Cabot Corp (CBT) 2009 Q2 法說會逐字稿

Welcome to the second quarter 2009 Cabot Earnings Conference Call.

I will be your coordinator for today.

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

We will be facilitating a question-and-answer session toward the end of this conference.

(Operator Instructions).

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

Susannah Robinson, Director of Investor Relations.

Good afternoon.

I would like to welcome you to the Cabot Corporation second quarter 2009 Earnings Conference Call.

Here this afternoon are Patrick Prevost, Cabot's President and CEO, Eddie Cordeiro, Cabot's Chief Financial Officer, Bill Brady, General Manager the Core Segment, Sean Keohane, General Manager of the Performance Segment, Fred Von Gottberg, General Manager of the New Business Segment, Robbie Plainfield, General Manager of the Specialty Fluids Segment, Jim Kelly, Cooperate Controller and Brian Berube, General Counsel.

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

Copies are posted in the Investor Relations section of our web site.

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 me in Investor Relations.

The slide deck that accompanies this call is also available in the Investor Relations portion of our web site.

And will be available following the earnings teleconference in conjunction with a 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 may 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 and subsequent filings with the Securities & Exchange Commission.

Copies of which are available on our web site.

As we typically do during our second quarter teleconference, I would also like to remind you that over the next several months, in conjunction with divesting of restricted stock awards issued under our long-term incentive equity program, officers of the Company may sell shares to pay their tax and in some cases, loan obligations related to their awards.

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

Eddie Cordeiro will review the business segment and corporate financial details.

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

Patrick?

Thank you, Susannah.

Good afternoon, everyone.

Thank you for joining us today.

Yesterday, we announced financial results for our second quarter of fiscal 2009 which reflect the ongoing global recession.

We experienced a net loss of $56 million due to significant decline in volumes, margin compression from higher cost inventory, and charges associated with the restructuring of our operations.

We nonetheless generated $193 million of cash from operations this quarter.

I will now provide some context for our performance and an outlook for the coming quarters.

Our volumes remain soft during the quarter as global weakness in the tire, automotive, construction, and electronics markets continues.

You will remember from our previous discussions that a significant portion of revenue from our key businesses comes from these industry sectors.

In today's uncertain environment, comparisons to prior year's performance are somewhat less useful than sequential period comparisons.

For the last several months, we have been focusing on volumes, margins, fixed costs and cash flow on a monthly and, to some extent, weekly basis as we monitor progress in each of our businesses.

Let me detail for you how we've been performing in each of these areas and what we might expect going forward.

First, volumes.

While our current black volumes in our second quarter were flat compared to the first quarter, the story is in the sequential months.

As you can see here, our volumes decline from October through December, but increased in January, February and March.

Although absolute levels relative to last year still remain soft, this progress may be an early indication that customer destocking is coming to an end.

Given the volatility of the current environment, however, we remain cautious in the near term.

Thus far, in April, our volumes are showing performance roughly in line with March.

Second, margins.

While the month to month volume trend is positive, unit margins in the second quarter were compressed relative to the first quarter.

In an environment of rapidly falling raw material prices, slow-moving inventories put substantial pressure on unit margins.

As finished product prices adjusted downward in the second quarter and we still had higher cost inventory to consume, our results were unfavorably affected by approximately $38 million.

We had originally anticipated we would be substantially through our high cost inventory at the end of this quarter.

Unfortunately, the volume recovery, particularly in south Asia, has not materialized as quickly as we expected.

At this point, we are approximately 3/4 of the way through the high cost inventory and with relatively stable feedstock costs, anticipate that the situation will be substantially behind us by the end of the third quarter.

At today's feedstock prices, normalized margins would be substantially in line with our expectations.

Third, fixed costs.

As you know, we're heavily focused in this area and have many activities on the way aimed at reducing our fixed cost phase to allow us to be stronger once the market recovery commences.

The restructuring we announced last quarter is a significant portion of this.

But is by no means the only activity going on in the Company relative to cost management.

Let me bring you up to date on our progress toward recognizing the savings associated with the restructuring.

We're on track to meet our objective of reducing our fixed costs by in excess of $80 million on a fiscal 2010 run rate basis.

Our reduction in force and plant closures are proceeding.

We have completed the downsizing at our Colombian facility as well as at our supermetals site in Japan.

We have closed our regional office in Kuala Lumpur.

We have mothballed assets at our North American and Indonesian plants.

And our Stanlow and Duckinfield facilities in the UK both ceased production this week.

We continue to anticipate that the majority of the affected facilities will close by the end of the fiscal year.

With site remediation work carrying over into fiscal 2010.

Since we last spoke in January, we have identified additional opportunities and executed on them.

As an example, we announced two weeks ago that we're closing the tantalum mining processing activities at our TANCO operation in Manitoba, Canada.

These actions are in response to the global market conditions for tantalum and are necessary to reduce fixed costs and position the supermetals business to be stronger once recovery in the electronics industry takes place.

