Cabot Corp (CBT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third 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 toward 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 presentation over to your host for today's call, Susannah Robinson, Investor Relations.

Please proceed.

Thank you, Michaela.

Good afternoon.

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

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

Last night we released results for the third 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 email or fax.

If you're 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 the call is also available in the Investor Relations portion of our website and will be available following the earnings teleconference in conjunction with the replay of the call.

I remind you that our conversation today will include forward-looking statements.

Forward-looking statements are subjects to risks and uncertainties.

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 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 of the company's performance for the quarter.

Eddie Cordeiro will then review the business segment and corporate financial detail, and following this Patrick will provide some closing comments and open the floor to questions.

Patrick?

Thank you, Susannah.

Good afternoon, everyone.

Thank you for joining us today.

As you saw from our press release last night, during the third quarter of fiscal 2009, we experienced a $46 million improvement in results from continuing operations versus second quarter.

Segment profitability improved by $51 million.

At a high level, the improvement came from multiple positive factors -- growth in volumes, stronger margins, and our cost-saving actions.

I will now provide some details on the key drivers of our quality results and we will share with you our thoughts about the future.

First in the area of volume improvement, given the demand environment since October of last year, we have been focused on monthly and weekly trends by industry sector to better understand underlying demand and signs of recovery.

We're pleased to say that throughout the third quarter, each of our key businesses saw significant sequential increases in volumes.

We're particularly encouraged by the growth in Asia, and more specifically in China, during this quarter.

Over the past several years, we have invested heavily in emerging markets, with the objective of improving our already strong positions.

These investments are integral to our strategy and are paying off as demand begins to recover in these key markets.

We remain committed to the continuing growth of our business in these geographies, and during the quarter, completed the construction of 150,000 metric tons of carbon black capacity and an energy sensor in Tianjin in China, effectively doubling our capacity at this plant.

This low-cost capacity is in one of the highest growth regions of the world.

And is part of our overall repositioning of assets in line with our restructuring plan.

Thus, we're pleased to see demand in the region recover to a level where the startup of this capacity in the coming weeks will immediately contribute to our bottom line.

Second, aggressive management of contract and spot business globally and the reduced impact of older, high-cost inventories, resulted in improved carbon black unit margins.

Last quarter, older high cost inventories cost the company $42 million.

This quarter, that impact was reduced to $10 million, and we believe the issue is now behind us.

Additionally, we continue our efforts to reduce the percentage of our rubber blacks volume subject to the four month lag, and have been successful in moving approximately 50% of our contracted volume to monthly pricing.

We continue to apply this practice as new contracts come up for renewal.

Our efforts here helped to mitigate the impact of rising feedstock costs during the third quarter.

Although recent increases in oil prices are of some concern, we remain committed to reducing the impact of feedstock volatility on our business performance.

Third, our specialty fluids business posted record results, earning $9 million during the quarter.

Favorable pricing and increased activity in the North Sea and Kazakhstan led to the improvement.

The additional activity in Kazakhstan is a testament to the technical success of our fluids.

We believe we can replicate the success in other regions and continue to expand our geographic presence.

The project nature of the oil field industry continues to make the timing of revenue and profit flows in this business difficult to predict.

But we are very pleased with our results this quarter and the continued recognition of our fluid as a key solution in complex oil fields.

Given the ongoing uncertainty in the broader economic environment, we remain focused on cash and liquidity.

We ended the quarter with total available liquidity of $375 million, including a cash balance of $177 million.

During the quarter, we paid $12 million in dividends to our shareholders and reduced our debt by $46 million.

Notwithstanding our focus on cash, we have maintained investment and spending on our most promising projects companywide and are seeing the benefits of that decision.

In the new business segment, we have accelerated the pace of commercialization and rationalized our project and cost structure.

Given the nature of this new business development activities, there is inevitable variability in quarterly performance.

However, both revenue and cash flow have improved significantly versus last year.

One example of this is in the aerogel business, where during the quarter we were awarded our third oil and gas job, illustrating the strength of our technology in this market.

Finally, the implementation of our restructuring program is ahead of plan.

This, combined with our discipline in maintaining the cost saving measures we put in place early in the economic crisis, reduced our quarterly operating expenses by $20 million compared to last year.

Let me provide you with some specifics on the progress of the restructuring.

Our manufacturing facilities in Stanlow and Dockenfield in the UK have ceased operation, and we have mothballed or curtailed certain assets at our facilities in Indonesia and Canada.

We have suspended tantalum mining in Manitoba, Canada and have closed our regional office in Kuala Lumpur, Malaysia.

The remaining facilities impacted by the restructuring will be closed during the fourth quarter.

We remain confident in our ability to deliver in excess of $80 million in fixed cost savings on a fiscal 2010 run-rate basis, and we will deliver approximately 30% of these savings in fiscal 2009.

Additionally, our anticipated one-time cost from the restructuring, have decreased from $150 million originally to $125 million today.

We're very pleased with our executions thus far, and our early response has helped us to weather the downturn.

We have strengthened our highly efficient global carbon black operating network by eliminating high cost plants and better utilizing our global footprint.

