Cabot Corp (CBT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2010 Cabot Corporation earnings conference call.

My name is Michelle and I'll be your operator for today.

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

We will be conducting a question-and-answer session, later in today's 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 of today's call, Ms.

Susannah Robinson, Director of Investor Relations.

Please proceed.

Thank you, Michelle.

Good afternoon.

I would like to welcome you to the Cabot Corporation 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, Jim Kelly, Corporate Controller, and Brian Berube, General Counsel.

Last night, we released results for our third fiscal quarter of 2010.

Copies of which are posted in the investor relation section of our website.

For those of you on mailing list, you received the press release either by e-mail 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 this call, is also available in the investor relations portion of our website and will be available in conjunction with the replay of the call.

I will 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 2009 Form 10-K and subsequent filing 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 review the business segment and corporate financial details.

Following this Patrick will provide closing comments and open the floor to questions.

Patrick.

Thank you, Susannah, and good afternoon.

For the third consecutive quarter, we have delivered strong earnings.

With this quarter's adjusted earnings per share reaching a record level of $0.95.

The main drivers of this quarter's strong performance were volumes that have increased roughly 20% from last year.

Robust unit margins across the board, strong performances in the Supermetals, and Specialty Fluid businesses, revenue growth from our new business activities, and an overall lower cost base.

Our strong operating results highlight the strength of our business portfolio.

Especially when every business performs at a high level, as we saw during this quarter.

The investments we have made to grow in the right areas, and the efficiency improvements made through leveraging our global operating network, are paying off.

We also continue to execute well in the key strategic areas of margin improvement, emerging market expansion, and new business development to achieve a step change in performance.

As a result, each of our businesses is currently contributing at, or above, free crisis profitability levels despite 5% to 10% lower volumes.

Let me give you some market perspective.

Volumes in each of our businesses are roughly 20% ahead of 2009 and are ahead of second quarter 2010 levels.

We have seen recovery in all of our end markets.

The tire and automotive sectors continue to recovery globally, led by the emerging markets.

There are differences, by region, in the recovery rates we are experiencing.

Europe remaining somewhat weaker than the rest of the world.

The electronics market, an important market for us, is showing strong growth and our volumes are reflecting that.

It is particularly true in the high performance niches, into which many of our products go.

Finally, the construction and infrastructure markets have remained stable this quarter.

As I mentioned, our businesses are performing at, or above, precrisis profitability levels despite the lower volumes due to many of the actions we have taken over the past 18 months to improve the growth potential, and earnings capability of the Company.

Let me tell what we have done to affect this change in performance level.

First, in the area of margin improvement, we are driving a performance culture across the Company and are seeing very good results.

We have focused our efforts on optimizing our product and customer mix and ensuring that we're pricing appropriately for the value we bring.

We are leading market positions in each of our business and are well positioned with many customers as a supplier with a highest value offering and the highest reliability.

We have leveraged the work done over the past 18 months to restructure and reposition our businesses.

To reduce our overall costs including improving the efficiency of our global operating network, capturing the value of our investments in energy recovery, and yield technology and improving our global feedstock sourcing.

With improving demand levels across the world, and our focus in emerging markets, we are starting to see the benefits of this work in our results.

We have also taken actions to improve the earnings stability of our business.

In the Rubber Blacks business we have minimized the effects of the contract lag on our financial results.

As you will see, the impact of the contract lag on the business has been minimal, during the last three quarters.

Although, we are still subject to see such volatility, the actions we have taken to eliminate the contract lag have been instrumental in adding more stability to our earnings performance.

Second, the investments we have made over the past several years, in emerging markets, give us leading market positions in some of the fastest growing regions of the world.

We're seeing the full benefit of our new Rubber Blacks unit in China and are in the final stages of commissioning our new Masterbatch facility in Dubai.

We have also announced significant expansions of our Fumed Silica facility in China starting up in 2012, as well as our Rubber Blacks facility in Indonesia, which will be operating next year.

These investments will help us grow and continue to build on our strength in these key emerging regions.

Our geographic breadth is a key strategic advantage.

