Cabot Corp (CBT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Cabot earnings conference call.

My name is Jeremy and I will be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Ms.

Susannah Robinson with Investor Relations.

Please proceed, ma'am.

Thanks, Jeremy.

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; 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 first quarter of fiscal year 2012, copies of which are posted in the Investor Relations section of our website.

For those on our mailing list, you received a 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 our website and will be available 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, and are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly our last annual report on Form 10-K.

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

And following this, Patrick will provide closing comments and open the floor to questions.

Patrick?

Thank you, Susannah.

And good afternoon, ladies and gentlemen.

For the first quarter of 2012, despite a difficult global economic environment, our results benefited from the successful execution of our long-term strategy.

We increased our margins through focused actions to improve the pricing and product mix of our businesses and by continuing to improve the efficiencies of our operations.

These efforts translated into a 9% increase in segment earnings year-over-year.

Our commercial strategy focuses on innovation and value.

We're working very closely with our customers to develop new products, or improve on the existing ones to enable increased performance of their products.

Enabling differentiation and making our customers successful is our aim.

Beyond that, we see ourselves as leaders in the businesses we run.

Here, our aim is to create value every day, by driving continual improvement in quality, service, and reliability.

In the first quarter, we completed most of our contract negotiations for the next calendar year and are pleased with the results achieved.

These agreements will yield higher margins and will start to impact results in our second fiscal quarter.

In the first quarter, we experienced some volume softness in the Core and Performance segments, due to economic uncertainty, some seasonality effects, and customer inventory destocking.

Although we do not know precisely how much of the volume decline was related to destocking, we are already seeing rebound in orders in January, particularly in the Performance segment.

This gives us some assurance that volumes will strengthen in the coming months.

From an economic point of view, the most challenging region of the world remains Europe, while we see improvements in the economy in North America.

The most recent Purchasing Managers Manufacturing Index shows improvements in many countries around the world.

And as a reminder, we have approximately 50% of our revenue in emerging markets.

And this gives us confidence that we should see business growth during the course of this year.

On the cost side, we benefited sequentially from lower maintenance spending and the impact of higher inventory levels.

As mentioned during last quarter's call, we planned important maintenance projects in the fourth fiscal quarter that did not reoccur this quarter.

The majority of our finished product inventory built in the first quarter was planned in anticipation of some manufacturing downtime during the second quarter.

For example, we will curtail our Colombian manufacturing operation for up to five weeks, due to a significant maintenance shutdown at our neighboring feedstock supplier.

We are also making additional strides in our efforts to improve our operating efficiencies.

We manage multiple projects to improve energy usage and yield.

We have been successful in improving our feedstock purchasing, both in terms of price and product mix.

Finally, this quarter, we announced the closure of our Hong Kong masterbatch operation and its consolidation into our more efficient facility in Tianjin, China.

Once completed, we estimate the annual savings to be approximately $5 million per year.

This marks the final move in a three-year strategic repositioning of the masterbatch business.

We have migrated from smaller, less efficient assets to larger more cost effective and strategically placed assets.

And those are in China now and in the Middle East.

We have further strengthened our balance sheet with the cash received in January from the sale of the Supermetals Business.

The completion of this transaction is an important step in our ongoing journey to become a leading specialty chemicals and performance materials company.

The disposition of the metals business will improve the stability of our earnings and focuses us on the business of chemicals.

The proceeds from this transaction will support our ongoing organic growth initiatives as well as potential inorganic opportunities.

I will now turn it over to Eddie to discuss the first quarter results in more detail.

Eddie?

Thank you, Patrick.

For the first fiscal quarter, total segment EBIT from continuing operations was $81 million, which was $7 million higher than last year's first quarter, driven by higher pricing and improved operating efficiency that more than offset higher costs from new capacity and lower volumes in Rubber Blacks and Fumed Metal Oxides.

Sequentially, segment profit from continuing operations increased by $2 million.

The key factors in the increase were higher margins from favorable feedstock purchasing and lower manufacturing costs.

The manufacturing costs were lower by approximately $10 million from a combination of lower maintenance spending and the fixed cost benefit of higher inventory levels.

Lower volumes across the Core and Performance segments partially offset these benefits.