Our actions will allow us to emerge a stronger company once a sustained recovery is in place.

I will now ask Eddie Cordeiro, our CFO, to review the business segment and financial details of the quarter.

Thank you, Patrick.

I will focus my financial performance discussions on the sequential quarter comparison, as we believe these are the most relevant to understanding the performance of the businesses today.

Having said that, business segment profit in the third quarter was down $40 million when compared to the third quarter of last year, principally as a result of lower volumes, partially offset by an improved cost position.

I will begin now with the core segment.

Rubber blacks profitability increased by $28 million compared to the second quarter fiscal 2009 with 8% higher volumes, particularly in emerging markets.

Specifically, volumes in China were up 34%.

Asia-Pacific volumes, excluding China, increased by 25%, and South America was up by 6%.

Both North America and Europe were each down 7%, although both regions saw growth within the quarter.

Overall, we would categorize the demand environment in the emerging markets as improving and in North America as stable, while Europe remains somewhat uncertain.

Sequentially, unit margins improved as the high cost inventory issue that unfavorably affected the business by $31 million in the second quarter, was reduced to a $5 million negative impact in the third quarter.

During the third quarter, the contract lag and LIFO impact was an unfavorable $5 million versus a benefit of $12 million in the second quarter.

In the supermetals business, profitability increased by $10 million sequentially due to significantly higher volumes, particularly in Asia, as well as higher prices and lower costs.

We continue to focus on cash, and during the quarter we were successful at generating $6 million of cash on a constant dollar basis, principally from positive operating results.

Moving to the performance segment, profitability increased by $11 million when compared to the second quarter of fiscal 2009, driven by higher volumes.

In the fumed metal oxide business, sequential volumes increased by 26% with improvements in all market sectors, and in the performance products business, volumes improved by 12%, principally in the Asia-Pacific region and in the infrastructure market sector.

Sequentially, unit margins improved as the high cost inventory issue that unfavorably affected the segment by $11 million in the second quarter was reduced to a $5 million negative impact this quarter.

During the third quarter, the LIFO impact was an unfavorable $3 million versus a benefit of $6 million in the second quarter.

The specialty fluids segment had an exceptionally strong third quarter, with profitability increasing by $5 million sequentially, due to significantly higher revenues from favorable pricing and increased activity in the North Sea and Kazakhstan.

In the new business segment, revenue decreased by $2 million compared to the second quarter of fiscal 2009, driven principally by the timing of projects in the aerogel business, partially offset by higher volumes and a favorable mix in ink jet colorants.

The project nature of the aerogel business leads to some quarterly variance in revenues and TBT for the segment, but year-to-date we have been successful at improving revenue for the segment by 30% and cash generation by $35 million.

During the third quarter, Cabot's global operations generated $36 million of cash, including a $10 million decrease in working capital.

As Patrick mentioned, we ended the quarter with a cash balance of $177 million and $197 million of additional unused credit available under our committed facilities.

Finally, during the third quarter of fiscal 2009, we recorded an income tax provision of $7 million, including $9 million from the reversal of net tax benefits under FIN 18 accounting that we mentioned last quarter and $1 million of discrete tax benefits.

There remains an additional $6 million of FIN 18 timing benefits that will reverse in the fourth quarter.

Looking forward, if one excludes the variability associated with FIN 18, and the impact of restructuring and discrete tax items, we expect an operating rate consistent with what we have been experiencing over the last couple of years.

As you can imagine, at these levels of earnings and tax, rounding conventions and minor changes in tax can have a meaningful impact on the calculated rate.

I will now turn it back over to Patrick.

Thank you, Eddie.

For the coming quarters, we're somewhat optimistic that the worst is behind us and we're beginning to see the signs of a recovery, although the speed of that recovery remains unclear.

We were pleased with the sequential volume improvements in our businesses this quarter, reflecting the nondiscretionary nature of our customers' products; our strong physical presence in emerging markets; and a reputation with our customers, for quality, service, and reliability.

We're executing on our restructuring plans, and we will deliver our targeted savings on time, positioning us well for the future.

Our strategy is robust.

And although delayed a year by the global economic crisis, we're confident that we can meet our long-term financial targets of $3 per share of adjusted earnings per share by 2012, and a 13% adjusted return on invested capital by 2014.

This timing will of course depend on how quickly the global economy recovers.

However, the restructuring work we have undertaken will strongly contribute to mitigating any enduring demand effects.

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

(Operator Instructions).

And our first question comes from the line of Laurence Alexander with Jefferies, please proceed.

Good afternoon.

Good afternoon, Laurence.

Two questions, first on specialty fluids.

As you look at the order patterns from your customers do you think that you have reached a new level, or a new range, in terms of order patterns from -- or is it -- or do you think you will be reverting back to the prior range at intervals?

Laurence, I -- as I mentioned in the speech earlier, we believe this is a business that has, or -- creates quite some difficulty in terms of forecasting.

Mainly due to the project nature and the uncertainty around some of the needs in the various oil fields around the world.

So we believe this is confirmation of the quality and the performance of our fluid, but we would be at a loss in terms of at this stage saying that we have attained a new plateau.