Our customers, especially the larger ones, look to us as a reliable parter to accompany them as they grow globally.

Our results are less affected by weak economic performance in one or other region of the world.

We can also optimize our global network to fully utilize our assets by leveraging cost opportunities in feedstock and logistics.

Although growth in our end markets in China has moderated slightly as a result of tightening monetary policy, the overall growth rate remains robust and we are as well positioned to benefit from that.

Lastly, our business development efforts continue to show steady improvement.

The new business segment achieved its second consecutive, positive quarterly EBIT performance, driven mainly by revenue growth.

In addition to improving the pace at which our current new business opportunity has become solid contributors, we're also investing in new technologies and innovation that will extend our business capabilities and allow us to serve new high-growth sectors.

As an example of our focus to develop our new business capabilities, we're very pleased to announce today the acquisition of Oxonica Materials, Inc.

for $5.2 million.

Oxonica Materials is a leading player in the surface enhanced raman scattering technology.

This technology is used to develop covered security materials and detection methods, which provide a highly counterfeit resistant solutions for a broad range of applications.

The purchase will complement our existing security business and expand our portfolio of security technologies.

Beyond the new business segment specifically, new business activities across all offer our segments are contributing to our strong performance.

In the performance segment, we have launched new differentiated products to the toners, displays and sealants industries.

Our Speciality fluid segment had an exceptionally strong quarter and we're making strides to increase the use of our fluid in areas beyond the North Sea.

Our Cabot elastomer composite technology and products, continue to contribute to our results from our joint development and commercialization program with Michelin and significant commercial interests in other end markets, such as the Defense and Mining Industries.

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

Eddie?

Thank you, Patrick.

Before I get to the discussion of the individual segments, let me give you a bit of perspective on results as a whole.

We have improved our total business profitability by $72 million, relative to the third quarter of last year.

Volumes were roughly 20% higher than last year with recovery in all of our end markets.

Our unit margins have remained robust and the residual high cost inventory, that unfavorably affected us by $10 million in the third quarter of 2009, was not an issue this quarter.

We are fully benefiting from the cost reductions we put in place, during fiscal 2009, and from additional actions to improve the margin profile and stability of our business portfolio in the key strategic areas that Patrick mentioned earlier.

Additionally, LIFO benefited our results by $15 million.

$8 million of which was related to liquidation of inventories in Supermetals and $7 million of which relates to lower raw materials costs in Carbon Black.

Sequentially, total business PBT increased by $22 million, as overall volumes improved.

Additionally, we had a timing related benefit from the achievement of certain milestones in the CEC business and both Specialty Fluids and Supermetals had exceptionally strong quarters contributing to the sequential improvement.

I will now discuss the details, at the business level, beginning with the Rubber Blacks business.

Third quarter fiscal 2010 profitability in the Rubber Blacks business increased by $30 million when compared to the same quarter of fiscal 2009.

Robust unit margins, and 22% higher volumes globally from improved demand in the tires and automotive markets, drove the improvement.

Volumes in China increased by 32% over the third quarter of fiscal 2009, in South America by 30%, in the Asia Pacific region excluding China by 27%, in North America by 24%, and in Europe, Middle East and Africa region by 2% Sequentially, profitability increased by $3 million.

Global volumes increased by 3% led by improvements in China and Asia Pacific.

Additionally, results benefited from the achievement of certain milestones in our CEC business, in accordance with revenue recognition rules.

During the quarter, we experienced only a $1 million unfavorable contract lag.

Our work over the past 18 months to eliminate the impact of the contract lag on our business results has contributed to a more stable earnings profile for the Rubber Blacks business.

Profitability in the Supermetals business increased by $11 million compared to last years third quarter driven by stronger demand from ongoing demand in the electronics industry, resulting in higher volumes, lower manufacturing costs, and the benefit of $8 million of lower LIFO related ore costs, partly offset by lower prices.

More importantly, sequential profit also improved by $11 million from substantially higher volumes, higher prices, including the effect of an improved product mix and lower operating costs.

Over the past two years, we have taken actions to reposition the Supermetals business to compete more effectively and have focused the operations on cash generation.