I'm confident that even with the closures, we have sufficient sources and supplies of raw material to meet our needs in this business.

We will continue to mine and process cesium for our specialty fluids business at this same TANCO facility.

These actions are never easy ,and I would like to thank all affected employees for their dedication to Cabot and many contributions over the years.

We also maintain other cost reduction activities such as travel, salary and hiring freezes as well as tightening capital expenditures spend.

As a result, we have reduced our operating expenses by $19 million since the first quarter of fiscal 2009.

Moving on to cash flow, we have been increasingly focused on cash since October when we began to see deteriorating conditions in our key sectors combined with the tight-knit credit markets.

During the second quarter, we were successful at building upon our strong cash position of the first quarter.

Our operations generated $193 million in cash in that period and we reduced our working capital position by $232 million, with all businesses having aggressive working capital targets and contributing to this positive result.

I'm pleased with our results in this area, particularly in the current economic environment.

Our cash balance improved sequentially from $149 million at the end of the first quarter to $220 million at the end of the second quarter.

After the payment of our quarterly dividend, amounting to $12 million, and an $85 million debt reduction.

In our new business development area, we achieved our second consecutive quarter of cash positive performance.

The improvement in cash flow was $2 million from the first quarter.

And a significant $10 million from the second quarter of fiscal 2008.

We have improved the operating performance of this segment for each of the past five successive quarters by mainly focusing in two areas.

First, we have improved the pace at which we generate revenue by working more closely with leading customers and by strictly managing milestone deliverables.

As an example, in our security business, which provides materials for anti-counterfeiting applications, we have successfully expanded our customer base and grown revenues by more than 200% year-to-date albeit from a small base.

Secondly, we have been actively improving the efficiency with which we develop new businesses.

Which includes managing our spending and focusing our efforts on the highest potential opportunities.

We're now operating the segment on a lower cost platform than in the past.

As I mentioned in our press release last night, I remain confident in the resilience of our end markets and the nondiscretionary nature of demand for many of our customer's products.

Nowhere is this more true than in the replacement tire market which represents approximately 75% of global tire demand.

Thus far this year, miles driven in the United States have declined by 2%.

Whereas tire shipments are off as much as 20%.

Clearly, this disconnect cannot continue.

Historically, the rebounding car rubber black sales in the years following a recessionary period has been solid.

Hence, I believe the growth will return although from a lower base and a mature recovery is likely to take some time.

We have modeled several scenarios which have led to our restructuring plan.

We have nonetheless maintained our ability to aggressively participate in the recovery in the higher growth regions of the world.

For example, we have accelerated the transition of our master batch business from its manufacturing base in western Europe to Dubai.

This will position us with a low cost operation in a high growth market.

I will now ask Eddie Cordeiro to review the business segment and financial details of the quarter before I speak to our outlook.

Eddie?

Thank you, Patrick.

In the core segment, rubber black's profitability decreased by $41 million, compared to the second quarter of fiscal 2008, and by $37 million sequentially.

Principally driven by lower volumes and unit margins.

Volumes declined by 28% globally with decreases in all regions.

Compared to the second quarter of fiscal 2008.

But were flat sequentially.

We were pleased to see improvements in some of our key regions, particularly China and North America, where volumes each increased by 12%.

The margin squeeze Patrick discussed earlier affected the rubber black's business by $27 million during the quarter.

Which was largely driven by the fact that both contract and spot prices have declined while our costs still reflect the flow through of higher cost inventories.

This was partially offset by a $9 million favorable contract lag and a $3 million LIFO benefit.

The contract lag during the same period of 2008 was an unfavorable $17 million with a LIFO benefit of $2 million.

We continue to make progress at reducing the percentage of our rubber black's volume subject to the four month contract lag, and will further reduce this percentage going forward and be substantially complete with this effort in 2010.

In the supermetals business, profitability decreased by $7 million compared to the second quarter of fiscal 2008, and by $9 million sequentially.

The decrease in profitability was driven by a substantial decline in volumes.

Weak demand and customer destocking in the electronics industry resulting from the global economic slowdown were key to these declines.

Partially offsetting the weak volumes was the impact of higher prices and improved product mix, contributing approximately $5 million.

The business was successful at generating $8 million in cash during the quarter on a constant dollar basis.

This principally coming from working capital reductions.

In the performance segment, profitability decreased by $33 million when compared to the second quarter of fiscal 2008 and by $4 million sequentially.

The decrease was driven by continued volume weakness in the automotive, construction and electronics sectors, and by margin pressure during the quarter due to slow-moving, higher-cost inventories.

Volumes in performance products and the few metal oxides business declined by 36% and 44%, respectively, compared to the second quarter of 2008.

In performance products, volumes improved sequentially by 10%.

But in few metal oxides sequential volumes were 18% lower due to the electronics industry weaknesses.

The margin squeeze in performance products affected this segment by $11 million, partially offset by a LIFO benefit of $6 million during the quarter.

This is compared to an unfavorable $5 million LIFO impact in the same period of fiscal 2008.

