Cabot Corp (CBT) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter one, 2009 Cabot earnings conference call.

My name is Ms.

Sal, and I will be your operator for today.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms.

Susannah Robinson.

Please proceed, ma'am.

Thank you, Ms.

Sal.

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

I would like to welcome you to the Cabot Corporation first quarter 2009 earnings teleconference.

Here this afternoon are Patrick Prevost, Cabot's President and CEO, Jonathan Mason, Cabot's current Chief Financial Officer, Eddie Cordeiro, who will be succeeding Jonathan in that role, 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, Ravijit Paintal, General Manager of the Specialty Fluid Segment, Jim Kelly, Corporate Controller, and Brian Berube, General Counsel.

Last night, we released results for the first quarter of fiscal year 2009.

Copies of which are posted in the Investor Relations section of our website.

For those on our 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 teleconference 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 2008 Form 10-K 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 the Company's performance for the with quarter, and details of the restructuring plan we announced last night.

He will then turn the call over to Eddie Cordeiro, who will provide the business segment and corporate financial details.

We will then provide our outlook for the future and open the floor for a question and answer period.

Patrick?

Thank you, Susannah.

Good afternoon, everyone.

It's a pleasure to be with you today.

Before I begin my remarks, I would like to take a moment to intro Eddie Cordeiro as our future CFO.

Eddie's financial, business, investor relations and strategy experience make him an ideal candidate for this job.

His background will serve the Company well as we move forward.

So we would like to welcome Eddie in this new position.

I would also like to thank Jonathan Mason for his valued service to Cabot over the past three years.

As most of you know, Jonathan will be leaving us in February to become CFO of Fonterra, in New Zealand.

We appreciate Jonathan's contribution during his tenure and wish him and his family all the best in their new endeavor.

As we mentioned in our press release last night, this was a difficult quarter for us.

I will touch on some of the key drivers of our performance for the quarter and then discuss the restructuring plan we announced last night.

During the quarter, we experienced an unprecedented decline in demand across most of our key businesses and in all geographies.

These declines were consistent with a 30% volume drop that we indicated to you in December.

The main drivers of the volume reductions were a combination of significant customer destocking and reduced demand in the tire, automotive and construction markets.

Our Rubber Blacks and performance products businesses benefited during the quarter from lower Carbon Black feedstock costs.

This included $22 million of contract lag benefit, and a $20 million LIFO benefit which was partly offset by an $11 million inventory write-down.

During the past two years, rising Carbon Black feedstock costs have led to unfavorable earnings and cash flow due to lag effects.

As discussed previously, we are working to reduce the pricing time lag in our Rubber Blacks supply contracts.

During this quarter, we successfully renegotiated many of these contracts, and about half of our total contracted volume has been converted to a more timely monthly pricing adjustment mechanism.

It is hence, important to know that we continue to have approximately 50% of our total Rubber Blacks volume under contract and this brings stability to the business.

Despite a difficult business environment, we continue to build on our strong liquidity position during the quarter.

Our focus on cash, working capital, and capital expenditures generated $91 million of cash from operations, including a $61 million decrease in working capital.

Each of our key businesses has aggressive targets with regard to cash and working capital.

And we see these businesses continuing to push forward in this regard.

I will now move to our restructuring announcement.

Last night, we outlined an aggressive plan to restructure our operations and achieve fixed cost savings in excess of $80 million per year.

These actions are necessary and will allow us to respond to the current business environment as well as position us strongly for the future.

This repositioning will significantly reduce our fixed costs and result in a stronger, more efficient, lower cost global network of manufacturing assets.

Our plan and the time line to achieve it are aggressive, but speed is essential in view of the steep and rapid reduction in customer orders around the globe.

As we detailed for you in December, we have implemented and continue to see benefit from hiring, travel and salary freezes.

We have eliminated 300 contractor positions around the globe, and have substantially reduced corporate costs and capital expenditures for 2009.

In addition to the actions taken, we plan to close four of our manufacturing operations and one regional office.

We will also, mark off assets at two other sites, implement short work time at a site in Germany and delay the start-up of our new Rubber Blacks capacity in Jiangxi China.

Our plans will I'll ultimately result in a reduction in force of approximately 500 Cabot jobs.

Let me go into a little more detail.

We plan to close our Stanlow and Duckenfield plants in the UK, our Behr facility in France, the Tantalum powder manufacturing operations at our plant in Boyertown, Pennsylvania and our regional office in Kuala Lumpur, Malaysia.

Our mothball assets will be in Indonesia and Canada and both of them are in the Carbon Black area.

These actions are difficult, as they personally affect many valued employees, colleagues and friends.

The affected facilities have all had a critical part in our history and success to this point.

The actions, however, are prudent, given the current environment and necessary to ensure that we can emerge even stronger in the future.

As you know, restructurings are not without costs.

We filed today a detailed Form 8-K with the SEC, giving a breakdown of specific types of costs related to the plan.

At a high level, we expect cash costs of approximately $80 million, and non-cash charges of approximately $70 million.

We anticipate the majority of these costs to be incurred in fiscal year 2009.

