Cabot Corp (CBT) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2008 Cabot earnings conference call.

My name is Angelique and I'll be your coordinator for today.

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

(OPERATOR INSTRUCTIONS)

I will now turn the presentation over to your host for today's call, Ms.

Susannah Robinson, Director of Investor Relations.

Good afternoon everyone, this is Susannah Robinson, Director of Investor Relations.

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

Here this afternoon are Patrick Prevost, Cabot's President and CEO, Jonathan Mason, Chief Financial Officer, Bill Brady, General Manager of our Carbon Black product line, Eddie Cordeiro, General Manager of Supermetals, Ravijit Paintal, General Manager of Metal Oxides, Fred von Gottberg, General Manager of Inkjet Colorants, Jim Kelly, Corporate Controller, and Brian Berube, General Counsel.

I would like to draw your attention to the fact that beginning this quarter we have a slide deck that will accompany our earnings teleconference.

This slide deck is available in the investor relations portion of our website.

The slides will be downloadable in PDF format for two weeks following the earnings teleconference, in conjunction with a replay of the call.

I will remind you that our conversations 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 2007 form 10-K filing with the Securities and Exchange Commission.

Copies of which are available on our website.

Last night we released results for the first quarter of fiscal year 2008, copies of which are posted in the investor relations section of our website.

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

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

I will now turn the call over to Patrick Prevost, Cabot's President and CEO, who will discuss the key highlights and business details pertaining to the Company's performance for the quarter, and our outlook for the future.

We will then turn the call over to Jonathan Mason, Cabot's Chief Financial Officer, who will provide the corporate financial details.

We will then open the floor for a brief question-and-answer period.

Patrick?

Thank you, Susannah.

Good afternoon.

It is a pleasure to be with you today at my first Cabot earnings call.

I look forward to getting to know all of you as we interact over the coming months and years.

By way of introduction, I have now been with Cabot for about three weeks.

I come to you with an extensive background in the chemical industry, and I'm very pleased to have the opportunity to lead a Company with such a long and admirable history as Cabot.

During my first few weeks, I have spent time with several of our business teams and technology groups.

Over the coming weeks, I will spend time with our remaining business teams.

I will visit key customers and shareholders, and I will travel to many of our manufacturing regions, including Europe and Asia.

Clearly, I am not yet in a position to comment to you about my assessments of any of our businesses, as I have yet to develop specific views about them.

I would like to share with you, however, a few of my first impressions of the Company as a whole.

First, Cabot is a Company with several very strong franchises in the form of our core businesses.

From what I have seen, these businesses have been well managed, and we have positioned them for strong growth far into the future.

This includes a very broad geographic footprint that has resulted from having made some key and, by my estimation and experience, quite bold decisions to position ourselves early in emerging markets, such as China, South America, and Eastern Europe.

Second, the Company has a very strong set of core technologies in the area of fine particles.

Perhaps even more importantly, we have a very good understanding of exactly what our core competencies are, which has and will continue to serve us well as we pursue new business development activities.

Third, I have been very impressed with the caliber of people with whom I've interacted.

It is of a level that one may not typically expect to yet see at a company of our size.

We have very strong management teams, and the Company seems to have been able to attract and retain at all levels a group of exceedingly capable individuals.

Last but not least, Cabot has a strong set of values that affect all things we do.

It is exemplified by our world class performance in the safety area.

Now, I will turn to our financial results for the quarter and some of the key themes.

As I mentioned in the press release, given all that impacted us during the quarter, I believe our performance was solid.

We are, however, not fully satisfied with the quarterly financial results.

Looking at the key messages for the quarter, firstly excluding the feed stock related contract lag, the Carbon Black Business posted another solid quarter.

Secondly, Metal Oxides continued its pattern of strong results driven by expansion in China, Asia-Pacific and South America.

Thirdly, Supermetals continue to experience competitive market conditions.

And finally, I will touch on the Company's ability to withstand an economic downturn in light of the recent economic news.

In the Carbon Black Business, volumes grew solidly in our core product lines, compared to the same period of last year.

As you look through the detail we provided to you, one of the things that may strike you are our China volumes.