During the third quarter this resulted n $18 million of cash generated from improved operating results and reduced working capital.

Additionally, we are seeing our electronics end markets increasing by an estimated 20%, on a full year basis, driven by the growth of high-end consumer electronics, in particular smart mobile devices, which our products offerings are particularly well suited for.

Going forward we are returning to our more traditional PBT based presentation of this business.

Third quarter fiscal 2010 profitability in the performance segment increased by $25 million, when compared to the same quarter of fiscal 2009.

The increase was driven by higher volumes from improved demand in the automotive, construction, infrastructure, and electronics markets, and robust unit margins.

Volumes increased by 18% in performance products and by 21% in fumed metal oxides, when compared to the third quarter of fiscal 2009.

Sequentially, profit increased by $3 million principally due to 4% higher volumes in fumed metal oxides.

Overall, this is a strong business with specialty products, high value applications, and close customer relationships.

Profitability in the Specialty Fluids segment for the third quarter of fiscal 2010 increased by $2 million, when compared to the third quarter of fiscal 2009, and by $6 million sequentially.

A greater level of activity and higher rental revenues during the third quarter of fiscal 2010 drove the improvements.

While Specialty Fluids continues to show quarterly earnings variability, due to its project nature, it is a very high return business that we are focused on growing beyond the North Sea.

This quarters performance demonstrates the significant leverage that exist with higher volumes and activity.

Third quarter fiscal 2010 revenues in the new business segment the increased by $11 million, when compared to the third quarter of 2009, and $3 million sequentially.

The increases in both periods were driven by improved revenues in the inkjet colorants and aerogel business.

During the third quarter of fiscal 2010, the new business segment reported its second consecutive quarter of positive profit performance, a $4 million improvement over the third quarter of fiscal '09 and a $6 million improvement year-to-date.

From a balance sheet perspective, the Company ended the third quarter of 2010 with a cash balance of $295 million, despite a $4 million increase in working capital from higher accounts receivable balances related to increased sales.

During the quarter, we successfully renewed our revolving credit facility, increasing the amount to $450 million, a term of four years, and attractive pricing and covenants.

The deal was oversubscribed and we were successful in broadening our lending base.

Capital expenditures for the quarter were $26 million.

We are now expecting to spend approximately $130 million in capital for the full fiscal year with continued investments in energy centers, technology, and efficiency projects and expansions in China and Southeast Asia.

During the third quarter of fiscal 2010 the Company recorded a tax provision of $20 million.

Excluding the impact of the closure of our Thane, India Carbon Black facility, and less than $1 million of discreet tax items, the operating tax rate for the quarter was approximately 25%.

We continue to anticipate an ongoing tax rate of between 25% and 27% for the full fiscal year.

Now back to Patrick.

Thank you, Eddie.

For the third quarter in a row, our performance has highlighted the strength of our businesses across all segments.

Our leading franchises, the actions we have taken to improve our margins, and the accelerated contribution our new businesses have been critical to our operating performance.

I continue to believe that Cabot is a stronger Company now, than it was before downturn, and our results this quarter reinforce this belief.

The fact that we are delivering earnings at precrisis levels, despite volumes that are 5% to 10% below that period, gives me confidence in our ability to grow our earnings and to reach our longer term earnings per share and ROIC targets, as the economic recovery continues.

Our focused implementation of strategy, and the operational improvements we continue to drive across the Company, will provide the necessary structural changes, and the sustainable competitive advantage, as we position ourselves as a top tier global speciality chemical Company.

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

(Operator Instructions) First question comes from the line of Lawrence Alexander of Jefferies.

Please proceed.

Good afternoon.

Good afternoon Lawrence.

I guess, the first question I have is on the energy efficiency project investment that you've been making, can you just recap how far along you are on those and how much more you can do over the next couple years?

Lawrence -- we, I believe, are looking at a current coverage of approximately 50% of our Carbon Black assets at this stage and considering the project we still have on our list, we should be reaching at the point of maximum coverage approximately 70% of -- 75% of the total Carbon Black capacity.