But some charges may extend into 2010 and beyond, as closure and side remediation activities take place.

During 2008, we developed strategies for each of our businesses.

This restructuring has led to an acceleration of activities that have been ongoing and remains consistent with our strategies.

We will maintain a broad geographic presence of focus on technological innovation and excellent customer service that have made us a global leader in our businesses.

Eddie Cordeiro will now review the business segment and financial details for the quarter.

Eddie.

Thank you.

I will start with the core segment.

Rubber Black's profitability increased by $6 million despite a 29% decline in volumes.

$22 million favorable contract lag and a $10 million LIFO impact benefited performance during the quarter.

This is compared to an unfavorable contract lag of $9 million, and an unfavorable LIFO impact of $6 million in the same period of 2008.

Additionally, the business recorded an $11 million unfavorable lower of cost per market inventory adjustment resulting from high cost inventory in our Asia-Pacific region and rapidly falling Carbon Black prices.

The demand drop in this region was more precipitous than our expectation and combined with the long supply chain, contributed to this margin squeeze.

We expect to substantially work through these high cost inventories by the end of the second quarter.

In the Supermetals business, we continue to be focused on cash, and were successful at generating an additional $10 million during the quarter on a constant dollar basis.

We implemented significant price increases in October and this, combined with lower average ore costs, contributed equally to the $6 million sequential profit improvement in the first quarter.

In the performance segment, profitability decreased by $28 million when compared to the first quarter of fiscal 2008.

The segment's volumes were particularly affected by the automotive and construction sectors.

The specialty nature of the business has allowed us to maintain unit margins.

Performance products volumes declined by 37% and Fumed Metal Oxides by 30% compared to the first quarter of 2008.

Lower Carbon Black feedstock costs resulted in a LIFO benefit of $10 million during the quarter.

This is compared to an unfavorable $2 million impact in the same period of fiscal 2008.

Business performance in the Specialty Fluids segment for the first quarter of fiscal 2009 declined by $4 million, when compared to the same period of 2008.

As we anticipated, the decline was driven principally by a slowdown in drilling activity in the North Sea, that has not yet been offset by increased activity in other regions.

During the last three months, oil companies have announced reductions in their capital expenditure budgets, which could impact the level of activity in this business.

Over the last year we have been working to improve the efficiency of our new business development efforts.

This quarter we began to realize the benefits of these efforts including 80% higher revenue than the same quarter last year, lower costs, and a $13 million improvement in cash performance.

Over the last several months, we have heavily focused on managing our cash and liquidity, and during the quarter the Company generated $91 million in cash from operations.

The significant uses of this cash included $32 million in capital expenditures, $24 million in debt repayments, and $12 million in dividend payments, yielding a net cash increase of $20 million.

As Patrick mentioned earlier, we successfully reduced working capital significantly during the quarter and have aggressive targets, including reducing inventory levels, proactively managing receivables with our customers, and extending payable terms.

We have also reduced our capital spending plans for fiscal 2009 to $150 million, which is a $50 million reduction from the fiscal 2008 level.

Over the coming 12 months, we have $49 million in debt that is maturing which we will be paying down.

Also during the quarter, we booked a provision for income taxes of $1 million.

Due to a geographic shift in the makeup of our earnings, we expect our operating tax rate for the year to be in the range of 35 to 36% before restructuring charges and tax settlements.

We would expect this rate to return to previous lower levels with a more normalized earnings pattern.

Finally, we have changed the allocation methodology for our corporate costs.

These costs, which are in the order of $30 million annually, now appear in the general unallocated expense line of the summary results by segments.

We believe the new presentation gives a more accurate look at underlying business performance, and provides better visibility an control of these costs at the corporate level.

Thank you.

Thank you, Eddie.

In conclusion, we're moving rapidly to address the new business environment.

We have planned for a weak 2009 globally, and we see demand in the automotive and construction market likely remaining slow in the second quarter.

More recently, the electronics industry has shown significant weakness including substantial customer destocking.

We believe that this will negatively affect demand in our Fumed Metal Oxides and Supermetals business during this coming quarter.

More positively, we're in a strong cash position.

As a result, we have flexibility, which in this environment is critical, and this will allow us to pursue opportunities that others may not.

We're continuing to invest prudently in our new businesses, and we anticipate that these investments will yield material returns in this fiscal year.

We're very focused on working with our customers through the restructuring and our operations will be well-positioned to respond rapidly as their demand recovers.

The restructuring actions that we announced last night are significant.

These plans are aggressive and rapid and will require focus, discipline and decisive action to execute.

Our team is experienced and I have full confidence in our ability to deliver the expected results.

The next few months will be challenging, but our focus on results and our teamwork will ensure that we emerge a much stronger company.

Finally, I wanted to give you some background on latest market developments.

In January, we are thus far seeing an increase in demand over the previous months, which is the first time we have experienced a monthly increase since September.

Although these volumes do not approximate the levels prior to the downturn, it does give us some optimism that we may be reaching the end of the customer destocking.

These are very early signs and cannot yet be seen as indicators of a recovery.

During my more than 25 years in the chemical industry, I have gone through several downturns.

