Cabot Corp (CBT) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the third-quarter 2014 Cabot Earnings Conference Call.

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

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Erica McLaughlin, Vice President of Investor Relations.

Please proceed.

Thank you.

Good afternoon.

I would like to welcome you to the Cabot Corporation Earnings Teleconference.

Last night we released results for our third quarter of 2014, 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 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 in 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.

Eddie Cordeiro will review the business segments and corporate financial details.

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

Patrick?

Thank you Erica, and good afternoon, ladies and gentlemen.

We achieved another strong quarter of business performance in FY14.

Volumes increased as compared to the prior year in both are reinforcement materials and performance materials segments, as demand in our key end markets improved, and we commercialized new capacity.

So far this year we have improved adjusted EPS by 20%, as we continue our strong year-over-year performance.

At the corporate level, we received cash proceeds of $215 million in April from the final payment related to the sale of the super metals business.

We used this cash to strengthen our balance sheet, and during the quarter we repaid $256 million of debt.

This reduction in debt, along with the outlook for the Company, resulted in Standard & Poor's reaffirming our BBB-plus investment-grade credit rating.

The purification solutions segment has not delivered the expected improvement this quarter, due to lower volume, less favorable product mix, and continued unplanned maintenance costs.

The last four quarters of purification solutions have not been a good reflection of the underlying profitability of this business.

We have been dealing with a number of ongoing plant reliability issues that we believe are the result of under-investment by the prior owners.

This has been in excess of what we had anticipated.

While I would not call any single event significant, combined they have impacted profitability by increasing operating and maintenance costs, as well as constraining product availability.

We have an operations improvement plan in place to ensure that we will fix these issues, and I'm very confident we can do just that.

Needless to say, I have been disappointed by the performance, and I'm committed to turning this situation around.

I believe we are well on our way to fixing this situation, which has overshadowed all of the work we have done to position ourselves for continued growth.

Developing new products and implementing price increases to enhance margins, upgrading our processes and standards, and implementing a global business organization operating on one ERP platform.

This business has extremely attractive end markets that are growing at greater-than-GDP growth rates, due to the macro trends in environmental, food, and water.

With these strong fundamentals and our global leadership position, we continue to see the business delivering $150 million to $200 million of EBITDA in 2017.

I'm also pleased to announce that today we completed the sale of our security materials business.

We sold the business to SICPA for $20 million, which represents approximately 3 times revenue.

I will now spend a few minutes talking about our specialty fluids business.

During the third quarter, we announced that our cesium reserves available for mining would likely be limited due to the technical challenges and economic feasibility of proceeding with a major development project at our mine in Canada.

This mine is the main raw material source for our specialty fluids business.

In light of these circumstances, we have been reviewing the business strategy in how to best maximize the value for our shareholders.

First of all, we'll continue to support both the oil and gas sector, as well as our fine cesium chemicals customers.

Secondly, and this is somewhat different, we will spend increased time and resources looking into accessing additional cesium, whether through future mine projects, the processing of lower-grade sources more efficient re-processing of returned material after the lease.

While we have not fundamentally changed our strategy, there will be a shift in how we operationalize it.

More so than in the past we will be favoring rental jobs, and we will be highly selective about projects, in order to conserve cesium atoms.

As a result of these actions, we anticipate that the annual earnings of the business may be 10% to 20% lower than what we have experienced over the last few years, while the quarter-to-quarter earnings variability will remain, due to the project nature of the business.

Over the life of the business, we believe this approach will ensure that we maximize its value.

I will now turn the call over to Eddie to discuss the financial results in more detail.

Eddie?

Thanks, Patrick, and good afternoon.

Adjusted EPS for the third quarter of FY14 was $0.88, which was an increase of 5% over the prior-year quarter.

Total segment EBIT from continuing operations was $109 million, driven by strong volumes in our reinforcement materials and performance materials segment.

I will now discuss the details at the segment level, beginning with reinforcement materials.

During the third quarter of 2014, EBIT for reinforcement materials increased by $12 million as compared to the third quarter of 2013.

The increase was due to 13% higher volumes as compared to the prior year.

Volumes improved due to the commercialization of our new China capacity, our acquisition in Mexico, and recovery in global demand.

Raw material purchasing savings and benefits from energy efficiency investments also contributed to the improvement in earnings.

Sequentially, EBIT was consistent with our second fiscal quarter, as 6% higher volumes were offset by higher maintenance spending, due to the timing of plant turn-arounds.

