Cabot Corp (CBT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter 2009 Cabot earnings conference call.

My name is Melania and I'll 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 towards the end of this conversation.

(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, Miss Susannah Robinson, Director of Investor Relations.

Please proceed.

Thank you.

Good afternoon, everyone.

I would like to welcome you to the Cabot Corporation's fourth quarter and full fiscal year 2009 earnings teleconference.

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

Last night we released results for our fourth quarter and full fiscal year 2009; copies of which are posted in the investor relations section of our website.

For those on our mailing list, you received the press release either by e-mail or fax.

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

The slide deck that accompanies this 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 which 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 and Exchange Commission; copies of which are available on our website.

I will now turn the call over to Patrick Prevost 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 details.

Following this, Patrick will provide our business outlook and closing comments and will open the floor to questions.

Patrick.

Thank you, Susannah, and good afternoon.

Before I begin my remarks today, I would like to take a moment to introduce Dave Miller as the new head of the Core Segment and the Americas Region.

Dave comes to Cabot from BP with more than 27 years experience in the chemical industry.

He has a broad base of experience in key leadership roles including in business management, strategy, manufacturing and sales.

His experience has been international in scope including significant time in Asia and Europe and he has managed several niche commodity businesses.

I have worked with Dave in the past and I'm pleased to have him here with us.

I'm looking forward to his contributions to Cabot and the executive team.

Welcome, Dave.

Now turning to our business performance.

I will begin by sharing with you some of our key highlights for the fourth quarter and full-year 2009.

I will then take time to discuss some of the opportunities I see for the Company that give us confidence in our ability to meet our long-term financial targets.

During the fourth quarter, we improved overall business segment profits by $17 million, driven by strong volume increases and cost management in our key businesses.

Demand in our downstream markets continues to improve in all regions with particular strength in Asia and more specifically in China.

Our fourth quarter volumes were 15% to 30% above those in the third quarter.

However, they remain 5% to 15% below last year's fourth quarter.

For the full year, volumes were 20% to 30% below the peak levels experienced in 2008.

As we look at the key industries that we serve, we are seeing continued sequential strength in tire and electronics.

Tire production is beginning to ramp up month-to-month in North America, although still 15% to 20% below last year's levels.

In Asia-Pacific and particularly in China demand has returned to predownturn levels.

In the electronics market, August marked the sixth consecutive month of growth in integrated circuit shipments.

The levels, however, remain substantially below 2008 with shipments in the first eight months of 2009 20% below the same period in 2008.

The OEM automotive and construction markets, however, are still lagging.

Year-to-date, the automotive markets in Europe and North America are substantially lower than last year, although demand has stabilized as a result of government initiatives in both regions.

Asia-Pacific markets are growing rapidly and September marked a record high automotive production level in China.

The residential construction industry remains more than 25% below 2008 levels, driven principally by the sharp decline in housing starts.

This performance is somewhat offset by an accelerated infrastructure spending in many countries as a result of government stimulus spending.

The restructuring program we announced in January, in response to the difficult market conditions, is well ahead of schedule and on track to deliver in excess of $80 million of fixed cost savings in fiscal 2010.

Approximately 30% of these savings we are realizing in fiscal 2009.

In addition, our total costs to implement the plan has come down from our original forecast of $150 million to approximately $115 million.

Our effective execution of the restructuring combined with additional cost saving measures put in place very early in the economic crisis, reduced our fourth quarter operating expenses by $24 million compared to last year's fourth quarter.

It is now clear that the scope and scale of our plan was appropriate and that our actions not only helped us weather the immediate downturn, but also positioned the Company with a significantly more cost effective network of operating assets.

We have closed down high cost plants and are better utilizing our exceptional global footprint.

I'm confident that our actions have made us a stronger company and will afford us further earnings potential as demand returns to more normal levels.

In the performance segment, profitability increased by $18 million from the third quarter on margin and volume improvements.

Due it its reliance on the automotive, construction and electronic industries, we experienced a sharper decline in volumes during the economic downturn relative to a business like rubber black which has a significant replacement component to its business.

Whereas rubber black volumes were down 20% to 30% at their lowest point during the year, volumes in the performance segment were down as much as 30% to 40%.

However, the specialty nature of its products and the high value we bring to our customer's applications have allowed us to maintain margins through these difficult market conditions.