Additionally, our total segment EBIT was unfavorably affected by a $7 million decline in the Specialty Fluids business, from an exceptionally strong fourth quarter.

Now, I will discuss the details at the segment level, beginning with Rubber Blacks.

During the first quarter of 2012, the Rubber Blacks business experienced its second strongest quarter ever, increasing EBIT by $18 million from the first quarter of 2011.

The increase was driven principally by higher margins resulting from higher prices and a favorable product mix.

These positive factors more than offset the impact of 9% lower global volumes.

Sequentially, EBIT increased $17 million from the fourth fiscal quarter of 2011.

This resulted from lower raw material and manufacturing costs, partially offset by 5% lower global volumes.

Our reduced manufacturing costs were due to lower plant maintenance and increased inventory levels.

In the Performance segment, EBIT decreased by $10 million, as compared to the first quarter of 2011.

The decrease was driven principally by higher fixed costs from the startup of new capacity, and unfavorable product mix, and increased segment management costs.

Sequentially, EBIT decreased by $6 million, mostly from lower volumes resulting from customer inventory destocking that more than offset lower manufacturing costs.

These lower costs resulted from reduced maintenance spending and the benefit of higher inventories.

In terms of year-over-year volumes, Performance Products increased 3%, while Fumed Metal Oxides decreased 10%.

Sequentially, both businesses experienced volume declines, Performance Products by 2% and FMO by 15%.

EBIT in our Specialty Fluids business decreased by $1 million from the first quarter of fiscal 2011 and by $7 million sequentially.

The decreases in both periods were due to lower sales revenues from fewer completed jobs during the quarter.

This more than offset higher rental revenues.

The sequential EBIT decrease is magnified by the strength of the fourth quarter of fiscal 2011, which was the second best quarter ever in this business.

Despite the quarter-to-quarter variability in Specialty Fluids, we continue to see a solid pipeline of projects and are winning business in geographic areas outside of the North Sea, including a recent job in Malaysia.

EBIT in the New Business segment for the first fiscal quarter was flat with the same period last year.

Our Inkjet business had strong volumes.

However this was offset by a less favorable product mix and higher costs from our growth investments.

Sequentially, our EBIT decreased by $2 million as higher Inkjet volumes were more than offset by lower sales in Aerogel and Superior MicroPowders.

During the quarter we anticipate the startup of our new inkjet capacity aimed at supporting the growth of this business.

In January, we completed the transaction to sell our Supermetals Business to Global Advanced Metals for a minimum of $450 million.

We received an initial cash payment of $175 million at the close of the transaction last month and will receive additional consideration of at least $275 million over the coming two years.

This consists of the remaining $215 million purchase price, an additional $11 million which may be higher based on the future business performance, and approximately $50 million for the sale of excess inventory.

The remaining payments are structured as a loan to GAM, and have an implied interest component.

The imputed interest of about $3 million to $5 million per quarter will be credited through interest income beginning in the second quarter.

In total, the transaction resulted in a pre-tax gain of $330 million.

The transaction was highly tax efficient on a cash basis, requiring approximately $23 million in cash taxes.

We expect that this transaction will utilize approximately $90 million of deferred tax assets, currently carried on our balance sheet.

We ended the quarter with a cash balance of $188 million, which was a decrease of $98 million from September 30.

Uses of cash during the quarter included capital expenditures of $61 million, a $64 million increase in working capital from decreased accruals and higher inventories, and share repurchases of $30 million.

These were partially offset by solid operating results.

We recorded a net tax provision of $16 million for the first quarter.

This included $2 million of net discrete tax charges.

Our quarterly operating tax rate on a continuing operations basis for the first quarter was 25%.

I will now turn the call back over to Patrick.

Thank you very much, Eddie.

Given the current economic environment, we are very pleased with our financial results this quarter.

We continue to make progress in improving the margin profile of our businesses through pricing, product mix management, and increased efficiency.

Although Europe will continue to be a challenge for us in the near term, we are optimistic about the Americas and Asia driving growth in our Core and Performance segments.

Overall, we are already seeing improving demand as our customers replenish inventories after the destocking that took place in the first quarter.

We're well positioned with our existing and new capacity to capture significant value for shareholders as growth returns.

From a slightly longer-term perspective, our capital investments in capacity and efficiency remain on track.

