Cabot Corp (CBT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot second quarter 2011 earnings conference call.

My name is Maria, and I will be your operator today.

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

Later, we will conduct a question and answer session.

(Operator Instructions).

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

Susannah Robinson, Director of Investor Relations.

Please proceed.

Thank you, Maria.

Good afternoon, everyone.

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 New Business Segment, Jim Kelly, Corporate Controller and Brian Berube, General Counsel .

Last night we released results for second quarter of fiscal 2011, copies of which are posted in the Investor Relations section of our website.

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

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

The slide deck that accompanies this call is also available in the Investor Relations portion of the website and will be available in conjunction with the replay of the call.

I remind you today that our conversation 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 and are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly in our last annual report on Form 10-K.

These filings can also be found in the Investor Relations portion of our website.

Also, as we typically do during our second quarter teleconference, I would like to remind you that over the next several months, in connection with the vesting of restricted stock awards issued under our long-term incentive equity program, officers of the Company may sell shares to pay tax and other obligations related to those awards.

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.

Thank you, Susanna, and good afternoon.

We're pleased to have another -- to have posted another quarter of strong financial results.

A more stable economy, robust customer demand and our continued ability to drive margin improvement across our portfolio have led to this excellent quarter.

During the past 3 years, we have worked to position the Company to achieve more consistent and higher returns.

Our financial targets were a reflection of this commitment.

As a reminder, there were $3 per share of adjusted earnings per year by 2012 and 13% return on invested capital by 2014.

Today, we consider that these goals have been achieved with some time to spare, and I've been very pleased with the dedication and commitment of the entire Cabot team.

As with all goals, once achieved, it becomes necessary to focus on what's next.

Over the last 3 years we have concentrated on resetting the fundamentals and reestablishing the potential of the Cabot portfolio.

We're now focusing on the next phase of our long-term plan.

This next phase will be about growth.

More specifically, growth in earnings as described in our corporate vision of delivering earnings growth through leadership and performance materials and specialty chemicals.

Our objective is to create superior shareholder value through managing a sustainable and profitable global enterprise.

Hence, we have set new long term financial targets for ourselves to quantify this intent and provide a perspective on the planned growth in earnings over the coming 3 years.

Our new goals are as follows; $4.50 of adjusted earnings per share in fiscal year 2014, and we're going to do that whilst maintaining a minimum 13% adjusted return on invested capital over the period.

This represents a robust increase in earnings over the 3 year period and a substantial increase in value to our shareholders.

Additionally, we firmly believe that are ROIC, or return on invested capital, is a main driver of value for any capital intensive enterprise, and we will continue to manage our capital base prudently.

Our strategy, proven ability to execute and strong balance sheet have served us well in the past and will provide an excellent platform for this future growth.

Our strategic levers are a good way to help us think about how we will achieve these new targets.

At a high level, we believe that there's a great opportunity in the areas of margin improvement, emerging market capacity expansion and new product/business development.

And as a way to frame our plans and give you some additional color, we anticipate that approximately 40% of the increase in profitability would come from capacity expansion.

Another 30% would come from margin improvement, including both improved pricing and cost reductions.

These cost reductions include, amongst others, contributions from technology investments such as energy sensors and yield improvements.

And then finally, another 30% would come from new businesses and new product development across the whole segments.

So, this is 40% from capacity improvement, expansion, 30% from margin and then 30% from the new products and new businesses.

From a geographic point of view, we expect the majority of the growth to come from emerging markets, but we'll also see strong contribution from more mature economies where our technological capability will be most impactful.

We'll continue to consider the portfolio levers when the right opportunity to add value to Cabot materializes.

To any acquisition to be considered, it needs to be an excellent fit with our strategy and capability and have the potential to significantly contribute to the bottom line.

Another point that's important is to achieve our targets, we're expecting our capital expenditures to be in the range of approximately $250 million per year over the period.

In order to help you better understand our strategy, as well as the assumptions and initiatives that underpin our targets, we'll be hosting an Investor Day in Boston on June 9.

We'll take at this time a deeper look at several of our business and their key drivers of performance, and we'll be sending out invitations to the event over the coming days, and we certainly hope to see you there.

Let me now spend a few moments speaking about what drove our results this quarter.