Additionally, one-time benefits in the second quarter of FY14 did not re-occur in the third quarter FY14.

As a global leader in carbon black, we announced a few months ago that we had entered into an agreement with the US EPA to invest in technologies to reduced emissions of SOx, NOx, and particulate matter at our US carbon black plants.

As expected, we have begun to incur operating and capital costs related to these investments.

In order to recover these increased costs and maintain our operating margins, we are implementing an environmental surcharge on carbon black produced and sold in the US effective January 1, 2015.

As we look ahead, we continue to be optimistic about the industry trends.

Overall, Europe has been improving, but is leveling off a bit.

South America remains challenging in the near term, and we expect to see continued economic growth in Asia and North America.

In performance materials, EBIT increased by $6 million as compared to the third quarter of 2013, due to 5% higher volumes in both specialty carbons and compounds, and fumed metal oxides, as demand improved in our key end markets.

Sequentially, performance materials EBIT decreased by $6 million, primarily due to a less favorable product mix, higher maintenance spending, and 5% lower volumes in specialty carbons and compounds.

The decline in our specialty carbons and compounds volumes was driven by European demand during the quarter.

This was partially offset by 7% higher volumes in fumed metal oxides, due to strengthening underlying demand and successful commercialization efforts.

Looking ahead, we expect to see continued growth in automotive, construction, and consumer applications in 2014.

We're on track to achieve a record EBIT this year, driven by successful commercialization of recent capacity expansions, and new product introductions.

Advanced technologies EBIT decreased by $14 million from the third quarter of FY13.

The EBIT decrease was driven primarily by lower activity levels in the specialty fluids business, which caused the EBIT in that business to decline from $18 million in the third quarter of FY13 to $10 million in the third quarter of FY14.

In addition, a $5-million royalty payment in the aerogel business in the third quarter of last year did not re-occur this year.

Sequentially, advanced technologies EBIT increased by $2 million, as compared to the second quarter of FY14, due to higher volumes in inkjet colorants.

As we look ahead, we expect to see continued lower levels of activities next quarter in specialty fluids.

We will be implementing our revised specialty fluids business strategy that Patrick discussed.

Adjusted EBITDA in purification solutions for the third quarter of 2014 was $7 million, which compares to $12 million for the same period last year.

The year-over-year decrease of $5 million was driven by lower volumes, most notably in the gas and air and water sectors.

Higher costs, primarily associated with maintenance, and a higher allocation of functional and indirect costs also unfavorably impacted results.

Sequentially, purification solutions EBITDA decreased by $2 million, driven by a less favorable product mix, and higher fixed costs.

Overall, volumes increased by 1%, driven by an increase of 5% in the non-gas and air sectors.

I will now turn to corporate items.

We ended the quarter with a cash balance of $101 million, and our liquidity position remained strong at $748 million.

During the third quarter we generated $145 million of adjusted EBITDA, and decreased net working capital by $6 million.

We received cash proceeds of $215 million in April from the final payment related to the sale of the super metals business, which was used to repay debt.

We reduced debt by $256 million during the quarter, and used $45 million of cash for capital expenditures.

We recorded a net tax provision of $20 million for the third quarter, which included a $1-million benefit for tax-related certain items.

Excluding the benefit from certain items, our operating tax rate on continuing operations for the second quarter was 27%.

We are anticipating an operating tax rate of 27% for FY14, and we expect capital expenditures to be in the range of $175 million to $200 million.

I will now turn the call back over to Patrick.

Thank you, Eddie.

As we head into the last quarter of FY14, I would like to provide an update on our $5 earnings per share target for 2015.

Over the past three years, we have substantially implemented the key foundational elements of our plan to achieve $5 per share.

They include continued investment in growth businesses and regions, such as our fumed silica and carbon black expansions in China, and carbon black de-bottlenecks in Indonesia and South America.

We also launched a broad commercial excellence initiative to drive margin improvement, which can be seen in the increase in adjusted EBITDA margins to 16% year to date.

We have introduced a number of new products to the market to serve fast-growing and valuable applications.

We have also implemented key asset rationalizations, such as the closure of our Malaysia carbon black plant, restructuring actions in advanced technologies, and the reposition of our specialty compounds business.

We've also completed a number of key portfolio moves.

We sold our tantalum and security businesses, and acquired our activated carbon business, as well as our partner's shares of our Mexican carbon black joint venture.

The combination of all of these actions has increased our adjusted EBITDA from $398 million in 2010 to $529 million in 2013, which represents a compound annual growth rate of 10%.

