sold out?

I can't tell you that exactly.

I don't know.

I don't think anyone can predict it so early on in the launch phase that that would be pure speculation at this stage.

Okay.

And let me just shift gears.

The second issue I wanted to explore which again has been discussed somewhat ad nauseum on this call -- but the Carbon Black situation and fiscal '07 was a tale of two halves.

You made $111 million of operating profit in the first half of the year and $45 million in the second half.

And I guess my question is trying to understand as just now beginning of fiscal '08 what we might expect to see from the business, given the oil price environment and whether we're likely to see earnings look more like they did in the second half of fiscal '07?

Or is there a possibility of getting back to the margins to where they were earlier in the last fiscal year?

Obviously I know a lot depends on oil, but I am just curious as to your thoughts as to what the earnings power of the Carbon Black business is in the upcoming fiscal year.

I think you answered your own question.

A lot does depend on oil.

I can tell you other than that, the business I feel is fundamentally very strong.

I think the volumes will continue to be strong, and the utilization around the world other than North America continues to be high.

So fundamentally the business is quite strong, but it will depend on oil, and if we have this ever-rising environment, we've got the burden of the lag in the contracted part of the business which will hurt us.

Is there much in the way of seasonality by the way in the business from the September quarter to the December quarter?

I know seasonality used to to be a bigger issue and maybe not so much any more given the change in the geographic mix?

Again, you're right.

I think we used to have a much -- for example, third quarter to fourth quarter we used to have a much bigger drop in volume.

Third fiscal to fourth fiscal.

Right, right, but I think again the emergence of China and Asia has flattened that out somewhat.

Let me give you a little bit of perspective, Bob on, a different way.

I think if you take that chart we put in the supplemental business information and wash out the lag in LIFO impacts, which I think we put there a couple of quarters ago and we'll continue -- certainly I hope they continue to refine it for you.

It is intended to give you a view of the real earnings power of the business.

If you do that and back out both the good and the bad, and look at the earnings power in the business, I think you'll find the business is performing at a very, very solid, attractive rate, and I would tell you that both in the rubber blacks business, particularly outside of North America and performance products all over the world, this business is really humming along.

I don't see any reason to believe that it won't continue to do so.

Okay.

Thanks for the help.

I appreciate it.

Our next question comes from the line of Ivan Marcuse with Keybanc Capital.

Please proceed.

Hi, guys.

Hi, Ivan.

I have a quick question on the CEC, the liquid Carbon Black -- what's the holdup and when do you expect that to be a done deal?

Well, as you know both Bill and I expected we would have an announcement here at this quarter about a firm deal.

One of the mistakes I made throughout my career is trying to predict these things.

As I said in my note and Bill can give you whatever color you want, two things.

We continue in conversations with the customer.

But more importantly, while the conversations are going on, the development work on both sides continues unabated.

And so we're disappointed we don't have a firm agreement to tell you about, but we continue to be very optimistic that it will evolve in an appropriate time.

Bill?

I think Ken is right.

The only thing I would add is this is a long-term important technology to our partner and trying to figure out the right framework and the right mechanisms for to us share value over a long period of time is very complex and taking some time, and that's where we are with it.

A question off the high speed.

What percentage was high speed up this past quarter on a year-over-year and a sequential basis?

I am not going to answer that question in particular because with the high speed it started off from a very low basis a year ago, and so it is a lot of noise generated at this early stage of any launch, so if I gave you a number, it will be so high it will be unrealistic for you to use that in any way whatever.

Got you.

One last question, since most of them have been asked is -- is there any discussion of increasing the buyback?

Let me take that.

There are a couple much issues running around the Company that I think I have postponed pending my successor being identified.

We did complete the first authorization, and as you know we bought 4.5 million shares.

Given the fact that there is going to be a new CEO here in the not too distant future, we all decided that the magnitude of that program going forward really ought to be an issue that he and the ongoing management team rather than I should decide.

So we sort of put it on hold here not too many weeks ago when we finished the last program, and it will certainly be an issue right on the top of the list for the new CEO to consider.

Great.

Good luck with the rest of the quarter.

Thank you.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

Please proceed.

Just a couple of things at the end.

What was cash flow from operations for the year?

We're going to get you the number here.

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

I think $312 million.

$312 million.

Okay.

With the buyback, what should be the average fully diluted share count for the first quarter?

About 65 million -- if it is not correct, we'll get you the precise number.

About 65 million.

Okay.

I guess lastly on Carbon Black at least by my calculations when I look at resid prices, I would think the raw material impact in the first fiscal quarter of '08 would be larger than in the fourth fiscal quarter of '07.

In looking at your very helpful table, you had a plus $13 million in quarter one.

And so is the way to think about that or just to think about this business broadly is it should be some number that resembles the detraction in Q3 and Q4 -- that is that $14 million or $16 million number less an additional $13 million where you had the benefit.

So all things being equal you should be about $25 million lower than where you were in the first quarter of last year?

Is that the order of magnitude?

Without commenting on the numbers, the logic of your thinking is fine.

Okay.

Fine.

Thank you very much, Ken.

Good luck.

Thanks.

Our next question comes from the line of Laurence Alexander with Jefferies.

Please proceed.

Two very quick ones because I realize the call has run over.

Specialty blacks, can you address the supply/demand balance by region and how that plays into pricing expectations going forward?

This is Bill.

First of all, we don't really run that business's capacity by region.

They're really global assets first of all.

Having said that, the capacity in that business is very tight, has been all year, and we are -- as Ken mentioned earlier, we started our new specialty unit in China at the end of September, and we will need every pound of that as soon as it starts producing.

It is very tight.

We're using using every pound as it produces.

We sure are.

What does that translate into on a pricing environment?

I am sorry, can you repeat it?

What does that translate into for a pricing outlook for next year?

Well, as I mentioned, in performance?

Just for the specialty blacks.

No.

The performance blacks?

Nothing on pricing going forward.

I can't comment very much on pricing going forward, but I can tell you that in that business we implemented a price increase October 1st.

Right.

Which continues our behavior that we had through most of '07.

And then just switching over to working capital just very quickly, all else being equal, are there any areas where you need to build inventory, or any areas where you can significantly reduce inventory in '08?

If you take away the potential or likely impact of oil prices, I think that some portions of the Carbon Black business, particularly outside the United States have probably had to draw down their finished product inventory a little bit tight.

We're very, very tight in China, but other than that I don't see any major movements either possible or likely in the business.

Thank you.

Our next question comes from the line of John Roberts.

Please proceed.

My question has been answered.

Thank you.

Okay.

Anything else, Teresa?

There appears to be no additional questions at this time.

Thank you all.

It has been a pleasure being with you and wish you all well in the future.

Thanks.

This concludes your presentation.

You may now disconnect at 3:09 and have a great day.