Cabot Corp (CBT) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4, 2008 Cabot Corporation earnings call.

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

(OPERATOR INSTRUCTIONS) I would now turn the presentation over to your host for today's conference, Ms.

Susannah Robinson, Director of Investor Relations.

Please proceed, ma'am.

Thank you, Kim.

Good afternoon.

I would like to welcome you to the Cabot Corporation fourth quarter and full year 2008 earnings teleconference.

Here this afternoon are Patrick Prevost, Cabot's President and CEO; Jonathan Mason, Chief Financial Officer; Bill Brady, General Manager of the Core Segment; Sean Keohane, General Manager of the Performance Segment, Fred von Gottberg, General Manager of the New Business Segment; [Robbie Paintel], General Manager of the Speciality Fluid Segment; Eddie Cordeiro, Head of our Corporate Strategy Group; Jim Kelly, Corporate Controller; and Brian Berube, General Counsel.

Last night we released results for the fourth quarter and full fiscal year of 2008, copies of which are posted in the Investor Relations section of our website.

For those on the mailing list, you received the press release 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.

The slide deck that accompanies this call is also available in the Investor Relations portion of our website and will be available for two weeks following the earnings conference in conjunction with the replay of the call.

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 2007 Form 10-K and subsequent filings with the Securities and Exchange Commission, copies of which are available on our website.

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

In addition, Patrick will discuss in some detail the drivers of demand and Cabot's strengths in the key industrial sectors that we serve.

He will then provide the outlook for the future and turn the call over to Jonathan Mason, Cabot's Chief Financial Officer, who will provide the specific segment and corporate financial details.

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

Patrick.

Thank you, Susannah, and good afternoon to everyone.

It is a pleasure to be with you today to talk about our fourth quarter results as well as our full fiscal year.

As we mentioned in our press release last night, although I'm not pleased with our operating results this quarter, I am confident in the underlying strength of our businesses.

As I touch on some of the specific highlights for the quarter, it is important to note that our total segment profit improved in the fourth quarter by $3 million compared to the same period of 2007.

The improvement was primarily driven by stronger results in Carbon Black where solid margin and cost management more than offset unprecedented $36 million of unfavorable contract lag during the quarter.

Volumes across most of our businesses were weaker than the seasonal norm due principally to slowing global demand, particularly in the automotive and construction sectors.

During the quarter we once again made progress in several of our new business development activities.

First, we signed a final agreement with Michelin for the commercialization of our patented Cabot Elastomer Composite technology products for use in tires.

As we noted last quarter, we received a cash payment related to the agreement during fiscal 2008.

However, due to the nature of the agreement and the associated revenue recognition rules, no revenue was recorded in our financial results.

Because of the confidential nature of the agreement, I remain limited in the details I can share with you, but what I can tell you is that this is an agreement covering both technology and manufacturing with a leader, a global leader in tire technology.

We anticipate this to be a long-term agreement, although there will be a series of stage [gait] decisions along the way.

Once proven out, the partnership should be very valuable for Michelin, Cabot and our shareholders.

Second, our cesium formate fluid was used successfully in jobs both in Kazakhstan and in Asia-Pacific.

The application in Kazakhstan represents successful use of our products in what is amongst the most complex oil and gas projects in the world, and we believe that our success positions us well to continue our expansion in this business.

And finally, during the quarter we recognized revenue for the use of aerogel for a large oil and gas project in the Gulf of Mexico.

This project represents one of several recent commercial successes we have had in the aerogel business.

Given the current financial crisis, I want to be clear that we are in a strong financial position.

Our liquidity and conservative balance sheet are our strength in this current environment.

To this point, our operations generated $94 million of cash during the fourth quarter, and we ended fiscal year 2008 with a cash balance of $129 million.

I've asked Jonathan Mason to outline some more specifics on our liquidity position later.

The economic slowdown following the financial crisis in both the US and abroad have made their way into our business results in the form of reduce demand in most of our markets.

I would like to share some insight on each of the key industrial sectors we serve, namely tire, non-tire automotive, construction and electronics.

I will address Cabot's level of exposure to each sector and identify the drivers of demand for our products.