For FY14, we're on track to continue to improve EBITDA again at this level of growth.

Over the same time period, we have also returned approximately $350 million of cash to our shareholders, through consistent payment, and increases in our dividend, and some share repurchases.

With all of this in place, and the new projects and activities we have in the pipeline, I'm very confident that the Company has the operating capability to deliver $5 earnings per share.

However, for this to happen, we also communicated that achieving $5 earnings per share will require a sustained mid-cycle economic environment.

While the environment has been improving as of late, we have not seen a normalized global environment for some time.

As a proxy for a normalized environment, we've previously noted that we needed to see a 10% to 15% improvement in volumes in our reinforcement and performance materials segments over 2012 to achieve this target.

In 2013, we actually experienced a modest decline in volumes as compared to 2012.

This year we are seeing some growth, with organic year-to-date volumes up 5% to 7%.

However, this still means we would need to see close to 10% improvement in volumes in 2015 to be operating at the level that is necessary to achieve the $5 earnings per share target.

Although this is not impossible, at this stage it is hard for me to say today that a volume increase of that magnitude is likely for next year.

The other area where we expect significant improvement is in our purification solutions segment.

Although the business has suffered from operational and market issues since our acquisition, we have a handle on these issues.

We are nine months away from the beginning of the mast implementation.

The business will see substantial improvements in the second half of 2015, with additional step-up in earnings in 2016 and 2017.

The 2015 plan improvement will however not be sufficient to support a $5-per-share delivery for Cabot.

At this stage, we believe that it will take us a year longer than anticipated to achieve our longer-term target of $5 adjusted EPS.

Our results track record confirms that the Company is well-positioned for continued earnings growth, and I'm confident that we can achieve $5 of adjusted earnings, albeit a year later than planned.

With that said, we continue to be optimistic about FY14, with the positive year-over-year demand trends in our reinforcement materials and performance materials segments.

Year to date, our adjusted earnings per share is 20% higher than 2013, and we have delivered EBITDA growth each year over the last four years.

We are on track to make it a fifth year in 2014.

We're confident in our ability to continue to deliver earnings growth for our shareholders.

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

(Operator Instructions)

Kevin Hocevar, Northcoast Research.

I was wondering if you could give us some color around your outlook for reimbursement materials volumes.

You indicated your outlook was for moderate growth going forward.

I just wanted to get a little bit more color with that means.

Volumes were up pretty strong this quarter.

Organic was 5%.

NHUMO was 8%.

I'm assuming you're talking about that organic piece.

Could you give us more color us to what you would expect out of that going forward?

Certainly.

Kevin, as you're saying, we're quite pleased with the volume developments and what we have achieved during the course of FY14.

What I would say is that as we look forward and as we engage in conversations with our customers around the tire industry, we are sensing that the expectations for the rest of this calendar year, and perhaps moving into 2015, we believe that the tire industry is looking at 3% to 4% growth.

This is what I meant when I said moderate growth.

We certainly would like to see in excess of that, and we would certainly welcome that.

However, at this stage, I would say we are more into this moderate growth forecast that anything beyond that.

Great.

In terms of the Norit business, it seems like there's been additional operational issues that seem to keep popping up every quarter.

It sounds like you have action plans in place to take care of it.

I'm just wondering, is this having any inability on your ability to win these mats businesses, as they're being put out for bid here as we're preparing for mats?

How confident are you that you'll have these issues resolved come April 2015, when the demand really kicks up?

Yes.

As you can hear from my earlier address, we're certainly not -- I'm certainly not pleased with the performance of the business.

We've been seeing operational issues that we hadn't expected.

We, during the diligence on the business had seen that it needed some additional maintenance and smaller capital to take care of the fact that previous owners hadn't taken care of the business the way we would have.

However, we've had a few more surprises than we had expected, and we are continually working at getting these out of the system.

These are, in general, smaller things that are happening.

But it's the combination of these, several of these, that have been putting some pressure on the business, not only in terms of costs, but also in terms of availability.

If I move to the mats side of things, we are very confident that none of this will affect the mats opportunity -- in a way, also because the more recent assets are the ones that are actually going to be supplying mats, and we've had much less issues on that front.

I would say, in summary, we are very confident on the mats support and where we stand with that, and we're working very hard on fixing the issues that have been popping up recently.

Okay, great.

My final question.