While we are not going to 100%, that is mainly because each asset and each site has its specific peculiarities and it is not always economical to introduce an energy center.

Overall, what we are currently targeting is 75%.

Thank you.

I guess as a follow up as you look at the gives and takes of the different plants that are -- time divestiture and also the (inaudible) capacity coming on stream.

Where do you expect, by say mid-year of next year capacity to be, compared to currently across your Carbon Black portfolio?

You mean total capacity in our system is that what you're looking at?

Yes.

So, that's the way to think about it the way I spoke about it at the last call where I indicated that the overall downturn of, or closure of capacity that took place in the restructuring was about 150,000 tons, which was actually perfectly offset by the new capacity that we bought on stream in Jiangxi.

The Jiangxi expansion brought us back to the original capacity we had and the recent Thane closure, which is approximately 40,000 to 50,000 tons of additional capacity that will be leaving the system, will be partially replaced to the tune of about 30,000 tons by our expansion in Indonesia, which should be up and running towards the middle of next year.

All-in-all, if you look at our system I would say that we will be somehow, middle of next year, at about the same place we were early 2008.

But, I do want to indicate there's been a lot of work over the last few years in two areas.

One is actually yield technology and what we're working on is bringing new technologies that are, actually to a great extent, drop in technologies that allow us to extract more capacity out of existing assets.

Then secondly, we've been doing a lot of work on the engineering front to gets the existing equipment to operate at a better rate of utilization, meaning, shortening the turn around time from one product to the other.

Also, looking at utilizing our assets on one or the other products for longer period of time.

So, it's a little bit about the planning technology, improving that.

Plus utilization of the asset footprints on a global basis and the combination of those factors, actually, will be providing us additional capacity even though on our ton-to-ton basis the capacity will be the same.

Thank you.

Thank you.

Your next question come from the line of Saul Ludwig of North Coast.

Please proceed.

Good afternoon.

Great results.

Thank you.

Going back to the restructuring and the anticipated savings, I think was talking about like around $70 or $80 million this year.

Can you bring us up-to-date on your success in achieving those saving and where do you think they're showing up?

As you may remember, when we entered think the restructuring program, which we had actually indicated as providing us savings in excess of $80 million, we were also looking at about $150 million of one-time cost to achieve those savings.

This was, I'm trying to remember, this was January 2009 when we made this activity public.

We're now a year and a half later and I would say that the savings have been achieved.

So, the $80 million plus saving in cost in, have been banked.

We're currently looking at the total cost of this project to reach approximately $120 million.

So, we eventually achieved our target and have done that at a lower cost.

When you think about the margins in your Rubber Black business, which was about 9% this quarter, and they were about 9% last quarter as well.

You think about that margin achievement in the context of a, you've got a big chunk of savings from the restructuring program.

You've also got a very high return on our energy projects.

Is the business as profitable as it should be, and if not, what steps are being taken and what we should be thinking about in terms of margins going forward?

Well Saul we're constantly working on all the aspects of the business to improve our margin and that is both our variable and our net margin.

The work is going on in the variable area, meaning in the manufacturing, feed stock, logistics, technology, efficiency area.

But also, in terms of raising productivity and that they're utilizing the asset base we have.

We're still currently running somewhere between 5% and 10% below the 2008 levels.

So it is -- there is still actually some volume up tick that we should be, hopefully, seeing in the upcoming quarters.

Albeit, we're still not counting on it because of the economic uncertainty.

I would say that, as I've mentioned in previous calls, the strong GDP correlation of our Carbon Black business is one that we have reviewed over the years and we believe, we will be returning to the year 3.5% to 4.5% underlying growth levels, post the economic crisis.

Some of that I believe has -- some of that recovery has been achieved .

You could see some of our volumes, over the last three quarters, have been more stable.

We believe that some of the inventory noise may have disappeared and we're looking at underlying demand and we think that off that underlying demand we should start seeing growth returning.

I will remind you, that a lot of our assets and a lot of our projects in terms of capturing new growth are ear-marked for the emerging markets where our positions are going to give us the opportunity to leverage perhaps higher growth rates than the averaged growth rate that we're going to see

Another question on, -- two quickies.