Underlying we still believe this business will continue to grow because complex oil fields will be more prevalent in the future so we have high hopes that growth will continue and that we -- we will continue to see very good performance in the specialty fluids sector.

What is your current estimate for utilization rates in carbon black in North America?

The utilization rate for our business has of course been affected not only by the reduction in demand, but also by the adjustment in the capacities -- not only our capacities but also the capacities of our competitors.

At the current stage, I would say that on a global basis, our utilization rates are in the high 70s.

And we expect that -- and there are variations on the global basis, meaning that we see different utilization rates in different geographies.

We're looking -- as we look forward, with a combination of some volume recovery in the market, and us working through our restructuring activities we believe that during the course of next year, we should be moving into the mid 80s to high 80s.

That is our current expectation.

With regard to the specific question, on North America, I would say that the utilization rates are slightly below the global averages at this stage.

And then I guess maybe just to put context around that.

As you discuss with your various customers for both the rubber black business and the fumed metal oxide business, do they give you a sense for the magnitude of potential restocking?

What level of restocking over a two to three year timeframe might be reasonable to expect?

The -- on the restocking side, we believe we have seen the end to the destocking.

As we speak with our customers, the -- the main messages that comes across to us, is that the -- they have shown very little appetite for restocking, certainly at the historical level.

So, I would say that there is a very cautious approach to inventory today.

I would say that we see a lot of -- perhaps not in the tire market, but in some of the other sectors we see customers actually making on demand, rather than working off stock.

So there has been a shift in the way the market operates today.

Now I will perhaps ask Bill Brady to provide a little more color on what we see in the tire industry.

So Laurence I would say a few things.

First of all, a general comment on demand.

With miles driven, which we see down in the single digits, year-over-year, with tire sales down, let's say in the 20s -- 20% or so -- that can only go on for so long before people start to need tires again and before manufacturers start to restock.

So that is one thing I would say.

A second thing I would say is, in our view, most of the destocking has been done.

I think Europe had been slow, but by and large I think a lot of the destocking is done.

Restocking, I think as Patrick said, we're not going to see people restock to the same inventory levels that they used to.

I think we have all learned a lot during this downturn.

But having said that, I think we feel pretty confident that restocking has started to occur, or is occurring in Asia and China, and is probably not happening in Europe and South America yet.

North America is maybe somewhere in the middle.

So I still think we have a ways to go with restocking, but I don't think it will be back to the levels we knew before.

Thank you.

You're welcome.

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

Please proceed.

Thank you, good morning.

This question might generate an all of the above type answer, but what gives you the confidence to reinstate the earnings targets and ROIC targets at this point?

Is it more the early demand improvement you're seeing, or is it the changes in the network or your restructuring work?

Yes, and let me tell that you we have spent quite a bit of time reassessing the targets we had committed to last year.

And -- as you can imagine, with the downturn in the economy, some of the assumptions that we had used to put these targets forward needed to be tested.

We did that.

And the main driver of our confidence in terms of being able to achieve these targets, albeit a year later, is that, number one, we believe that our restructuring efforts, are going to position us much, much stronger in the years to come and enable us to earn much higher margins and achieve better profitability.

Second, we have focused our resources in the new and innovation areas of the company, so new products and new business development, in a way where we believe these resources are, one better used at a lower level, and are going to yield much better returns through development of new business opportunities.

So we're -- we're much more confident about -- about those.

Thirdly, we have kept our focus on the R&D projects that have significant opportunities for us, both in the process technology area, and in the new product area.

Although these will develop perhaps at a slightly later stage, we're confident that we're on track with them and that we have kept our momentum with regard to those.

And then finally, I would say the recent development in the markets, have shown us that the business -- a lot of the businesses we're in are nondiscretionary, meaning that we have retained, reached a floor.

We have passed the worst of the destocking and that we are going to see some level of demand that we feel confident that will enable us to one, operate our assets at an acceptable level, if not a high level.

And we also believe that our strength in the markets, with regard to our competitive capability will be reinforced by that.

So all in all, I would say, having tested all of these, we reverted back to saying yes, we can achieve these targets, albeit a year later.

Okay.

Fair enough.

Thank you for all the detail.

Could you sort of help us contrast versus say the Waverly plant.

What kind of improved -- what is the scale of better gross margin you see in a plant like Tianjin?

I am going to ask Bill Brady to give us perhaps a perspective on that and -- I think what -- one of the things we have in China, perhaps as an introduction to the answer here that Bill will give, is we have very advantaged location.

We have low labor cost, although of course low labor is not the key characteristic.

But we also have low capital costs because we believe we're the leader in the carbon black business and we can build carbon black plants at the lowest capital cost.

Finally, we're a getting a scale, which is, I would say, of a magnitude of roughly three to five times the average scale of carbon black plants.

And then finally we're in the highest growth market in the world, which is China.

Since I have answered the question, I will pass it on to Bill.

Without being facetious here, I think that there are a lot of factors that are positive.

Bill?

I think Patrick hit on many of the factors, but let me just take it from my perspective.