I will also outline where Cabot has significant competitive advantages that will bolster our position today and help strengthen us over the long term.

Turning to the industry and geographic overview, on the slide you can see that 45% of Cabot's total revenues are driven by the tire sector.

It is important to keep in mind here that only about a quarter of these revenues are from OEM tire markets with the remainder coming from the replacement tire market.

Demand drivers for the tire sector include the number of global miles driven each year which drives the replacement tire market, automotive builds which drives the OEM tire market, and commercial activity and government spending, which drives commercial trucking and public transport tire demand.

In past economic down turns the replacement tire market acted differently than OEM tire demand.

Although consumers may decide not to purchase a new car, replacing tires tend to be a safety decision and, as such, demand for replacement tires has usually been stronger than OEM tire demand during a slowdown.

Global Carbon Black demand has increased 3% to 3.5% per year over the past ten years.

The industry however, experienced 0% growth in 1998 during the Asian crisis and experienced 2% to 2.5% decline during the 2001 recession.

Clearly, there are many differences between this downturn and the previous one.

For example, credit availability has put significant pressure on new car sales and greater volatility in oil prices has put pressure on miles driven.

Our long-term view on tire demand growth continues to be, in spite of that, 3% to 4% a year with significant differences by region.

Moving on from the tire sector, we also sell to the OEM automotive and transportation sector which accounts for about 15% of our total revenues.

Here we sell Carbon Black and Fumed silica for hoses, belts, extruded parts, molded goods, coatings, engineer plastics and adhesives.

We expect this business to be highly dependent on global automobile builds.

The electronics industry represents 10% of our sales.

The Supermetals business and the performance segment each account for about half of our sales in this sector.

We supply technically advance and differentiated products used to manufacture (inaudible), CMP [slurries], and high-performance plastics.

The use of our products in the electronics sector track the number of intergrated circuits manufactured and the number of electronic devices purchased.

Finally, construction infrastructure represents 10% of Cabot's total revenue.

The performance sector provides products used in cable and pipeline applications as well as other multiple use.

Demand for products is driven by housing starts and infrastructure spending with infrastructure being less cyclical.

So this is a coverage of about 75% of our revenue.

Having discussed these industry sectors, let me remind you about our strong geographic diversification.

We have about one-third of our sales and assets in each region, the Americas, Europe, Middle East and Africa and Asia-Pacific.

Hence, we believe we are well placed with regard to both sector and geography which reduces our risk and positions us well to capitalize on opportunities.

Cabot has significant competitive advantages that positions us well for the long term.

We have leading business franchises, we occupy either the number one or number two market share position in each of our key businesses.

Our broad global scale, including our early entry in emerging markets, positions us to be stronger once the economy recovers.

Over time, we have strong customer relationships with market leaders in each of the industry sectors we serve.

These relationships have led to long-term supply contracts allowing for relative stability in our various businesses.

Our technology leadership position and our innovation capability make us a prefer partner for leaders in the industry.

This technology capability enables our customers to be successful in their markets.

As I mentioned earlier, we are committed to our strategy, and we'll continue to focus on its four leaders, margin improvement, capacity and emerging market expansion, new product development, and portfolio management.

As we look out to fiscal 2009 and beyond, we are cautious about the global economic slowdown and its effect on demand in all of our key businesses.

A few key messages in that respect.

In contrast to the last quarter, [rubber blacks] will see a contract lag benefit in the coming quarter as a result of the recent unprecedented decline in raw material cost.

We are well positioned in emerging markets to serve robust long-term demand in this business.

In the performance segment, our differentiated product offering, strong customer relationships and application understanding positions us well versus our competitors.

We continue to secure orders in our new businesses which will lead to revenue growth in this segment.

We are fully committed to returning the Supermetals business to profitability in fiscal 2009 and have taken significant steps to this end.

Our cash position remains strong which will serve us well in the current economic environment.

We will get benefits from lower Carbon Black feedstock costs and we have expanded our efforts to improve our costs and working capital positions which will further enhance our liquidity.

We intend to leverage our core competencies, including our strong customer relationship and market leadership.

Hence, we remain confident in our ability to meet our performance commitments of $3 per share of adjusted EPS within three years and a 13% return on invested capital by 2013.