Volumes in our key businesses remain solid and in this environment, our capacity utilization remains at very high levels.

We remain focused on providing reliable supply of high quality products to our customers around the world, and we realize that our customers count on Cabot to deliver dependable quality product and reliable customer service.

We aspire to be their preferred supplier in meeting their future needs.

Our recent carbon black capacity announcement show our commitment and support for our global customer base.

During the second quarter, demand in most of our end markets remained robust, with perhaps the only exception being construction and infrastructure in North America and Europe.

We saw significant volume growth in our performance products business, and volumes in rubber blacks and fumed metal oxides business stabled, however, at high utilization levels.

The tire industry has recovered at a faster pace than we had anticipated in late 2008 and early 2009.

As this has occurred, we have seen strong recovery in our rubber black volumes.

Looking back, we believe that our sales volumes rebounded at a faster rate than the industry as a whole, and the result is that we are now running at very high utilization rates of in and around 90%, which is very close to full capacity.

Today, we remain focused on maintaining reliable, high quality supply to our customers at these high utilization rates, and we're looking forward to our capacity expansions, the first of which will be commissioned later this year in Indonesia.

A little more about the capacity expansions.

As we're looking at supporting our customers' growth, we have announced a significant capacity expansion program with a strong emphasis in the emerging markets to give us added volume starting later this year.

We will expand our carbon black capacity by about 15%, or 300,000 metric tons by the end of 2013.

This includes a new rubber blacks facility in China that will add 130,000 metric tons at the end of 2013 and 2 rubber black capacity expansions in Indonesia, the first of which we'll start this year.

Additionally, we'll add approximately 20% to our South American capacity and 10% to our capacity in Europe, and this will be done by expanding existing assets.

It's not just about rubber blacks.

We're also continuing to work on the expansion of our fumed silica capacity in Jiangxi, China and also on the new black master batch unit in Tianjin, also in China, and both of those will be commissioned later this year.

Let's turn to margins.

Our strategic focus on margin improvement continues to be a critical driver of our strong financial performance, and during this quarter, we were once again successful at increasing our profitability by expanding unit margins across the portfolio.

The contract lag effect that burdened us in the past has been essentially eliminated.

We continue to implement value pricing across the entire portfolio to insure that we're getting paid for the value our products bring to our customers' businesses.

Superior product performance, quality, reliability of supply and service are the key areas we're focusing on.

We're optimizing our product and customer mix in all of our businesses and have implemented price increases in our core and performance segments.

Additionally, our energy recovery and yield technology investments are contributing to our results in the form of lower costs, and we're utilizing our global reach to continually optimize our raw material purchasing.

Before I turn the call over to Eddie Cordeiro to review the business segment and financial details, I would like to take a moment to commend the Japanese team for the work that they have done over the past several weeks in the face of extraordinary challenge.

We were quite fortunate that all of our employees and their families were safe.

And once we secured the safety of our people, we turned to assessing the impact on our operations.

Remarkably, we sustained only minor damage to our facilities.

Through the diligent work of our local teams, we were capable of running again within 3 days of the disaster.

Like most companies, we had some volume impact as a result of power disruptions and the ability to get raw materials in and finished goods out of our facilities, but all in all, the disruptions were minor.

We recently announced that we would donate $500,000 to help the people most impacted by the crisis.

And we continue to work very closely with our customers, some of whom were dramatically affected by the events.

There remains some uncertainty in the coming months, however, but we're confident that we're well prepared to deal with the situation.

Eddie?

Thank you, Patrick.

During the second quarter of 2011, total segment profit for the Company was $108 million.

This was our strongest quarter in history on a segment profit basis.

Total segment EBIT increased by $29 million when compared to last year's second quarter, driven by higher unit margins from favorable pricing and improved product mix that more than offset increases in carbon black raw materials costs.

Sequentially, segment profit increased by $14 million.

The key factors in the increase were higher unit margins overall and higher volumes in the performance segment.

I will now discuss the details at the business level, beginning with the core segment.

In the rubber blacks business, EBIT increased by $12 million over the second quarter of 2010.

The increase was driven by higher margins resulting from higher prices, a favorable product mix and energy center benefits.