You know, first and foremost the Waverly plant made about 50,000 tons of carbon black a year and Tianjin is going to make 300,000 tons.

There is a big difference right there.

Second, for example -- second factor, we have a very advanced energy recovery system, in Tianjin which we did not have in Waverly, and frankly we can get more value for the energy in China than we could in the US.

Of course there is the labor difference.

And the last one just comparing those two in particular, Tianjin being on the coast and close to good available feedstock, and West Virginia being more or less a landlocked site had it somewhat disadvantaged.

So you picked the two extremes to compare, I'll tell you that, because Tianjin is a terrific place to make carbon black.

I hope that gives you a flavor of the differences.

That's great.

I can hear the rest of the queue groaning, but if you'll allow me one quick one -- just the energy centers, can you remind us how many you were going to roll out and give us a status update?

We have in progress, now we have three fairly substantial energy centers in progress, and should be online sometime during the early part of the next fiscal year.

So, three pretty substantial energy centers with more things in our pipeline, but three in the relatively near term.

Thank you very much.

You're welcome.

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

Please proceed.

Hi, good afternoon.

Good afternoon, Jeff.

I have got a few questions -- in terms of the rubber black business, you have had three quarters of just surprisingly weak volumes and you -- what you said is that you thought your utilization rates next year it sounded like would go up about 10 percentage points.

So, where do things stand in general for the fourth quarter?

Is it that you think that the fourth quarter is going to be the ending of the level of business that we're at and then next year, things would pick up?

Is that your general conceptualization?

We're seeing the volumes increasing on a monthly basis and we -- I would say that Q3 also from a seasonality point of view is one of our stronger quarters in the year.

So I would say it is difficult at this stage to say that the fourth quarter will continue on the same pace of recovery.

However, if you look at the actual delta we still have versus 2008 volumes which is as I remember right, there were approximately 24%, behind.

I would say the probability of a return to higher levels of volume is high.

I would not actually at this stage, say that we're going to see that within the immediate future, but I would say in the longer run, we should see a recovery.

And if you remember, we had adjusted our footprint in the carbon black business in the restructuring plan, by about a 16% factor, which was part of our longer term scenario.

So that's where we're aiming and that is where -- what should be providing the comfort with regard to the high utilization rates.

That is helpful.

In general recently, I think oil prices have averaged a little bit higher over say the past six weeks than they did three months ago.

And there is always a lot of movement in terms of your pricing, both positive and negative.

In general, from a raw material standpoint, when we come to the fiscal fourth quarter, in rubber black, are your raw material margins narrowing or are they widening, or staying the same?

How do you see that, if you can forecast it?

All right.

I think the -- one of the key objectives we have as a company -- have had for -- I would say most of last year, and certainly this year is to reduce the volatility of the feedstock impact on our financial performance.

And if you remember we spent a lot of time explaining the lag, in most of last year, and one of the responses we had to that is to actually diminish the risk through restructuring of our carbon black contracts, rubber black contracts.

And we have been successful in converting approximately half of those contracts to monthly pricing, which has to a great degree eliminated the volatility from the time where we purchase our feedstock 'till the time we actually price and sell our feedstock.

So that is actually reflected in this quarter.

We have also had less volume, so certainly, that has also affected the magnitude of the lag, but in general it has been about managing this volatility more aggressively.

Also looking at inventories and working capital in a more detailed fashion, considering the risks attached to that currently.

So I was having a little difficulty following your answer.

So are you saying that more or less there is a stability in margins for the fourth quarter?

Or are they going up or down in terms of raw materials?

Well, a good portion of our business -- if you think about the contractual structures we have in rubber black, it is formulaic.

That actually provides us protection against fluctuation in the raw material prices and provides some stability in margins.

I think in the past, what we had was that we -- our formulas didn't entirely protect us because of the lag effect, which we have been working at eliminating.

I guess then just lastly for Eddie, what is the working capital outlook like for the fourth quarter and for the beginning part of next year?

Jeff, the working capital I think is -- as you're trying to get to will depend somewhat in terms of the volume recovery and whether we'll continue to see volume growing.

And also in terms of whether we will see either increases or decreases in our raw material depending on what happens with feedstock costs.

I would say, though, that if we do see some recovery in volume, we should also see some improvement in working capital as a result of operating cash flow.

Okay.

Thank you very much.

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

Please proceed.

Hey, good afternoon.

Relative to the restructuring savings, Patrick, $80 million annual rate, you expect to get 30% this year, which would be around $24 million.

I don't imagine you got very much in the first half of the year.

How much of that $24 million did you actually bring down to the bottom line in the third quarter, and what segments got the benefit of it?

So, as we said, we're very pleased with the progress on the restructuring work, and we remain highly optimistic that we will exceed the $80 million of fixed cost savings on a run-rate basis.

The delivery of 30% in fiscal year 2009 is predicated on the closures and the completion of the projects that we still have in motion.

We're confident that we will deliver that $24 million on the restructuring.

In terms of the current cost savings that we have reflected in our performance this quarter, we mentioned in the earlier speech that we had delivered $20 million of savings against our third quarter of 2008.