The deteriorating environment will not detract us from the strategy we shared with you several months ago.

We believe it to be robust in the long term.

I will now turn the call over to Jonathan Mason who will review the business segments.

Thank you Patrick.

And good afternoon, everyone.

In the core segment, as Patrick mentioned earlier, rubber black's improved profitability during the fourth quarter when compared to the fourth quarter of 2007 by $13 million.

Increased unit margins, lower fixed manufacturing cost from the closure of our Ohio River plant, a contribution of energy centers, and our operations excellence program drove this performance.

We have three additional energy centers that will be commissioned in fiscal year 2009.

As Patrick noted, the unfavorable contract lag was $36 million during the quarter with the record high feedstock cost of the summer hitting our P&L during August and September.

In line with the recent announcements from tire manufacturers to reduce production driven by slowing demand, we saw global volume weakness of 7% overall.

Unlike in prior quarters where volume growth in emerging markets compensated for slowdowns in developed markets, the volume weakness we saw this quarter was broad based.

The only exception within Asia-Pacific excluding China were volumes increased by 3%.

We believe the decrease in China was partially due to the effect of the Olympics compounded by the global slowdown.

For the full fiscal year 2008, operating profit increased compared to fiscal 2007 despite a $66 million contract lag and flat volumes.

This performance is attributable to solid margin management, a strict control on manufacturing spending, and the benefit of foreign currency translation.

In the core segment Supermetals.

Results in the Supermetals continue to be weak during the fourth quarter.

Although volumes increase from the third quarter, they were still below the fourth quarter of 2007 and the business continued to experience higher average ore costs.

For the full fiscal year 2008 profitability was significantly below last year.

This performance was driven principally by the expiration of favorable supply contracts in the first fiscal quarter of 2007 which led to an unfavorable volume and price comparison for the full fiscal year.

The business continues to focus on cash.

During the fiscal year we were successful in reducing networking capital by $23 million.

As we mentioned during last quarter's call, we have taken pricing actions with the goal of returning the business to profitability in fiscal 2009.

Turning to the performance segment.

Profitability decreased in the fourth quarter of 2008 compared to the same quarter last year.

This performance resulted from a late quarter decline in volumes driven by weakening demand in the construction and automotive sectors and the global macroenvironment.

Volumes declined 8% in performance products and 2% in Fumed Metal Oxides.

In addition, we experienced higher raw material and energy costs in our Fumed Metal Oxide business as well as a higher level of spending to drive our new product development and geographic expansion strategies.

We are taking the appropriate actions to improve Fumed Metal Oxide margins.

For the full year, volumes increased in both product lines, 1% in performance products and 2% in Fumed Metal Oxides, profitability on a reported basis was significantly lower.

The dramatic rise in Carbon Black feedstock cost in the year caused a significant LIFO impact of $17 million as well as a delay in recovering feedstock cost increases.

As we progressed through the year our pricing actions caught up and we restored margins back to 2007 levels in line with our value pricing expectations.

Despite the current volume uncertainty, the performance segment continues to invest in differentiated new products, strengthening our customer relationships and geographic expansion to sustain long-term health of this segment.

In Specialty Fluids, performance in the segment was solid for both the fourth quarter and full year of fiscal 2008.

As Patrick alluded to earlier with the Kazakhstan and Asia-Pacific opportunities, Specialty Fluids continues to increase the percentage of its business outside of the North Sea area.

During fiscal 2008, 21% of the total revenue of this segment was from business outside of the North Sea, this is an increase from 17% in fiscal 2007 and 6% in 2006, showing solid progress.

These and future successes will allow us to maintain the strength of the business, offsetting temporary declines in the North Sea market over the next 18 to 24 months driven by the timing of projects in this region.

Our new business segment was very successful in growing revenue by $8 million in the fourth quarter of 2008.

This included increased volumes in inkjet colorants, the recognition of revenue in aerogel from the previously announced oil and gas project, and the continued revenue progress in the security market segment of Superior Micropowders.

You will recall that in the third quarter 2008 we discussed steps that were taken in this segment to reduce costs, including workforce reduction and elimination of underperforming projects.