These positive factors more than offset the impact of higher raw materials costs and 2% lower volumes.

On a regional basis, volumes grew in China by 4% and in North America by 1%, while volumes in South America were flat.

Southeast Asian volumes declined by 16% due to the closure of our plant in [Tonna], India last year.

Volumes in the Europe, Middle East and Africa region declined by 6%, primarily due to unplanned down time at one of our European facilities.

Volumes in Japan were down 3% as a result of power and logistical disruptions related to the earthquake.

Excluding the impact of the closure of our operations in India, our volumes were flat.

As Patrick noted earlier, our manufacturing utilization rates in this business remain very high.

We expect the first of our announced capacity additions to come on line within the next 6 months.

During the quarter we recognized a $3 million payment as we achieved a key milestone in our Cabot elastomer composites business.

CEC continues to make significant progress toward becoming an important new commercial technology for the rubber industry.

The rubber blacks business also benefited from approximately $5 million of proceeds received in the quarter related to a claim filed for business disruption in a prior period.

These benefits were partially offset by a $3 million unfavorable LIFO charge during the quarter due to rising carbon black raw materials costs.

Sequentially, EBIT increased by $12 million.

Higher unit margins resulting from higher pricing, favorable product mix and lower maintenance spend more than offset the effect of higher raw materials costs.

Volumes were 3% lower globally due to Chinese New Year and business disruptions resulting from the Japan earthquake.

Although the price of carbon black raw materials increased dramatically during the quarter, we experienced minimal impact from contract lag due to the efforts made over the last 2 years to restructure our sales contracts.

In the super metals business, EBIT increased by $17 million compared to the second quarter of 2010.

The tantalum business continues to benefit from the ongoing shift in strategy to focus on pricing and higher value products while de-emphasizing volumes.

As a result, the increased profitability was due to higher prices and improved product mix which substantially offset lower volumes.

Sequentially, profitability decreased slightly by $2 million.

Lower volumes and higher ore costs more than offset the favorable margin impact of higher pricing and improved product mix.

Despite the events in Japan, we are pleased to report that our operations continue and we did not miss a single customer shipment.

In the performance segment, EBIT increased by $5 million in the second quarter when compared to the same quarter last year.

The increase resulted from 8% higher volumes in the performance products business and higher unit margins resulting from our efforts to focus on value pricing and improving our product mix.

These efforts more than offset higher raw materials costs, including a $5 million unfavorable LIFO impact.

In fumed metal oxides, volumes were down 1% compared to very strong volumes in the same quarter of 2010 due to customers' inventory replenishment in that period.

We anticipate the first phase of our new low cost capacity in Jiangxi, China to be completed later this year.

Sequentially, EBIT increased by $7 million from substantially higher performance products volumes and an increase in unit margins.

Volumes in performance products were 16% higher, while volumes in fumed metal oxides increased by 2% when compared to the first quarter of fiscal 2011.

Performance products volumes benefited from seasonality, strong growth in emerging markets, and our leading customer positions.

EBIT in specialty fluids decreased by $4 million for the second quarter when compared to the second quarter of 2010 and by $5 million sequentially.

The decrease in profitability this quarter was due to a less favorable mix of business driving both lower sales and rental revenues.

As we had mentioned in the past, this business is very project oriented.

In this quarter, the mix of jobs were smaller and shorter in duration.

We expect this performance to continue through the summer, but will improve thereafter.

Second quarter revenues in the new business segment increased by 23%, or $5 million compared to last year and by 35%, or $7 million sequentially.

Commercial sales grew across all businesses in this segment during the quarter.

In inkjet colorants, we benefited from strong volumes, in aerogel we completed several oil & gas installation products and in superior micropowders, we experienced increased revenues related to our security taggants business.

EBIT was up slightly during the second quarter as we continue to focus this segment on generating commercial revenues while we maintain investments in new business development activities.

The commercial success in this segment included a new printer platform win in inkjet colorants, the launch of Enova Aerogel, a high performance thermal installation additive for coatings and initial sales of a new anti-counterfeiting product and superior micropowders.

We ended the quarter with a cash balance of $366 million, notwithstanding a substantial increase in raw material costs.

