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Executives

Susannah Robinson - Director of IR

Jonathan Mason - CFO

William Brady - EVP and GM of Carbon Black Business Group

Patrick Prevost - President and CEO

James Kelly - Corporate Controller

Shawn Cohane - GM of Performance Segment

Fred von Gottberg - GM of New Business Segment

Robby Plainfield - GM of Specialty Fluid Segment

Eddy Cordeiro - Head of Corporate Strategy Group

Brian Berube - General Counsel

Analysts

Laurence Alexander - Jefferies

Jeff Zekauskas - JPMorgan

Saul Ludwig – KeyBanc

Jay Harris - Goldsmith & Harris

John Roberts - Buckingham

Mike Judd - Greenwich Consultants

Jason Miner - Deutsche Bank

Cabot Corp. (CBT) F1Q09 (Qtr end 12/31/08) Earnings Call January 29, 2009 2:00 PM ET

Operator

Welcome to the Q1 2009 Cabot earning conference call. My name is Mesal and I will be your operator for today. (Operator Instructions). I would now like to turn the call over to Ms. Susannah Robinson. Please proceed ma’am

Susannah Robinson

Thank you Missal. Good afternoon. This is Susannah Robinson, Director of Investor Relations. I would like to welcome you to the Cabot Corporation first quarter 2009 earnings teleconference.

Here this afternoon are Patrick Prevost, Cabot’s President and CEO; Jonathan Mason, Cabot’s current Chief Financial Officer; Eddy Cordeiro, who will succeeding Jonathan in that roll; Bill Brady, General Manager of the Core Segment; Shawn Cohane, General Manager of the Performance Segment; Fred von Gottberg, General Manager of the New Business Segment; Robby Plainfield, General Manger of the Specialty Fluid Segment; Jim Kelly, Corporate controller; and Brian Berube, General Counsel.

Last night we released results for the first quarter of full fiscal year 2009, copies of which are posted in the Investor Relations section of our website. For those on our mailing list you received the press release either by e-mail or fax. If you are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations.

The slide deck that accompanies this call is also available in the Investor Relations portion of our website and will be available for two weeks following the earnings teleconference in conjunction with the replay of the call. I will remind you that our conversation today will include forward-looking statements.

Forward-looking statements are subject to risks and uncertainties and Cabot’s actual results might differ materially from those expressed in the forward-looking statements. A list of factors that could affect Cabot’s actual results can be found in the press release, we issued last night, as well as in our 2008 Form 10K filings with the Securities and Exchange Commission, copies of which are available on our website.

I will now turn the call over to Patrick Prevost, Cabot's President and CEO, who will discuss the key highlights pertaining to the company’s performance for the quarter and details of the restructuring plan we announced last night. He will then turn the call over to Eddy Cordeiro, who will provide the specific segment and corporate financial details. We will then provide our outlook for the future and open the floor for a question and answer period. Patrick?

Patrick Prevost

Thank you Susannah. Good afternoon, everyone. It's a pleasure to be with you today. Before I begin my remarks, I would like to take a moment to introduce Eddie Cordiero, as our future CFO. Eddie's financial, business, Investor Relations, and strategy experience make him an ideal candidate for this job. His background will serve the company well as we move forward. So we would like to welcome Eddie in this new position.

I would also like to thank Jonathan Mason for his valued service to Cabot over the past three years. As most of you know, Jonathan will be leaving us in February to become CFO of [Fontera] in New Zealand. We appreciate Jonathan's contribution during his tenure and wish him and his family all the best in their new endeavor.

As we mentioned in our press release last night, this was a difficult quarter for us. I will touch on some of the key drivers of our performance for the quarter and then discuss the restructuring plan we announced last night.

During the quarter, we experienced an unprecedented decline in demand across most of our key businesses and in all geographies. These declines were consistent with a 30% volume drop that we indicated to you in December. The main drivers of the volume reductions were a combination of significant customer destocking and reduced demand in the tire, automotive and construction markets.

Our rubber blacks and performance products businesses benefited during the quarter from lower carbon black feedstock costs. This included 22 million of contract lag benefit and a $20 million LIFO benefit, which was partly offset by an $11 million inventory write-down.