These actions contributed to lower manufacturing and administrative costs during the fourth quarter.

Now turning to several corporate financial detail items.

During the fourth quarter 2008 our operations generated $94 million in cash, including a $9 million decrease in working capital on a constant dollar basis.

The decrease in working capital was principally the result of lower inventory levels.

For the full year, our operations generated $138 million despite a $135 million increase in working capital resulting from higher Carbon Black feedstock costs.

We ended the year with a cash balance of $129 million.

With the uncertainty surrounding oil prices and the current credit crisis, we remain focused on cash, as Patrick mentioned.

We will continue to take all appropriate steps to manage our cash position and working capital closely.

Some examples of what we are working on include but are certainly not limited to managing our feedstock and finished product inventory levels tightly, ensuring we are paid on time by our customers, extending payables terms where possible and appropriate, and in some cases where lower demand would warrant curtailing our production for short periods of time.

During fiscal 2008 we spent $199 million on capital expenditures which was in line with our estimates.

We have flexibility to reduce our level of capital spending if need be and, in fact, our attention as of now is to spend approximately $175 million during fiscal 2009, which is a reduction from our initial plans.

We believe this reduction is prudent given the economic uncertainty and can be executed without putting in jeopardy any of our long-term business strategies.

During the fourth quarter we did not repurchase any shares on the open market, but for the year we repurchased 935,400 at an average price of $29.66 per share.

Patrick mentioned earlier our solid liquidity position and I want to take a few minutes to outline the specifics for them.

As those of you who have followed us for some time are aware that we have a stable credit rating of BBB plus and BAA1 for over 20 years.

Moody's issued its annual ratings report on Cabot in September reaffirming its rating.

We have $140 million of availability under our committed revolving credit facility and additional uncommitted lines of credit that we believe are sufficient to weather a global economic downturn.

We are not dependent on access to commercial paper, had no losses on our short-term investments, and have no counterparty exposure to the recently failed institutions.

We expect further improvement in cash flow and liquidity as we reduce working capital associated with high price Carbon Black feedstock.

Moving to tax.

For the fourth quarter and full year 2008 our effective tax rates were 2% and 13% respectively.

The fourth quarter rate included a favorable $3 million cumulative tax rate adjustment and the full year rate included $11 million of net tax settlement benefits and reinvestment tax credits without which our quarter and full year tax rate would have been approximately 23%, below our previous guidance of 26%.

This drop from guidance is because of our earnings mix and high and low tax jurisdictions.

Now finally, to assist those of you who model our Company in some detail, you may have been surprised by the sudden increase in our other income and expense line during the fourth quarter.

Other income expense is a line on the P&L which captures, among other things, translation changes on our foreign currency exposures.

During the fourth quarter we were unfavorably affected by $9 million from an unrealized foreign exchange loss.

This was a non-cash event relating to a US dollar intercompany loan to our Brazilian entity.

As we have expanded our operations in Brazil we have funded these expansions all internally and often times within our Company loans.

Foreign currency accounting requires us to market this liability to market even though it is owed to Cabot, from Cabot to Cabot.

While we could have borrowed externally in Brazil, this option would have been more expensive than the intercompany loan and we are working on ways to reduce this exposure.

With that, back to Patrick.

Thank you, Jonathan.

In conclusion, I wanted to reiterate that we remain confident in the underlying strengths of our Company.

We are in a solid financial position, which will allow us to manage the company to the near-term uncertainty while keeping in mind our long-term strategy and performance commitments.

Our competitive advantages of leading business franchises, broad global scale, strong customer relationships, long-term supply agreements and superior technical capabilities will serve us well.

We'll continue to leverage these strengths through our four strategic levers.

We remain keenly focused on margin improvement, capacity and emerging market expansion and new product development, and we will also prudently examine opportunities to actively manage our portfolio to strengthen our long-term position.

So with that, I'd like to thank you very much for joining us today, and I will now turn the call back over for your questions and answers and we will give you answers.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jeff Zekauskas from JP Morgan.

Please proceed.

Hi.

Good afternoon.

Good afternoon, Jeff.