This year, we have new, very low-cost fumed silica capacity coming online in China.

We will also see carbon black de-bottlenecks starting up in Indonesia and South America.

Our yield improvement projects are being implemented around the world, and a new energy center will be commissioned in Europe.

Finally, we're excited about the innovative products and technologies we're pursuing in areas such as commercial inkjet printing, insulative coatings, battery materials, and graphenes.

In Inkjet, we will complete the expansion of our US facility to support the growth of this business.

All of these investments coming onstream will support the longer-term growth and efficiency of the Company.

Overall, I'm pleased with the ongoing strengthening of Cabot and the successful execution of our strategy and remain confident in our ability to achieve our long-term objectives.

Thank you very much for joining us today.

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

(Operator Instructions) Saul Ludwig, Northcoast Research.

Good afternoon, everybody.

And congratulations on a good quarter.

Thank you.

Good afternoon, Saul.

How much -- this question concerns the startup costs or unusual costs.

How much were the startup costs in the Performance sector in the first quarter?

And you talk about shutting down a plant for five weeks in the second quarter and some other inkjet plants starting up.

What kind of magnitude of expenses are you going to incur from these types of actions that are certainly embedded in your positive outlook for earnings for the Company?

But I'm just curious as to what the headwind is from these various startup and plant issues that occurred in the first quarter and will occur in the balance of the year.

Right, Saul, so I guess there's two types of costs that come with this.

And again, I think to make money, you need to spend money.

And we are going to have one-time costs in terms of starting up new operations, and I would put those in the single millions of dollars in each case.

So not huge expenses.

And then there is the additional fixed costs coming from new operations being added to the portfolio.

And here, we've been focusing on efficiency, and mostly around de-bottlenecking existing operations.

So in general, I would say that the addition of capacity is happening at very low fixed-cost rates.

And those that are starting up in the current period or the last period, the costs there are already embedded in the operation.

And what was the cost in the first quarter in the Performance sector?

I don't think that we disclosed that, Saul.

Okay.

You mentioned the new contracts that you signed successfully, and you're pleased with the outcomes that will begin to take effect in the current period.

Where you do have contracts, they're typically -- they may be one year, two year or three year and it is different by customer, but approximately what percentage of your contracts rolled over this year and might roll over next year, and might roll over the following year?

Because I don't think you get all of your contracts rolled over at the same time.

Right.

So Saul, this is a sensitive area in terms of disclosing what we do in the contract field, but we, in the past, we've indicated that roughly 50% of our Rubber Blacks volume would be under contract.

And I would say most of these contracts are of an annual tenure, and that would still be a good way to think about it today.

So most of them would have rolled over in January?

That would be the way to think about it, yes.

Got you.

And the final question, you mentioned you saw a pickup in January in your performance areas from your customers.

Did you see any movement in Rubber Blacks?

Well, we saw a positive movement in Rubber Blacks, but it has been most, I would say, visible in the Performance segment, and we're talking almost up to 10% on the Performance segment side.

Great.

Thank you very much.

Thank you, Saul.

Ivan Marcuse, KeyBanc Capital.

Thanks, guys, for taking my question.

The first is on the mix side.

You had a benefit for mix.

So is this -- Rubber Blacks are going to the higher-end tires or could you give a little granularity around what this mix is, and should this trend continue going forward?

Right.

So what has been going on with regard to our commercial strategy, it has been actually about focusing on the higher value-added products that we deliver to the market.

And that has been about product that impart capabilities to our customers and products that are unique, where we are also able to differentiate compared to our competition, and this is an effort that will be ongoing.

I mean the same happens on the Performance segment as well.

And clearly, we're migrating towards the more differentiated part of our portfolio.

And we've been very successful with that.

And we will continue to be.

That does not diminish the fact that we're continuing to be very focused on value pricing in the rest of the portfolio, where we look at the quality, the reliability, the superior service we offer to our customers, and work very hard at getting paid for that.

Got you.

Thanks.

And then with -- in the Inkjet, in the New Business, with capacity coming on, would you expect that segment to start being consistently profitable starting in the back half of the year?

Or do you -- how should I think about this volume coming on, or capacity?