Compared to the same quarter last year, our volumes increased, but not at the same rate as in prior quarters.

When compared to the sequential quarter, we had a decline.

Thus it is important to recognize that our Rubber Black's capacity in China remain sold out.

The impact you are seeing is the result of a curtailing of imported products or seeding volumes.

This was necessitated by higher feed stock costs outside of China during the quarter, which would have resulted in selling product into the country below an acceptable margin.

We however, remain confident in the continued growth of the region, driven by solid market demand in both rubber and specialty end use applications.

We had a very successful startup of our performance products unit in Tianjin and look forward to our further capacity expansion in Tianjin towards the end of this year.

When compared to the first quarter of 2007, profitability of the Carbon Black Business segment was significantly impacted by decreased unit margins in both our contracted and non-contracted business, due to rapidly rising feed stock costs.

The chart you see shows the PBT of our Carbon Black Business as reported in the blue bars, and adjusted for the contract lag and LIFO impact in the orange bars.

The contract lag represents the time lag in our ability to recognize feed stock cost increases through the pricing adjustments in our Rubber Black contracts and our actual feed stock costs.

We believe that given the significant impact of these two factors on our results, this chart helps to evaluate the trend of the Carbon Black Business PBT over time.

The unfavorable impact of the contract lag and LIFO impact was 17 million during the quarter.

When contrasting against the 13 million positive benefit during the same quarter of last year, it is a 30 million unfavorable swing in PBT.

Sequentially, unit margins increased in both our contracted and non-contracted business.

However, this was almost entirely offset by the impact of the LIFO adjustment and the seasonal decline in Performance Products volumes.

Given the formula timing of the contracts and what we have continued to see for feed stocks cost during the quarter, it is reasonable to assume a similar development in the second quarter.

Although the performance of Inkjet Colorants remained weak, we believe we have seen signs of stabilization in the after market, as evidenced by a 14% increase in volumes from the previous quarter.

The weakness during the quarter was principally attributable to year-end inventory management by our OEM customers in the small home office market segment.

Looking at our order book for the first few weeks of January, we believe this was, indeed, the case.

As we mentioned in the press release, progress in the high-speed segment remains unsatisfactory.

Due to the slower pace of development, we have delayed our capital spending for an additional high-speed production unit.

The bottlenecking of our initial high speed capacity announced last quarter was successfully completed, and we are comfortable that we are well positioned to be able to supply the market as it continues to develop.

Profitability in the Metal Oxides Business segment continued to be strong.

Volumes remain solid, particularly in the regions China, Asia-Pacific and South America.

Additionally, we are encouraged by early market interest in new product developments in our portfolio of specialty products.

Turning to the Supermetals Business, profitability declined significantly when compared to the prior year, as last year's first quarter contained the last of the favorable supply contracts.

We discussed with you last quarter the highly competitive market environment we're facing in this business, and the situation continued during this quarter.

We continue to focus on generating cash in this business, and are also looking for additional opportunities to reduce costs.

It is unclear how long the situation will continue.

The Specialty Fluids Business, once again, had strong results with increased fluid utilization rates.

This business has been on a track of expanding its geographic footprint beyond the North Sea and continues to make strides in that effort.

We have many ongoing opportunities in the key oil regions of the world where high pressure wells, that could potentially use our fluids, exist.

Overall, we are pleased with the progress we are making.

Finally, as we look more broadly at the Company in light of the recent macro economic and financial market movements, we believe we are well positioned to weather a downturn should it occur.

Historically, Cabot's businesses have been resilient to economic slowdown.

Looking at the Carbon Black Business specifically, our performance has held up well in such times.

Also, if we experience lower oil prices, it will be a positive factor in the short term.

As you can see from this chart, our increased geographic breadth has lowered the importance of any single region on our results, as our geographic mix has changed over time.

We have become less weighed on North America as we are -- as we have grown our sales in places like China and Asia-Pacific.

We have taken a leading role in ensuring our capacity was well situated for our customer growth in these emerging regions.

Additionally our balance sheet is robust, and I will now turn the call over to Jonathan Mason who will review some of the financial details of the quarter.

Jonathan?