During the past two years, rising carbon black feedstock costs have led to unfavorable earnings and cash flow due to lag effects. As discussed previously, we are working to reduce the pricing time lag in our rubber blacks supply contracts. During this quarter, we successfully renegotiated many of these contracts and about half of our total contracted volume has been converted to a more timely monthly pricing adjustment mechanism.

It is hence important to know that we continue to have approximately 50% of our total Rubber Blacks volume under contract and this brings stability to the business. Despite a difficult business environment, we continue to build on our strong liquidity position during the quarter.

Our focus on cash, working capital and capital expenditures generated $91 million of cash from operations including a $61 million decrease in working capital. Each of our key businesses has aggressive targets with regard to cash and working capital. And we see these businesses continuing to push forward in this regard.

I will now move to our restructuring announcement. Last night, we outlined an aggressive plan to restructure our operations and achieve fixed cost savings in excess of $80 million per year. These actions are necessary and will allow us to respond to the current business environment, as well as position us strongly for the future. This repositioning will significantly reduce our fixed costs and result in a stronger, more efficient, lower cost, global network of manufacturing assets.

Our plan and the timeline to achieve it is -- are aggressive, but speed is essential, in view of the steep and rapid reduction in customer orders around the globe. As we detailed for you in December, we have implemented and continue to see benefit from hiring, travel and salary freezes. We have eliminated 300 contractor positions, around the globe and have substantially reduced corporate costs and capital expenditures for 2009.

In addition to the actions taken, we plan to close four of our manufacturing operations and one regional office. We will also mothball assets at two other sites, implement short worktime at a site in Germany and delay the start-up of our new Rubber Blacks capacity in Tianjin, China. Our plans will ultimately result in a reduction in force of approximately 500 Cabot jobs.

Let me go into a little more detail. We plan to close our Stanlow and Dukinfield plants in the UK., our Berre facility in France, the tantalum powder manufacturing operations at our plant in Boyertown, Pennsylvania and our regional office in Kuala Lumpur, Malaysia. Our mothball assets will be in Indonesia and Canada and both of them are in the Carbon Black area.

These actions are difficult, as they personally affect many valued employees, colleagues and friends. The affect of facilities have all had a critical part to play in our history and success to this point. The actions however, are prudent, given the current environment and necessary to ensure that we can emerge even stronger in the future. As you know, restructurings are not without costs.

We filed today a detailed Form 8-K with the SEC, giving a breakdown of specific types of costs related to the plan. At a high level, we expect cash costs of approximately $80 million and non-cash charges of approximately $70 million. We anticipate the majority of these costs to be incurred in fiscal year 2009. But some charges may extend into 2010 and beyond, as closure and side remediation activities take place.

During 2008, we developed strategies for each of our businesses. This restructuring has led to an acceleration of activities that have been ongoing and remains consistent with our strategies. We will maintain a broad geographic presence of focus on technological innovation and excellent customer service that have made us a global leader in our businesses.

Eddy Cordeiro, will now review the business segment and financial details for the quarter. Eddy?

Eddy Cordeiro

Thank you. I will start with the core segment. Rubber Blacks profitability increased by $6 million, despite a 29% decline in volumes. $22 million favorable contract lag and a $10 million LIFO impact benefited performance during the quarter. This is compared to an unfavorable contract lag of $9 million and an unfavorable LIFO impact of $6 million in the same period of 2008.

Additionally, the business recorded an $11 million unfavorable lower our cost for market inventory adjustment resulting from high cost inventory in our Asia Pacific region and rapidly falling Carbon Black prices. The demand drop in this region was more precipitous than our expectation and combined with the long supply chain, contributed to this margin squeeze. We expect to substantially work through these high cost inventories by the end of the second quarter.

In the Supermetals business, we continue to be focused on cash, and we were successful at generating an additional $10 million during the quarter, on a constant dollar basis. We implemented significant price increases in October, and this, combined with lower average ore costs, contributed equally to the $6 million sequential profit improvement in the first quarter.

In the Performance segment, profitability decreased by $28 million, when compared to the first quarter of fiscal 2008. The segments volumes were particularly affected by the automotive and construction sectors. But the specialty nature of the business has allowed us to maintain unit margins.