Well, I would say, Fred is here, but it is really -- clearly, the objective of that segment to deliver profitability, not only in the long term but also in the near term, so there is a lot of work going on to make that happen.

And right now, the Inkjet business, especially the commercial side of that business, has been growing very rapidly, and it is a very good business for us, which has led actually to us deciding to invest in our Haverhill facility in Massachusetts and we're putting a new line in for $10 million, which will be starting up during the course of this year.

Got you.

And then in the Rubber Blacks business, can customers continue to de-stock or manage their inventories aggressively, or going to more of a seasonal driving season, do you see volumes pick up?

And how should you think about that trend going forward?

I would say that somewhat differently from the customers in the Performance segment, the Rubber Black customers tend to have a much tighter supply chain, meaning that there is very little inventory in that supply chain.

And you can also imagine that there is less steps in the supply chain between us as current black suppliers and the final user, the consumer.

And because of that, and the efficiency in that supply chain, we believe that we see fairly clearly what the underlying demand is.

That is quite different on the Performance segment side where the supply chain is broader and deeper.

There are more steps in it.

And that creates somewhat more distortion in terms of the volumes, especially as you look at it on a monthly or quarterly basis.

Great.

And then is there any update to the CEC business?

We're on track, working very hard at making this a success.

Great.

Thank you for taking my questions.

Thank you, Ivan.

Jeff Zekauskas.

Thanks very much.

Patrick, when you were talking about use of proceeds from the sale of the business, you talked about organic and inorganic opportunities.

Does inorganic mean acquisitions?

Hi, Jeff.

Yes, it does.

And I certainly look at that as a way to continue to add value to the Company, and bring value back to the shareholders, and it is one of our four strategic pillars.

The portfolio management can happen in terms of sales of business, and we've just demonstrated that we could do that, to focus the portfolio.

And we will be looking and continue to look at opportunities to bring new businesses, or extend our existing businesses through acquisitions.

Okay.

Then a question for Ed.

In the note that you're going to get from GAM, what is the value of the note?

And will that be a current asset?

So I guess, Jeff, the note which we've already received from GAM, because the transaction has been closed --

Right.

-- will be for the full value of the $215 million, which is the second part of the purchase price --

Right.

Yes.

-- but the way we've accounted for it essentially, because it is a note, it is essentially a loan, we've had to impute some interest.

And the real issue here is that it will manifest itself in interest income that we will receive.

But essentially, we will get the full $215 million payment at one point in time when they decide to pay that up through this next 24 months.

Is it a current liability?

Non-current asset because they have two years.

It will be a non-current asset.

A non-current asset, okay.

Your China volumes in carbon black in the quarter were basically up 1%, and sort of down 6% sequentially.

And GDP in China grew around 9%.

And many of the chemical companies talk about inventory destocking and all of that though it is always amazing to see sort of flat growth in a 9% growth economy.

Do you have any reflections on that 1% number, and do you expect the first quarter in China to be relatively slow or to rebound strongly?

Or how do you see that?

So we're still -- and we continue to be very pleased with our China business.

I think it is a real success story for Cabot.

With regard to the more recent environment, I think we're seeing a couple of things going on here.

I would say perhaps some destocking, because of increased uncertainty with regard to the -- even the China economic environment.

There was Chinese New Year that they were preparing for, which occurred last week, or the week before last.

And then I think there is some effect that it is difficult to quantify, but may be related to a slowdown in export opportunities of tires to Europe and North America, we know, because of the duties.

But indirectly, a slowdown in demand in North America.

So we're tracking things, but I would say at this stage, my China team continues to be very positive, and we believe that the growth will continue, especially as we see the domestic market in China continuing to be very strong.

Okay.

And then lastly, you talked about the shutdown of your Colombian capacity for five weeks.

Can you remind me what the size of this facility is on an annualized basis?

Yes, it is one of our smaller carbon black facilities.

It's, I believe on an annual capacity, around 60,000 to 70,000 tons a year.

So it is not a very large facility.

But clearly, when you're in a situation where you have to shut down for a period of time, you need to prepare and build some inventory.

It is a bit of an unusual situation.

Because the refinery from which we get our raw material, which is next door, is actually going through a major revamp and is shutting down for that same period of time.

Okay.

Thank you.

I will get back in the queue.

Thank you.