Thank you, Patrick, and good afternoon everyone.

I just have a few brief comment on four corporate issues.

First, on tax during the quarter, our earnings benefited by approximately $14 million from the settlement of tax audits as well as various tax related credits in China.

Excluding these benefits, our tax rate on continuing operations would have been approximately 27%.

We anticipate a tax rate between 26 and 28% for the full year, excluding the impact of current and possible future settlements on the tax rate.

Second, we invested approximately $33 million during the quarter in capital expenditures.

These expenditures included spending on our continued Carbon Black expansions into China and on energy centers.

We continue to anticipate spending approximately $225 million for the full fiscal year 2008.

Third, during the quarter, our operations consumed approximately $42 million in cash.

Our cash flow was unfavorably impacted by the affect of rising carbon black feed stock costs on working capital.

And finally, during the quarter, we repurchased approximately 119,000 shares on the open market at a cash cost of approximately $4 million.

We have continued to repurchase shares in the second quarter.

Back to Patrick.

Thank you, Jonathan.

In conclusion, I believe our quarterly results were solid, given all that affected us during the quarter.

So far, I am pleased with our (inaudible) financial state and our leadership position in our core businesses.

I am pleased to have the opportunity to lead such a strong organization and look forward to sharing with you my full impressions of the businesses and our strategies at an appropriate time in the near future.

I would like to thank you all once again for joining us today.

Thank you.

Thank you, Patrick.

Angelique, I'm going to turn the call back over to you for our question-and-answer session.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of David Begleiter of Deutsche Bank.

Please proceed.

Thank you.

Good afternoon.

Patrick, could you share with us the data on Carbon Black volumes in prior recessions, how that has trended?

We have indicated, as I mentioned in the call, that we were pleased with our performance through the last recessions and prior to the call, of course, we went through those numbers, and what I will do is ask Bill Brady to provide some background to that data set.

I think, if you go back over the past two recessions we found certainly a dip in the volumes for relatively short period of time, and then it bounced back relatively quickly.

The other thing we saw in both recessions is that oil prices decreased as economic activity slowed down.

And so that had an offsetting effect to a lower volume.

That's really what we saw in the last two recessions.

And Bill, how much of your Rubber Black volumes are now in Europe, western Europe and North America?

Rubber black.

Let's see.

Give me just a second and I'll give you the exact number.

One more question while you look that up.

Just on Cesium Formate, despite higher utilization rates, neither the revenues or profits increased.

Can you explain why that occurred.

Let me try to take that question while Bill looks at the data and sums the volumes for Rubber Black.

Dave, the unique situation with Cesium Formate is that it's a business where we rent our product, and it's a business that's driven very much by projects, and as we go from project to project, it's the portfolios of these projects that determines the performance of the business.

So it is a business that will have underlying some volatility due to that unique feature of it.

What we're seeing is that we're seeing more and more demand for the type of product that Cesium Formate is because of its unique features from a technical point of view, allowing drilling at very high pressures and very high temperatures, but also because it is a much better environmental solution for these type of drillings.

So we're seeing more and more requests.

We're working with more and more people in this field, and we're quite confident that we will continue to see some trend.

However, performance on the quarter to quarter basis will be somewhat volatile because of the project nature of the business.

Thank you.

Bill?

Yes, and the percentage volumes, those two regions combined is about 50% of the Rubber Black volumes.

Thank you very much.

You're welcome.

Angelique?

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

Please proceed.

The last page of the release has some restructuring initiatives, Altona, North America, Europe.

Could you discuss that a little?

John, thank you for your question.

I will ask Jonathan to provide an answer to that.

The most important restructuring initiative was the sale of our Australia, Altona, facility that we closed down, I guess it was probably two years ago now, October of 2005, and we had a considerable gain on the sale of that property.

Then, the other restructuring initiatives, North America, as we had predicted or told you two to three quarters ago, the cost of the shutdown of our Ohio River facility, we can't take those all immediately, so those will bleed into multiple quarters, and so we had some spend there.

European restructuring initiatives, there is a facility that we shut down some time ago that we had a residual loss on.

And then, secondly --

The land and buildings on that facility in Europe.