This one is certainly the most significant that I am experience -- that I have experienced.

But I know that our industry has a strong ability to bounce back quickly.

The non-discretionary nature of the tire industry should provide us some additional optimism that we should be able to reach a normal level of activity in the coming months and Finally, Cabot has strong franchises and global leadership positions, which gives me a high level of comfort in our ability to work through this downturn and come out stronger.

Thank you very much for joining us today and I will now turn the call back over for our question-and-answer session.

Thank you.

(Operator Instructions).

Your first question comes from Laurence Alexander with Jefferies.

Please proceed.

Good afternoon.

Good afternoon,.

Patrick, first on the new contracts that you're negotiating in the tire black business, could you discuss a little bit what you think normalized margins for those contracts should be.

Because obviously the data we have is rather volatile and skewed by the historical contracts.

Well, Laurence, we do not provide details with regard to margins because of the competitive concerns that we have with regard to providing that information.

But what I can say is that we've had -- you know, with the contracts we have in place and the formulas, we've had some stability in the margins and that has come through in terms of the profitability levels of the business.

On the spot side of the Carbon Black business or Rubber Blacks Business, there has been more volatility, essentially because of the rapid decline in the feedstock market, but I would say that there again, the ability to retain margin has been excellent.

Maybe to come at it from a different angle, if oil prices were to stay flat for the rest of the year, would you expect the profit before tax excluding lag and LIFO to be more comparable under the new contract regime with the back half of '08 or with 2007?

I think, Lawrence, the issue here is that there is a large volume factor, in addition to the volatility on the feedstock side.

And right now, what we're focusing on is getting our fixed costs aligned to a new level of demand and we're certainly working very hard to manage working capital.

And pricing at this stage has remained stable in the sense that we've been able to retain margins on the line and basically corrected for the feedstock volatility.

And I guess then just lastly, can you discuss in the Carbon Black market on a regional basis utilization rates currently and what will happen once the facilities are closed?

Right.

Perhaps what I would do here is ask Bill Brady to give you some background in terms of the geographical situation in the Carbon Black business.

You've seen that we indicated our volumes by region and the volumes do mirror the utilization.

But bill?

Hi, Lawrence.

the current -- you asked about current utilization.

It's a tricky question, given these months, but maybe I can help you out qualitatively.

In North America -- well, everything was quite low towards the end of the last quarter, that is, November and December.

But as we go into January, North America actually has picked up nicely and so is running at not bad utilization levels.

Europe is low now but will tighten up after the restructuring.

South America is a bit on the low side.

China is recovering in January.

Asia-Pacific south is quite low but will get better after the restructuring and then our operations in northern Asia is quite stable and in a good position.

Okay.

Thank you.

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

Please proceed.

Hi, good afternoon.

Good afternoon, Jeff.

I think in early December you put out a press release saying that you intended to close or idle 40% of your Carbon Black capacity.

Is that still your target and when do you expect to reach it and where are you now?

Jeff, let me perhaps address what we said in December.

We mentioned in December that we had curtailed operations to the tune of 40% and what that meant is we had slowed down our manufacturing from a much higher level in the previous month to a level of about 60% on the utilization rate.

That did not mean that we were actually cutting back or closing 40% of our capacity.

I think that that is maybe what you're addressing.

We had indicated that our volumes were down somewhere to the tune of 30% and what you see now in terms of our restructuring is what we believe to be the prudent level of cost reduction and capacity closure, that represents what we believe the new demand environment to be requiring.

So in your capacity announcements that you've made today, how much does that cut your Carbon Black capacity by?

The announcement that we made today represents approximately 250 to 300,000 tons of capacity, of which approximately 150,000 tons is going to be closed permanently.

And the moth balled facilities will be able to be restarted at short notice, so that we have the flexibility to respond to a change of environment.

The other point I would make on the capacity in the Carbon Black side is that we are in the process of concluding the build of 150,000 tons of capacity in Jiangxi China that we will be delaying the start-up of that operation until further notice, and until we believe that the market would warrant that.

So we're shutting down significant amount of capacity that we believe is the least effective and efficient in our system, but we do have flexibility to respond to potential bounceback in the market.

Just a couple more questions.

There's $80 million that you are attempting to achieve in cost reductions and you're laying off 500 people.

I don't know if the average employee cost is $50,000 per employee, that would be $25 million.

So there's another $55 million to go to get to your cost target.

So can you give us some idea of how you're going to get to the $80 million number and why there isn't any cost savings in fiscal 2009?

Okay.

On the cost side, Jeff, the cost of the reduction in employment is only one part of the costs that we will be eliminating.

As you may understand, we will be shutting down entire sites, so there is actually costs that will go away in the sense of maintenance and other costs linked to that, to these sites, which makes the labor part and the job reduction component of that $80 million perhaps lower than -- you know, a lower part of what you're used to see.

Let me assure you that these -- you know, this minimum of $80 million has been worked through in high level of detail and that we fully understand that this is what we will be delivering.

I guess last -- so if I understand what you said, it sounds like $80 million also comprises capital costs?

Yes.