(Operator Instructions) Christopher Butler.

Hi, good afternoon.

With the Rubber Black business, was there any CEC income in this quarter?

Well, if you remember, we actually moved the CEC business into the New Business segment, in the previous quarter.

Right.

I thought that was for all non-tire business though.

No, it is for all of the business actually.

The management of the tire relationship remains with the Rubber Blacks business because of the importance of the relationship there.

But in terms of the financials, it will all be in the New Business segment from now on.

I apologize for the confusion.

With the soft volumes in the quarter, if we're looking at the mix of that soft volumes, was that just an average mix or was there anything particular in that, that may bounce back next quarter?

Chris, I'm not sure I got the question.

Do you mind repeating it?

Sure.

With the volumes that you lost, was this good product mix that you were losing, bad product mix, or average?

I would say that in general, when there is a slowdown like this, there's a tendency for the larger, more standard products to see a larger slowdown than the higher margin, higher value products.

And as we look forward here, could you talk on raw material costs, with oil rebounding, and expectations there?

Well, we're managing the feedstock for carbon black very actively as a Company, and as you may remember, we have various sources of feedstock.

Some are tied to the steel industry.

Some to the petrochemical industry.

Some directly to the oil industry.

And what we've seen actually over the last quarter or two quarters is an ability to be able to capture some more interesting and more attractive type materials, and this has started to be reflected in the performance of the business.

With regard to the absolute price of oil and how it affects our business, I would say that we have driven our business management to be able to recover the fluctuations in the base oil price very rapidly, to the extent where we become somewhat indifferent to the absolute price level.

I appreciate your time.

Thank you, Chris.

John Roberts, Buckingham Research.

Good afternoon.

The press release talked about the Core segment benefiting from an inventory increase.

Maybe that was the prior question just answered.

But were you building inventories of cheap feedstock?

What were you referring to there?

No, actually, we've built inventory in the raw blacks segment for two reasons.

And the majority of the inventory build was actually planned because the example of our Cartagena operation in Colombia is one, but we also have a few other situations, including the tie-in of some other facilities within our system, which has required us to build some modest level of inventory.

The other part of this inventory build was unplanned, and somewhat focused on our European region, where the demand in December was somewhat lighter than we had originally forecast.

But what has been interesting here is that although the European economic environment seems to be quite uncertain, we have also seen in Europe some recovery in the month of January, which would indicate that destocking had also been going on towards the end of the calendar year.

So what you were referring to is, you benefited to the extent your operating rates would have been even lower if you hadn't built the inventory.

That's correct.

Okay.

Thank you.

David Begleiter, Deutsche Bank.

Thank you.

Good afternoon.

Patrick, you mentioned earlier that about half of your Rubber Black volumes are under contract.

Would you prefer to have more or less of your Rubber Blacks volume under contract?

I would say that this is a question that is quite strategic and is very dependent on the type of customers, the type of products, and the type of geography we're dealing with.

I would say that the 50% level at which we operate at, is a level that we're comfortable with.

It is a level that we drive towards.

But of course, in a relationship like that, there's two parties, and it is also one that is reflective of the strong ties that are maybe stronger with certain of our customers than with others.

But I would say that it is a good level for us.

Fair enough.

Also, margins in Rubber Blacks were the highest in a while, 11%.

Some was unusual, I gather, by the inventory build.

How much of that was a bit unusual?

How much is sustainable or realizable at this new higher level?

Well, the inventory build is a minute part of this.

So I would say it is fundamentally a very solid base for the business.

Also, obviously mix is driving a lot of this.

Can you remind us of the range of margins amongst these Rubber Black products from low to high mix?

Right.

It is an area that we are uncomfortable sharing, because of the competitive nature of that information.

So sorry about that, Dave.

Understood.

And lastly, volumes in South America, they were down a lot year-over-year and sequentially.

Was that due to the Colombian situation or was that something else driving those numbers?

Well the Colombian situation was not affecting that.

What we have been seeing in South America is because of the strength of the real; some of our customers have seen more competition from imported tires into the region.

I mean fundamentally, the demand is fairly good, still growing, but more imports are putting pressure on the tire producers.

But I think this is slightly abating with where the real has been more recently.

Thank you very much.

Thank you.

Saul Ludwig.