Thank you.

And then, secondly, the Fumed Silica Business has often in the past been termed a leading indicator business for Cabot or a maybe a more coincident indicator.

The fact that you had declines both in Silicones and the Electronics segment, the bigger segments within that business in the quarter, is that somewhat concerning to you if it still is a leading indicator type business?

I'm not familiar with this leading indicator connotation, so I'm going to ask Ravijit to pick up this question.

John, a couple of comments.

One, you're right, historically we've always looked at Silicon as the leading indicator of where the business may be headed.

So we've been watching volumes in our Silicon segment very closely.

The small decline that we saw in Silicone volumes in the last quarter, as best as we can tell, have almost -- have very little to do with the drop-off in demand on the Silicon side, and it has more to do with operational motivations that in the first part of January we believe have gone away.

So while we continue to watch it closely, we don't really see any strong signals that a downturn is headed our way based on volumes in Q1.

Thank you.

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

Please proceed.

A couple of Carbon Black related questions first.

If your raw material costs in China caused you to reduce your outputs, that would suggest that you couldn't get selling price relief.

Was that because other producers had lower cost, raw material costs, or some other factors?

Could you delve into that for a moment?

Jay, I'll try to answer the question.

The message was that we -- actually, during the high growth phase of our business in China, supported the local demand with volumes out of other parts of the Asian region.

So we were importing Carbon Black into China in addition to the local production.

In the last quarter, we actually pulled back on some of these import volumes, which showed a decline in the absolute volumes sold in China.

However, it did not actually indicate that we reduced our production in China.

What we did is we pulled back on some of the export volume to China or import volume into China because of higher feed stock costs in Asia, not specifically in China.

All right.

Second Carbon Black question, what were the reasons for the consecutive quarterly decline in Performance Products?

What were they related to?

Bill, would you take that question, please?

Okay.

It's almost entirely seasonal.

If you go back in time and look at the sequential fourth quarter to first quarter, you'll see very, very similar numbers.

So are we starting this quarter with better volume trends, the one we're in now?

I mean-

We're very early into the quarter, but as I indicated, we checked on the Inkjet side, because we saw weakness there in the first quarter, and the first few weeks of January have given us confirmation that it was inventory drawdown by our customers.

And similarly, we're seeing in the first few weeks of the year, although this is a very short period of time and cannot be taken as an indication for quarterly performance, we have seen that volumes and order intakes have been robust.

In the Performance Products?

Correct.

Okay.

Coming back to Cesium Formate, the language in the press release sort of suggests that in the last couple of quarters, there were some trade-offs.

You had higher drilling activity, and then the drilling activity, I guess, in the summer wasn't as high, but the daily rental rates went up, because the fluid was on the platform for a longer period of time.

Are we entering a period -- well, I guess in the March quarter in the North Sea -- in the Northern Hemisphere, you can get storms that interrupt activity trends, but is it your sense that looking forward, drilling activity and-- will go up because of -- rental rates will go up because of drilling activity?

And the second part of my question is, basically, what kind of loss ratio are you experiencing?

Has it improved so that we're retaining more of the fluid for future use?

Let me -- let me try to answer the question.

I would say, to the first part of the question, the business is a very mixed business in terms of the geography and the types of wells and the types of technical problems our customers encounter.

Therefore, it is difficult to make any prediction.

But what I can say is that we're continuing to see a high level of interest, and we are not -- albeit us being a special provider to that industry, we are not seeing any reduction in the amount of drilling going on, and especially not in the high-technical drilling.

On the other question, I believe again each of the projects that we're working with has a different profile, and we can go from 30 days of usage of drilling fluid in a project to up to 14 months.

So you can see that the variability is very high, and similarly, also loss of fluid can be very different depending on the formation in which we're drilling.

So it is very difficult to provide any indication in that respect.

Well, has there been any trend in terms of the recovery ratio of the fluid used in wells?

I'm not aware of any indication in this respect, no.

All right.

Thank you.

Your next question comes from the line of Laurence Alexander of Jefferies.

Please proceed.

Hi this is Lucy Watson speaking for Laurence.

What is your pricing power in Specialty Black?