I guess I wanted to start off with the lovely chart you gave us on rubber black's profits before tax, and I apologize if I'm asking such a primitive question.

If you add up the rubber black's business profit before tax, excluding lags and LIFO for '07, you get $104 million.

And if you add up the numbers for '08, excluding the lags, you get $176.

So why does it go from $104 to $176?

Well, Jeff, that's -- we appreciate the question, and I believe that the answer was partially embedded in the text in our press release, but we've been focusing very much on margin management over the last two years and we've also been very active at reducing our cost and what I'm going to do is I'm going to turn it over to Bill Brady, who will give you some more details on that.

Okay.

Hi Jeff.

Hi, how are you, Bill?

Fine.

I think Patrick really hit the two key points.

One is that we have focused very much on the margin management, both in contracted portion of our business and in the spot portion, and so I think our commercial team has made some excellent trade offs and managed very well maximizing the margins.

That's one.

And then on the other hand, we have done both structural cost reductions, that is plant closures such as Ohio River, and remember we have added energy centers to our plant as well which has helped our structural costs.

In addition to that, we have a strong operations excellence program which year after year continually takes cost out of the system.

And when you add all that up, as you know there's a lot of leverage in the business, when you add all that up it adds up to the numbers that you articulated.

What this chart really shows is much of the internal progress that the Company has made I guess in making its operations more efficient.

So if what we do is we go to '09, if the base business is earning at roughly $176 million and you are going to probably have some kind of positive effects from contract lags and LIFO, I guess just sort of to begin with, the profits for this year should be, I don't know, order of magnitude above $200 million?

Well, I think projecting '09 is tricky business at this point in time.

Well, if volume was zero, say volume was zero, just in theory in looking at the architecture of your financial statements and it turns out you have oil prices down on average, I don't know, $30 a barrel, would that produce operating income above $200 million or wouldn't it?

If you look at what happened in oil prices, we would get a benefit in the first quarter from the drop .

And then if everything stays static from that point out, we would capture that benefit and move forward from there.

But, as I've said, Jeff, there are a lot of different variables going into '09 that could change

If I may add, Bill, I think what we are seeing here is a congruence of factors and the fact that Cabot has been playing its cards very well in this business.

We are the largest global player in Carbon Black.

We have very strong customer relationships that have been long term that we have been building up, and in addition to that I look at us having very high quality products.

We are differentiating our products, but we also have quality that is equal to none and we have, and this is very important considering the highly concentrated nature of the industry, we have a high reliability, which is critical.

Also in the current environment to ensure that our customers are able to operate on a concentrated and stable basis.

So I think what we are seeing here, notwithstanding the fluctuations of raw material, is the power of this business and we believe this is a business that will service us well in the long term.

Then if I may just clarify.

So if it turned out that there were no lags and no LIFO charges and your volumes didn't increase in 2009, order of magnitude you would report operating earning of $176 million.

Is that the meaning of this chart?

I think, Jeff, you could be drawing that conclusion.

We wouldn't want to go as far as that because we do believe that there's a lot of uncertainty in terms of trying to forecast what will happen in the next fiscal year.

I'm sorry.

But I think you are drawing a certain conclusion, and I would say that you can take that and consider that there may be fluctuations that will occur.

And, as we mentioned, volume is a significant factor that will affect the business in 2009.

It's sort of funny because your volumes I guess were down something like, if I have it right, something like 7% in the quarter for rubber blacks and one would have thought that your customers would want to buy in advance of price increases.

I guess intuitively I would have thought this was a good volume quarter and that the bad volume quarters would be to come.

I think, Jeff, going back to the comment I made earlier, we have customers that are fairly large, mostly, and that are managing their working capital very tightly, meaning that the chain at least the chain between us and the tire producers is a very tight chain, meaning that there's very little volume and ability to store Carbon Black in those two steps in the chain, which means that the ability for our customers to buy in advance is limited and is capped by their intent to be careful about their working capital.

Okay.

Thank you very much.

Thank you, Jeff.

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

Please proceed.

Good afternoon.