This has given the segment significant profitability leverage with a volume recovery, leading to strong improvement in performance from the third quarter.

Finally, we continue to be pleased with our cash and liquidity position.

Throughout the downturn, we have maintained our financial discipline and during fiscal 2009 generated nearly $400 million in operating cash flow.

Our strong balance sheet and credit rating enabled us to obtain very favorable terms on a $300 million public bond issuance in September.

We view our cash and liquidity position as a competitive advantage that affords us the financial flexibility to pursue our long-term objectives and achieve our financial targets.

During the last quarter's earnings call, we re-affirmed our financial targets of $3 per share of adjusted earnings by 2012 and a 13% adjusted ROIC by 2014.

I would like to outline some of the underpinnings of our current planning, specifically in the areas of margin improvement, emerging market expansion and new business development that we believe will structurally improve the profitability of the Company, allowing us to meet these targets.

Margin improvement is a key lever for any chemical company and an area of focus for us during 2009.

In addition to the cost reduction initiatives that we have already discussed, let me give you a few other examples of work being done in this area.

First, on the commercial front, we have been focusing our business on sharpening our value proposition.

For example, in the performance segment, we have achieved robust unit margins through the downturn by strengthening our market segmentation, enhancing our engagement with customers to better understand the value of our products in their applications and deriving appropriate value pricing.

This type of systematic thinking and value creation is key to our success in this segment.

Another margin improvement area and one where we have made significant investment over the past several years is energy centers.

Energy centers convert unused energy in our current black manufacturing process to electricity or steam.

They are high return investments that reduce our variable costs and improve our environmental footprint.

In the past several months, we have commissioned new energy centers in India and Italy, and will commission units in Brazil and China in early fiscal 2010.

There are also three additional projects planned for the coming years.

The completion of these energy centers will increase the percentage of our capacity benefiting from this technology from approximately 40% in 2009 to roughly 75% over the coming years.

The final example in margin improvement is yield technology.

Increasing the amount of carbon black obtained from raw material, even by a small percentage, substantially lowers variable costs.

In this area we are constantly improving our existing processes and have earmarked significant resources to accelerate multiple R&D projects.

These go from incremental activities that have immediate impacts to break through research that will yield results over three to five years.

The next lever is emerging market expansion.

We have invested heavily in emerging markets over the past several years, giving us strong market positions.

These investments are integral to our strategy.

They are benefiting results as growth is higher and demand is recovering more quickly in those regions.

I just returned from China where I attended the formal ceremonies marking the startup of our two new rubber black units in Jiangxi.

These units double the capacity of Jiangxi and make it the largest and most technologically advanced carbon black facility in the world.

We are pleased that demand in the region has recovered to a level where we were able to initiate the startup of this highly competitive asset.

Jiangxi low cost capacity is in one of the highest growth regions in the world and will immediately contribute to our bottom line.

China is an increasingly important region for us and in the fourth quarter of 2009 represented more than 15% of our total Company sales.

In addition to Jiangxi, our facility in [Baraque] Indonesia has restarted after being mothballed for several months as a result of the downturn.

It is encouraging to see the restart of this capacity ahead of expectation as it is driven by increased demand in the region.

Coming in the early part of fiscal 2010, we anticipate commissioning a new masterbatch facility in Dubai.

The plastics industry is growing rapidly in this region and our facility positions us well to serve our customers.

This, too, is part of our overall repositioning of assets.

You will recall that we closed our masterbatch facility in the UK as part of our restructuring program and Dubai will provide us with a significantly lower cost platform.

Finally in the area of new business development, notwithstanding our focus on costs on cash in 2009, we maintain investment and spending on our most promising new business projects Company-wide.

During fiscal 2009, we made significant progress in accelerating the pace of revenue growth and took steps to ensure that our spending was adapted to the potential of the opportunities.

As a result, our new business segment ended the year with positive cash flow, improving its cash flow performance by $43 million.

We are well-positioned to build on this success in the coming years with opportunities for growth in several sectors.

These include inkjet penetration into office and commercial printing applications, multiple oil and gas and daylighting projects within aerogel and a broader adoption of our security products.

We also have a robust pipeline of new opportunities targeted at the environmental, energy and electronics segment.

Outside of the new business segment, there are other areas of the Company where improvements in new business development will contribute to our success in meeting our financial targets.