Bill, may I pass the question to you?

Our pricing power in Specialty Black.

It's not bad.

We've been able to do very well in keeping up with raw material increases pretty consistently over time in the business, and we would expect to continue to do that.

Perhaps additionally, to what Bill just said, though, we have been doing price increases both on October 1 and on January 1, and that is not only because of raw material increases and trying to keep up with those, but also because we have a true value pricing philosophy in this business, and we're looking at extracting maximum value out of the performance of our products in our customers end uses.

Okay.

And what is the demand outlook for the next couple of quarters in the Fumed Metal Oxides?

May I ask Ravijit to take this question?

As I mentioned earlier on, we're only three weeks into our second quarter, and our order book at this stage is looking robust, but it's very difficult for me to predict what's going to happen in the coming months, given the uncertainties in obviously in the North American economy, but what could happen globally as well.

So all that I can say is that based on a very small window of three weeks in January, things look good, but I can't say anything beyond that.

Can you give us any visibility by end market?

I'm afraid I can't.

My earlier comment applies to any individual segment within the industries that we serve.

Okay.

And just one follow-up.

Given the current valuation, what is your willingness to become more aggressive on share buy-backs?

On share buy-back, I would say the situation we're in right now is that we have a 5 million authorization from our board, and we're in the very early stages of doing that -- accessing that authorization.

We will continue to look at how the business development -- develops and how the opportunities for share buy-backs will occur, and we will continue to consider that as a way to utilize our cash.

Thank you.

Your next question comes from the line of Jeff Zekauskas from JPMorgan.

Please proceed.

Hi, good afternoon.

You've got an unallocated expense line with an 8 million profit.

Can you tell me what's behind that?

Jeff, thanks for your question.

I will ask my colleague Jonathan to give you an answer to that.

Sure.

That would be primarily related to the sale of our Altona, Australia facility.

I think that's where that's showing up, yes.

I thought that that only influenced that line by 1 million.

Isn't there 11 that ripples through the Carbon Black Business?

Isn't that the way you show it in your last slide, your Exhibit 1?

Okay.

So certain items of which Altona is a certain item -- an income certain item, we never show those in the segment profits.

So the Carbon Black results exclude the benefit of the sale of that facility.

Okay.

So that -- this certain items -- this 10 million pre-tax certain item number ripples through the general unallocated expense?

Correct.

Okay.

That -- that's helpful.

Yes.

Second question, in the Supermetals Business, do you have sort of a general outlook, or can you see into your customers' demand at this point in time?

And when you look at the order pattern, do you see business accelerating, or do you see business decreasing?

We -- this is Patrick speaking.

We looked at the demand situation in the Capacitor industry, which is the main application for our Supermetals, and we are seeing continued growth in Capacitor demand at fairly significant levels.

I believe in the high 6-8% a year.

However, what is working against us is that Capacitors are becoming smaller and smaller.

Yes.

And needing less and less of our Supermetals.

But on a combined basis, if you look at those two effects, we believe that there's going to continue to be a 1 to 2% growth in demand for Supermetals coming from that industry sector.

I just have two more questions if I may.

Can you expand a bit more as to why there's a slowdown in demand for inks in your high-speed printing business?

Certainly.

What I would say here is that it is not really a slowdown in demand.

It is actually part of the development and the marketing of a new technology, and with that, you have bumps in the road, and we're continuing to experience bumps here.

We're not particularly pleased with the speed at which the high-speed technology gets introduced into the market.

But of course, we can only influence part of that, and we are somewhat of a taker of how the end user accepts this new technology.

So I would say, this is the situation we're in, we're not seeing a decline, we're just seeing the normal slowness in the development of new technology.

What I will do is I will ask Fred to provide some more insight into that.

Thanks, Patrick.

I think Patrick overall has got the message right in that it's really about a technology being adopted, and that takes time for that technology to be adopted.

However, there was a decline year on year on volumes, and that was based, as far as we can understand, to what we call a launch bubble.

When the new product goes out to the market they need to fill up the supply chain, and that creates an unrealistic demand last year versus what we're seeing as sort of the recurring demand of current units that are in the marketplace.