Well, no, no capital costs, no, these are fixed costs, cash and non-cash, so -- and perhaps one other point here is that we have or will eliminate 300 contractor positions or have started in the last few months and will complete it in the coming weeks.

So that may also be part of what you're trying to see there.

Okay.

And just lastly, in performance products, I didn't notice any restructuring actions there and the year-over-year comparisons are tough.

How are you going to extricate yourself out of that profitability relationship?

Well, I think what may not be seen or perceived here is that as we restructure our Carbon Black operations, that includes actually activities that are related to our special blacks because some of our special black units are situated within the Carbon Black sites that we will be shutting down.

So the separation of what will be attributable to Rubber Blacks and special blacks is actually quite difficult to achieve and we will not be able to provide that level of detail.

But suffice it to say that the minimum $80 million of fixed cost savings are cost savings that will be affecting both the Rubber Black and the special blacks businesses.

In addition, I wanted to make the point that the Fumed Metal Oxides business which is part of the performance segment is also being affected and we have restructuring work going on here as well and we have announced that the plant in Reinfelden Germany is going to a short work time mode and that is going to be linked to the German government's support for the current downturn.

So in essence, we're going to be running the RFMO plant in Germany at very low rates with very low staffing level and we'll be getting the support from the German government.

Okay.

Thank you very much.

Thank you.

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

Please proceed.

Hey, good afternoon.

Good afternoon, Saul.

Thank you.

Hey, Eddie, you mentioned that the corporate expense should be about $30 million a year which would be about $7.5 million a quarter.

In the first quarter, if you back out the $2 million special that was embedded in your corporate unallocated, it was $16 million, so two questions related to that.

The $16 million was much higher than, a year ago would have been 11, without the special costs, so why the increase of $5 million when you guys are trying to cut back costs?

And then, how do you reconcile the $16 million with your comment that it will be $7.5 million a quarter going forward?

Yes, Saul.

I think what you're looking at is a quarter-over-quarter comparison and what's in the first quarter of 2008 number includes a one-time benefit from the sale of our Altoona land facility.

I backed that out.

That's why I said $11 million, ex the special.

I think actually if you take out, the two numbers are almost identical.

So the corporate costs are --

it was $10 million of special gain as shown in your release.

I'll have to go look at it, Saul, but I think it was a bit higher than that.

Okay.

Maybe let me just engage here.

I think what we'll do is we'll have a look at the specific question and the consistency of the numbers we published.

What I do want to say here is that the corporate costs have been scrutinized and are continuing to be reduced.

Just as an example, we have actually reduced and eliminated seven senior management positions in the last six to nine months, and that is coming directly to the bottom line.

So the reduction in costs and the scrutiny that we're applying to the Company is not only being applied in the manufacturing sector, it is actually being applied across the Company.

What about the $7.5 million guidance going forward, compared with the $16 million cost in the first quarter?

I'm not sure I can relate to that.

Perhaps Jonathan?

Saul, if you recall, I think there's also emerging market FX one-offs that hit us in the December quarter.

How much was that?

Certainly didn't have a year ago.

We had both -- let's just say generally concentrated in South America, and those would have been in the 5 to $10 million range between the two of them.

Okay.

That answers the question there and that's done, we shouldn't see that anymore?

Well, it's related to the currencies there.

Right.

So who knows.

They have been more stable so far in January.

Okay.

Great.

That's a good answer to that question.

That helps.

Thank you.

Secondly, you said that the -- you took these inventory write-downs in the first quarter where you were trying to mark your inventory levels to current realized costs.

A statement was then made that in the second quarter, you will continue to be utilizing high cost inventory.

Trying to understand the write-down which would have brought the inventory levels down to today's levels and why you would have high cost inventory running through P&L in the second quarter.

Perhaps I could ask Eddie to take that question.

Yeah, Saul, when you do the write-down, you write it down to essentially eliminate the profit for the forward-looking quarters, but you still have high cost inventory, so as we burn through these high costs inventories, it will not be until we eliminate all of them that we will get to inventories that are more, shall we call it market-looking.

Okay.

Do you know what the -- you gave us in the first quarter, the impact of lag, inventory write-down.

How much was in the Rubber Blacks area, how much did you have in the way of unabsorbed overhead, meaning fixed costs that weren't absorbed because you were operating at such a low operating rate?

I think, you know, Saul, if you -- in a very simplistic way, if you look at the various moving parts and you go -- you basically take the base performance of the Rubber Blacks Business, eliminate the lag LIFO and correct for the inventory write-down, you basically can see that the business has at a 30% lower volume rate than the same quarter of last year, has been operating close to a breakeven level.

Okay.

And --

And that is the reason why we're actually taking the measures we're taking in terms of restructuring because that is an untenable situation, but firmly I believe that what we're seeing right now is a combination of destocking and potentially a new underlying demand level.

But once the destocking has occurred, we should be at a level of volume that is to be considered more normal.

Right now, 30% in my view is not a normal level and I believe that the non-discretionary nature of the tire industry should be bringing us back to levels that are more acceptable and that with the restructuring that we're undertaking, that should bring our margins and our profitability level to more acceptable levels.