In Europe, you commented your volume was up only 2% this quarter.

I would note consumer shipments of, -- consumer tire demand in Europe in the quarter was up 11%, and truck tire demand was up 30%, do you think you you're losing any position in Europe?

The market was very, very strong in terms of tires.

I would say that, first of all as you know, we, a good chunk of our capacity restructuring occurred in Europe, where the combination of low performance and high cost did not make it attractive for us to participate in every segment of the business.

So, we have, of course, have been affecting that European business more so than any other.

What that has done is forced us, and focused us, on the higher margin applications and opportunities and has led us to utilize our global asset base to serve the European markets from outside of Europe.

So, as a case in point, or as an example, our Columbian operation is actually serving several of the European markets and doing that at a very competitive cost, on a very competitive cost basis.

That's good to hear.

Finally, for Eddy.

Is the $8 million LIFO benefits that you got in Supermetals sort of a one shot deal that we shouldn't expect to recur in subsequent quarters?

Saul, the $8 million benefit was from the prior years quarter to this years quarter.

When you look at it sequentially, from Q2 to Q3, there really was a very minimal benefit.

So, if the electronics industry maintains it's current pulse of very strong demand then this current run rate of operating profit, $2 million more, $2 million less, but in this arena wouldn't be unexpected?

I think I would say that the industry and the business have been quite dynamic and volatile and what we are seeing is very strong market for tantalum, and we are well positioned to be able to take advantage of that and that's what really drove a lot of the increased volumes that we had in this particular quarter.

Great.

The other positive thing that we are seeing, sequentially, is price increases going from the second to the third quarter.

Very good.

Thank you very much.

Thank you Saul.

Your next question comes from Douglas Chudy with KeyBank Capital Markets.

Please proceed.

Hi.

Good afternoon.

Nice quarter.

Thank you very much, Doug.

You guys have made some pretty nice headway in reducing this contract lag here in the Rubber Blacks business.

Can you give us an update where you stand there?

Lastly, is there room for more improvement or are you pretty much at the optimal range?

So, there's been a quite of bit of work in the sector, and I would say, that today we sit at approximately 10% raw black volume still on a four month lag.

We expect this to be going away over the coming quarters as we renew some of our remaining contracts that embed that lag.

So, the ultimate objective is to take the lag out of the contracts and then basically operate in a much more stable fashion, meaning, that we would have the price of our products reflecting the cost of our raw materials in a much more direct fashion.

That does not eliminate the volatility of feed stock, which I wanted to remind you of.

But, certainly gives us a much more stabilize base in terms of the earnings profile.

But, then over the next couple quarters you can eliminate the remaining 10%?

I would say the next four quarter is the peer I envision for that.

That's helpful.

Secondly, can you give us a sense how demand progressed throughout the quarter?

Were you seeing sequential improvement on month-by-month basis.

What are the early indications, so far, for July?

If I look at July, we -- we're currently seeing actually solid demand across all of the businesses and that means that we're not seeing any change in the pattern that has been developing since late last year.

And we're not seeing huge increases.

I think, we're on a steady paths of improved volume demand.

With the exception perhaps of a slight slow down in China, which has been growing at a very rapid pace in the last nine months or so.

But, we believe that that is not actually reflective of a dramatic change in the Chinese economy.

We believe that there's some short term inventory correction that's going on as a result of the credit tightening that has happened in the last few weeks there.

Thanks, and then just lastly.

You announced small acquisition today.

Should we expect anything more on the M&A front in the near term?

Is that improved, the focus, or a one-off deal?

We're certainly looking at opportunities from M&A point of view.

If you look at our strategic message, we have our portfolio management as one key lever of performance, and value creation, and we're continually looking at opportunities.

I would say that they don't happen on a regular basis.

They need to be a good strategic fit.

They need to come at the right price.

There needs to be a willing seller on the other side.

So, until you have that combination, you can't actually do much M&A.

But, in this case, with Oxonica, we're really excited.

We got an opportunity to make an acquisition of, I would say sophisticated and very promising new technology, and it fits very well with our existing security business.