These include working with our customers on new products and technology developments, such as TC in our rubber blacks business and a solid pipeline of opportunities within our performance segment.

In addition, we have continued to grow our specialty fluids business beyond the North Sea including projects in Asia-Pacific and Kazakhstan.

During fiscal 2009, 29% of our specialty fluids sales came from regions outside of the North Sea.

This is compared to 21% in fiscal 2008 and 17% in fiscal 2007.

These are just a few of the many activities underway that underpin our plan to achieve $3 in earnings per share.

Our delivery of the cost reduction and restructuring program, our management of the contract lag and our improvement of performance in the new business segment are several examples of our ability to get things done and move the Company to this new level of profitability.

I will now ask Eddie Cordeiro to review the business segment and financial details for the quarter prior to me giving our outlook for the Company for 2010 and beyond.

Eddie?

Thank you, Patrick.

Overall, fourth quarter segment profit increased, both sequentially and year-over-year.

Relative to the fourth quarter of 2008, lower fixed operating and raw material costs more than offset lower volumes.

As I've done in previous quarters, I will focus my detailed business discussions sequentially, giving you an understanding of the current trends.

Beginning with rubber blacks, profitability increased by $5 million when compared to the third quarter with 15% higher volumes.

The business saw growth in all regions.

Specifically, volumes increased 19% in China and South America, 16% in Asia-Pacific excluding China, 12% in Europe and 8% in North America.

During the quarter, raw material costs increased leading to $11 million unfavorable contract lag and LIFO impact.

This is compared to an unfavorable $5 million last quarter.

Although we are not pleased with the impact of the lag on our business results, the work done during 2009 to move half of our contracted volume to a more timely pricing adjustment allowed us to mitigate much of the substantial increase in oil prices during the quarter.

In 2010, we intend to further reduce the percentage of our business affected by the lag.

When compared to the third quarter, profitability in the supermetals business decreased by $3 million due principally to lower tantalum powder demand and unfavorable product mix.

The business generated $13 million of cash during the quarter from a reduction in working capital.

In October, we settled all outstanding litigation with ABX.

Putting this litigation behind us allowed both companies to build a stronger relationship for the future.

When compared to the third quarter of 2009, profitability in the performance segment increased by $18 million.

The increase was driven by higher volumes and improved unit margins.

Sequentially, volumes increases 11% in performance products and 31% in fumed metal oxides.

During the fourth quarter, the LIFO impact was an unfavorable $3 million which was equivalent to that of the third quarter.

Profitability in the specialty fluids segment for the fourth quarter decreased by $5 million when compared to an exceptionally strong third quarter.

Although for some time now this business has been very profitable with excellent returns on capital, the project nature of the business leads to inherent volatility in quarterly results.

In the new business segment, fourth quarter revenues increased by $5 million when compared to the third quarter.

The increase was principally driven by higher sales in InkJet colorants.

For the full year, revenue in this segment increased by 16% or $9 million with revenue growth in every business.

Year-over-year profitability improved by $25 million.

Cash generation improved by $43 million and we ended 2009 with positive cash flow.

Looking at the corporate financial details.

During fiscal 2009, we generated $395 million of cash from operations, including a $340 million decrease in working capital.

We ended the year with a $304 million cash balance.

In September, the Company issued $300 million in long-term public debt with a 5% coupon maturing in 2016.

Portion of the net proceeds were used to pay down borrowings under our revolving credit facility and the balance will be used for general corporate purposes.

Our capital expenditures for the year were $102 million which were substantially below our revised target of $150 million as we managed our cash very carefully throughout the year.

For the coming year, we currently anticipate a spending level of approximately $150 million.

Finally, during the fourth quarter the Company recorded a tax provision of $1 million, including a $6 million reversal of tax benefits from the first half of fiscal 2009.

We had an unusually low operating tax rate for the quarter as we experienced a substantial improvement in our business performance in lower tax jurisdictions.

Despite the favorable performance this quarter, we continue to anticipate an operating tax rate for fiscal 2010 more in line with our historic 26% to 28% rate, excluding the impact of certain discrete items.

Now back to Patrick.

Thank you, Eddie.

The volume improvements we experienced in the last two quarters have been very positive.

We are, however, remain cautiously optimistic about the speed of the recovery given the broader economic environment.

The actions we have taken with our restructuring and our continued focus in emerging markets and technology position us well to benefit from volume improvements.