We absorbed an $86 million increase in working capital during the quarter that was caused by the impact of rising carbon black raw material costs on our inventory values and accounts receivable balances.

We recorded a net tax provision of $17 million for the second quarter.

This was net of $1 million of discrete tax benefits.

Our tax rate on continuing operations was 24% and excluding discrete tax benefits and the impact of certain items, the quarterly operating tax rate was 26%.

During the quarter, we invested $41 million in capital expenditures.

We expect the run rate of CapEx to increase for the remainder of the year and anticipate spending up to $250 million for the full year as we ramp up our capacity expansion program.

And now, back to Patrick.

Thank you, Eddie.

Having delivered on our initial set of promises, we're starting a new chapter for Cabot.

Our strategy is sound, and our execution has been successful.

That makes us confident that our gross initiatives in the areas of margin expansion, new capacity in the right markets and new product development will help us achieve our new long term earnings of $4.50 per share in 2014, while also maintaining our adjusted ROIC at a minimum of 13%.

So with that, thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

(Operator Instructions).

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

Please proceed.

Good morning.

Good afternoon, Lawrence.

Good afternoon, there we go.

I guess two quick questions.

First, on -- are you seeing signs of disruptions in the auto supply chain that might affect your business in the next quarter or two?

And if so, how severe could those be?

I think at this stage, we haven't noticed any of these effects.

If you think about the proportion of the tire business that's related to OEMs, it's only 25% of total production worldwide, so it's a smaller fraction of the total tire business and at this stage, we haven't seen any effect yet, no.

And then when you are looking at the productivity gains to help improve your margins and you cite both the energy efficiency and the yield gains, can you give us an update on how many more energy efficiency projects you have to roll out or how much capital you need to invest there?

And on the yield gain side, how much of a yield gain you think you can achieve over the next few years?

I understand its been fairly difficult to get incremental gains.

Right.

I think what I'd like to do is perhaps take those questions in more detail during our investor day, but I would say -- what I can say is that on the energy centers, we've had three new start ups in the last year in Brazil, in China, and in Italy and that we're continuing to monitor the opportunity set.

Now, that opportunity set is very dependent on each site and the site's configuration, as well as both the steam and power markets that are available locally.

We believe that we're currently covered to the tune of about 50% across the portfolio of sites, and we're continuing to build up and we think that over time, we should be able to cover about 75% of our sites worldwide, 70% to 75%, which would mean perhaps between zero and 10 new energy centers.

What we'll do is we'll make sure that you're appraised of the potential.

On the yield side, what we will do at the investor day is give you a little more color on the type of work we're doing and how it can and will affect the performance of the carbon black franchise, so I'd like to delay that answer.

And lastly, on the new business portfolio, when you say new business, are these just the new businesses that have already been highlighted and have been around for several years including the CEC, or is there anything new that we should be looking for as well?

Right, so when we talk about, especially with regard to our new targets, when we talk about the 30% of improved performance coming from new business and new products, it is the new business segment, but it's also new products and new activities that may occur or develop within the existing other segment, so as an example, the CEC business would be actually covered by that caption.

Okay, thank you.

Thanks.

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

Please proceed.

Good afternoon.

Good afternoon, Saul.

In tantalum, you have been benefiting because you had substantial inventory of low cost ore which had been accumulated in prior years.

You mentioned that you had a sequential increase in your raw material costs.

Is that because you're beginning to wind down on your availability of low cost inventory and you're having to buy a higher percentage of your needs in the marketplace, or does it relate to hitting different LIFO layers?

And what should we be thinking about in terms of raw material costs going forward?

I think the answer to that is somewhat complicated because we have both the existing inventory that we're working through, but we're also continuing to buy material as we speak.

And the combination of that is what we're going to be looking at point forward.

I think more importantly is the fact that we have been focusing the portfolio on the lower volume, higher margin niches of the business which are more carrying and more appropriate for what we're trying to do and the type of returns we're expecting for the business.

If we look at that new approach to running the super metals business or tantalum business, we have been considering the raw material issues and at this stage, we're very comfortable in terms of the amount of material we have to cover our customer needs in the long run.

I hope that answers your question, Saul.

Does the trend get -- the costs go higher from here because of, tantalum prices have increased in the marketplace, so -- and you'll have to cover with pricing and mix.