Which is a small business, but it's growing rapidly.

It brings new potential in the high security sector and we think we can also extend it to some of the businesses we currently have.

So, very complementary opportunity for us and I'm very pleased that we were ably to seize the chance here.

So, we'll be continuing to look, but Oxonica, is certainly an example of the kind of things we'll be considering.

Great.

Thanks guys.

Thank you.

Next question come from the Jeffrey Zekauskas from JPMorgan.

Please proceed.

Hi.

Good afternoon.

Hi Jeff.

Good.

The Specialty Fluids Business had a very strong quarter.

When you think about that business, is it at an $88 million run rate, or $60 million run rate, as it was in the previous quarter?

Is the change from the second to the third quarter more one time in nature or is more the trend of the business?

Jeff, the Specialty Fluid Business is quite a peculiar business in the sense it is very much project driven.

It is highly dependent on the number of opportunities that are brought to us by the oil industry and then it's doubly affected by the fact that the use of the fluid in the well is very, I would say, ranges in wide ranges of terms of the time and the quantity needed.

So, we have a business that has a tendency to be quite volatile because of those two factors.

What we have this quarter is the situation where we've had strong performance because we had a number of opportunities that converged.

Do I, would I extend that performance into the next quarters?

I would say, no, based on the knowledge that this is a business that is volatile.

But, I would say that the trend continues to be on an increasing slope, meaning that high pressure high temperature wells continue to be drilled around the world and we believe that those will be attracting season (inaudible) business and services.

Of course, you may be thinking about the BP situation in the Gulf and that potentially constraining the deep wells we're talking about here.

We, however, believe that although there will be a slowdown, especially in the Gulf, which is actually an area where we don't do business.

We think that season format, the performance attributes that will make it the preferred drilling fluids for the years to come, especially in these difficult wells situations.

So, we're very optimistic about the business and we will continue to develop the opportunities across the world.

That's very helpful, if I may follow up.

I realized that your businesses is a mix of lease rates and sale of the fluid?

Correct.

I was wondering whether your lease rates and your sales prices were going up or down or staying the same?

They are going up on a regular basis.

So, it's both a matter of volume and price.

If you think about the business, we prefer to lease in the sense that this is a product that is in short availability around the world and we like to recover the fluids, so we can reuse it in different wells.

At times, we do have some sales and those are done at, of course, the expected future value of a long term lease for product.

So, it's a combination.

But essentially, we trying to do a more lease business and, as I mentioned earlier, it is a service business, meaning that we accompanied the product to the well and work with engineers on the platforms to make better use of the products and minimize, actually, their losses.

That's helpful.

If I could just turn back to Supermetals for a moment.

The profitability of the third quarter was really much greater than the profitability of the second.

Did something structural occur or was there a squeeze in supply-and-demand?

How do you view that change in sequential profitability?

I would say this is a business that had been under quite a bit of pressure for the last three years in terms of profitability, as you remember.

We had actually put it on cash focus and there was some restructuring work going on.

We are now at a point where the market is actually developing very nicely.

The electronics industry is strengthening in terms of demand and our products are in stronger need currently.

To a great extent we're seeing volume driving this profitability increase.

However, I would be remiss if I didn't mention that some restructuring work we did have improved the cost quite substantially.

We've also been active on the pricing side as the tightening supply-and-demand gives the opportunity to extract more value.

We believe as long as the electronics markets behaves in the way it does, and has need for our tantalum powders, especially the high end ones, we think this could be a very attractive business for a while.

Lastly in Carbon Black.

When you look at your changes, global prices, and your changes in raw material prices, are we at some kind of plateau right or is there positive or negative volatility that you expect over short term?

I think we reached a new base, as I mentioned earlier, where after the volatility of the last quarters essentially due, in my view, to a lot of uncertainty in terms of consumer demand and the ensuing value chain inventory volatility.

We're back to a more stable volume environment and I believe that, from that base, we're going to see growth again.

I mentioned that GDP is kind of an indicator and one of the assets we engage in to be investing and growing in the emerging markets and we're well positioned there to capture the high growth of these markets.