I have a question about the tire volume in the fourth quarter and I don't know whether Patrick or Bill could handle it, but yesterday on Michelin's conference call they talked about what the tire market was like in the September quarter in each of the geographies they operate and what they said about North America and Europe pretty much parallel what your volume changes were and there seems to be no disconnect.

On the other hand they commented that the market for tires in South America was up 12% in the third calendar quarter and your volume was down 15, and in Asia-Pacific they talked about volume being up 10% for tires and yet your volume was down very substantially.

I'm curious as to why there may have been such a big disconnect between your volume and what Michelin talked about the market in the Asia-Pacific and Latin America regions while being fairly consistent in Europe and North America.

Hi, Saul, it's Bill.

Let me try to shed a little bit of light on that.

In South America, you might remember from last quarter, we made some pretty solid choices of managing margin over volume in South America, and I think although I don't have the exact numbers in front of me, but I think that would probably account for the difference in South America.

Your volume was up 2% in the third quarter and was down 10% in the preceding quarter.

Yes.

With regard to Asia-Pacific, remember our non-China Asia-Pacific volume was up.

Our China volume was down.

And just thinking off the top of my head, Michelin volume in Asia I think is probably a lot less dependent on China than ours which might account for that difference.

I'm concerned about -- when [Tianjin] comes on in January, how much does that increase your Chinese capacity?

Well it increases it in a fair amount.

There's about 150,000 tons plant to come on in Tianjin.

On the base of how much?

On the basis of about 300.

So that's a 50% increase.

Approximately.

With the market down 16% this quarter and you are about to bring on 50% more capacity, we have something to worry about?

Yes.

Let me say a few words about the Tianjin investment.

First of all, remember, this is point of a global network, and so we'll evaluate that capacity and what we can do with it in the context of our global network.

Second, this capacity is going to be some of the most competitive capacity in the world.

It's fairly low cost and it has our latest technology.

Now having said that, we have mechanical completion of that due to finish up in the January time frame, which we'll do.

And between now and then, we'll watch October, November, December volumes both in China and elsewhere, and we'll make a decision in that period whether we bring that capacity up right away or we have a slight delay or any delay at all.

Do you incur the fix cost of this plant starting in January?

Let me just finish with one thing, Saul.

Let me reemphasize that this capacity while it may be a bit missed time with the market, will be very powerful capacity, very advantaged capacity and will strengthen our China position over the long term considerably.

So there might be a little bit of short-term paying associated with the timing of this capacity, but we'll manage it well and over time it's going to be very advantage and very important.

If I may, Saul, what needs to be remembered here as well is that this is capacity that is incremental to an existing site.

So its impact in terms of fixed cost is going to be very much manageable in terms of cash fixed cost and, again, I think the point, Bill, was making is important.

It is an expansion of our global network, and we will and are continuing currently to optimize that global network to make sure that the cheapest possible ton gets delivered to the appropriate customer, and that is an advantage we have, and that's a flexibility that gives us the opportunity to maximize the bottom line and certainly do better than all of our competitors.

Carbon Black isn't shipped very far, is it?

It's a local business, so I don't understand the global reach, how far can you ship this stuff?

Well, you can ship Carbon Black around the world and we do ship across regions when it is economical to do so.

So I think you are right in general that Carbon Black does not get transferred over long distances, but in times like in today's times there may actually be opportunities to optimize the system beyond what we have done in the past, and this product can be shipped over long distances.

I have a financial question.

You talked about the good liquidity and all, but you did in the course of the year actually consume about $157 million worth of cash and your debt increased by $130 million and cash came down by $26 million.

What do you expect to happen in the current fiscal year with regard to cash generation?

Does your net debt go up, go down again, but you did consume a lot of cash last year and I was wonder if that was what was planned even though the explanation was working capital.

Right, Saul.

I will turn it over to Jonathan, but first I just wanted to remind us that a lot of the cash consumed last fiscal year was consumed for working capital purposes, as you just mentioned, and that was to the tune of in excess of $130 million.

So that was I would say the main driver of our cash shift last year.

But, Jonathan, would you like to expand on that?

That's the big issue.

We mentioned CapEx and it will be $25 million we think on CapEx year on year.