Do you think, Patrick, that with, A, what you've seen in January, B, what your customers are telling you about their needs for your products and both Rubber Blacks, performance blacks and Fumed Metal Oxides and call it C, your own gut feel, do you think the volume decline percentages that we will see in the second quarter will be less onerous than what we saw in the the first quarter, just directionally?

Let me -- it's difficult to provide a forecast at this level.

I think this has been unprecedented.

I've never seen something like this, and we're still trying to work our way through what we're seeing.

I mentioned earlier that we had seen an increase in the volume in January, so we're close to end of January, versus December.

However, the level as such is certainly not satisfactory, and nowhere close to where it was in similar in the month of last year.

December was a disaster for everybody so to do better than December isn't the saving grace.

Correct.

And that's why I'm also very cautious about providing any indication of where things are going.

But again, my sense is that we're, one, starting to see potentially the end of the destocking.

The big question for me is where the underlying demand going to stabilize and how long will it take to see some growth developing.

Now, I believe that the second quarter will continue to be a very difficult quarter in that respect.

But I'm hopeful that we will see some improvement going into the third and the fourth quarter this year, but again, this is -- you know, this is a very, very difficult situation.

Right.

Right.

And I think one anecdote here, which is also a positive, is that in the last few weeks, month, we weren't getting any forecasts from our customers, meaning that the orders were coming in weekly, without any indication of what the following week orders would be.

And we're starting to see forecasts coming through again from some of customers, meaning that potentially further down the chain, the destocking may have bottomed out as well.

But again, I would say much too early to say, and I would feel very uncomfortable providing more than I've just provided in terms of a sense for the coming quarters.

That was fine.

My last question, to get on a good news topic, very, very encouraging to see the progress in your new businesses, with the sharp sales increase and particularly the profit improvement.

Which businesses were the ones that contributed to that and I just wonder within goals was there any unusual payment from Aspen that may have distorted the number on a temporary basis or were the improvements in profitability not related to any single noteworthy item?

Saul, thanks for touching upon one of the few bright spots we have, and we've done very well in the new businesses and it's actually across the board.

So there's no unusual situation that may have shown a dramatic improvement in the last quarter.

It's across the board and what I would like to do is I'd like to let Fred perhaps say a few words about the various businesses that are been the New Business Segment.

Saul, this is Fred.

On the air gel side, we actually saw significant boost in revenues as the entire year continued so over the last calendar year, so it was actually based on commercial revenues that actually with a solid cost structure, led to actually the improvement in essentially the profitability of that business.

That means they lost less.

Yes.

Exactly right.

They lost significantly less.

At this stage, they have minimal cash burn in that business which is very positive.

So we continue to be optimistic about the commercial revenue on that side.

As Patrick mentioned, inkjet also saw stronger revenues year on year, this was based on both the OEM and the aftermarket segment and so that was positive and also it had a lower cost structure which helped the profitability of that business and at our CSMP facility, we had stronger revenues in the Security area and once again we had a lower cost structure.

And that helped reduce the loss we were making in that business.

Did you make money in inkjet?

So all in all, the segment as a whole actually was cash positive in the quarter and yes, we did make money in inkjet.

Thank you very much, Fred.

Thank you all.

Thank you, Saul.

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

Please proceed.

Unfortunately, I'm going to revisit the operating rate questions on Carbon Black.

You were operating at 60% of capacity in December.

What percentage of your capacity are you moth balling an shutting down, forget for a moment the fact that you're -- we're not counting the capacity that you could start up in China but are not, and do you have any gauge at all as to the -- what percentage of the decline that you've experienced let's say in December was inventory reduction?

Do you have any glimmer of what you think final demand really looks like at this point?

Okay.

Hi, Jay.

Coming back to the moth ball and shutdown of Carbon Black facilities, just to give you a sense of the the percentage, versus our total capacity, this represents somewhere in the vicinity of 16% of our capacity.

And I think the second part of your question was related to -- could you repeat it, Jay?

Well, I'd like to get a feel to the extent that you feel comfortable in sharing it, on how much of the business downturn is associated with inventory reductions as opposed to final demand reductions.

Right.

Quite a difficult question, so I'm happy to pass it on to Bill Brady.

Jay, it's a difficult question.

Let me just give you one data point, semianecdotal.

But one of our global tire customers who was down somewhere around 26, 27% in that October through December quarter, felt that possibly about half of that down -- of that decline was destocking related in that quarter.

So I don't --

You guys were also destocking at the same time.

We were -- well, we were destocking at the same time but I can tell you, we had been working hard on our inventory levels well before October.

So it was not -- perhaps not as dramatic for us as maybe for others.

Well -- so we're going to go -- when you complete the mothballing and the plant shutdowns, we're going to go to somewhere north of 80%, I would think, and how much north of 80% depends upon where final demand is?

That's right.

All right.

Could we get the same kind of a picture on Tantalum and on Fumed Metal Oxides?

I would say that because the -- of the nature of those markets and the competitive environment, I would not -- I wouldn't be willing to actually go to that level of detail.