In the specialty fluids segment, profitability decreased by $1 million when compared to the second quarter of 2008 and was flat sequentially.

Decrease was driven principally by slow drilling activity in the North Sea.

We continue to focus our efforts on expanding our business to geographic areas beyond the North Sea.

In the new business segment, revenue increased by $2 million, compared to the second quarter of fiscal 2008.

The segment remained cash positive for the second consecutive quarter.

Improving by $2 million from the first quarter of fiscal 2009 and by $10 million compared to the same period last year.

In the inkjet colorants business, slowing of the consumer electronics industry affected sequential volumes while both air gel and superior micropowders were successful at improving revenue year-over-year and sequentially.

In inkjet, we have successfully grown the number of OEMs we serve as well as expanded into new markets.

As Patrick mentioned earlier, operations generated $193 million in cash, ending the quarter with a cash balance of $220 million.

We paid out $12 million in dividends and spent $23 million in capital expenditures during the quarter.

Overall, we reduced our gross debt by $85 million and increased cash by $71 million, leading to $156 million decrease in net debt during the quarter.

We continue to have a strong balance sheet with available liquidity of nearly $400 million.

During the second quarter of fiscal 2009, we recorded an income tax benefit of $27 million.

This amount included $5 million of net tax benefit from audit settlements, and $15 million of benefit from the timing of losses at certain locations.

Under FIN-18 accounting and due to the nature and timing of the losses, the $11 million of year-to-date benefit will reverse by the end of this year.

At these levels of earnings, the effective tax rate is highly sensitive, making it difficult to predict an ongoing rate with certainty, as minor changes in tax would dramatically impact the rate.

Therefore, at this time, it would not be useful to estimate our effective tax rate for the year.

Now, back to Patrick.

Thank you, Eddie.

In conclusion, we're encouraged by the month to month increases we've seen in many of our key businesses.

As I mentioned earlier, we believe that this may be an early sign that customer destocking has come to an end.

We remain cautious in the near term.

We're actively managing our global capacity and are working closely with customers to meet their needs.

We're also actively pursuing opportunities to improve our competitive position in this new environment.

The restructuring of operations is well underway and we're pleased with our progress thus far.

These actions will allow us to better utilize a more efficient global asset base.

We remain confident in our ability to deliver against objectives of reducing our fixed costs by at least $80 million on a fiscal 2010 run rate basis.

Longer term, I believe in the resilience of our end markets due, in particular, to the nondiscretionary demand for many of our customer's products.

Our market leadership positions and continued prudent investment in both efficiency and improvement projects like energy centers and high value technology products position us to emerge even stronger through the recovery.

Finally, our balance sheet and cash positions remain robust.

Our strength in this area gives us the flexibility to continue to invest wisely in our future and to consider opportunities when they arise.

So, thank you very much for joining us today.

I will now turn the call back over for our question-and-answer session.

Thank you, Patrick.

Erica, we would like to turn the call over to you for questions.

(Operator Instructions).

Our first question is from Laurence Alexander from Jefferies.

Good afternoon.

Good afternoon, Laurence.

First on the performance black segment, could you discuss in a little bit more detail, the business trends in the plastic master batch and automotive markets.

Are you seeing similar order recoveries in both, or is there some variation and also geographic variation.

Laurence, I think, as you saw, we provided an overview in terms of the volumes in the performance sector which, because of its higher dependency on the automotive and construction segment has been -- as well as electronic sector has been hit somewhat harder than the rubber black business.

But I think I will ask Sean Keohane to help me with this question that was slightly more precise.

Sean, if you would like to take that.

Sure.

Hi, Laurence.

The master batch channel experienced a sharper decline last quarter, and therefore a little bit more rapid recovery this quarter in part because of the collapse of polymer prices last year and the destocking that occurs in the plastics value chain.

So, we did see a stronger bounce back as that destocking that was quite severe last quarter has come to -- we think, some degree of completion.

So, that's a positive.

The other point of color that I would put on this is with our continued commitment to our investment in Dubai and our long-term view on the role of that region as a leader in plastics and polymers, I think we're well-positioned for the long-term.

So, definitely a little bit of a more pronounced snap back this quarter because of the severe destocking last quarter.

Ok.

And then, I guess on the working capital side, did you have any changes in your target for working capital returns?

Laurence, you're asking in general terms.

Over the next two, three years.

What you see is a normalized level.

I would say that we have been focusing in terms of -- this being an area critical to us in these times because we have had a strong focus on cash.

We don't disclose the actual targets that we set.

What I can tell you is that we have been tightening the screws dramatically in terms of making sure that we have, number one, a good understanding where our working capital and in what form it is, and making sure we maintain as much flexibility as possible in the utilization, and that the overall levels are kept as low as possible.

For that, we've been using and applying a more risk-based approach than in the past where to a great degree, it was about providing high level of assurance to our customers.

Ok.

And then lastly, just a bookkeeping question.

The high cost inventory overhang in the next quarter, in the June quarter, that would be about $9 to $10 million as a likely overhang?