Right.

Well, yes.

The tantalum prices have increased in the market and we recognize that.

We will be buying product in the coming month and in the coming year, and we'll most likely be, in terms of the cost, closer to those market prices.

And then Eddie mentioned something in the rubber black business about a recovery of $5 million for some sort of claim.

That was both I guess a year-over-year and a sequential.

But what was the nature of that?

And that of course added 1% to the margin and that doesn't sound like it's a sustainable component.

Eddie, if you'd like to take that?

Hi, Saul, yes.

Just to be clear, the claim was related to an incident that took place 10 years ago, so it's obviously not a recurring type of benefit.

Okay, so that was $5 million of profit in the rubber black segment?

Correct.

Got you.

And then I just gather from the comments about rubber blacks and you're operating at a high utilization rate.

You really don't have a lot of extra supply, so it sounds like almost regardless of the tire industry, your volumes are going to be fairly level going forward until you have the incremental capacity later this year in Indonesia and then of course, a year from now when some of the new capacity is coming on.

But should we be thinking more in terms of fairly stable volume as opposed to a significant up or down either way from current levels?

I think that's a good assumption.

Now, it is slightly more complex because we have differences in utilization, depending on the geographies in which we operate in.

And as you know, you can't move very large quantities of carbon black without incurring dramatic costs, so the ability to optimize through logistics has limitations, so we're going to see some regional effects here.

I think the other point I would make is that we're continually working at the -- at getting better availability from the assets we have so there's continued work on the current kit.

And of course, as you know and as I've mentioned, we're bringing new capacity on stream in the coming month with the first one up within the next six months in Indonesia.

And the plant in Europe where you had a problem, is that now back running?

That was -- that is now back running.

It has been back running for a couple of weeks already.

Okay, and then just final question.

On aerogel which is project related, and you had some good projects completed in the recent quarter, is your backlog of projects such that we're going to see some more of these as we look at your third and fourth quarters, or is it going to be very lumpy?

I think in general, with any business that's driven by project, there's a certain lumpiness.

However, in the case of aerogel, we have a certain number of orders on hand, and we're working actively to fulfill these orders.

Great.

Thank you very much.

Thank you, Saul.

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

Please proceed.

Thanks very much.

Good afternoon.

Good afternoon, Jeff.

When you estimate your 2014 earnings or you estimate your goal at $4.50 a share, does that assume that the super metals margins will be higher than they are now or lower or the same?

We -- I think this is something that we would rather talk about when we get together on the investor day, but I would say it's a combination of portfolio management activity, and what I mean by this is not M&A.

I mean management of the businesses in the various segments over time, and I would rather not get into the details at this stage, but I would still say that the intent for the super metals business is to drive towards higher margins and higher returns and that we're on a very good path in that respect.

Well, where my question was coming from is that historically, super metals has been a very cyclical business where at particular times the margins have been exceptionally high and then at other types the reverse.

And so I was wondering whether you think that the business is now structurally different than it was before so that the general margin profile over a series of years might be different than it was in the past.

Well, the activities that we've undertaken and our focus on the higher end products of the tantalum sector is driven by our intent to reduce the volatility of the margins over time, and I believe that we're on the right path in that respect.

However, as you can see from the volatility of tantalum ore pricing, some of that volatility, certainly at the headline level, meaning price level, will continue to effect the business, and I believe that's something that we only have limited ability to influence.

You spoke about a significant piece of the operational improvement to reach the $4.50 number, but you didn't really specify where the margin expansion would come, whether it would be in carbon black or in your performance business or reawakening of the fluids area.

Where are the margin opportunities over a multi-year period of time as you see it?

Well, the margin opportunity will come from multiple factors.

It will be from technology, meaning better efficiency and effectiveness of assets.

It will come from better management of feedstock and input costs.

It will come from pricing and new products, so it's really a broad range of levers that we will be applying to achieve that growth from the margin improvement bucket.

Right, and I guess lastly for Ed, is there a different tax rate you're assuming in 2014?

Is it higher, is it lower, the same?

So Jeff, you know the tax rate for the Company has been at about this mid 20s level for the last several years.