Carbon Black is somewhat more transparent and there are more competitors so we feel much more comfortable sharing this but I would feel much less comfortable with Tantalum and Fumed Metal Oxides expect to say that we are running at low operating rates.

We're not satisfied with the demand and we're applying the right principles to adjust the cost base, so the case in point here is our shutdown of the powder capacity in Boyertown, Pennsylvania and we will only be manufacturing Tantalum powder in Japan in the future and the Fumed Metal Oxides business as I mentioned we have our Reinfelden facility that is operating at low or no rate of operation and to the -- to help the global system.

When I looked at the Dow Corning results, I think the Corning published, it didn't seem to me that the full brunt of recession had yet hit their volume requirements.

Perhaps I should ask Shawn Keohane to pick up on that question.

Sure.

Hi, Jay.

When looking at the Dow Corning results, important to look at -- they don't really disclose it, but I obviously, is a very important part of their business and that business is being driven right now by strong fundamentals in the solar industry, which I think they're a bit disconnected from the general economy.

So that the historical volume sensitivity probably does not apply anymore.

I think that's correct.

So it's a much more important part of their business today, than traditional silicones, not that that's not important to them, but clearly this is big for them now.

I guess historically we've sort of viewed that silicone customers and electronic customer or customers represented about 70% of your Fumed Metal Oxide business.

And I presume that the March quarter is starting out weaker than you averaged in the December quarter for that business.

I think we are going to see some weakness in the electronics sector and so that's pretty broad-based, if you look at what's happening with everybody in that value chain from Intel all the way down.

So we are very cautious on the electronics, the sale of silica into the electronics industry, consistent with what's happening in the entire chain.

And then -- all right.

And then what's been the -- has there been an inventory -- downstream inventory correction issue in -- for Tantalum powders, similar to what we've been talking about in Rubber Blacks?

Let me pick up on that question, Jay.

Because the actual Tantalum Business has seen increase in -- significant increase in pricing, and the feedstock or the ore to manufacture Tantalum, the prices of that ore have been coming down, we have not seen any of the effects that we have seen in the Carbon Black business.

The volumes have held up?

The volumes have not held up, no.

I was really addressing volumes.

I understand the points you've just made.

Yeah, I was making the points about the potential write-down of inventory, which have not affected the Tantalum Business.

I guess the question is basically the lower volume of orders are you seeing, is that paralleling final demand or is there an inventory reduction component to that.

Bill, would you like to take that?

Sure.

Jay, I think it is also a mix.

I think our read on the inventory at our customers is a real mixed bag.

We have some of our Western customers who have quite a bit of Tantalum inventory that's going to last them a while in '09.

We have others who are running hard for cash and have very, very little inventory and then on the other side, the Asian customers I think have been working hard on their inventory, particularly in the last three or four months.

So it's a little bit of a mixed bag and I think what we have seen is a mix of underlying demand and destocking in Tantalum as well.

Thank you very much, gentlemen.

You're welcome.

Thank you, Jay.

Your next question comes from John Roberts with Buckingham.

Please proceed.

First, good luck, Jonathan.

Thank you.

Congratulations, Eddie.

Thank you.

The non-contract side of the Rubber Blacks Business has a price lag as well, it's just not contractually set.

Was there a sort of similar when fit of lag in the non contract side as there was in the contracted side?

Hi, John.

Let me ask Bill to take this question.

Sure, John.

I think you're right for Asia-Pacific, places in Asia-Pacific that use US Gulf Coast feedstock.

You have a lag in that it takes a little bit of time for the feedstock to get across the ocean and to get used.

So that was the problem that Eddie had talked about earlier.

But conversely, last year as feed stock was on the way up, we had some benefit from that mechanism.

And in the non-contract side of the rubber black business, what are the most recent trends in pricing?

I mean, we had feedstock that was plummeting as you finished the year, then they had a strong rally over the holiday period and we kind of stabilized a little bit now.

Are prices going down because of the big decline?

This is in the non-contract side.

Prices still going down in the non-contract side because of the big decline or have they actually bounced up a little bit with the recent rally that you've had.

A lot of the our non-contracted business remember is in China and in Asia and prices in both of those areas dropped.

Pricing I would say was more aggressive in China than it was in the rest of Asia, so it dropped.

As feedstock dropped and I would say right now it's stabilized but not necessarily bounced back up yet.

Okay.

So even though feedstock bottomed a few months ago and bounced up, that hasn't hit the pricing side yet?

Yeah.

And then in the New Business Segment revenue slide, would new businesses, people often look at sequential improvement because the new businesses aren't yet large enough to have strong seasonal patterns.

The sequential decline, is that -- is there a seasonal pattern here that's pretty significant in these businesses at this point that accounts for the sequential decline?

John, let me answer that.

There are two components.

One is a seasonal element which is in the ink jet business, it is the -- the fourth calendar quarter is always weaker since people have built up inventory prior to the fall period where you've got back-to-school sales and things like that.

In the air gel business, we work on projects, and those projects come and go and so there's quite a bit of variability in the revenue base on those projects and we saw a bit of that in the air gel business in that quarter.