And thus, we are confident in our ability to achieve our long-term financial targets.

Before I turn the call over for the question-and-answer session, I would like to ask Dave Miller, our new core segment leader, to share with us some of his initial observations on the Company.

Dave?

Thank you, Patrick.

It is great to be on board.

Over the last six weeks, I have been focused on getting to know the supermetals and rubber blacks businesses and the Cabot team.

I have spent time with customers and business partners in our core businesses around the globe and have had the chance to visit several of our production facilities.

What I'm finding is largely what I had expected; strong businesses, well positioned and specifically in the case of rubber blacks, possessing the unique advantage of a global asset network.

The businesses are led by strong teams with highly motivated people and with deep talent.

Most recently, I spent time with our Cabot team in China ahead of the opening ceremonies for our new units in Jiangxi.

I'm very impressed with the business that has been built in China and the potential we now have to continue to capture growth in this important market.

In the coming weeks, I'll be focused on deepening my understanding of our operations.

I'm seeing many ways to bring my experience in managing global chemical niche commodity businesses to bear in moving the core segment forward and I'm looking forward to doing just that.

Great.

Thank you, Dave.

We would like to thank everyone very much for joining us today and I will now turn the call back over for a question-and-answer session.

Thank you.

(Operator Instructions).

Your first question comes from the line of Laurence Alexander with Jefferies.

Hi, this is Lucy Watson sitting in for Laurence today.

Would you mind providing an update of capacity utilization and if possible by segment?

Thank you.

In terms of the rubber black business which is the dominant business in our portfolio, we believe that current industry utilizations are somewhere in the high 70%, perhaps low 80% around the world.

With regard to perhaps more granularity by region, I will ask Dave to provide some comments.

Let me start with a recap of what we have seen with our rubber black sales this past quarter around the globe.

Again, we saw growth in all regions.

Eddie gave you the details of our sequential volume increases.

But in summary, Japan, China and South America saw the greatest increases.

Europe, North America and southeast Asia saw the lowest increases.

If you now look at what we have done with our restructuring activity, we have taken lower efficiency capacity out of North America and Europe and built new world class capacity in China.

This positions us with a more cost efficient set of assets, redistributed into the higher growth regions and more properly sized in the lower growth regions.

We now plan to run these higher efficiency units hard and that's exactly what we have been doing in recent months.

As Patrick mentioned, we believe the industry is running in the high 80s -- I'm sorry, high 70s, low 80s range.

We are running several percentage points above the industry average in all the regions in which we operate.

And concerning the other businesses, I don't believe that the utilization rate is a major factor, considering that these are specialty chemicals or more margin driven businesses that are driven by customer applications.

And then could you address pricing trends in performance blacks and fumed metal oxides?

Thank you for your question.

We are very pleased with the margin trends in the performance segment.

As you can see the performance -- the financial performance is reflecting that, especially considering that the volumes in the performance segment are still in the 15% or 20% below the first half of 2008 level.

Very good development in that respect.

Sean, would you like to add anything to that?

Sure.

I think the key here is that we are pleased with the strong unit margins that we have produced in a downturn here.

As Patrick commented earlier, I think it is important to remember that success in this segment is really driven by a strong understanding of market segmentation, being close to customers, delivering products that deliver performance in their application and then deriving the appropriate value pricing.

That's what we have been focused on and we are pleased with that progress and pleased with where we are positioned compared to historical levels.

Do you believe that inventory restocking has ended in all of your end market?

Have you seen signs of restocking in any of them?

I'll comment on the performance segment.

I've spent a lot of time with customers over the last number of months, focusing a lot on this question.

I think, like Cabot, all of our customers have been very aggressive in working down their inventories in the supply chain.

Most are still focused more on a produced-to-order type of mind set versus building stock for orders.

That gives us a fair degree of confidence and what we are seeing is largely underlying demand growth.

That being said, the value chains that we participate in in the performance segment are typically longer and there is, I'm sure, some measure of destocking.

But again, I think our customers are telling us that it largely reflects underlying demand.

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

Hi.

Good afternoon.

Good afternoon, Jeff.

Hi.

You've been splendidly successful in generating working capital during -- generating cash from working capital during fiscal '09.

Can you give us an idea of your outlook on working capital in fiscal 2010 right now?

Thank you for mentioning that we have done a good job in that respect.