I'm wondering if you could comment on the US carbon black environment over the next couple of years, particularly 2015 and 2016; because I've seen reports that suggest that based on all the on-shoring of tire capacity that's coming to the US, to no carbon black capacity, that utilization rates should become really tight in the 2015, 2016 time frame.

I'm curious to your thoughts on how you view this playing out.

Do you believe the industry in the US in particular, how the pricing power of the industry should be as that unfolds?

We are certainly pleased to see the opportunity for us to serve the North American market developing in a positive fashion.

This is certainly very different from what we have seen in the last decade.

We're also pleased to see our customers investing entire capacity in North America, which is new and very welcome.

Some of that capacity will be designated to replace some of the less efficient and effective assets.

However, there is an expectation that the North American market will grow, and we will certainly be there to participate in that growth.

Now in terms of the total market, we believe there is still capacity available to meet that growth in demand over the coming years.

We will be continuing to monitor this growth and demand, and looking at certainly our assets in North America, and that includes our assets in Canada and Mexico, being available as the market grows in the US.

But we also, of course, have the option of bringing material in from other assets.

I would say expansions in North America are also a way for us to meet any demand that will exceed the current capacity.

I would say in general we are quite confident in our ability to support the industry.

James Sheehan, SunTrust

Could you comment on where your overall carbon black utilization rates were during the quarter, and what your expectation is for the fourth quarter?

Yes, we're continuing to see utilization rates in the 80% to 85% range, which has been somewhat in line with what we saw in the last couple of quarters, perhaps one quarter.

As we look forward, of course, we should see that tightening as the demand increases.

But again, back to the comments I made earlier, we were banking on perhaps a more moderate growth, 3% to 4%, going forward, which should result in a moderate ramp-up of that utilization.

Were your carbon black prices during the quarter up sequentially?

We'll be looking at the market forces, but at this stage there's no indication in this area.

I mean for the quarter you just reported, this fiscal third quarter, was that up or down or flat relative to the prior quarter?

Well, we don't really provide -- for competitive reasons, we don't provide more granularity on prices.

I'm sorry about that, James.

Okay.

Thank you very much.

Thank you.

Ivan Marcuse, KeyBanc

In China, your volumes were up very strongly sequentially.

I assume that's because the new plant is coming on line.

For looking out the next couple of quarters, should volumes rise at that pace for the next couple of quarters as the plant fully ramps on, or is this sort of a one-time thing?

Could you walk through the dynamics of how this plant should be -- come up -- and how that should impact your China volumes on a sequential basis?

First of all, I would say if you look at the growth in volumes that we reported in our press release, you can see that on a quarter, a year-over-year basis we're indicating 11%.

I would say that is more the type of growth we're expecting for the business in China.

The current indications for the first half of the year is that tire production has been up between 8% and 9%.

We're kind of in line with that on the carbon black front.

The 26% that you're seeing on the sequential side of things is more related to a seasonal effect, which is the lumpiness that Chinese New Year creates for us.

I would say, back to that 10%-ish growth, I think that's what -- considering the economy in China has recovered, that's what we would be expecting.

Certainly that has been supporting strongly our new Jing Tai investments, so we are very well on track with that growth there.

Okay, then looking at -- flipping over to the other side of the world.

You mentioned that South America has been weak, which it has been, clearly.

They improved sequentially.

Was that more of a seasonal aspect, or is that an indication that maybe things are getting a little bit better there?

Is there a certain region or country like Argentina, et cetera, that would be -- that's weaker than others, that's driving down the total region, or is it generally the same story across the board in that area?

I would say that it's, in general, a weaker story across the board.

I don't see that changing in the near term, at least not until the end of this calendar year.

I would say that we may have a better business environment in Columbia, but the Brazil, Venezuela, Argentina geographies where we have assets have been quite weak.

Coming back to the sequential change, which looks quite positive for South America, this is actually related to a unique situation with a new customer win, and has somewhat distorted the numbers.

You have to put it also in the context of South America being a somewhat smaller region than the other regions we have.

Okay.

You talked about putting through a surcharge to cover the cost of the EPA in North America.

A surcharge, is that something that needs to be negotiated with your customers?

Will it be enough?

You may have said this, and I missed it -- enough to cover the full, the total cost, or does this put you at a cost disadvantage relative to maybe other competitors that have not settled with the EPA, or aren't planning to?

The intent here, and actually what we're implementing is a stated surcharge, which would be the same for all of our customers.

The intent here for us is to recover the costs, both the capital and the operating costs that will come our way over the coming years.