Performance products volumes declined by 37% and Fumed Metal Oxides by 30% compared to the first quarter of 2008. Lower Carbon Black feedstock costs resulted in a LIFO benefit of $10 million during the quarter. This is compared to an unfavorable $2 million impact in the same period of fiscal 2008.

Business performance in the Specialty Fluids segment for the first quarter of fiscal 2009, declined by $4 million, when compared to the same period of 2008, as we anticipated, the decline was driven principally by a slowdown in drilling activity in the North Sea, but has not yet been offset by increased activity in other regions.

During the last three months, oil companies have announced reductions in their capital expenditure budgets, which could impact the level of activity in this business. Over the last year, we have been working to improve the efficiency of our new business development efforts. This quarter, we began to realize the benefit of these efforts, including [8%] higher revenue than the same quarter last year, lower costs and a $13 million improvement in cash performance.

Over the last several months, we have heavily focused on managing our cash and liquidity; and during the quarter the company generated $91 million in cash from operations. The significant uses of this cash included $32 million in capital expenditures, $24 million in debt repayments, and $12 million in dividend payments, yielding a net cash increase of $20 million.

As Patrick mentioned earlier, we successfully reduced working capital significantly during the quarter and have aggressive targets, including reducing inventory levels, proactively managing receivables with our customers, and extending payable terms.

We’ve also reduced our capital spending plans for fiscal 2009 to $150 million, which is a $50 million reduction from the fiscal 2008 level. Over the coming 12 months, we have $49 million in debt that is maturing, which we will be paying down.

Also during the quarter, we booked a provision for income taxes of $1 million. Due to a geographic shift in the makeup of our earnings, we expect our operating tax rate for the year to be in the range of 35% to 36% before restructuring charges and tax settlements. We would expect this rate to return to previous lower levels with a more normalized earnings pattern.

Finally, we have changed the allocation methodology for our corporate costs. These costs, which are in the order of $30 million annually, now appear in the general unallocated expense line of the summary results by segments. We believe the new presentation gives a more accurate look and underlying business performance, and provides the better visibility and control of these costs at the corporate level. Thank you.

Patrick Prevost

Thank you, Eddie. In conclusion, we are moving rapidly to address the new business environment. We have planned for a weak 2009 globally and we see demand in the automotive and construction market likely remaining slow in the second quarter. More recently, the electronics industry has shown significant weakness, including substantial customer de-stocking. We believe that this will negatively affect the demand in our Fumed Metal Oxides and Supermetals business during this coming quarter.

More positively, we are in a strong cash position. As a result, we have flexibility, which in this environment is critical and this will allow us to pursue opportunities that others may not.

We are continuing to invest prudently in our new businesses and we anticipate that these investments will yield material returns in this fiscal year. We are very focused on working with our customers through the restructuring and our operations will be well positioned to respond rapidly as their demand recovers.

The restructuring actions that we announced last night are significant. These plans are aggressive and rapid and will require focus, discipline and decisive action to execute. Our team is experienced. And I have full confidence in our ability to deliver the expected results. The next few months will be challenging, but our focus on results and our teamwork will ensure that we emerge a much stronger company.

Finally, I wanted to give you some background on latest market developments. In January, we are thus far seeing an increase in demand over the previous months, which is the first time we have experienced a monthly increase since September.

Although, these volumes do not approximate the levels prior to the downturn, it does give us some optimism that we may be reaching the end of the customer de-stocking. These are very early signs and cannot yet been seen as indicators of a recovery.

During my more than 25 years in the chemical industry, I have gone through several downturns. This one is certainly the most significant that I have experienced. But I know that our industry has a strong ability to bounce back quickly.

The non-discretionary nature of the tire industry should provide us some additional optimism that we should be able to reach a normal level of activity in the coming months. And finally, Cabot has strong franchises and global leadership positions, which gives me a high level of comfort in our ability to work through this downturn and come out stronger.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Laurence Alexander with Jefferies. Please proceed.

Laurence Alexander - Jefferies

Good afternoon.

Patrick Prevost

Good afternoon, Laurence.

Laurence Alexander - Jefferies

Patrick, first on the new contracts that you're negotiating in the Tire Black business. Could you discuss a little bit what you think normalized margins for those contracts should be. Because obviously the data we have is rather volatile and skewed by the historical contracts?