I think it is not only been the job of the organization that has put a lot of effort into this very important area over the last year, but it has also been, of course, helped by the energy markets that have declined.

We in the last few months have seen energy prices increasing.

However, there has been a lot of asset to offset that through a much tighter management of working capital and we have been successful keeping working capital flat.

And we intend to of course do the same in the future notwithstanding, of course, oil prices going back to $150 per barrel, for example, that would put us, of course, in a slightly different situation.

If I understand what you said to me, you don't expect much change in the cash use of working capital in 2010?

I would say that's what I said.

Of course, I can't predict where oil prices are going to go.

There is going to be a limit in terms of our ability to only manage this through tight working capital inventory management program.

And you have also really done a nice job in improving returns in the performance businesses.

Can you give us an idea from the third to the fourth quarter how specialty blacks and fumed metal oxides did perhaps relative to each other?

Are the better returns coming from both businesses or more from one or less from the other?

We don't provide that level of granularity, Jeff.

But I would say both businesses have seen improvements, both in terms of volume and in the case of volume, we provide some information on separating the PPBG business from the SMO business.

But again, both of them have actually seen a significant improvement, both in terms of margins and volumes.

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

Good morning, and welcome to Dave.

Thank you.

Just a question on your contract changes.

Presumably as you move to more of an indexing or quick pass through, there is some built in margin level and I wonder if, Patrick, if you think there is some benefit to what you are locking in versus historical averages?

Jason, I'm not totally sure that I understand the question.

Would you mind rephrasing it perhaps?

Just that there has traditionally been a large impact from lagging raw materials and so if you pass them through more rapidly, presumably you agree with the customer that you pass through everything except for the margin you're going to retain.

I just wonder if that's a benefit if that margin you retain is health -- is more healthy than traditionally.

What we have done is we have reduced the timing in terms of recognizing the feed stock costs.

In a simplified way, we are now on a monthly pricing basis with a lot more of our customers than we were in the past.

We have mentioned that we still have about 25% of our volume affected by lag which tends to be three to four-month delay in the recognition of the changes in feed stock costs.

That shortening in the recognition is what is enabling us to diminish the volatility which results from this lag effect.

In terms of the margin, I would say it does not affect the margin and -- that change does not affect the margin.

The margin is more driven by competitive pressures and our ability to negotiate contracts with our customers and provide value to them through the products we sell.

Thank you.

And on rubber blacks, I just wonder if the new capacity opening up was any headwinds to units margins.

I assume it is not fully utilized or is that assumption wrong?

We have been -- let me put it this way.

We completed the construction of the Jiangxi units somewhat earlier this year and we are waiting for the right moment to start them up.

We were going to be patient in terms of the startup.

The positive surprise has been our ability to start them up earlier than we originally expected.

The startup was really driven by an ability to run those units at a fairly high rate because we weren't going to take the risk of these units not actually adding to the bottom line.

Today what I can say is that both units are running and they are running at significant rates and they are adding value to the bottom line.

Thank you very much.

Thank you.

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

Good afternoon.

Good afternoon, Saul.

Patrick, I was glad to hear about the $24 million in cost reduction that you've already achieved from some of the restructuring initiatives.

That's a great achievement.

Could you share with us -- when you look at the different segments where the lion's share of that benefit appeared?

In other words, that would be part of the year-over-year earnings improvement.

The $24 million of it would have come from these -- the restructuring savings.

Where would we see the lion's share of those?

Let me say that we do not provide that level of detail because of the competitive nature of some of the information we have here.

But it is clear that on the restructuring specifically, we have announced that we closed two rubber black facilities.

We have closed also one masterbatch facility in PPBG.

If you think about that and you think about the scale of the rubber black business to the entire company, it would be a good assumption to say that a good portion of the savings would apply to the rubber black business.

And a similar question with the energy centers, you've invested many million dollars in those.

Do you have any way of quantifying the return that you're getting on those?

And that, too, would have helped the rubber black business?

We would say that these energy centers are strong value adders to our businesses and to our sites.

The information we have provided in the past is that the investments for each of these energy centers tend to be between $20 million and $30 million.

We look at the returns in terms of IR to be between 15% and 20%.

We continue to hold to that and believe that at those levels they are strong value contributors to the rubber blacks business, or the carbon black business for that matter.