This is a surcharge, in a way.

It will be implemented as of January 1, 2015, and we've structured it so it will be covering the cost that will incur.

My last question, and I'll jump back in.

You talked about mats starting to come through and stable 2015.

Do we -- should performance of purification solutions charge at this level for the next couple of quarters until we get into the second half of your FY15, or will mats allow demand to start to ramp up in maybe the first or second quarter of FY15?

How is that going to go, and how will that impact your overall operating results, at least for the next couple of quarters?

Okay.

Considering the size of the mats opportunity, and the ramp-up between 2015 and 2016, and the fact that we'll have a two-half year in 2015, with respect to mats, we expect the second half of the year to be stronger than the first half of the year.

Right.

Will the first half be similar to 2014?

Our expectation for next year is to bring the business into profitability, which has been clearly what we were hoping to do this year.

We've been -- we've had a few setbacks, but what I was saying is that we're clearly keen on getting this in the right place, and having a 2015 that is more akin to what we can perform with in the purification solutions segment.

Of course, this will assume smooth operations and no new surprises, but clearly at this stage that is what we're looking forward to.

Lawrence Alexander, Jefferies.

This is George D'Angelo sitting in for Lawrence this afternoon.

Can you guys provide a little bit of an update on trends in the aerogels business?

Hi, George.

We've seen, as you can see from the press release, we have seen a decline in the revenue of the aerogel business during the last two quarters.

The decline that you see, in terms of revenue, is due to two factors.

One is a fact related to the lack of royalties that we had received in the past that are not re-occurring this year.

The second effect is that we have exited the oil and gas business, which has been a nice revenue generator, but has not actually been providing any profitability for us.

The business has been concentrating in the areas and niches that it has the most impact, and the best bottom-line performance.

Those are niches such as the -- and one of the larger ones, such as the building installation and building materials business in Europe.

But we've also seen some very good in-roads in the coatings, industrial coatings area, and day-lighting, which is the application of aerogel inside of polycarbonate sheets to provide insulation, but still have some light coming through that insulating material.

These are the three areas we are focusing on.

It has resulted in a decline in revenue, but we're still in a place where we believe that we have strong potential with this unique material.

Jeff Zekauskas.

Hi.

You talked about instituting a surcharge having to do with your higher environmental costs.

I don't think any of the other carbon black players in North America has signed agreements with the EPA, or are bearing higher costs.

Won't it be difficult to actually put a surcharge through, since my imagination is that you will be higher-priced than your competitors?

Jeff, thanks for the question.

We clearly will have this issue to deal with, but let me just tell you that we have been in contact with our customers for a month already on this issue, because the regulatory environment has actually, or will be such, that we will incur a significantly -- a significant additional cost to run the carbon black business.

For our customers to have reliable and high-quality supply, there is a need for them to understand that higher costs will be part of the game in the future, and that they will need to think about passing on these additional costs all the way to the end consumer.

The other point I would make is that we understand from what we have heard that all of our competitors are going through this same type of negotiation we have gone through with the EPA.

We believe that they will be facing these same additional costs in the near future.

Our belief is that the entire industry will be in the same boat, and having to deal with that same challenge going forward.

In purification solutions, can you divide the operating losses into the difficulty in operations, what the underlying profitability of the business is?

Let's use this quarter, perhaps, as an example.

We've indicated that we had issues with regard to our reliability, and that there was slightly weaker volumes and a mix effect.

All in all, I would say that each of these three buckets are about of a similar size.

So the business continues to lose money, even if you were operating it adequately?

Is that at the current level of revenues?

I would say that's correct, yes.

In the moderation for reinforcement materials demand, you have a benefit from the NHUMO acquisition.

Is the moderation in demand that you're talking about, is that inclusive of NHUMO, or exclusive of NHUMO.

In other words, is volume, is your overall total volume going to be -- I don't know, pick low single digits or something like that -- inclusive of NHUMO, or exclusive of NHUMO in the fourth quarter?

It will be exclusive of NHUMO.

Exclusive of NHUMO, okay.

In cesium formate, have you effectively ruled out plans to expand the mine's capacity?

Is that unfeasible?

So now what we're really doing, or what you're really doing is finding a way to maximize the output as the mine depletes itself?

Actually, we're -- the original plan that we had in terms of accessing areas of the mine that we wanted to access, has not actually worked out.

In a way, it was economics that set us back in terms of the complexity of what needed to be done to ensure safe and reliable mining.