Patrick, the 15% drop in volume in Southeast Asia -- when you were having, last year similar declines, that represented the closure of the plant in India.

In the first quarter, the 15% decline would be more apples and apples with the capacity that you had post-closing the plant in India.

Why do you think it was so weak and what do you think happens going forward?

So that is a good analysis, Saul.

As we look at what is going on in Southeast Asia, and in Indonesia, most specifically, although we also have an operation in Malaysia, these markets are very dependent on export volume.

I believe that the Indonesian tire market exports something like 60% of its production, and what we're seeing currently is the weakening of the European and North American replacement tire demand, and this backing up into the Indonesian local production.

We look at Indonesia as a huge market which will continue to grow, there's more than 250 million people there.

And as the wealth increases, and the economy does well, there is going to be more and more demand locally.

So this is kind of the way we think about that market, and why we're continuing to be bullish about that market and continuing to look at capacity expansion there.

Got you.

And then finally, you commented earlier about your pleasure, or your satisfaction with the renegotiation of your Rubber Black contracts and that's on the 50%.

In the areas where you don't have contracts, you're more like in Asia, China, South America, and the pricing is more month-to-month.

Are those prices moving kind of commensurate with the type of changes, whatever the changes you did get in the contract business?

Maybe the question is, how is pricing moving in the non-contract world, versus the contract world?

Well, I would say with regard to us, there's not much difference.

So we're driving a pricing strategy and philosophy that is very similar.

And I would say that we're generally satisfied with where things are going from that point of view.

And then the final question for Eddie, you're going to get $3 million to $5 million a quarter in interest income.

Let's call it $4 million.

That will be $12 million of interest income which will book -- that's about $0.15 a share of additional earnings in the back three quarters of the year.

Is that thinking about it the right way?

That's correct.

Thank you very much.

Thank you, Saul.

Jeff Zekauskas.

Thanks.

In fiscal 2011, what was the earnings per share currency benefit?

And what do you see as the currency decrement in 2012?

Just a second.

Jeff, I don't have the number off the top of my head here for 2011.

Then what is the 2012 decrement?

We don't really forecast the currency because I don't really know what it is going to look like.

Okay.

Perhaps you could follow up on 2011.

We could certainly get you the information for 2011.

I guess my recollection is it was not significant.

Because what happened was that there was a strengthening and then a weakening.

And so it looked like it was going to be a big deal for us, but then by the time the fiscal year played out, it really wasn't a huge impact in fiscal 2011.

And again, we don't typically forecast what the currencies look like for exactly that reason.

Okay.

You talked about benefiting from a lower level of maintenance spending in the first quarter.

What do you normally spend annually for maintenance?

And do you expect the maintenance spending to be any different in the second quarter?

I guess we wouldn't get into the specifics on how much we spend in absolute, but for the second quarter, and as we sort of think about the rest of the year, Jeff, we tend to have most of our maintenance, or a heavier chunk of maintenance take place in the summer months.

Which is when we tend to have plants go down, and do turn-arounds.

And that's really why we saw a big chunk in the September quarter, and why we did not see that re-occurring again in the December quarter.

And so I think we had said that in October, that we would not anticipate seeing that maintenance spending reoccur.

And that was the principal driver of the $10 million reduction or so of fixed costs that we saw in Q1.

And then going into the rest of this year, we wouldn't expect to see tremendously different maintenance spending until we get to the summer months.

Okay.

Then I guess I didn't fully understand the year-over-year profit decrement in the Performance segment.

In that, you know it is true that your volumes were negative, but probably your prices were up nicely, and the earnings decrement was basically a third.

So were there significant extra costs from the start-up of the manufacturing asset?

Or can you analyze that $10 million decrease?

Yes, I think, Jeff, basically year-over-year -- so a year ago, we did not have the startup costs of a couple of key facilities.

We had a masterbatch facility that started up during the year.

And we've also started to incur costs for a fumed silica facility in China for which we have a pretty significant de-bottleneck that has come online.

Those were the two main drivers of the additional costs but on top of that we also had an unfavorable product mix.

And so if you look at the volumes, you will see that the fumed silica volumes were down year-over-year, and that tends to be quite a high margin product, so when you have that unfavorable mix, that's the other key driver of that $10 million.