Relative to your goal of $3 which seems like you've made -- fourth quarter showed some good progress towards that direction.

When you think about the macroenvironment and if you think about where oil is today -- where oil production is today, where GDP is today, the macro-forces will certainly either help or hinder your ability to get there.

Could you share with us some macro-assumptions that are built into the $3 goal?

Because you just can't -- if everything stayed demand where it is today, that probably wouldn't be achievable.

In broader terms, not specifics but in broader terms, what do you see that has to happen outside of your control to help you get there?

It would be very optimistic on our part to say that we would be able to achieve $3 per share on the basis of the current economic environment.

Obviously, we have built in some level of recovery into the assumption that we will be able to achieve that $3 per share in 2012.

We would consider that a return to 2008 levels of demand should be achievable in that timeframe, roughly by 2012.

We are somewhat cautious in terms of the speed at which we are going to be getting there, considering the magnitude of the economic downturn that we just experienced.

I would say that it would be safe to say that getting back to 2008 levels would be considered to be a good base of which to think about that $3 per share.

That's very, very helpful.

Then just a quickie for Eddie.

You had the $7 million negative hit -- or was it $6 million negative hit from the reversion on the taxes.

But it looked as though -- if you look at the pretax and the taxes relative to the $0.30 a share, you would have had $26 million pretax and $7 million in taxes or a tax rate of 27%.

Are you saying that if you didn't have that $6 million reversion, your tax rate would have been almost negligible?

And if so why?

Yes, that's very accurate, Saul.

Actually, your numbers were about $1million off.

But without that, if you take the $6 million out, the tax rate would have been in the order of 8% for the quarter.

The reason why is because we made more money in relatively lower tax jurisdictions and so that depresses the rate overall.

And then finally, on your balance sheet, your other assets went up from $50 million to $100 million.

What was the nature of that swing?

Last thing, on other assets, it went up from $59 million to $102 million.

What would have caused that $43 million increase?

Saul, this is Jim Kelly here.

A fair amount of that is reclassification of things that were classified as current last year and moved to longer term this year.

There are some pension assets and one of our European pension plans that account for a fair portion of that, as well as some land in Japan related to a facility that came with our purchase there a few years ago.

We originally thought we would be selling that land currently so had it as a current asset.

But ultimately with the downturn determined it would be sold longer term, it was moved to a longer term asset.

Great.

Thank you very much.

Our next question is from the line of Mr.

Jeff Zekauskas.

Your line is now back on, sir.

Thank you very much.

One of the themes of your discussion today has been the elimination of contract lags in the rubber blacks business.

How exactly does that work?

How does the Company eliminate the contract lags?

The elimination of the lag can only come through two means.

One is clearly the management of the contractual agreements with a certain number of our customers that were structured over the last few years and these contractual agreements had provisions in them that recognize the feed stock costs with a three to four-month delay.

As these contracts get renewed, we are basically recognizing those feed stock costs much more quickly.

And to a certain degree and in a simplified way, it is now happening on a monthly basis.

That is how we have been coming down from that 50% of our volume being on the four-month lag or so to being within that monthly recognition pattern which is roughly equivalent to our working capital situation.

That eliminates the volatility.

The other one that allows us to reduce the lag, and this one is again one that we have control over, is more aggressive management of our working capital at the feed stock level.

That's helpful.

Just directionally, will you experience a lag and a LIFO hit in the first quarter of 2010?

Or the reverse, a LIFO benefit and a contract lag benefit?

As far as you can see?

As far as I can say, we shouldn't see any dramatic change.

We are looking at a flat evolution in that respect.

We are still continuing to work the contract situation, meaning that contracts that are filled today with a four-month lag will be negotiated as they come up for renegotiation with customers.

We will continue to drive towards the monthly pricing volume approach.

Eddie?

If I could add one thing.

I agree with you on the lag.

Just on the LIFO, we really don't -- we can't predict that until the very end of the quarter because it depends on what happens to raw materials cost at the very end of the quarter.

But otherwise, I would agree with Patrick.

You've also done a nice job of limiting your losses in new businesses which is in part an R&D function as I understand it for Cabot.

In 2010 should those losses increase or decrease, in that there have been so many changes in that area this year?

Thank you for recognizing the results that have been achieved in that business.

They have been achieved with a lot of work from the new business team.

I'm going to let Fred von Gottberg give a few comments and a response to your question.