I think there's some difficulty in actually identifying, as you can see, we were surprised by the fact that it would take us longer to work through this, and as I mentioned, the volume movements in south Asia have been the main culprit of that.

Can we financialize -- I would say somewhat difficult at this stage.

We believe that we're about 3/4 of the way, through.

Of course, that's dependent on how the next quarter materializes.

But I would say that the numbers you're using are somewhat in the ballpark, yes.

Thank you.

Thank you.

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

Please proceed.

Hi.

Good afternoon.

Good afternoon, Jeff.

I guess I would like to just sart off with taxes, the $27 million benefit.

So, are there further benefits to come in the course of the year, all things being equal or further detriments other than the ones that you've talked about?

And is the way to view your ongoing taxes to exclude that benefit to determine what you paid in the quarter or what you booked in the quarter?

Jeff, the tax situation this quarter is fairly complex.

One, due to quite a few moving parts and the different locations in which we do business which have different corporate tax rates.

Plus, secondarily, the effect of an accounting rule I believe called FIN-18.

Which requires us to deal with taxes in a certain way.

Now, to perhaps answer the question more directly, I'm going to ask Eddie Cordeiro to provide a little more color to this.

Jeff, on the discrete tax items that we have on a quarterly basis, we need to call those out and we want to separate those from what we view as an ongoing running tax rate.

So, that's one portion of which I think about $5 million hit us in Q2 which was a benefit.

The other item which was the $15 million item relates to what Patrick was talking about is more of a timing issue around applying this accounting rule.

And that year-to-date has been an $11 million benefit, and we would expect that to reverse by the end of the year.

And as we go forward throughout the quarters, it is -- we're not forecasting whether or not we would see additional discrete items throughout the year.

And so, it is a bit, I guess from your perspective, a bit of a cloudy view.

It is the way we handle the taxes.

So, the meaning of reverse is that there is an $11 million tax penalty?

Yes.

That item -- the $11 million of benefit will go away by the end of the year.

We just had to apply it on a quarterly basis in the first and second quarter as we did.

And the $4 million unfavorable impact, was that -- I don't remember that being disclosed in the first quarter.

Was this retroactive or we've just learned about it?

No.

I guess we didn't disclose it in the first quarter.

It is not retroactive.

Ok.

That's helpful.

In terms of the $80 million in fixed cost reduction, I realize that it is very, very early in the game.

But how much have you achieved so far?

Because we're early in the game, it is quite difficult to actually pinpoint the number, even for us because there's so many moving parts.

But I can tell you we're on a solid way.

As I mentioned, we have been closing facilities, mothballing operations so we - have concrete evidence of us moving down the path.

I, at this stage, see no signs of us actually not being able to get to that number, nor actually miss the deadline.

And I would say that at this stage, we even believe that we're slightly below plan in terms of the total spend we were expecting on this restructuring plan.

So, overall, a positive development in a difficult environment, but a necessary development in terms of positioning our business to adapt to the new reality.

And to a certain degree, using the opportunity to strengthen our operation by eliminating higher cost activities and plants and then focusing our resources on lesser sights which means that the absorption of corporate resources, the need for working capital and capital expenditures will be diminished.

And we feel that to a certain degree, the ability to extract more volume out of the remaining side is high with very much lower incremental costs.

So, we see the -- not only the cost of the whole system coming down, but we also believe that the competitiveness of the remaining system will be dramatically enhanced by this.

That's helpful.

In terms of the newly-built Chinese capacity in rubber blacks, has that come on stream yet?

Or when might that come on stream?

Or are you trying to coordinate it with other actions you're taking.

We have a sizeable expansion that's being built in China and it is about 150,000 tons.

And we're expecting to bring this operation in stream later this year.

What I will do is I will ask Bill Brady to provide a little color to how we're thinking about it.

I mean, it is one of our most efficient and lowest cost plants, using the latest technology.

So, very important -- I would say part of our growth in the future.

Bill?

I would say a couple of things.

First, it is very advantaged capacity.

We have all of our latest technology on the units.

And we expect to bring it online before the end of the year.

And we would do that for a couple of reasons.

One, is that actually we're starting to see volumes in China firm up a bit these months.

Second, I think our competitive position in China in these times is getting even stronger than it was.

And so we are, and I think we will continue to grow market share in China.

And then third, the capacity is so competitive that it will allow us to export to other parts of the region to the extent growth starts to come to other parts of Asia.

We'll start it by the end of the year for all of those reasons.

By the end of the year, do you mean by the end of the fiscal year or calendar year?

By the end of the calendar year but in the fall time frame.

Fall time frame.

Yes.

One other point here is that this capacity in China will be linked to an energy center.

Very efficient operation also from an operating cost point of view.

And then just lastly, in both in rubber black and in performance blacks, the utilization rates have been relatively distressed because of the poor demand environment.

Both for you, and I imagine for your competitors.