Okay.

And but we should expect not -- maybe my comment on the seasonality, Q2 versus Q1, the seasonality is only really the inkjet side then.

It's really your Q4 or calendar Q3 going into calendar Q4.

That is correct.

It's an inkjet phenomenon.

Thank you.

Next question comes from the line of Mike Judd with Greenwich Consultants.

Please proceed.

Thanks for taking my question.

I have a question about -- also about the volumes, the changes on a year-over-year basis and the Rubber Blacks and I guess we've gone through a lot of this and I guess the thought process, if I could summarize here is that we're due for some sort of bounceback in that trend.

So it's not quite so negative.

But I guess my question is if we want to look at it instead of just beyond let's say an inventory restocking in perhaps the March quarter or whenever it occurs, I'm trying to get a sense of maybe longer term, over maybe the full year this year and maybe moving into next year, what -- for planning purposes, maybe even on a regional basis, what your thought process is.

Because I realize a lot of this has to do with the idea of miles driven, and I know that there's been a cutback in miles driven but I don't think it's nearly as significant as these numbers that we're seeing right now.

But on the other hand, these numbers are pretty alarming in terms of the magnitude so I'm just wondering if there might be some other factors that we should be thinking about other than just miles driven.

Mike, I think this is an area where we're still trying to find an answer and we've talked to few of the elements earlier.

I believe you're right that the miles driven have not come down as dramatically as the volumes would make you believe, which is why we also think that destocking is occurring, but then if you look at the value chain, the tire value chain, that is not a very deep chain, meaning that we believe that the destocking at some point -- and there's not that much inventory in that whole chain, that we believe that the destocking should come to an end in the coming months.

The critical question is, what will be the underlying demand and here I would say that working in our favor, we may also have the lower gasoline prices, which should bring people to drive again, perhaps, and of course against that could be a lower economic activity reducing the amount of goods being transported.

But all in all, I believe that we should be seeing the business returning to what may be a new underlying demand, and that new underlying demand most likely is going to be at a level that is above that 30% decline we saw in the fourth calendar quarter of last year.

But at this stage, very difficult to assess where we're going to end up.

But let me ask Bill Brady to perhaps give some additional comments on that.

Mike, I'd just like to add a thing or two to what Patrick said.

As you point out, miles driven is absolutely a very important indicator.

Usually, the miles driven data that we all see is miles driven in the mature regions of the world, which is important.

But there are two other indicators that are very important as well.

One is the number of new drivers in the world.

And this is particularly in the emerging regions, and the other is truck freight.

And this is particularly important, A, because the tire are bigger and B because in some emerging parts of the world, for example, China, where the rail system is not as developed as in mature regions of the world, you have more truck freight to deliver the commerce.

I would just point those things out because I think it's important to take the holistic picture of all these things that can drive the demand over time.

And then just lastly, I apologize for the nature of this question ahead of time, but we've seen some actual surprises as it relates to bankruptcies for customers, even industrial gas companies, and where there have been some surprises, so the reason I'm asking this question is I don't know as much as I would like to know about the tire companies globally.

But are there any of our customers that are in any kind of a tough situation and is there any situations where you've -- where there could be any issues in terms of write-offs of inventory or anything like that.

Bill, would you like to take that?

Yeah.

Mike, I would just tell you on that point that we are managing our receivables very closely and we have not only in the field many do we have these contacts going on every day, but with our bigger customers, we have CFO to CFO discussions ongoing and so we are very close to it.

Okay.

Thanks for the help.

You're welcome.

Next question comes from the line of Jason Miner with Deutsche Bank.

Please proceed.

Yes, thank you, good afternoon.

Good afternoon, Jason.

Couple ones for Bill and Sean.

Dramatic volume declines, are there significant market share shifts going on in the Rubber Blacks or the performance markets and what about after you curtail capacities as you plan to do?

We had a little trouble hearing the question, but I think the question was what is going on in terms of market share today and what do we thing is going to happen with market share after the curtailment or the shutdowns that we make.

Is that correct?

That's right.

Sorry, is that better?

Yeah, that's better.

Why don't I take it first and then Sean can add his.

I think the question today -- I think it's pretty stable, actually.

I do think there are some parts of the world, I will point out in particular, North America, where we have customers coming to us for a little bit more than they've usually taken from us, so there may be some mild positive market share shifts going on for us and then with regards to the curtailment and after we take our restructuring actions, we have done the planning on this and it is our full intention to make sure we've got the capacity, the most competitive capacity in the right places to serve the growth.

And so we are very confident that we're going to be able to at least maintain our market share, even through and after the restructuring in rubber.

Sean?

Sure.

A couple of comments.

With respect to market share, we also view it as quite stable at this point in time and I think a few important points maybe to add a little color on the volume decline in Performance Segment, the first is to understand the importance of the broad plastics value chain to this segment and it's quite significant.

We sell a lot of specialty grades of Carbon Black as well as master batch into this chain and polymer prices over the last couple of months, three, four months, the bottom has fallen out on those and when that happens in the plastics industry you get a massive pipeline effect going on and we've seen this across the board.