Jeff, part of the benefits we saw in the last year was all driven by revenue growth and then managing the projects more tightly and making sure that they are appropriately based on the project, size, opportunity and maturity of those projects.

We will continue to do that next year.

For fiscal year 2010, the intent of the group is to try and grow revenues robustly like we did last year and we're still targeting to get aerogel to break even.

We will continue to invest also in new opportunities.

We will continue to search and fund new opportunities that hopefully will provide long-term benefit to Cabot.

And if I can continue a little bit.

What's the outlook for specialty fluids next year?

On the specialty fluids side, we are still seeing the overall environment, in terms of the types of wells that are being drilled and the types of completion situations that we have out there in the oil sector, developing in a favorable way.

Meaning that those types of wells and environments are going to become more demanding and therefore we see that the cesium formate will become more and more a solution to deal with these situations..

We are very positive in terms of the development of the cesium formate business.

The difficulty in terms of that business has been and remains the fact that the growth of that business is very dependent on projects.

And projects don't happen in a very smooth way, meaning that we have lumpiness and that affects the quarterly results.

But in a trend manner, we see strong growth continuing in the cesium formate business.

Lastly, you've talked about your $3 earnings target for 2012.

In your imagination, Patrick, does it go, you earn $1 and then $2 and then $3?

Or does it go $1, $1.50, $3?

Is it back ended loaded?

Is it front end loaded?

You start at $2 and then you move up from there?

When you look at your plan versus current business conditions, what's the trajectory of the move to $3?

Jeff, this is a very difficult question.

I would say that there's too many factors that will affect our business over the coming few years to be able to create a trajectory.

We have several scenarios that we have developed.

We have worked the scenarios, both in terms of going out to 2012, working back and working from where we are today up to 2012.

But saying that we are going to be on a flat trajectory would be very optimistic.

I think we are going to -- we have all the projects identified.

We know where we are going.

We are confident in getting the delivery on that.

I think the exact shape of that curve is very difficult today to predict, also in the context of the economic environment and the recovery.

Thank you very much.

Thank you, Jeff.

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

Good afternoon.

Good afternoon, John.

I think you you said the rubber blacks volumes were only 4% below the year ago quarter -- below the September quarter.

That's much better than most industrial businesses and material businesses.

I think most businesses [polymer related] are down still 10% to 15% from a year ago.

Were there any timing issues here?

Or do you think customers may have actually started to restock, seeing raw material cost increases were coming at them?

I don't believe that we are seeing restocking.

I believe that our contacts with our customers and down the chain indicates that there's a lot of caution still out there and people are worried about the developments or how they see the developments.

I think what may be behind this comparison is that last year in September, which is the last month of the quarter, and the month of August being seasonally weak in Europe, we believe that the quarter of last year -- the fourth quarter of last year was a weak quarter.

That the tire industry was quite rapid in recognizing the economic downturn.

That would be in my view the reasons for only being 4% below fourth quarter of last year.

But not an indication in my view that the tire business or the rubber business is ahead of any other industry at this stage.

And then secondly, the electronics materials supply chain, at least as measured by the semiconductor guys and their materials, had a pretty substantial recovery in the last few quarters .

But it seems like the tantalum business is not seeing that.

Are there still substantial inventories at customers that are being worked off?

Why the disconnect between tantalum and other electronic materials at the volume

Let me ask Eddie to take that question.

Hi, John.

One of the things I would comment on is that tantalum is quite a bit lumpier in the way the materials flow.

A lot of the materials flow through distribution.

There can be a fair bit of inventory that builds up and then takes longer to deplete in the chain.

I would say generally speaking that those type of distortions can make it look as though it is lagging or leading.

It certainly, from a volume perspective, has not performed in the same way as some of the other electronic sectors that we have seen.

Looking at what has happened with polysilicon and Cabot micros, you sell silica into them so you can see what's going on in their business.

Would you use that an a leading indicator for your tantalum operations?

It would be -- I would call it a vague leading indicator, John.

It's not been as nearly tightly correlated as one would think over the years.

We had those big inventory effects for so many years, it was hard to see any correlation.

I thought with the inventories getting low, the correlation would tighten up here.

Yes.

Once you get past the tap makers, John, 50% goes through distribution.

It becomes very difficult to see far down into the chain.

Thank you.