We however have, and continue to have, work going on in terms of smaller projects around the mine to access additional cesium.

We will be proceeding with those.

Then we're going to be looking at other ways to achieve access to cesium for the future.

These are -- they may be around the mine, in the sense that we may have lower concentration ore in and around the mine; but they will also be around recovering more cesium from some of the fluids that we rent and recover.

In addition to the fact that we will be spending more resources looking at other geographies around the world to access cesium, there are some known sources, albeit at lower ore concentration or cesium concentration levels, which will require additional technology and different extraction mechanisms to achieve.

This is where we're going to be spending more of our resources in the future, to extend beyond the five years visibility that we have today.

Lastly, with the extra costs that you're bearing, or the extra expense that you're bearing because of environmental requirements, are those extra capital costs, or are those, in addition, extra capital costs and operating costs?

These would be both capital and operating costs.

The capital will be over a defined period of time, with of course additional capital, but at a lower rate to maintain the equipment; and then operating costs as the assets get started up.

What's the magnitude of the surcharge?

I would rather not get into that.

We've been communicating with our customers as of last week, so this is something that I would like to keep between us and our customers for the time being.

John Roberts, UBS

After January 1, when the surcharges are in, will you break out for us how much of the reinforcement segment revenue change is due to the surcharge?

No, we won't break that out.

Okay.

Will it be meaningful enough that we'll ask about it, or we won't notice it?

I would say it is designed to recover our costs, and we have designed it in a way that it's as close as possible to the recovery of our capital and our operating costs over time.

Okay.

I used to think in the cesium formate business that you needed an oil-field services partner.

Now I'm sort of thinking maybe you need an ore or a mining partner in that business.

It's a little bit like the tantalum business years ago, looking for new sources of material.

Is that something you might -- I guess, let me rephrase the question.

Is this a Cabot core competency to go out and discover new sources of ore?

I would say that it is not our core competency.

However, in the world of cesium, we may actually be one of the experts.

In a way, we are experts in this area, but clearly not experts in scouring the world for new sources of cesium.

We are certainly going to be getting the support of external experts to help us in this process.

But certainly something that we have been thinking about, John.

Christopher Butler, Sidoti

Sticking with the cesium formate business, understanding that this is historically very lumpy, As we think of normal for this business before the adjustments that you make, should we be thinking in operating income of $35 million to maybe $40 million, like you seem to be shaping up to this year, or a number higher than that, like you did last year?

I would say it's a business that's been difficult to predict.

It will continue to be that way because we've got such a strong project connection to it.

As we've said, the last two quarters and the quarter ahead of us will be most likely weaker at this stage.

As we look at our new strategy, we're going to be somewhat more conservative, and we'll be spending a little more.

We said that all in all if you look over annual periods, we should be 10% to 20% lower than in the past.

The cost improvements that you were hoping to make out of this -- from this business at one point in time, are those gone by the by because of the change of strategy?

I'm not sure what cost improvements you're --?

Well, at your Investor Day you had highlighted improvements that you were trying to make in each of the different segments, including specialty fluids.

I'm going back a little bit a ways, here.

I'm not sure I can relate to that.

I think the specialty fluids business has been properly resourced.

There's been a strong focus on maximizing value, and we had some costs related to our mining operations.

But again, a lot of these costs have been put in question, as a result of our change in strategy, because we realized that some of the mine projects we had were uneconomical.

Shifting gears to purification.

Could you speak to the soft demand that you saw in the water side, which I always viewed as a little bit more stable?

Right.

Now, the -- what's been going on, on the water side, there's been -- as you know, the water business tends to be more seasonal.

We're at the -- in the period where the water business is stronger than the rest of the year.

We have seen some of that coming through.

However, what has happened is that the water business has happened a little later than the normal season, due to some weather effects and impacts.

I'm not an expert here, but I've been told that the water sector in general has been slower for the industry.

We're only now seeing the pick-up of things.

Actually, in July we've seen the business becoming more normalized in that respect.

In the third quarter last year, you had a royalty payment.

I may be mistaken, but I thought there was one more payment coming this year?

Was I --?

That is correct.

We have received a royalty payment in and around the same amount as last year.

So that's included in the loss in the quarter?

That's correct.

I appreciate your time.

Thank you.

Jay Harris

I have a couple of questions.

One, when you look at the cash you've expended and will expend the correct the operational efficiencies in the purification solutions business, what will that aggregate?

It's a lot of small things, Jay.