We don't have a very specific connection for 2014, but based on a similar set of -- a similar portfolio and similar entities around the world, we would expect it to be in that range, but we don't have a specific number.

Okay, thank you very much.

(Operator Instructions).

Your next question comes from Jay Harris with Goldsmith and Harris.

Please proceed.

First for Eddie.

Should we assume that the rise in dollar value of inventories is all raw material cost driven and that volumes are relatively flat?

Yes, Jay, that's a pretty good assumption.

The days were very comparable, so it was really driven by the price of raw materials.

And I presume principally raw materials for carbon black?

Principally.

Okay.

Talking about carbon black, it seems to me that the competitive environment is changing with an Indian company now owning Columbian Carbon, perhaps on a leveraged basis.

And what is it, [Evenick] putting its facilities up for sale.

How do you perceive these changes to the environment in which you'll be functioning over the next three or four years?

Well first of all, I won't comment on what our competitors are doing.

What I'll focus on is on what we're doing and a lot of what we're doing was described over the past quarters.

And we're extremely focused on making sure that we understand our customer needs, that we're there to fulfill their demand, that we build the capacity in the right places.

And in addition to that, that from our point of view that we achieve the type of margins we are seeking to achieve, and that happens through development of new products, but also through efficiency and application of new technology And in that respect, I believe we have a very nice portfolio of opportunities that should give us a continued support to stay in a comfortable lead in this business, in spite of what happens with regard to the competitive environment.

To what extent do you think your carbon black expansions are preemptive?

As you heard earlier, we're running our portfolio of assets at very high utilization levels, and we're at a point now where there is a necessity to recognize that for us to participate in the growth of the market, we need to build new capacity.

And we've been very selective in terms of where we would add capacity, and it's been both the recognition that we need to and can exploit existing assets in a better way in geographies like Europe and South America.

And we need new assets, clearly in geographies like China and Indonesia.

So, this is the background and we're working closely with our customers to understand where they need the capacity so that they can continue to operate their tire plants in a very efficient way.

Do you have any evidence that you're operating at a much higher profitability rate than the industry is?

The issue with -- it's very difficult to do.

There are no or very few pure plays out there, and a lot of our competitors are either divisions of companies or are owned by financial groups, so the numbers that would allow us to do a comparison aren't really available.

But I would say that based on our understanding of the business, we believe that we are not only in the lead in terms of market position and customer relationships, we're also in the lead in terms of financial performance.

And finally, can you bring us up-to-date on progress, if any, in commercializing your elastomer composite process?

On the CEC, so Cabot elastomer compounding business, there are two elements to that business.

One is an element where we are providing products for the tire industry, and we're working in a very close arrangement with Michelin that we had announced.

On that side of the business, we're proceeding and as we mentioned, we had another milestone payment coming through this past quarter, so everything is on track.

With regard to the other side of the business, which is looking at industrial rubber applications in defense and mining, we're making very good progress.

We've been sampling with multiple clients, and they're seeing that this product has dramatic improvement attributes that should provide them increased performance.

Again, this is the other side of the business, and we're very pleased with the continued development there.

And finally, just a general question.

As you look out to 2014, is it in your plan that there will be significant changes in the sources of revenues and for percentages of revenues and the profits coming from the various business segments?

I'm sure you'll get into this in more detail at your analyst day, but I wonder if you could comment generally.

I'm not sure I understand your question.

Well, in the latest quarter, 70% of your operating income came from core segment, and you lay out where your earnings are coming from by some certain segments.

Is that likely -- is that distribution likely to change in a meaningful fashion as you implement the next phase of your growth strategy?

Okay, thanks.

I would say that of course if you look at the new business segment, you see growth in revenue that far outstrips what's happening in the other segment, so we'll see that part of the business growing more rapidly than other parts of the Company.

But all in all, I would say that the portfolio as it is is the base for the -- for our long range plan and has been the base for the targets that we've set for ourselves.

Thank you.

(Operator Instructions).

Your next question comes from Christopher Butler with Sidoti & Company.

Please proceed.

Hi, good afternoon, everyone.

Good afternoon.

On the specialty fluids business, the sounds of your initial comments, it seemed like it's going to be slow for a little bit, but nothing that's just more than just the normal ebbs and flows of the business.