So hopefully that answers your question.

So the launch bubble will last -- I don't know -- so that's a 2008 phenomenon, and maybe you pick up in '09, something like that?

So it's very difficult to predict a pickup and when it will occur, it really depends on the selling of units, the growth of installed base and the number of pages printed.

So it's very difficult for me to speculate on that when that will grow.

Okay.

My last question has to do with the Carbon Black Business in the second quarter.

So, because of the way your contracts work, you get to see your prices move up as they catch up with raw material costs, and if you assume that raw material costs don't change from this point, I assume that there will be some positive variance for you on a sequential basis, as your prices go up, though it may not be very much.

How do we think about it?

That is all things being equal, if your raw materials don't change from here, should the second quarter be a materially better quarter than the first quarter?

Let me -- let me try to address this.

We -- a significant part of our Carbon black business is contracted, and the contract structure which we believe is the right way to market this product because of its strategic nature, has built-in lag in terms of raw material to price, and this lag goes for three months, and we've tried -- in the graph we outlined to show the profit or the EBIT of the business adjusted for those changes to give a sense for the underlying business.

I would say that also in my introductory words, I mentioned that we are, at this stage of the quarter considering that the lag -- the negative lag will also continue into the next quarter because of recognition of several months of raw material purchases.

So what's the meaning of contract lag and LIFO impact?

Does that mean that all things being equal, there will be a day when we'll get back the 17 million we've lost in the first quarter or the 14 million we lost in the fourth quarter of '07?

Well, let's, first of all, say that we didn't lose anything.

It's just a matter of --

You lost it temporarily.

What will happen is, of course, as oil prices or raw material prices decline, you will start seeing the opposite effect, and I mean, in a symmetrical way.

So I think what's important is to understand how these contracts work and how they affect our PDT, and also to understand that it can be symmetrical, meaning that it works both ways either as a lead or as a lag, and the last three quarters we've been in a lag mode, and the indication for second quarter is that most likely we will also be in the lag mode.

So in the third quarter, we won't be in a lag mode, all things being equal?

We, at this stage, don't have any information to provide any insights on that.

Well, if raw materials didn't change, wouldn't you lose your lag?

That's correct.

All right.

Thank you very much.

Your next question comes from the line of Saul Ludwig from Keybanc.

Please proceed.

Good afternoon, everybody.

A couple questions.

In the Performance Products area, while your revenues were up sharply year on year, what was the directional change in their profitability?

I will ask Bill to pick up on that.

Your question, Saul, is year on year.

Yes, Bill.

So we don't talk specifically about the profitability of the product line --

I mean, what was the Delta?

But remember last year's first quarter was exceptionally strong for us because of what was happening with oil prices.

We had actually falling oil prices last year's first quarter, and of course we had rising oil prices in this year's first quarter.

So you can imagine what that did in the business.

Would you say you had a negative swing of 2, 3, 4, 5 million dollars?

Sorry Saul, I can't get that specific with you.

Okay.

Let's focus on the chart that you have on page 5 on the PBT for the Carbon Black Business for a moment, where you show that on the adjusted basis, your earnings fell modestly $3 million from 41 million to 38 million, and that's a very good chart by the way and I appreciate you putting that together.

You also say in your text, by the way that adjustment really relates to the pricing lag versus your raw material costs, which also say in your text that the PBT in the Carbon Black sector was improved by $14 million, due to the sharp increase in volume, but particularly in the Carbon Black area where you were up 8% volume.

So if we look at last year's 41 million adjusted, you theoretically would have had on top of that, a plus 14 million to pick up on the statement that you had $14 million more for improved volume, which it would seem like something had a pretty sharp profit drop, because that 38 million adjusted number didn't really -- would be even higher if you added in the $14 million on the volume.

So it seems like, the reason I asked the question about Performance Products and also Inkjet combined, they probably had a negative swing of, it looks like maybe $11 million, year on year.

Am I thinking about it the right way and the loss in Inkjet had to be a pretty substantial number.

I mean, just using your data, is that the right conclusion to come to, or am I missing something?

Jonathan, may I ask you to pick up on this.

Saul, the chart and the adjustments only relates to the what?