It's in the millions of dollars per quarter, single, low single-digit millions of dollars per quarter.

Yes, but if you add up all the quarters are we talking $10 million, are we talking $20 million?

Yes.

$10 million or so is a good number.

Is most of that being expensed as a sort of a maintenance?

That is correct, yes.

Okay.

To what extent is that responsible for generating the losses in the business?

It's been a significant factor in the business, because what you have to realize is it's not just the cost, but it's also actually the fact that we've had equipment that has not been available to produce, and we've not been able to supply at the rate we would have liked to.

We've been losing business partially because of these operational disruptions.

The other question I had, going over to advanced technologies, it looks like inkjet colorants is a successful growth segment, or sub-segment.

I'm not sure about aerogels, and given your disclosure today on specialty fluids.

I wonder if you could go -- cover those four businesses, and tell me what you expect out of them in terms of achieving a size over, I don't know, a four- or five-year period?

Right.

So we still see -- first of all, I will say that when I joined the Company we spent quite a bit of time doing a deep dive in all of the activities we have and businesses we have.

We, over time, have been high-grading the efforts of the Company in the areas where we have the most value-creation potential.

That has resulted in projects that were perhaps not visible to the outside world, disappearing and being shut off.

It has resulted in us selling the security materials business, where we achieved this sale of $20 million.

The cash was received, actually today.

We have ended up concentrating on these four businesses that we currently report back, and have been quite pleased with the performance.

Now, the performance is driven by different types of markets.

The performance has been at different levels because of the maturity of the business in which we were in.

If you look at the specialty fluids businesses, the business where we have matured, where we're continuing to become, or to see the adoption of the technology across the industry.

We continue to be very positive with regard to the business model and the margins that are being achieved in that business.

We see, save for the current restrictions that we have encountered on cesium access from the mine, we believe that over the coming years we'll be able to get cesium at reasonable cost for us to continue to grow the business.

If I move to the elastomer composites business, which we also call CEC, we over the years have decided to move this business more into a technology royalty model, which is now reflected in the earnings and the sales that we have reported this quarter, and will be happening at a constant rate going forward.

We have reduced the sales of materials to a very low level, because we're actually today using the equipment we have in Malaysia more, as what I would call, a technology-driven asset to continue to develop and progress the CEC technology.

The business has been moved more into a technology realm, with expectation of royalty payments in the future.

Moving on to aerogel, this is a business that has had its cyclicality.

I mentioned earlier on the call, that we have concentrated the markets that we will be considering in the future to the three markets, or essentially those three that I mentioned, which is the coatings, the insulating materials, building materials, mainly in Europe; and the day-lighting.

Here we see opportunities.

In the past, we would seize more opportunities than we could -- than we should have, perhaps, pursued.

We have restructured the business, have shrunk its cost base; and have made it -- have repositioned it to be successful in the future.

A lot of effort, certainly now, put on to these three markets I mentioned.

Can you get the aerogel business to $50 million or larger size over a period of time?

Right.

This is a business that, in my view, has the possibility of growing to a significant size, if the European building material insulation material develops in the way that we perceive it may.

What I mean here is that we have been working with the European building materials producers in very close cooperation to include the aerogel into their final products.

If we can get these products -- and they have been getting these products to market.

If we find the space where we can manage the cost-value benefit, then this could be a very large opportunity for us, and would require, at that moment in time, a new investment.

If I could ask one more question.

Could Eddie please refresh my memory as to where the debt levels were?

You talk about over a $200-million reduction in debt.

Yet when I'm looking at the September 30, 2013, versus June 30, 2014, long-term debt is up $6 million and short-term debt is up $4 million.

What happened in between?

I'm looking for the numbers you're referring to.

I think there's shift between long term and short term, Jay.

If you look at the net debt for the third quarter we are at $1.06 billion, which is quite a substantial reduction from September of 2013.

I was asking specifically about the $256 million for the repayment of debt.

You'd have to look at the March quarter to the September quarter.

Was that -- the debt levels were much higher in the March quarter?

Yes.

Okay.

Thank you.

Ivan Marcuse, KeyBanc

Just a quick follow-up.

You're going to be producing quite a bit of cash now that you've paid down debt.

Your debt-to-EBITDA levels are probably as those you want to get them, maybe.

Where do see with your excess free cash flow, and with your CapEx coming down a little bit?

Do you anticipate maybe picking up a little bit more on the share repurchase side, or looking at raising your payout ratio in terms of dividends?