And that's a combination of cost reductions from operational activities such as travel freeze, salary freezes, and various other measures we have got in place, and some of the restructuring cost savings that are coming through.

Exactly I won't be able to tell you what has been delivered, when we get the restructuring in the third quarter, but what I can tell you is we will deliver that $24 million in the fiscal year 2009.

Directionally, would you think more -- a bigger percentage of the 2009 savings would be achieved in the fourth quarter than the third quarter.

Yes, most likely there will be a larger proportion in the fourth quarter than in the third quarter.

Good.

Eddie, in the quarter you really didn't generate any net cash -- in other words, the deduction in your cash from the third quarter, from the second to the third was about equal to the reduction in your debt.

Do you expect there to be any net cash generation or consumption in the fourth quarter?

Saul, I think the first part of your question is accurate.

I don't think we're in the position to forecast that for you for the fourth quarter.

Just directionally, you think it [would be] a plus or a minus.

Not -- without quantifying it.

Again, I would say we're just not in a position to forecast that for you.

Okay.

Next question.

This is for Bill, Patrick if you want him to answer it.

It looked as though your unit selling price for rubber blacks in the third quarter didn't change a lot from the second quarter -- when you go through happened to your revenue change and your 24% of volume change, this is third quarter versus third quarter.

And that kind of surprised me in that your feedstock cost really came down dramatically for the third quarter.

And I am wondering how were you able to maintain pricing basically at the same level as the second quarter, which is very, very good, by the way, and -- or is there going to be some lag effect where you have some price contraction in your fourth quarter relative to the third quarter?

It was absolute magic, Saul, to get it done.

No, I'm just kidding with you.

But you're a magician.

No, you're right.

It was -- average selling prices were down a bit, but not a lot.

Not very much.

And the contracts do what they are supposed to do, which is to keep prices and margins pretty steady, and I think our commercial team actually has done a fine job actively managing the mix of products and the mix of customers, and that's both within the region and across the region to try to optimize.

And it is a constant battle, and some quarters we do it pretty well, some quarters we don't do it as well.

And I think this happened to be one where we did it pretty well.

Wouldn't it just look like the pricing was far greater than one would have expected given the raw material costs degradations?

Are you going to -- when we look at your pricing, now you're already through July, are you seeing some third quarter to fourth quarter price giveback, even though we have had some little uptick in raw material costs?

How would you think pricing will be in the fourth quarter, unit pricing versus the third quarter?

Well, I can't -- unfortunately I can't forecast that for you, Saul, but I -- maybe I would tell you that there is no -- you had asked earlier were there some structural things that we were able to keep prices in the third, but structurally have to give them back in the fourth.

There is none of that.

But other than that, I can't really forecast it for you for the fourth.

Would you say directionally it would be up or down without quantifying?

I think what we can say, Saul, is that on the volume side, we're seeing at least as good a volume in July as we had in June with some upside potential and that is both in the rubber blacks area, as also, we are seeing the similar development perhaps even stronger in the performance segment.

That would be unusual, wouldn't that, for you to have fourth quarter volume as good as your third quarter volume?

We're only talking about the month of July.

That is the visibility we have today.

But I would say the other thing perhaps, and I may ask Sean to provide a little color to that is that -- we have seen a strengthening in the commitments to volume from customers in terms of the order placing and the length of time customers are ready to commit to volumes, and that has been in most sectors.

And perhaps Sean, if you would like to add anything to that, for the performance segment?

Sure.

I think the performance segment -- as you know, Saul, we reach a number of different market sectors and I think that is really the way you have to think about it.

So as I look across the different market sectors, we are seeing some positive momentum, which is good, as Patrick said.

But I think we see a mixed story.

If you look at any applications that are related to infrastructure, we find those are holding up pretty well, and we have seen a bounce in the electronics sector that I think is greater than probably any players in the industry had expected in this past quarter.

But if you look at sectors in automotive, for example, those remain weak, although there is even a substory inside of that comment.

There is quite a geographic component to it -- if you look at North America and Europe, I would say sales in the broad auto sector have pretty much bottomed out, but that is maybe about it.

However, in the emerging markets, sales into the automotive sector for us have been recovering in our positions, and those geographies are quite strong.

So I think we're cautiously optimistic about some of the volume bounce that we have experienced.

My final question.

The new plant in China sounds very exciting as you discussed it.

Has that actually started up and is producing and are you depreciating it and selling products from it?

Or is that still yet to happen?

We have completed the two units, the two additional production units for rubber blacks in Tianjin, which combined would give us 150,000 tons of additional capacity and roughly double the size of the site.

We have started up the first units, so it is half of that capacity that is running.

We have been at spec and at capacity within 72 hours from start-up, so we have done extremely well.

And we're expecting the start-up of the second unit by the end of the next month.

Early September.

So you will start depreciating it in your fourth quarter?

In the fourth quarter, we will start seeing depreciation for that, yes.

Thank you very much, guys.

Thank you, Saul.

And your next question comes from the line of Christopher Butler with Sidoti & Company, please proceed.

Hi, good afternoon.

Good afternoon.

Wanted to touch on the comments that you made about volume improvement sequentially.