When you survey competitive behavior in these areas, do you find that pricing is relatively rational or is it rational in certain regions and less rational in others?

In other words, how is the industry holding up and strategizing under the difficult volume conditions?

Well, I don't know how the industry is strategizing but I can tell you what we're doing and what we're seeing.

So, certainly pricing has moved down as oil and feedstock prices have moved down.

I would say generally beyond that, we're finding pricing to be reasonable in these times.

And I would say if we took our prices today relative to the feedstock cost today, we would have margins that you would expect.

That we would expect in these times.

So, I think a reasonable picture.

Perhaps another point is on the rubber black side and partially on the special black side, we have still a proportion of our business in the case of raw blacks that's about 50% and somewhat lower number in special blacks that is under contracts with formulas which provide some assurance to margins in terms of these formulas being linked to feedstock.

Ok.

Thank you very much.

Thank you, Jeff.

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

Please proceed.

Thank you, good morning.

Good morning or good afternoon, Jason.

Good afternoon, I'm sorry.

Different time zone.

Just want to return and make sure I heard correctly one of your comments in rubber blacks.

If I add the $27 million back, I get around a 5% margin.

You said something about we would have had results near expectations, but is that sort of a goal margin, or where should the margin trend once we've done a lot of this capacity tightening?

Yes, Jason, let me try to talk to this.

I think when we're talking about margin, we're talking about variable or contribution margins.

And considering the depressed level of volumes, that certainly puts a large -- weight in terms of the overall profitability downward.

Which is the reason why we have the restructuring program in place to reduce that overall fixed cost base.

In terms of the variable margin picture, we talk about our expectation in the following context.

One is we look at our historical experience with regard to margins.

Secondly, we look at where we are in the cycle and some of that is linked to a supply demand picture.

And then thirdly, we have to bring into that picture, also, the variable cost improvement projects that affect our variable costs to a positive, as we have been continuing to strengthen our position and develop new technologies.

And based on that and in our experience over a long period of time, we believe the current margin level is meeting our expectations.

And I apologize for not being able to go into more detail because of competitive issues and us not being comfortable disclosing those margins at the next level down.

That's fine.

That's helpful.

Just to return to things you said on prior calls, is it global or regional capacity utilization that matters most?

To your margins or profitability in rubber blacks?

I think the way I would address that is in high demand periods when the whole system is fully loaded or close to, I would say it is potentially more of a regional picture.

As you move into an environment like we have today where we are actually in the process of restructuring our capacity to the tune of about 16% downward, the game is played in, my view, more and more at the global level.

And a case in point here is that we have actually today, product moving from our Colombian operation to Asia and Europe.

So, what's happening is we're utilizing our assets on an optimized basis globally, and because of feedstock price differentials, plant cost differentials and much, much lower transportation costs, we're able to leverage the system much more aggressively.

So, does that answer your question, Jason?

Well, it does help.

Let me take it one step further.

Forgive me for the what if nature.

But because of all of the moving parts, if I were to draw a line that represents your global shrinking capacity, and one that represents the rising demand you're facing, where do we get to utilization that -- pick a number high single digit perhaps operating margin or just tighter, or to use your own paradigm, where we flip over into tight and we're into regional dynamics mattering.

Where do those lines intersect if you could help me within a few quarters conceptualize the shift.

I think -- the dynamics of the market are such that it is difficult to provide a direct answer because there's competition at the global competition, at the regional and competition at the local level which may be so different that providing a number would go beyond my comfort level.

But let's put it this way .

In general, businesses like ours that are asset intensive and have some degree of maturity will expected to be operating in the, let's say, 80% to 90% utilization rate to generate cost of capital type

Ok.

And I can't entice you to hazard a guess of when we could get there?

No, sorry.

My crystal ball is out of order right now.

Well, that's fair.

I appreciate it.

Thank you very much.

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

Good afternoon, everybody.

Good afternoon, Saul.

Patrick, when you use the word about the cost savings of $80 million at a run rate in 2010, I want to make sure I got the semantics right.

Do you expect to save in 2010, $80 million, or during 2010, will the projects that are designed to achieve that level of savings be completed and therefore, not fully achieve the $80 million in 2010?

I think it is the latter.

Sorry, I'm not sure I understood.

No, we're expecting to see on a fiscal year 2010 --

You said run rate basis.

And that's the terminology that has me confused.

Right.

Let me just clarify that.

What we mean by that, that is that in fiscal 2010, if you look at our fixed cost base, it will be at least $80 million lower than our fixed cost base in 2008.

For the full year.

For the full year.

Ok.

That clarifies it.

Good.

Secondly, when we look about the impacts on your profitability and you talk about the high cost inventory running through, I assume that's distinctly and separate from the lag in LIFO influences.

Yes, that's correct.

Ok.

Would we expect to have -- given the raw material costs are kind of flattening out now, any further LIFO or even lag impact when we look to the back end of the year or do you think that has going to be a pretty minimal number?

The expectation right now is that that would become a diminishing number.