We're also continuing to develop new products to meet the demand of our customers and we're seeing actually tire industry becoming more sophisticated, perhaps it was already sophisticated, I think what we're seeing is a need for differentiation, a need coming through from the customer base that new performances in tires are on the order and we're developing together with some of the tire companies new products to meet these demands.

So, combination return to growth and the development of new need that should give us the opportunity to participate in the development of differentiated product that would provide higher margin opportunities.

Good, thank you very much.

Thank you.

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

In response to Saul's question on slow growth in Europe, you cited that some of that now served from Columbia.

Do you book revenues based on customer destination or based on source?

I would have though that Columbia shipments to Europe would be in that 2% volume growth.

They are in that 2% volume growth and Columbia was an example.

So yes, we're doing business in Europe from our Columbian source.

But, the actual, the 2% that you saw is actually based on the markets.

So, yes we're seeing diminished, or lesser, activity in Europe.

Some of it is because we are -- we have less capacity in the region.

But, we also believe that the overall market is not growing as fast as in the other regions and perhaps I could ask Dave Miller to make a comment on that, on the European market?

I think Patrick characterized it well.

Europe is growing slower and our ability to growth share was restricted by the capacity we had available after restructuring.

I think the only other thing I'd say about Europe is what Patrick had mentioned earlier, by working closely with customers to develop grades that really meet their changing requirements and tire application is big part of the European story and our business there as well.

And secondly, were there any exchange rate affects in the quarter?

Historically Cabot's had some and didn't get discussed, I don't think, anywhere in the presentation release.

In general, I will let Eddie perhaps go specifically to the quarter.

In general, as I look at currency, we do about 80% of our business outside of the US.

That doesn't mean that all of that business is done in other currency than the US dollar.

But, and the way to think about this, we have a natural hedge in the sense that the business we do outside of the US tends to be from assets that are located in the regions in which we do business.

So, that provides a natural hedge.

When we do business that goes across, I would say currencies, we look at opportunities to do actual formula hedges to cover risk.

If you think about the translational effects of the business, the US dollar is our referenced currency.

There's not much we can do about that.

And again it's difficult to speculate about what currencies are doing.

I thought that the, for example, the Euro would be at a lower level today and it seems to be recovering.

So, it's very difficult to say what can happen.

Specifically to the current quarter Eddy.

John, from a translational perspective as Patrick was saying, both year-over-year sequential there was a very minor currency impact, which was negative.

On a sequential basis, that was actually completely offset by some of the transactional currency benefits that we saw this quarter relative to the second quarter.

I can certainly see how one might have expected a larger currency impact, but we actually saw some intraquarter currency movements.

I'm sorry, intraquarter currency movements that reverse themselves sorts of mid-way or late in the quarter, as Patrick mentioned.

We also are, as Patrick mentioned, impacted by a number of different currencies and in some cases we had some benefits throughout the quarter.

So, that's why I think we saw a relatively minor impact.

I'll get back the queue.

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

Please proceed.

Hi.

Good afternoon.

Hi, Chris.

You had mentioned there was some revenue from the Rubber Black business from hitting CEC milestones.

Can you give us what the impact there was?

Have we gotten to a point where this is going to be a fairly regular occurrence?

If I could ask Dave to take that question?

Yes.

We book our CEC revenue under Rubber Blacks.

It's now beginning to -- our financial results there are beginning to be seen.

I would point out that we're very excited about how the relationship with Michelin is developing as well as the activity we have going on to develop applications outside of the tire segment.

We have a lot of work to do.

We're making good progress.

But, I would anticipate we'll continue to see small, but ongoing, contribution from CEC in the near term accelerating over the longer period of time.

Perhaps an additional comment, is that the relationship with Michelin is under confidentiality agreement that prevents us from providing you with additional details.

But, I would still say that the contribution of CEC over the years will reach a mature level which is why we're giving it the visibility we are.

As we look forward on the Rubber Black at the demand environment, you had mentioned that China was slowing.

You had 5% sequential growth in the third quarter.

Looking out over the next year, would be safe looking at something slower than 5%, like 3%, for the volume growth?