Could you just talk about that?

Thanks.

I think we've been pretty clear in terms of our cash strategy.

We haven't changed that.

We're clearly focusing on projects that generate good returns for the Company.

Then the dividend has the priority, and we're continuing to show to our shareholders that we're a dividend-paying Company, and have been for many years.

We've raised the dividend the last two years.

We are clearly also making sure that we're holding on to our investment-grade rating.

All of that is in place.

We continuing to do the right thing in terms of managing our balance sheet.

We will also be repurchasing shares to offset dilution.

We'll also at times be considering opportunistic purchases of shares, if we have excess cash on hand.

Does that answer the question, Ivan?

Yes.

Just last quarter there was a lot of conversation around paying debt or buying back stock, et cetera.

Now that you've paid down the debt, that would imply that maybe debt as a priority of cash has maybe fallen in terms, and you're still going to continue to produce quite a bit of free cash flow over the next, if my projections are right, over the next several quarters.

The thought was, your CapEx is coming down.

I know that you want to invest in your business, but then there's two or three other ways we could spend the cash outside of debt.

I was just wondering if those priorities have changed, or if you would assume bigger dividend payout ratio, or maybe look at buying back stock above and beyond offsetting dilution?

No, I would say we're still looking at projects that have high returns as our first priority.

That will stay that way.

With regard to repurchases, first objective is to offset dilution.

Of course, if there are opportunities to access the market at prices that we consider attractive, we will be looking at our cash position and working that opportunistically.

Kevin Hocevar, Northcoast Research.

Thanks for the follow-up.

I was just wondering if you could comment back to the NORIT operational issues.

When do you think you'll have the majority of these equipment issues fixed?

Will it be the end of this fiscal year, the end of the calendar year?

Also, if you could give us an idea of how much business you've lost because of the problems?

On the loss of the business, we would rather not comment for competitive reasons.

With regard to the operational problems, I was hoping that we would be complete this year in terms of being able, this calendar year, in terms of having fixed the things we had seen.

Unfortunately, we have had more surprises in areas that we hadn't expected.

Again, these are all smaller things.

Not so significant, but quite disruptive.

I would say with that additional knowledge of the last couple of quarters, I would say that we will have additional spending needs in this area into 2015.

Got you.

One other quick one.

The performance materials segment margins were good, up nicely year over year, but they were down sequentially, about 200 basis points.

It seems like historically those two quarters are kind of on par with each other, or the third quarter is normally even a little higher.

I was just wondering why the sequential decline?

Was it just more that the second quarter was abnormally high, and this is a more normalized margin for the business, or was there anything that drove that down sequentially?

Yes, I would say that these are global businesses, and yes, we've got puts and takes depending on applications and customers.

I would say that, in general, it was in line with historical movements, so the slightly weaker Q3 was not anything that concerned us.

We saw a slightly weaker European environment in our specialty carbons that affected the third quarter, but we were pretty comfortable with the business.

We are seeing some real strong potential here.

We were applying some of our new commercial excellence tools and processes onto the business, and we're driving new products into the market in certain new applications.

Plus, we've seen a nice rebound in the silicone's business recently, which across the board, across the globe, more specifically in the US, where silicones are heavily used in commercial buildings.

We've seen that actually pick up quite nicely, and has been supporting to a greater degree our ISMO business recently.

Okay, great.

Could I just sneak one more in?

I'm just wondering, when do you think NORIT turns profitable?

Do you think it will be before the back half of fiscal 2015, or will we have to wait until that time?

We expect the business to be profitable next year.

Again, as I mentioned, we're going to two halves to the year, with mats kicking in after April of 2015.

That's second half of our FY15.

We'll see a grade in here, but all in all the objective is to return the business to profitability next year.

Thank you.

James Sheehan, SunTrust

On the environmental surcharges, how much time do you expect to elapse between when you implement surcharges and when your competitors do?

Would it be weeks or months, or do you have any idea?

I must say, I really don't know what our competitors are going to do in this field.

We've decided that it's a necessity for us to pass through these additional costs, and we'll be implementing this surcharge as of January 1, 2015.

Okay.

Thank you very much.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference.

I would now like to turn the call back over to Patrick Prevost for closing remarks.

I just wanted to thank you for joining us today.

We are looking forward to speaking with all of you again next quarter.

Thank you, bye-bye.

Ladies and gentlemen, that concludes today's conference.

Thank you all for your participation, and you may all now disconnect.

Have a wonderful day.