It seemed that your comments, today, and the press release last night seemed to show a bit of -- a bit more optimism there.

It seems to me that as we move from what is essentially the second quarter, which is winter months into the spring quarter, we're going to get a natural uptick in demand just due to seasonality.

How much of that, how much of the volume improvement would you attribute to seasonality?

I am going to be looking at my colleagues here in terms of -- we believe the third quarter or we have seen and experienced the third quarter to be stronger than other quarters, if you look back in history.

It has not been significant in terms of that seasonality.

And I believe that seasonality, considering the current economic environment, is very difficult to -- to capture or confirm.

So at this stage, I am not sure I would actually count on any seasonality.

I think what we know is that we're still in the 20s to mid 20% lower in terms of volumes than we were last year at this time.

And I think that is something we shouldn't forget.

So still significantly below the peak volume period of 2008.

However, we are seeing a recovery.

The recovery has been significant, and certainly has been much stronger in Asia where, for example, in China, we are back to 2008 type levels today.

So right now, a difficult environment for volume forecasting, and -- I am not sure that I would count on any seasonality at this stage.

And similarly, I mean you had mentioned that inventory levels were low.

Are you getting indications from your customers that there is demand through the supply chain versus the inventory chinks that have been going on in the supply chain over the last couple of quarters?

I would say that all in all, we're not seeing restocking going on.

So we believe that any increase in demand is truly reflecting the end consumer demand through the chain.

I believe most of the value chain has been hurt badly, due to the very sudden slowdown last year.

So people are very cautious about -- cash and replenishing inventory when the degree of recovery and the speed of recovery is still highly uncertain.

And wanted to circle back to a question on cash flow from earlier.

If we're looking at oil in and around where it is now and any sort of recovery for the fiscal 2010, I mean are we going to be looking at cash outflows next year?

Eddie, would you like to help me with that?

The question around oil versus what our specific feedstock costs are, and depending on where we see recoveries in the world and what the feedstock situation looks like for that, makes it a bit difficult.

We're not going to get into forecasting cash flows or earnings or volumes, because we're -- we just don't do that and we are not in the position to do that today.

I think you should bear in mind, however, that, to the extent we continue to see the type of volumes that we have experienced in the last few months, we would expect to generate significant amount of cash from operations as a result.

And finally, just you know looking at the $80 million of restructuring savings, I know that some of that is plant closures, but some of that is plants that have been idled that down the road, if necessary, you can bring up online.

Could you give us an idea of the breakout that we're looking there as far as the overall costs and also an idea of the plants that we're looking at and what can be brought up quickly?

Let me perhaps separate your two questions, or -- your question in two parts.

One is the $80 million or excessive -- or above $80 million in fixed cost savings.

We believe those cost savings are permanent in the sense that we are changing our footprint dramatically and are repositioning the business.

Of course we will have to grow and spend money to grow again in the future.

But in terms of the footprint and the change to the asset-base of the company that those are permanent changes.

So on the basis of a 2010 picture, we believe that there will be an adjustment by at least $80 million.

Now the question with regard to the -- the mothballing and temporary curtailments of the operations, I would say is one that relates more to the operational nature of the business and how we are going to address any opportunities to meet the demand of our customers.

And since we're not operating at full rates any more like we did in 2008, we're going to be very cautious with regard to how we're going to use the footprint that we have.

And we're going to be optimizing on every ton of production and sale, to make sure that we maximize our margins across the globe.

And that means that most likely, a lot of the mothballed operations or curtailed units will remain that way for some time to come, considering that we're still looking at being in the mid-to-high 80s utilization rates through the course of next year.

Your earnings target for 2012, does that assume that these plants are still mothballed or up and running?

The earnings targets for 2012 is based on looking at the full asset base that we have.

I would say the -- at this stage we're considering the footprint as something broader than just looking at curtailed units.

If we consider that in 2012 we have the volumes that we expect, most likely those units will be running again.

But, I would say that the target at this stage does not go to that level of granularity.

All right.

I appreciate your time.

Thank you.

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

Please proceed.

First, I would like to say I -- Patrick, I think you and your team have accomplished an awful lot in a short period of time.

Thank you.

Where are we going in terms of inventory levels?

Assuming some progress in the tone of business going forward.

Well, we have -- considering our focus on cash in the last few quarters, as you imagine, our inventory levels have been very, very high on our list of priorities.

So, we're keeping a very tight tab on that.

We're looking at on a weekly basis where and what level of inventories we have.

We're much tighter in terms of thinking about risk management with regard to the appropriate level of inventories we need to carry.

And in the end the absolute number of the inventory in terms of dollars would also be dependent on the development of the feedstock costs.

So quite difficult in terms of absolute numbers to forecast.

However, just to give you a sense of how we're managing inventories, we manage them on a days basis.

And the entire organization has targets with regard to inventory days.

SO we're very much focused on that and there's very clear alignment within the entire Cabot organization that inventories are critical.

If your carbon black feedstock costs were to stay flat, and I know they are not going to stay flat, do you see room to bring inventories down further?

Or are we at the right inventory to sales ratio?

Bill?