Patrick Prevost

Well, as you know, Laurence, we do not provide details with regard to margins because of the competitive concerns that we have with regard to providing that information. But what I can say is that we've had -- with the contracts we have in place and the formulas, we've had some stability in the margins and that has come through in terms of the profitability levels of the business.

On the spot side of the Carbon Black business or Rubber Blacks Business, there has been more volatility, essentially because of the rapid decline in the feedstock market, but I would say that there again, the ability to retain margin has been excellent.

Laurence Alexander - Jefferies

Maybe to come at it from a different angle, if oil prices were to stay flat for the rest of the year, would you expect the profit before tax, excluding lag and LIFO, to be more comparable under the new contract regime with the back half of '08 or with 2007?

Patrick Prevost

I think, Laurence, the issue here is that there is a large volume factor, in addition to the volatility on the feedstock side. And right now, what we're focusing on is getting our fixed costs aligned to a new level of demand, and we're certainly working very hard to manage our working capital. And pricing at this stage has remained stable, in the sense that we've been able to retain margins underlying and basically corrected for the feedstock volatility.

Laurence Alexander - Jefferies

And I guess then just lastly, can you discuss in the Carbon Black market on a regional basis, utilization rates currently and what will happen once the facilities are closed?

Patrick Prevost

Right. Perhaps, what I would do here is ask William Brady to give you some background, in terms of the geographical situation in the Carbon Black business. You've seen that we've indicated our volumes by region and the volumes do mirror the utilization. But, Bill?

William Brady

Hi, Laurence. The current, you asked about current utilization, it's a tricky question, given these months, but maybe I can help you out qualitatively. In North America, well everything was quite low towards the end of the last quarter, that is, November and December. But as we go into January, North America actually has picked up nicely, and so is running at not bad utilization levels.

Europe is low now, but will tighten up after the restructuring. South America is a bit on the low side. China is recovering in January. Asia Pacific south is quite low, but will get better after the restructuring, and then our operations in northern Asia is quite stable and in a good position.

Laurence Alexander - Jefferies

Okay. Thank you.

Operator

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

Jeff Zekauskas - JPMorgan

Hi, good afternoon.

Patrick Prevost

Good afternoon, Jeff.

Jeff Zekauskas - JPMorgan

I think in early December you put out a press release, saying that you intended to close or idle 40% of your Carbon Black capacity. Is that still your target and when do you expect to reach it and where are you now?

Patrick Prevost

Jeff, let me perhaps address what we said in December.

Jeff Zekauskas - JPMorgan

Okay.

Patrick Prevost

We mentioned in December that we had curtailed operations to the tune of 40% and what that meant is we had slowed down our manufacturing from a much higher level in the previous month to a level of about 60% on the utilization rate. That did not mean that, we were actually cutting back or closing 40% of our capacity. I think that that is maybe what you're addressing.

We had indicated that our volumes were down, somewhere to the tune of 30%. And what you see now in terms of our restructuring is what we believe to be the prudent level of cost reduction and capacity closure that represents what we believe the new demand environment to be requiring.

Jeff Zekauskas - JPMorgan

So in your capacity announcements that you've today, how much does that cut your Carbon Black capacity volume?

Patrick Prevost

The announcement that we've made today represents approximately 250 to 300,000 tons of capacity, of which approximately 150,000 tons is going to be closed permanently. And the mothballed facilities will be able to be restarted at short notice, so that we have the flexibility to respond to a change of environment. The other point I would make on the capacity in the Carbon Black side is that, we are in the process of concluding the build of 150,000 tons of capacity in Tianjin, China.

And that we will be delaying the startup of that operation until further notice and until we believe that the market would warrant that. So we're shutting down significant amount of capacity that we believe is the least effective and efficient in our system. But we do have flexibility to respond to potential bounce back in the market.

Jeff Zekauskas - JPMorgan

Just a couple of more questions. There is $80 million that you are attempting to achieve in cost reductions and you are laying off 500 people. I don't know if the average employee cost is 50,000 per employee that would be $25 million. So, there is another $55 million to go to get to your cost target. So can you give us some idea of how you're going to get to the $80 million number? And why there isn't any cost savings in fiscal 2009?