Both in terms of the fact that raw material prices have been or look to be somewhat more stable than what we experienced last year, and then secondly, also the fact that we are actively working through eliminating the lag in the contract.

So, those two factors should diminish that noise.

Ok.

Do you have any idea what the unabsorbed overhead costs were?

You lowered your plant utilization because of the volume.

We were talking earlier about your variable margins and that could hold up because you have certain price versus raw material costs, but then you have the fixed cost absorption and if you only are running at a 75% of capacity instead of 100%, then 25% of the fixed costs don't get absorbed.

How much were fixed costs absorption issues an influence in the quarter?

I'm not exactly sure I understand your question, Saul.

So, you're asking --

What was the unabsorbed overhead.

Oh, okay.

I don't think we provide that level of granularity.

What I can tell you is that we're clearly reducing cost, not only by closing sites and operations, but we're also reducing costs across the board.

As I mentioned in the speech earlier, we actually saw a $19 million operating expense reduction between last quarter and this quarter, and that includes cost reductions in all areas of the Company.

So, the belt tightening and the focus on cash is very broad.

And in the case of overhead, of course, it has been link to reduction in force and that reduction in force has been occurring in a broad fashion.

If we think about your rubber black business and your performance business, would it be reasonable to say your variable cost, if your total costs are $100, would your variable costs be $75 to $80 and your fixed costs be $20 to $25, what would be the typical split between fixed and variable costs?

I want to ask Eddie to provide that.

Yes, Saul.

That's the case.

Depending on the price of feedstock at any given time.

When you're buying feedstock at $140 a barrel versus $40 a barrel, those percentages shift.

Some normal, the average over four, five years.

Not trying to pick on any particular month.

Yes, I'm looking at Bill.

I think if you take an average over a long period of time, your numbers might be a little bit out of whack.

A little bit high.

I forget what you said.

70 or 80.

70 variable and 30 fixed.

Yes.

It wouldn't be too far if you looked at it over a period of time.

But as Eddie says, the price of oil can swing it pretty significantly.

I understand.

Next question, how much was the royalty income in aerogels from Aspen in the quarter, and how long does that royalty continue?

I'm going to be asking -- Saul, I'm going to be asking Fred to help me with that question.

Saul, we don't typically disclose the exact numbers or the exact time frame, but there was a significant traction in the quarter of Aspen aerogel, but to be fair in most quarters, we're getting aerogel revenue or licensing revenue from Aspen.

And on top of that, this agreement continues for another significant period of time.

Another two to three years as we go forward.

So, that's going to be sustainable.

That will be a sustainable, and it actually grows with time.

My final question, now your Company and just about every other company is concentrating on cash and working capital and you're having great success.

But part of this cash that you're building up is -- it is called a temporary build-up.

In other words, the function of a business is lousy, so you build up cash.

How much of your cash do you think you really have available for investment purposes?

Whether it is cap spending or acquisitions or dividends, versus cash that you got to keep around to restock the bin when business turns around.

Saul, I think you're right in terms of a lot of the cash coming back to us from reduction in working capital and that having a very positive effect.

But I do want to say that there is a lot of work that is going on that goes beyond just the return and the reduction in the raw material prices.

And I would say that we have focus in all areas of cash.

And we feel that we have sufficient cash to drive our business, to grow our business.

We're continuing to look at spending somewhere in the vicinity of $150 million of capital, both in terms of completing existing project but also developing new projects that are -- I would say currently more focused perhaps on productivity and efficiency areas including the restructuring, then of course on the growth side.

But we have a few growth projects that are earmarked in the future which are going to be critical from a strategic point of view.

And we're not letting our guard down in terms of looking at cash for that.

And of course, in times like these, we are -- we are open to portfolio moves if they're a good fit with the Company and provide some either synergistic or complimentary additions to the performance of Cabot but all in all, I would say,, the cash position is very solid.

And I don't feel at all that there are any concerns to be had in terms of the cash not being adequate for what we need to do.

One last final question.

You lost $17 million at the segment line.

And that $17 million had it in this $38 million of high cost inventory.

As we discussed earlier, that could be $20 million less in the third quarter.

And your business trends were improving during the quarter.

Would you think that that segment operating number should be at least a black number?

Without quantifying the degree, but should it be on the plus side of neutral as you look forward the third and fourth quarters?

Saul, you can imagine that our efforts are moving in that direction.

So, clearly, that is the intent and purpose of everything we're doing on a daily basis.

I think as I mentioned earlier, we're hopeful that some of the inventory problems and high cost feedstock or finished good problems will be flowing through in the third quarter.

In addition to the fact that hopefully we'll have a -- some wind in our sails from a demand point of view and then ultimately we're working very hard at getting our costs down to provide that additional cushion to enable us to be profitable and moving us back to the cost of capital returns as soon as possible.

Great.

Thank you very much, Patrick.

Thank you, Saul.

our next question comes from the line of Christopher Butler with Sidoti & Co.

Please proceed.

Hi, good afternoon.

Good afternoon, Chris.