Jay, it is Bill.

I -- we've made a lot of progress in the past couple of years on both our finished product inventory and on our feedstock inventory.

And we are getting close to limits, I would say.

So I would certainly not expect the same level of impact from a days of inventory reduction that we have seen in the past.

I think we're getting pretty close.

And then if we go over to tantalum, I presume we're still harvesting inventories there?

Harvesting.

Or consuming?

We're consuming inventory there, yes.

Okay.

Has the time of when you think you will have to go out and start to purchase ore again -- has that shifted at all as a result of the level business that you've seen over the last 90 days?

Over the last 90 days did you say?

Yes, I presume business was a little better in the June quarter than you probably anticipated at the start of the quarter.

It was probably pretty close to what we anticipated, actually.

A lot better than the second quarter, of course, but that level was really low.

Right.

So the percentage increase was high, but I don't think our view has changed much about the -- about how long it would take us to get into our inventory.

All right.

So there is some cash yet to be harvested there but not as much as perhaps we have harvested already.

I think there is some opportunity there, you're right.

All right.

In terms of the new capacity, carbon black capacity, in China.

I guess, when you announced your restructuring program, you indicated that you would complete the plant, but might not start it off.

In starting it up, is that because the level of business is higher than you anticipated when you made that earlier statement?

Or are you going to start up the new trains and because they are more efficient and then cut back on the older trains?

Well, it -- I would say the first and foremost, yes.

The demand is stronger than we thought it would be at this point in time.

But second, you hit the second point as well that is important, which is, as Patrick said earlier, we're going to look at the network and the Tianjin units are very efficient and it may well be that we scale back some of the other units.

All right.

And the next question is on oil field fluids.

Can you put into context where the demand for Kazakhstan wells is relative to the other well drilling?

Is it coming in -- are the demands coming in on a regular basis now, and it is a fixed and perhaps growing percentage of your activity?

Give us a little color on that?

Sure.

Jay, this is Ravi.

Kazakhstan is really no different than any of the other oil fields in that typically the work comes in campaigns and we have been able to predict fairly accurately when a campaign would begin and when it would end.

We are -- the performance that you saw in the last quarter was largely a result of what I would call the summer of 2009 campaign which began sometime in the middle of May and we expect it to continue for well into Q4.

And then, after that there should be a lull before it resumes again sometime middle of next year.

So there is a winter curtailment in activity there?

That's correct.

It is a little bit coincidental that the lull happens in the winter.

It is just that they need six months between development off these batches of wells if you like, and so we tend to get our activity, our business in the summer months.

What percentage of the well drilling are we participating in?

In that theater?

I would say that we have close to 100% off the applicable wells, applicable as in the ones in which our fluid delivers more value to the customer.

And what percentage of oil well does that represent?

I wouldn't know.

There is a lot of drilling activity going on in Kazakhstan, just like everywhere else in the world, but it wouldn't be cost effective for the customer to be using us --

Are all the effective wells -- are all the wells in the Caspian Sea, that is what we're talking about, or are you are also including dry land wells?

Actually, I am only talking about Kazakhstan offshore wells and the Caspian.

There is also [some] other Caspian wells, which aren't even in our relevant market segment.

And have they been drilling long enough so that you can state what percentage of the wells drilled have been appropriate for our fluid?

I wouldn't have that information to hand, Jay.

Thank you very much.

Thank you, Jay.

And your next question comes from the line of Mike Judd with Greenwich Consultants, please proceed.

Good afternoon.

Good afternoon.

I know that you guys are struggling with just what is happening this month, and not to mention next month.

But, for your own -- regardless of what happens with the end market or maybe that is not really the right thing to say, I guess it will have something to do with what happens over the next few months but -- for planning purposes, given your wish to keep as much cash around, and getting back to this inventory issue, do you think that we're going to have a typical slow down in December that is similar for every company?

And do you think that if we're going from a destocking to a nonrestocking or maybe slightly restocking in China, do we then potentially head into as we go into the fiscal first quarter of next year and into December, do you think that will be a destocking at the end of the year -- or just some thoughts about that, thank you.

The -- I think the question relates to how we're going to be managing cash.

And the way we look at that is that we've got multiple levers that we're considering, and these levers go from our operating costs to capital expenditures, and working capital.

And these need to be put in the context of our operating profits, and this balancing act is one that we have been doing -- you always do it running a business, but we have been doing certainly in a more tight fashion more than recently.

We will be looking at the developments over the next few months to make sure we're appropriately funded.

We're a company that has a conservative financial approaches to things, so as I mentioned earlier, we have $197 million of committed lines of credit we can use.

But we also have in excess of $150 million of cash on hand.

So I would say the -- we're comfortable in our cash situation.

We can weather any further difficulties ahead of us.

But what I had would like to say here that is we're very comfortable in terms of any -- I would say faster recovery, or perhaps slower recovery within the coming months.

And our next question comes from the line of John Roberts with Buckingham Research, please proceed.

Afternoon everyone.

Good afternoon, John.

I apologize, I jumped on late.

I was wondering about this monthly pattern of sails sales across the quarter, if it hasn't been asked.