Approximately 50% of our Carbon Black business that is contracts.

Okay.

So go back to Bill's original point.

We're comparing our -- just think about spot business now.

We're comparing ourselves year on year to one quarter when oil prices fell all the way down to $50, right?

It was a precipitous fall a year ago, and then to this quarter, that ended in December, where we had the biggest quarter on quarter swing upward in the last 10 years on feed stock prices.

So our spot businesses have a very favorable environment a year ago, a very tough environment this past quarter, and that would account -- you've gotten the Delta right, and that would account for most of the Delta.

So of this $11 million, you're saying the biggest chunk would have come in lower profits in the spot business, in the non-contract business.

Due to the different --

For the reasons that you enunciated.

So the biggest chunk would be in the non-contract business, some would be in the Performance, and some would be in the Inkjet?

Would that be about the right way of putting it?

It's the first -- the major thing is the first two.

The first two meaning the Performance Blacks and the non-contract business?

Yes.

Is that what you said, Jonathan?

Yes, that's correct.

Great.

Thank you.

That helps on that question.

The other question is, on Cesium Formate, when you rent a barrel for a day, now granted maybe it's different prices for different jobs, but Cesium Formate is sort of Cesium Formate.

What is your average price that you charge per day to rent a barrel of Cesium Formate?

I'm not sure we disclose that because of the competitive nature of that information.

So if you bear with us here, we won't be able to give you that number.

Okay.

How many -- what is your -- you show that you have $43 million worth of assets that you rent out.

How many -- how many barrels is that?

Is it 40,000, 50 ,000, 20,000?

I mean, what's your inventory of Cesium Formate in terms of barrels, I guess, and is that increasing?

I saw the dollar amount went up a million dollars year to year, so it doesn't look like it went up a whole lot.

What's the barrel inventory, if you will,?

We only provide the inventory in dollar terms.

We don't provide the inventory in barrel terms, and I think, just to give you a sense Saul, from what we, my understanding is, is that at this very early stage, is that we replenish inventory based on losses.

So we're not producing or adding much Cesium Formate beyond what we're losing in the process of renting it, and we continue as the business grows to add Cesium Formate to our inventory, but at this stage we feel very comfortable with the way we manage this.

And the other question -- I think in the text, you talked about that one of the reasons that you had the year on year decline is that last year, you sold more barrels relative to rental, whereas this year, you had more rental and less sales?

How much -- I mean, if last year you sold a hundred units of Cesium Formate, what was the percentage decline, and if you sold a hundred units last year, how many units did you sell this year?

My understanding is that we had a bigger loss last year than we did this year, and if I look at the way the business runs, we can actually sell Cesium Formate, either because we have loss in the drilling process or in the cabin formation process, or it happens also that we sell Cesium Formate in times where very special needs are required where the Cesium Formate cannot be recycled and reused.

So it's a fairly complex and difficult way to account for it, and I'm not sure that we would be able to get you that level of detail and would like to do that.

Also most likely, my colleagues tell me that, no, we wouldn't want that information to be known by our competitors, because although we're one of the few Cesium Formate producers, we also have -- our competitors have alternative drilling fluids and would be interested in that data.

And then, finally, what was the Delta in the losses that you incurred first in aerogels this year versus last year, and secondly in superior micropowders this year versus last year?

I'm not sure that at this stage we can provide an answer to this question, because we do not --

Well, you've given the loss on aerogels in your 10-K each year.

On a full-year basis Saul, absolutely.

But just directionally on a quarterly basis, did the loss get less or did the loss stay about the same?

Aerogel is a very new development.

It's a highly technical product that is showing growth in sales, albeit from a low base.

We see a lot of opportunities in this business.

We believe they are options for us to continue to grow the business.

But again, we don't provide any indication on the quarterly basis at this stage.

Okay.

Thank you very much.

Thank you.

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

Please proceed.

Good afternoon.

I had a question on the Inkjet Colorant Business.

I was just wondering, on the recent capacity expansion that you made in that business, where you are in terms of filling out that new capacity, and I believe I heard you say earlier that you're delaying some further capital spending in that business.