Is that the best way to think of it?

Yes, I would say that's the best way.

I was particularly disappointed with the results this quarter, and it is somewhat frustrating to have to deal with a business that's very project dependent.

And what we see right now is that most likely we're going to have to live through a few more months of this before we will see a recovery and an improvement.

The fundamentals haven't changed, meaning that we're still seeing the benefits of this unique product being recognized in the market, not only in terms of the high pressure, high temperature wells, but also the very advantaged environmental performance of the product.

We continue to see this as being a very attractive drilling fluid for years to come.

And with your operations running at high utilization rates, are you up-to-date on maintenance?

And what could we expect looking into the back half of the year as far as any kind of planned maintenance outages?

I think we're on track with maintenance.

We had some high maintenance in one of the previous quarters due to activity that needed to occur.

We're past that now, and we're into a normal maintenance phase going forward.

Can you quantify the unplanned down time in Europe and maybe even the supply chain disruption in Japan for the quarter for us?

The -- we had a down time on one of the units in Europe.

That lasted approximately a week to 10 days.

And as I mentioned in Japan, we actually only missed a few days of operation, however we weren't back to full operation immediately on all units.

I would say that has now occurred again, but if you look at the sales volume numbers that we mentioned the difference, that's a good proxy for the impact in Japan.

And just to be clear, you'd said CapEx at $250 million each year through your 2014 target?

That's correct.

All right, I appreciate your time.

Thank you, Chris.

There's a follow-up from the line of Saul Ludwig with Northcoast.

Please proceed.

One thing we noted in the release is the heavy spending for unallocated corporate costs of $13 million and then the general unallocated expense was $5 million, so that $18 million combined unallocated expense is up much higher than what you've typically had in any other quarter.

Was there anything unusual there, and should that be moving down the other direction as we look to the back end of the year?

Eddie, would you like to take this?

Yes, thanks, Saul.

On the unallocated corporate cost, there was some project related costs that we had incurred in this quarter, and that's why it was up from the normal run rate, which I think was about $10 million per quarter.

On the general unallocated?

General unallocated was largely driven by a change in the unearned revenue, so it was sort of a quarterly aberration, Saul, and not something we would expect to see occurring quarter to quarter.

It was more based on the timing of shipments toward the end of the quarter.

Basically, when we're looking at this number in the third quarter that combined $18 million number should go to around $10 million?

Approximately?

I would expect it to go back to a normalized level like that, yes, somewhere in that range.

Okay, great.

Second question is there are a lot of positive comments about CEC, Patrick, and that's very, very good to hear.

And again ,the additional $3 million is very, very encouraging.

Are we at the point where there's got to be some capacity built to make this stuff, and is there any capacity being made any place in the system that will gear up for higher volumes of CEC as we look into, say 2012?

Right, so Saul, so we have been actually expanding our existing unit in Malaysia over the past month, and this expansion has now been started up, and we will continue to monitor the growth of the business to look at the further expansions over the coming years.

Well, as this product gets put into, assuming it does, get put into commercial utilization to build truck tires and other rubber products, is this going to show up as a, let's say a royalty stream which really is just is revenues with no real direct expenses, or is it going to be more likely actually selling product in much the same way you sell traditional carbon black where you have sales and cost of sales?

How is this going to play out?

Because of the confidential nature of the agreement with Michelin, I can't give you any further details on how CEC is going to be managing that tire context.

But with regard to the other applications, we're going to be making the compound and selling the compound to the mining and the defense industry.

But the relation with Michelin may have a different twist to it?

Okay, thank you.

Thank you, Saul.

At this time, there are no further questions.

I'll turn the call over to Patrick Prevost, President and Chief Executive Officer of the Company, for final remarks.

Thank you.

We're very pleased with our second quarter's performance, and we're looking forward to continuing to run a tight ship and provide good value to our shareholders.

We're also looking forward to fulfilling our promise with regard to the new set of long term targets that we have unveiled today.

And then finally, we're looking forward to sharing more details about this at our upcoming investor day in early June, so thank you for attending the call today and looking forward to seeing you soon.

Bye-bye.

Ladies and gentlemen, that concludes today's presentation.

Thank you all for your participation.

You may now disconnect.

Good day.