When Corning reported earlier this quarter, they said Dow-Corning was up every month for the quarter and continued up in July.

And of course Cabot Micro has had that pattern as well.

So I assume fume metal oxides were up every month and continues up nicely into July.

Can you comment about the rest of the businesses at all?

So, perhaps I can let Sean pick up on that one since we started with fume metal oxide.

Sure.

John, I think your assessment is pretty much correct and the patterns that we would see would follow some of those bellwether customers in fume metal oxides, so I think that is accurate.

I would say that in general, that statement probably holds for most of the key sectors and performance segments through the quarter -- we saw strength month over month.

Bill?

Same -- really the same.

We certainly saw a steady growth through the quarter.

The only thing I would say -- I would just be a little careful.

We're not talking about dramatic month to month changes.

We're talking about, at least in terms of rubber black, and tantalum I would put in this category as well -- slow, steady, solid growth month-to-month.

All right.

And then secondly, Eddie, have you any idea what you're going to book for a tax rate in the September quarter?

Sure.

John, if you jumped on late, you might have missed the comments I made about the tax rate already.

I think it is fair so say that there is a fair bit of variability in what we're seeing, in part due to the application we're required to do of this FIN 18 interim reporting requirements -- but also, the variability due to the impact of the restructuring and when we take those charges in the quarters and the discrete tax items we have had quarter-to-quarter.

Put on top of that the relatively low numbers we're talking about of both tax and/or earnings, and it is very difficult to give you a rate.

And the rate is highly sensitive to small changes either in the absolute tax or absolute earnings.

I think --

Wouldn't you want to get all the sell side folks at least on the same page making a similar assumption?

As I have had to say unfortunately, a few times, I can't forecast these types of things for you, John.

I think if you assume that -- if you try to take out all of these discrete items I think it is fair for to you assume that we would be running at a rate that is comparable to what we have been running at in the past.

But I would just remind you that at these levels, these rounding conventions can have an impact when you calculate an actual rate.

Thanks.

And we have a follow-up question from the line of Laurence Alexander with Jefferies, please proceed.

Just a couple of quick things just to wrap up.

If your customers -- just to follow-up on the earlier destocking question, if your customers in electronics or the tire industry were to decide to destock, going into Christmas, at what point in the calendar would you reasonably expect to get your first indication from them of the change in intention?

Would it be September, would it be October, would it be November?

Just a rough sense of how the business works.

I am going to be asking -- this is beyond my level of knowledge here, so I will ask Bill to help me with that and Sean perhaps.

I think we probably -- if that event were going to take place at the end of the year, say, I think we would start to get our indication that at some point early in that quarter, when we and the customers talk about the quarterly plan of what they need where.

So maybe October is probably a good estimate.

Okay.

I think in the electronics sector, as you know, they really build to that holiday season, and so if they overshoot, then the correction usually happens after the holiday season.

And -- so I think that is how that particular sector would play out.

And secondly, a somewhat theoretical question.

If you were to have -- pick a random, say, 5% of volume increase, on -- next year, in -- both for the performance segment and the core segment, what would -- all those being equal, what would you expect the incremental margins to be?

Laurence, can you say that again?

If you were just to have a step up in volumes next year and performance and all else was equal, so no change in raw material, no change in FX, no change in any taxes or any other item, what would you think the incremental margin contribution would be?

Just on volumes and fixed cost absorption?

Well, I don't think historically we've given that sort of information out, and I think that we have to be careful about competitive information, too.

It is not too difficult for someone to back into numbers here when you start disclosing things like that.

There are a whole bunch of factors embedded in there as well in terms of product mix and where we source and how we optimize the network, so I guess I can't give you a specific answer on that.

Would the core be more or less volatile than the performance just from -- just in terms of incremental margins?

I am with Sean, Laurence.

That would be a little dangerous to start forecasting these things out.

Sorry we can't help that you much.

Think -- Laurence maybe one point here is our margins in the performance sector are higher than in the core sector just by the nature of the business, being more specialty business in the performance sector than in the core.

So that -- if had you a similar increase in volumes, the performance sector would likely benefit more.

Then lastly given the current environment and your recent results, any change in your philosophy or public commitments on the dividend?

No, at this stage we don't see any reason to change our approach to the dividend.

We believe as I mentioned earlier that we're working towards achieving the best and the highest return possible for the shareholders.

We're managing our cash and financials in a very conservative way, and have proven that even through a very difficult downturn, we could continue to pay a dividend.

Thank you.

Thank you.

This concludes our question-and-answer session.

I will now turn the call back over to Patrick Prevost, Cabot President and CEO, please proceed.

Yes, just in closing, first of all, I wanted to thank you for attending our earnings call today.

And a couple of messages perhaps in closing.

One is, we certainly believe that the worst of the economic crisis is behind us.

We also think that the -- and we have conveyed to you that the restructuring work that we have done is ahead of plan, so we're very confident in terms of the delivery and perhaps exceeding that delivery promise.

And then finally, we believe that we have positioned ourselves well to take advantage of the recovery, so we're confident about the future, and would like to leave with you that confidence.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.