What was the timing of that decision, and what would cause you to rethink that situation with regard to the Inkjet Business?

Let me perhaps start the answer and then pass it on to Fred, who's running the business.

As I mentioned in the notes at the beginning of this earnings call, the business on the high-speed opportunity is not developing as fast as we'd like.

We have the bottleneck, the capacity, and have been successful in debottlenecking the capacity to provide product for this application.

However, we also had, in parallel, a project to add a new capacity, and this is the project that we've delayed at this stage, because the development speed of the technology is not moving at the space that was originally planned.

What I'd like to do is hand over to Fred perhaps to add some color to this.

Yes.

Let me try and provide a bit more context behind the expansion.

You know, last year, we had, which we now believe it was a launch bubble, so there was considerable demand, and as a result we went down a debottlenecking as well as an expansion activity.

As the quarters have gone by, we've seen weaker demand in the high-speed segment, and as a result we revisited the capital expansion for the new line.

We will continue to monitor with our customer on a regular basis the need for additional capacity, and as we believe eventually the demand will arrive, we will then work to install the capacity at the appropriate time.

I guess I'm still not clear.

Is there now unused capacity in your system that's unabsorbed?

Yes, there is considerable unused capacity in our system.

We did do the debottleneck, that's provided us with additional capacity, and so we believe we're very well prepared for when there's an uptick in the demand, that we can meet the demand with the existing assets.

Is that a significant fixed cost issue in terms of not being able to utilize that capacity fully, or is that a fairly minor issue for you.

Like with any new plant, when you install a new plant and it's underutilized, that does have fixed cost implications that you'll experience in the period.

But in the whole scheme of Cabot it is a minor event.

Okay.

And, Patrick, just wondering -- I appreciate those thoughts -- any thoughts -- I know you've only been at Cabot for a few weeks, but on the broader new product and business development portfolio, what are you most excited about as you look at the opportunities the Company has?

As I mentioned at the beginning, I see -- I'm not ready to make any specific comments about the businesses, but one of the reasons why I joined this Company is I saw a very attractive portfolio both in terms of well established franchises with first -- with further potential for development, but also a set of business development opportunities that I believe have strong potential, and it's that mix and the capability of this team and the technology competencies of this Company that have attracted me to join.

I believe there's strong potential here, but I at this stage, would like to not get into more details in terms of the various businesses, and I will hold my comments for a later stage that I've indicated that we would set up.

Okay.

Thank you.

I look forward to that.

Thanks.

Thank you.

Your final question is from the line of Mike Judd of Greenwich consultants.

Please proceed.

Hello?

Hi Mike.

Actually this is Dave Gutterman with Harrick Research.

A couple of questions, Patrick.

I like your enthusiasm for the Company.

Regarding operational improvement initiatives, what are you guys doing in your 42 manufacturing facilities to improve on operations regarding like lean manufacturing, TPM and Six Sigma and how are you measuring the benefits so you could let us know, hey, these are the quantifiable results we're seeing and that's why we're a good company?

With my experience in the chemical industry, I look at that part of the activity as bread and butter thing, and what I can say is that Cabot is doing an exceedingly good job in this respect.

We have our finger on the pulse.

We consider that cost and productivity is an essential part of running a solid and robust business going forward.

We've got all the right tools in place.

I don't have, of course, details.

I've gotten an overview from each of the businesses, but I believe we're on the right track.

I also looked at, of course, the historical data, and I'm seeing that we are doing the right thing in terms of continually managing our costs and our efficiency and productivity.

What metrics are you guys using in your 42 facilities to make sure you're up to par in terms of throughput?

Are you looking at OEE, RONA?

How are you gauging that your facilities are running at full strength?

We don't -- this is something we don't disclose, what we're using in terms of measures, because we have a set of measures with which we described the company externally, and we will be sticking to that set of measures.

What I can tell you is that we have measures in place, and we're tracking those, and we're doing benchmarking and comparing internally and externally the performance of our businesses.

I believe this line is disconnected.

I apologize.

There are no further questions from the audience.

Thanks Angelique.

Thank you everyone for joining us today.

We look forward to speaking with you again next quarter.

Thank you very much.