$25 million improvement there, but to put some context around working capital, when we started the year oil, I'm going to say, was $65 to $75 a barely, and now ending the year in September because of the way our supply chain works, we still pretty much have that $120, $130 barrel oil in our balance sheet.

So I think both Patrick and I refer to the expectation of a pretty good reversal on working capital should feedstock costs remain where they are today.

It should be a cash generator.

Absolutely.

A final question with your intercompany loan to Brazil you marked that to the market at the end of the September.

The Real has continued to tumble dramatically here in the last four weeks.

Is there going to be another similar type of expense taken in the first quarter assuming that today's Real stays in effect until the end of December?

The observation, actually the Real has been very volatile, but today versus the quarter end, it's kinder than the month of September when we took the $8 million to $9 million.

It is likely at today's rate we would take another more minor hit in the December quarter.

Any reason why you don't want to hedge this out so this problem goes away in the future?

We are working on ways to reduce the accounting exposure.

This gets back into the philosophy, the problem with Brazil is it's very expense to hedge.

Their interest rates are very, very high compared to inflation rate in Brazil.

So do we go pay a third party to hedge something that is intercompany to give us a better accounting result?

You and I have had a talk about this before, but challenges in accounting versus economics.

I think the point here is that this is a non-cash accounting effect and that any activity for us to correct that may actually result in us spending cash which would not be prudent.

Therefore, we are dealing here with accounting rules which we believe not to be appropriate in this case, but which we have to comply with and we have to recognize this hit to our P&L, although we believe that this is an intercompany Cabot to Cabot obligation which should not result in a negative P&L impact.

So here we are going to be looking at how we can mitigate that, but certainly I could not support us spending any cash to offset an accounting issue.

Thank you very much.

Thank you.

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

Good afternoon.

Good afternoon, John.

I apologize if this is a stupid question.

But why is there an offsetting mark-to-market by your Brazilian subsidiary for the reduced liability?

There is.

It goes directly to the balance sheet.

I really can't defend that treatment.

So -- there were actually two offsetting mark-to-markets, just only one went through the income statement the other one was a comprehensive income?

Correct.

Got it.

Patrick, at the investment meeting back in Boston you were going to try to shorten the price lag with Carbon Black cost as contracts renewed, I think.

Have any contracts come up for negotiation since that investor day?

We are absolutely committed to eliminating or reducing the lag that has been affected the Company and that has brought us to report in the way we are reporting, and considering the volatility of the feedstock markets, we believe that this lag has no reason to continue to exist and we are going to, as I mentioned in the investor meeting in May, we are looking at eliminating it over a period of 18 to 24 months as the contracts come up for renegotiation.

Some of the shorter term contracts that we've renegotiated have actually been adjusted to eliminate the lag, and we are going to have longer term contracts coming up for renewal at different points over the next 18 months or so and that will be a significant part of the negotiation and clearly we believe that as Cabot we cannot play the bank for our customers, and we'd rather actually focus on the things where we really can add value like the quality of the products and the ability to provide reliable service and products.

So I guess the answer to your question is that we are committed to continue on the [strike].

Secondly, how important are the big mining tires?

The commodity decline that we've had out there and a lot of metals, things like that, you I would that the equipment would use large volume tires even though not large number of tires might slow up abruptly out there.

Is that a meaningful issue out there for the business?

I will ask Bill to answer that question.

Bill?

Hi John.

It's an issue.

You asked if it's a meaningful issue.

It's an issue.

I don't have the numbers in front of me but I think the mining and the earth moving tires might be kind of 20%ish of our volume, something like that.

And, as you point out, they are likely to slow for the reasons you cited.

But we'll watch it closely and we'll manage that sector just like we do the truck sector and the passenger sector as well.

Thank you

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Laurence Alexander of Jefferies.

Please proceed.

Good afternoon.

Good afternoon.

I guess first question just on North American volumes for rubber black, they were down about 7%.

What's the utilization rate roughly in your business, and are you rethinking the decision to keep your playing open and wait for one of your competitors to shut down capacity?

Laurence, as you may expect, providing utilization rates on our units is especially by region is a significant issue with regard to providing information to our competitors.