Our next question comes from the line of Christopher Butler with Sidoti & Company.

Good afternoon, all.

Good afternoon, Christopher.

I wanted to ask some questions on the demand environment.

Come at it from a few different perspectives.

First off, it sounded like you were a little bit more optimistic than you were when we spoke last quarter.

Could you touch on whether the improving outlook is due to the fact that destocking is done so everything's flowing through the supply chain now?

Or if there is actually indications that the end markets are improving outside of what we have seen in Asia which seems to be relatively strong?

I would say that we sense that the destocking has come to an end.

And that is a phenomenon that we have seen over the last few months which means that the volumes we are seeing today are more reflective of underlying demand.

As we have been seeing volume improvements month over month, I would say that we are getting more optimistic about this being a sign of a recovery.

Now, this needs to be put into the context of us still being between 10% and 20% below let's say the first three quarters of 2008 and I'm talking calendar quarters here.

I think it needs to be put in context.

Clearly, I would say we seem to be seeing more of the underlying demand now being reflected in those volumes.

That would jive with what you had said previously about restarting some capacity a little bit earlier than expected.

Is this happening that the slight recovery that we are seeing a little bit sooner than what you were originally expecting?

That's correct.

I would say we have the benefit of having placed a lot of our new capacity in the emerging markets and in the high growth areas of the world.

To a certain degree what we are seeing today is also the result of some good strategic decisions that the Company has made, allowing us to grow the business in those markets and grow faster than the total markets.

If you look at the -- as an example, the rubber black volume growth in the various geographies that are in our press release, you will see that China and Asia-Pacific are -- and South America are growing fastest.

We have a significant portion of our business in these geographies that are benefiting from that.

In this case, China in particular has been very beneficial to us, in terms of that market having grown back to levels that are actually ahead of the 2008 levels.

We are certainly benefiting from that and that has allowed us to start our plants.

Specifically for your rubber black business, in the context of Goodyear's announcement yesterday on their side is a little more cautious, it wasn't necessarily a volume issue.

But could you touch on what implications that might have for rubber blacks in the fourth quarter?

I'm going to ask Dave to take that question.

We won't, of course, comment on specific customers.

What I think I can say is that as I look around the globe, including North America, we are not seeing any material shifts in our order books for this quarter relative to our expectations.

I appreciate your time.

Thank you.

Our final question is a follow-up question from the line of Jason Minor with Deutsche Bank.

Thanks again.

I quickly wanted to ask if you could walk through the pieces and sizes of incremental CapEx this year to next year?

As you can see from our press release, we were very tight on CapEx through the course of 2009.

We had to manage cash.

We didn't know how long and how severe the downturn would be.

Looking at 2008 being close to under $100 million of spend, we brought our total spend in 2009 down to 100 million.

We are looking at 2010 as a year where we are going to build on our strong positions that we have developed through some of the restructuring and repositioning of our businesses and we are looking at a spend of about $150 million.

This is going to be focused in the areas where we believe we can expand our strength.

We can build on sites where the possibility of either improving our margins or expanding our volume will have a very long-term beneficial effect.

Some of that will be in Asia, of course, where we already have a strong position because I am a strong believer you need to continue strengthening your strong hand.

I can't give you any more granularity at this stage, but this is I think the way we think about it.

Thank you very much.

Thank you, Jason.

Ladies and gentlemen, this concludes our question-and-answer session for today's conference.

I would now like to turn the conference over to Mr.

Patrick Prevost, Cabot's President and CEO for closing remarks.

Thank you very much for joining us this afternoon for the call.

I just wanted to summarize some of the key messages that we conveyed during this last hour.

What we have experienced in the last quarter was a continuation of strong margins across all of our businesses.

We have seen volume recovery in all regions.

However, we would say that volumes are still 10% to 15% below the 2008 levels so still at a low level.

Recovery, we believe, could be slow and we are ready for that.

We are very pleased with the developments on the new business side where we saw 15% revenue growth and we believe that there is more to come in that respect.

Our restructuring and cost reduction activities are ahead of plan.

They are being delivered and I believe they will continue to contribute to the bottom line of the Company and will position us well as the economy recovers.

All in all, I would say we are in a good position to take on the challenges ahead of us.

Thank you very much.

Ladies and gentlemen, this concludes your presentation for today.

Thank you for your participation and you may now disconnect.

Have a great day.