So we think there's a fairly pronounced inventory destocking phenomenon in the plastics industry in general.

The other thing is that we sell into a broad range of applications and the supply chains end up being typically longer.

There are a lot more intermediaries and as a result it can take longer for the pipeline to empty.

So a couple of just important aspects to this business that I think should be understood to put the volume story a bit into context.

That's very helpful.

Thank you.

Just a last one, focusing back on tires, if I recall correctly, three quarters of your volumes, of your sales are to replacement which I know has been more resilient in past downturns but I wonder if that's also the case now or if consumer pressures are manifesting themselves a little more dramatically this time.

I think you're right.

I think it has been resilient in the past and I think tires are a discretionary buy for some period of time but at some point, people have to replace them.

And so we are hopeful that this time it's just -- it's going to be just as resilient as it was in the past.

That's very helpful.

Thank you.

You're welcome.

Thank you.

Your next question comes from Saul Ludwig with KeyBanc.

Please proceed.

Just a couple quick follow-ups.

Fred, could you just comment a little bit about what's going on in the high speed sector of inkjet?

Seeing any increased activity in sales by HP or other people in the high speed area and how did that affect your results?

Saul, let me comment on that.

First of all, in the high speed area in general, this is where people are using essentially colorants more in the office market, et cetera.

We're seeing a modest pickup, part of that is associated with people preparing to launch new printers in the office segment and we have seen so in the first quarter, we did see a pickup from some of those volumes.

However, to be frank, the volumes have been disappointing in that segment and it's taken a lot longer than we've anticipated and there's a significant hurdles to actually penetrating that segment in a large way.

Okay.

And then in the Rubber Blacks area your volume was down 29%.

What were the components of price and FX that got you to your revenue numbers?

Saul, not sure we understand the question.

Would you mind -- ?

How much was -- your revenue change in Rubber Blacks was $414 million versus, what was it, 463, so that would be down -- no, 20 -- down about 5%.

So we had 29% down in volume, so there was also a price component and an FX component that would explain the if it's 5% change.

Not sure we have that data, Saul, so can we --

Sure.

Pick that up at a later stage, if that is okay with you?

Sure.

And then the last question is you know, your contract with your Tantalum supplier ended December 31st.

How much benefit do we see in your cost in this quarter and subsequent quarters compared to what you had to pay in your fourth quarter and would the implication be that even with weak volume in the electronics industry, as you had in the first quarter, that your profitability would trend higher from what your first quarter was?

Because of the lower -- the elimination of the contract that you've had burdened for so long.

Right.

Saul, so on the Tantalum side, we've got -- we've come to the end of that ore contract that we had actually mentioned in previous calls and what I can say is that the -- in general, ore prices have come down for us as a result of the environment in which we are operating in, and as a result of us not having that contract.

But I wouldn't be able to provide you any more information than that at this stage.

Anything wrong with my logic?

I mean, if you raised prices in October, you're getting better prices and your costs are coming down and your volumes stay lousy, why wouldn't that be a net plus versus where you've been?

We -- I mean, prices have come up, unfortunately, volumes have declined and as you could see, from the first quarter results, one offset the other so unfortunately we're not -- we're not in a much, much better position and --

I'm sorry, better position.

How much were your volumes down in the first quarter in Supermetals?

We don't actually disclose that.

You've done that always historically.

Is that new that you're not going to?

Okay.

No, we've stopped doing that two years ago is what Susannah told me here.

Thanks very much.

Next question comes from the line of John Roberts with Buckingham.

Please proceed.

Just to follow up up on that.

Closing Boyertown is there a lot of inventory or sales from inventory that occur over the next one two two quarters as you move whatever is there into the marketplace?

I don't know John, let me ask Bill to answer that question.

John, obviously for the customers who are buying products from Boyertown today and then will buy them from in the future, there will be a transition period and we would probably supply them for some period out of Boyertown until they switch.

Might not a lower ore cost flow through the P&L or at least be diluted through the P&L as Boyertown is using up higher cost materials.

It would be.

And is your carbon elastomer composite project with Michigan Len being affected at all by this market environment?

I would just report that the CEC project is going full steam ahead and is actually going quite well.

At this point in time, there are a number of tests going on on the road and in other places and we're also doing scale-up work to prepare for the future in the project.

So I'm really pleased to report that that's going very well.

Great.

Thanks.

Thank you, John.

I believe this was the last question and I wanted to thank the people who have joined the call today.

I just wanted to say a few words to close on this earnings call.

First, I wanted to say that the environment is a difficult one but Cabot is a strong company.

We have very good franchises.

We have good relationships with our customers and we're ready to move in terms of adapting our cost base to this new environment.

I believe this also gives us an opportunity to strengthen our footprint, basically operate on a leaner mode in the future, without taking undue risk with regard to being able to adapt to potential recoveries.

So we're very hopeful in that respect.

We think that strong companies can take advantage of difficult environments and we're getting ready for that.

Our cash flow is strong.

Our balance sheet is robust and we have a strategy in place so I just wanted to close in terms of saying that we're responding and we believe we'll come out stronger.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect and have a wonderful day.