Wanted to circle back to restructuring a little bit.

You had mentioned that you were taking advantage of some additional opportunities, pointing out tantalum specifically.

And noticed on the press release that you specified at least $80 million.

Is there an opportunity for some of these opportunities to increase the savings that we're looking at for 2010?

Chris, you've made a good note here that yes, we said at least $18 million because we believe that that's a minimum that we should be expecting.

The $80 million was driven by -- that floor was driven by our belief that perhaps a certain number of things had not been completely understood by the time we put the restructuring plan in place.

And then secondly, that we may have some additional opportunities.

So, in that respect, I would say that the tantalum opportunity and the reduction in cost in Canada will be adding to that line of projects that should give us in excess of $80 million.

And with destocking coming to an end and better visibility on what the demand environment is going to look like for the remainder of the year, are you comfortable with the -- that the larger scale restructuring, that you've put in place or could we expect something, another announcement down the road?

At this stage, we're comfortable with what we've put in place.

I would say that at the time we put the restructuring plan in place, we felt it was -- perhaps on the aggressive side, I would say that reflecting on it now, we believe it is in the right place.

It is appropriate.

And also was designed to ensure that we had some ability in the system to be aggressive on a recovery and make sure that we could utilize our existing assets more effectively going forward than benefit from, let's say, the bottlenecks that could be done either at minor capital or no capital at all, to make sure we capture the growth when it occurs.

And in that respect, I think Asia is clearly an area for us where we've had a lot of success in the past.

I just spent a week in Malaysia and China and Indonesia last week.

I was positively impressed and somewhat optimistic after that trip because of the dynamics of the local markets in these countries.

And although Indonesia and I mentioned earlier that south Asia has been a problem for us, Indonesia has a big export base for tires, meaning that a lot of tires are produced in Indonesia for the rest of the world, so they've been hit -- I think it is about 50% their tires are exported.

They've been hit quite hard by that.

What has been remarkable during the visit is to see how the domestic market has been holding up.

Actually continuing to expand and if you look at the -- how the Asian countries have learned from the 1998 -- 1997-1998 crisis, you're looking at Indonesia running a budget surplus and having foreign exchange reserves that cover their debt very handsomely.

I think those economies are going to recover extremely rapidly and I think, case in point is China where we're already seeing some pickup in terms of rubber black volumes.

That leads nicely into my last question which is on the core segment, rubber black, Asia Pacific, sequentially was the weak link.

Is it this tire exposure?

Is this -- are we looking at a difference in timing on inventory destocking?

What's going on over there that it is so dramatically different from the North America?

Let me ask Bill to pick on that one, please.

Yes, I think the south Asia region probably had the biggest inventory destocking effect in the numbers you're looking at.

So, they had the double problem, the lower demand and the considerable destocking.

I appreciate your time.

Thank you very much, Chris.

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

Please proceed.

I have a couple of balance sheet questions.

I apologize if you've given the answer earlier in a different form.

We have $360 million of inventories on the balance sheet as of March 31.

When you're through with your high cost materials and you're buying raw materials at current prices, what will that number look like?

Jay, good afternoon.

I'm going to let my financial experts help me with this one.

Eddie or Jim?

Jay, there's two components to that.

One is how much is overvalued, and the second is how much excess do we have?

From the perspective of how much is overvalued, I think we try to explain that we're substantially through the overvaluation through this quarter.

So, there is a little bit left there.

But it is not a significant amount.

And then the second question gets to where are we in terms of our inventory levels.

What I would say is from a day's perspective, we're close to getting back to where we were before we built up a lot of excess inventory in the September time period.

While I don't have the exact number for you, I wouldn't expect the inventory number to be hugely lower than the $360 million, but it will come down.

Does that mean going forward, the cash flow from operations will be solely out of EBIT?

Yes, what I would say, Jay, is that substantially, the cash flow from operations has been the working capital release.

Right.

But I'm saying going forward, we're now going to rely totally on EBIT.

I would say substantially, yes.

Ok.

Second question, if you look at that tax benefit, how does the expenditure on a cost reduction affect your taxes as we go through the year?

So, Jay, the benefit that we get due to write-offs as a result of the restructuring or the costs that are resulting from the restructuring, will really depend on what the total costs end up being, and in which jurisdictions we experience those costs and those write-offs.

And at this point in time, I think we had disclosed that we thought that it would be on the -- the total cost of the restructuring for this fiscal year would be on the order of $100 million.

Is that right?

For fiscal year '09.

Of which you spent what?

$45 million in the March quarter?

Yes.

A little bit higher than that.

So, we're looking now at $90 million, Jay, for the full year in terms of restructuring costs.

And I would say that the tax rate related to that restructuring cost is not something that we have disclosed right now.

But will be somewhat lower than what our effective tax rate has been for the last couple of years.

I heard the words and I understood nothing.

Well, our effective tax rate has been in the mid-20s, and so our tax rate will be somewhat lower than that on that $90 million.

All right.