It's difficult to forecast.

I think coming back to the point I made earlier, we've been correlating the entire tire industry, and the carbon black needs, against GDP and we look at long term trends of GDP to be around 3.5% to 4.5%.

I think within that each country or region may have growth rates that are very different and what we are trying to do is position ourselves in the areas where the growth is higher.

In addition to that, of course, you have to look at the uncertainty that's still with us from the economic environment and the high and depthness of the various governments around the world.

So, I would say making a forecast on growth rates in demand of tires and carbon black is very difficult at this stage.

Then how about on the investment side?

In the past, you've been more than happy to add capacity in China with the idea that maybe the growth rates are coming in a little bit signs seem to indicate that some of the operational cost over there might be climbing.

You had mentioned that capacity in Europe was a little bit constrained.

Are you changing or will there be a change in focus on investments?

We're going to continue to be focusing on investment in emerging markets.

And our decision, that was announced a weeks ago, to expand our Indonesian operation is a case in point.

We're also expanding our fume silica business in China and our Masterbatch business in the Middle East.

We're focusing in the right areas, I believe.

We're going to continue to look at opportunities, because we believe, that with our technology and marketing strength we are able to capture the demand in these markets and a lot of our customers are very large global players who are very interested in having high quality, highly reliable supplies and we're proud to be part of that group of suppliers and I'm going to make sure that we can support our customers in those regions around the world.

So, we're continuing to look and we'll be developing projects.

Albeit with some caution considering that the economic environment is still somewhat uncertain.

I appreciate your time.

Thank you Chris.

Your final question is a follow up of John Roberts of Buckingham Research.

Please proceed.

Thanks.

Patrick, you have this target of $3.00 plus earnings by 2012.

Even you back out LIFO and anything else you can, you're running pretty close to that a lot earlier I think than you thought you were.

Does it -- do you need to have another stretch target or somehow reset to keep the carrot a little further away?

Do you have to cross that target before you actually think about having some other target?

So, John the $3 per share target we set for 2012 is still valid and what's based on lot of internal work to estimate what the potential of this portfolio was or could be.

We got a lot of work going on, has been going on, even independent of the restructuring work that was triggered by the economic crisis.

So, that work is ongoing.

Some of that work is resulting in some structural improvements and efficiency improvements across the company.

But, it's also in marketing and technology that we're doing work here.

If I look at it, I believe we're on track with our 2012 target and timing, where we believe we would have made a step change in terms of performance level for the current portfolio.

I just want to remind you that the reference point is $1.50 to $2 earnings per share level that we demonstrated over the past seven to eight years and that $3 per share achievement would be a 50% to 100% percent improvement in performance.

So, it's a big leap and what we're looking for is consistency.

So, to be able achieve both, we believe, we're going to need a couple more years and then we'll be considering what our next challenge would be.

To a certain degree we have already positioned our next challenge where the return on investment capital target that's slightly further out, another two years out essentially, because we need to see some of our capital investment starting to bear fruit.

I think we got a path set for ourselves for the next four years and achieving $3.00 per share on a consistent basis would be a very nice intermediate step.

Is there any significant executive compensation payout tied to crossing $3.00?

I ask that because, the December quarter, your first fiscal quarter of '11 is coming up, if you're going to cross in 2011, you'll start accruing that in the first quarter I think?

The executive compensation is linked to a great degree of financial performance, both in the short term and in the long term, but there's nothing, I would say, that's specific about the $3.00 per share in the short run.

Thank you.

Ladies and gentlemen that concludes our question-and-answer session.

I will now turn the call back to Patrick Prevost CEO.

Thank you.

Thank you for joining us this afternoon.

Just in closing, I wanted to say that the combination of the economic recovery and the improving activities that we've engaged is resulting in very strong performance this quarter.

We're pleased with our results and we even more pleased that we've been able to achieve strong performance for three consecutive quarters.

We believe that the performance we've demonstrated indicates our potential and again talking about the mid-term financial objectives that we set ourselves, we believe that we're well on track to meet them.

I'm looking forward to speaking to you, again, in the next quarter.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a great day.