Okay thank you.

And then for the interest on the note, these are pretty high interest rates.

So, how do you think about that?

You're not putting it into discontinued operations.

No, I'm going to ask Jim to answer, because we actually had to go through a pretty extensive examination and we actually went outside to make sure we were doing this appropriately.

Okay.

We worked with Deloitte on this one, Jeff, and essentially, we have to associate all of the notes that relate to the contingent earn-out from the business, going forward, the remaining $175 million that will ultimately be a $215 million payment, et cetera, and had to associate all of those together and present value those for the calculation of the gain.

And the rate at which we present valued was basically a market interest rate that was reflective of the credit risk of the buyer of the business.

I see.

Okay.

Thank you very much.

Ivan Marcuse, KeyBanc Capital.

Thanks for taking my question.

It has been a couple quarters now where you're doing share buybacks.

Is this going to be a continuing trend?

And then also how do you look at ever increasing your dividend?

Is that ever a consideration versus doing a buyback or maybe even both?

So Ivan, we have a continued history of returning cash to shareholders.

And that happens through dividend payments and share buybacks.

On the dividend side, I believe it has been many years -- I can't remember, actually, when we had an interruption, if we did, in the dividend payments.

And what we do on very regularly is to check how our yield and our payout ratio compares to other companies in our sector, and we do this evaluation on a regular basis.

We've done one just recently.

And we believe that we're very competitive from both perspectives.

On the share buyback side, our philosophy has been, except for exceptional circumstances, to offset the dilution on a regular basis, and we hadn't done, because of the 2008, 2009 economic environment, we hadn't done any of that for a couple of years.

And as we looked at our cash situation and the share price more recently, we decided to do some share buybacks, and the total shares we bought back were -- I'm trying to remember, Eddie -- 2.5 million shares, which is more than -- is actually reflective of several years of dilution.

And we've done that at a price that was close or slightly below $32 per share.

And we will be continuing to look at doing that going forward.

How much more available do you have on your --?

So we have -- our authorization allows us to buy back 1.8 million shares at this stage.

So we still have that capacity today.

Great.

Thanks.

Thank you.

Laurence Alexander, Jefferies.

Good afternoon.

This is Lucy Watson on for Laurence today.

Just to go back to the topic of potential inorganic growth opportunities, what do you view as a good business to add to your current portfolio, and what are the criteria that you would use to evaluate M&A prospects?

So we, in terms of opportunities, from an acquisition perspective, we look at it in three buckets.

The first one would be acquisitions that would be in the businesses in which we're in.

So those are fairly simple to do, from a strategic point of view.

The second bucket is a technology bucket, which would be leveraging our material capability, our technology, in adjacent material capabilities.

So for example, the graphenes business would be a case in point, or the recent -- two years ago, we did an acquisition in the security materials area.

So those would be reflective of that second bucket.

More technology-driven in our space.

And then the third one would be looking at adjacencies to our portfolio.

They would need to be in a similar space, as the space we operate in.

So chemicals -- specialty chemicals, performance materials, and would need to have some link with regard to either technology or types of markets to pass the test.

We, of course, have other tests which relate to valuation, and also the fact that we would most likely only be interested, especially in this adjacency area, in businesses that would have leadership positions.

Okay.

And as you evaluate your growth prospects going forward in inorganic versus organic opportunities, do you have an equally active pipeline of both?

Or I guess as you think about reaching your earnings target, do you view one or the other as -- are you equally balanced in getting that growth from both organic and inorganic opportunities?

So as we have mentioned before, we look at the -- our long term target, our 2014 target to be effected with the portfolio we have.

We think that one or the other small acquisitions would be helpful in achieving the target, but we're very comfortable in terms of being able to achieve that target with the current growth plans and the organic investments that we're currently doing.

Okay.

Thank you.

Thank you.

At this time, there are no questions.

I would like to hand it back to Mr.

Patrick Prevost, President and CEO.

So thank you very much for joining us this afternoon.

As you see, the execution of our strategy continues to result in strong financial performance, and I'm pleased with our performance, and it makes me very confident about the future of Cabot.

And we're looking forward to delivering the value to our shareholders.

And again, thank you very much for joining us, and looking forward to speaking to you next quarter.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.