So we are clearly not comfortable providing that information, but what we can say is as you mentioned with the volume shift we have seen recently that there has been some effect on the utilization of the plants and what we are doing is looking at each of the units in terms of their cost position, their geographic position, and the ease of turning them up and down to optimize our global system like we mentioned.

What I'll do is I'll pass it on to Bill Brady to perhaps give you a little more granularity in terms of how we are managing this on a daily basis.

Yes.

Laurence, I think Patrick hit it right when he said it's a pretty fluid situation, and we are watching it very closely.

I just wanted to point out two other important things though.

One, remember these are very permanent decisions, so should we decide to close plants anywhere, we have to make sure we are not reacting to short-term conditions and that the demand is not going to come back.

Number one.

The second thing I wanted to add is after the closure of our West Virginia plant, we have put ourselves in a very strong position relative to the competitor plant in North America, in my view, so I will watch it closely.

It's a fluid situation, but I think we are in -- we are dealing from a position of strength as we look at this going forward.

Just to follow up on that, you expressed several times concerns about or highlighted risk to volume in 2009.

How do you see that playing out?

Is your concern really focused on the first half of the year or are you seeing it more as smoothed across the year, do you see lumpiness?

Obviously it's a very fluid situation, but what is your read as of this moment?

I wish I had a crystal ball to know exactly what is going to happen with volume.

The best way I can answer that is just tell you what we do know, and then give you a little bit of color on what we are doing to deal with any scenario that might come our way.

So we have certainly seen a reduction, a slowdown in our volume in the past two or three months driven by slower tire production and I think that is outright demand but it's also people managing their year-[end inventories.

So we have certainly seen that.

Going forward, we are close to the customers.

We talk to them all the time, and we'll deal with it as they forecast.

But maybe I'll take a second and just give you feel for four or five things we are doing to deal with any scenario that comes our way.

The first, as Patrick and Jonathan mentioned, is we are focused on working capital and cash.

So based on the every changing customer forecast in these volatile times, we are curtailing our units as appropriate to deal with cash.

We are also watching very closely our customer mix and managing our receivables as well.

We've done a couple of things proactively on structural cost.

We closed Ohio River, the West Virginia plant in August and we have three new energy centers coming on throughout '09 which will help our cost position.

On the commercial side, I will point out in the down markets the contracts are really -- real assets for us because they keep both the volume and the margins pretty steady.

So the contracts we have are quite good in these times.

And then finally we are managing our CapEx quite closely.

We are not giving up on our key spanning projects although we are watching the timing, we are not giving up on occupy energy centers we are squeezing our base cash to be rather conservative in these times.

So I'm not sure what will happen with volume in '09, but I think we have a lot of in place to deal with whatever comes our way.

And then just lastly this might be a red hearing, but it looks as looking at your slides on the rubber black segment the profits before tax for the rubber black business has moved up by about 10% for both Q2 and Q3 compared with the last conference call.

Was there a change in the business or is this just an accounting issue?

Laurence, this is Jim Kelly.

That was a reclassification that we made between rubber black and performance products related to manufacturing variances and how the variances and the shared facilities are allocated across the two.

If you go back to last quarter we did note on the financial statement that we continue to evaluate the allocation across -- of cost across the businesses, and we now pretty much completed that and think we are in a solid position on those allocations now.

Okay.

Thank you very much.

You're welcome.

There are no further questions in the queue.

I will now turn the call back over to Mr.

Patrick Prevost for closing remarks.

Thank you very much.

I just wanted to say a few words on closing.

First of all, I wanted to thank you for participating in our call, but I also wanted to close on saying that in this uncertain environment clearly there's a few things we need to keep in mind and I think these messages are that we have a sound corporate strategy and long-[term financial goals.

We have leading global franchises and we are prudent in terms of managing our financial position and watching our liquidity.

I also believe that our businesses know where they are going and that we put actions in place to deal with the slowdown and, finally, we have an experienced team that has gone through these times or times like these, although we certainly don't know if they will turn out the same way as in the past.

But I believe we are confident.

We can weather this storm and that we will continue to balance the short and long-[term objectives of this company to come out stronger for our shareholders and our customers.

So, with that, I wanted to thank you and we will speak again next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may disconnect.

Have a great day.