I presume where you spend the money affects the tax rate.

When you complete a project, is that when you recognize the loss of the project?

Can you go through that a little

Jim?

Jay, Jim Kelly here.

You recognize it more as the actual expenditures take place, as opposed to at the end of the project itself.

The issue is not only differential tax rates in different jurisdictions, but also the fact that in some jurisdictions, you have what you call trapped losses so you don't get the benefit because you have longer term NOLs.

All right.

In some jurisdictions where you're shutting down facilities, you have the NOLs and in others, do you have them in all, the jurisdictions which you're shutting down facilities?

We do not in all.

No.

It is a mix.

All right.

Ok.

I still remain confused on the -- how you end up with a $27 million credit and part of the credit is building, but will disappear by the end of the year.

Perhaps I should call after the call and I can get educated.

That would be fine, Jay.

It is complex tax issue.

We would be happy to help you through that.

Thank you very much.

Thank you, Jay.

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

Please proceed.

Mr.

Roberts, your line is open.

You may proceed.

We have a follow-up question from the line of Laurence Alexander with Jefferies.

Please proceed.

Hello.

Just two quick questions.

Just on the rubber tire black business.

What percentage of that business goes to mining towers -- mining tires and what are you seeing in that end market specifically?

Laurence, I'm going to let Bill take that question.

Laurence, I'm sorry.

I don't have that specific number.

I don't have that specific number.

The one thing I can tell you is that qualitatively, is that it has been a pretty strong segment for our customers with a fair amount of backlog in the tire orders.

So, it is pretty strong segment.

I'm sorry.

I don't have that exact percentage off the top of my head.

Secondly, did you mention earlier the industry utilization rate or estimated utilization rate in North America?

I don't think we've mentioned that, no.

Or what do you think it would be roughly?

Give or take 10%?

Is your question about North America, Laurence?

Yes.

Well, industry utilization, I don't know.

Let me just give you a little bit of flavor for our utilization.

And let me just go around the regions.

It will put North America in context, I think.

If I start with the high category, China would be in the high utilization category these months.

I would say South America and North America would probably be in the medium category, not where we want them to be by the way, but on a relative basis, kind of medium.

Then Japan, Europe and south Asia would be in the lower category utilization.

So, that just puts it in some perspective.

I would make one other comment about North America though.

As you know, the market is not a growth market for tire manufacturing.

But I will tell you that we are very confident in our relative competitive position in North America, and so I think we have a very solid position even though the market is not a particular growth market.

I guess where I was headed with that is it sounds as if your overall capacity utilization is in the medium to slightly low category.

And looking at slide six, it looks as if volumes improved about 40% from December to March.

On an -- over the index volumes.

And I guess given your uncertainty about when the industry will return back to tight market conditions, are you fairly nervous that after we've had this initial recovery in volumes, that volumes are probably not going to continue to improve sequentially over the next six to nine months?

In North America.

Or I guess actually looking at slide six, that could be a global slide.

Yes.

I'm trying to parse the degree of caution about when you return to tight conditions.

It sounds as if the outlook for the next year or so is not commensurate with what we've seen since December.

But you know, in that respect what we need to remember is that we're working both the numerator and hopefully that's going to go up, and the denominator where we're taking some capacity out and we believe that some of our competitors are doing the same thing.

So, it is a little difficult to look at utilization in this current environment because the parts are moving much more than usual.

But what we believe is that on the black side and on the tire side, we think that the levels that we're at right now seem to be well below what we think is reasonable to expect for even an economy that is running at a decline of 5%, 6%.

And that may be what we're seeing in 2009 for quite a few western economies.

On the other hand, we're looking at a China still expecting and some of the Asian countries and we're expecting growth there still of -- in the 3% to 5% or more percent.

So, I think there's quite a lot of moving parts both in terms of what we're doing with regard to capacity and what's going to be happening in various parts of the world.

So, I'm not sure I'm giving you a very clear answer, but I think we believe that we're doing the right thing in terms of managing our capacity and to that we think that demand should be recovering.

When that happens is, of course, the big question for us.

Thank you.

Thank you, Laurence.

There are no further questions.

I will now turn the call back over to Patrick Prevost for closing remarks.

Thank you, and thank you for attending the conference this afternoon.

And I think in closing, I just wanted to reiterate that as Cabot, we're still very much positioned as wanting to be the leading producer of performance materials in the long run.

Id in the current environment, we had to focus on cash and that respect, our sound balance sheet has been very helpful.

So, we have the right position, we believe, to withstand the difficult economic environment.

We have a restructuring plan in place.

But we have not forgotten about the longer run, meaning we're continuing to invest in our R&D and technology activities because we believe that they are -- these are high value propositions and will help us in the long run, strengthen our Company's performance.

So, we're very confident in the future of Cabot and wanted to reassure you about the efforts that the Cabot team puts in making sure that the Company returns to the level of profitability it deserves.

So, thank you for that.

Thank you for your participation in today's conference.

This concludes today's presentation.

Everyone have a great day.