Patrick Prevost

Okay. On the cost side, Jeff, the cost of the reduction in employment is only one part of the costs that we will be eliminating. As you may understand, we will be shutting down entire sites. So there is actually costs that will go away in the sense of maintenance and other costs linked to that, to these sites, which makes the labor part and the job reduction component of that $80 million perhaps lower than -- lower part of what you're used to see. But let me assure you that this minimum of $80 million has been worked through in high level of detail and that we fully understand that this is what we will be delivering.

Jeff Zekauskas - JPMorgan

I guess last -- so if I understand what you said, it sounds like $80 million also comprises capital costs?

Patrick Prevost

Yes. Well, no, no capital costs. No, these are fixed costs, cash and non-cash/. So, and perhaps one other point here is that we have or will eliminate 300 contractor positions or have started in the last few months and will complete it in the coming weeks. So that may also be part of what you're trying to see there.

Jeff Zekauskas - JPMorgan

Okay. And just lastly, in performance products, I didn't notice any restructuring actions there and, the year-over-year comparisons are tough. Sort of, how are you going to extricate yourself out of that profitability relationship?

Patrick Prevost

Well, I think what may not be seen or perceived here is that as we restructure our Carbon Black operations, that includes actually activities that are related to our Special Blacks, because some of our Special Black units are situated within the Carbon Black sites that we will be shutting down. So the separation of what will be attributable to Rubber Blacks and Special Blacks is actually quite difficult to achieve and we will not be able to provide that level of detail. But suffice it to say that the minimum $80 million of fixed cost savings are cost savings that will be affecting both the Rubber Black and the Special Blacks businesses.

In addition, I wanted to make the point that the Fumed Metal Oxides business, which is part of the performance segment is also being affected and we have restructuring work going on here as well and we have announced that our Rheinfelden plant in Germany is going to a short worktime mode and that is going to be linked to the German government's support for the current downturn. So in essence, we're going to be running the [RF MO] plant in Germany at very low rates with very low staffing level and we'll be getting the support from the German government.

Jeff Zekauskas - JPMorgan

Okay. Thank you very much.

Patrick Prevost

Thank you.

Operator

Your next question comes from the line of Saul Ludwig with KeyBanc. Please proceed.

Saul Ludwig – KeyBanc

Hey, good afternoon.

Patrick Prevost

Good afternoon, Saul.

Saul Ludwig – KeyBanc

Thank you. Hey, Eddie, you mentioned that the corporate expense should be about $30 million a year, which would be about $7.5 million a quarter. In the first quarter if you back out the $2 million special that was embedded in your corporate unallocated, it was $16 million. So two questions related to that. The $16 million was much higher than a year ago it would have been $11 million without the special costs, so why the increase of $5 million, when you guys are trying to cut back costs? And then how do you reconcile the $16 million with your comment that it will be $7.5 million a quarter going forward?

Eddy Cordeiro

Yes, Saul. I think what you're looking at is a quarter-over-quarter comparison and what's in the first quarter of 2008 number includes a one-time benefit from the sale of our Altona land facility.

Saul Ludwig – KeyBanc

But we backed that out. That's why I said $11 million, ex the special.

Patrick Prevost

You are absolutely right.

Eddy Cordeiro

I think actually if you take out Altona, the two numbers are almost identical. So the corporate costs are…

Saul Ludwig – KeyBanc

Actually, it was $10 million of special gain as shown in your release.

Eddy Cordeiro

I'll have to go look at it, Saul but I think it was a bit higher than that.

Saul Ludwig – KeyBanc

Okay.

Patrick Prevost

I think maybe let me just engage here. I think what we'll do is we'll have a look at the specific question and the consistency of the numbers we published. What I do want to say here is that the corporate costs have been scrutinized and are continued to be reduced. Just as an example, we have actually reduced and eliminated even seven senior management positions in the last six to nine months and that is coming directly to the bottom line. So the reduction in cost and the scrutiny that we are applying to the company is not only being applied in the manufacturing sector, it is actually being applied across the company.

Saul Ludwig - KeyBanc

So what about the $7.5 million guidance going forward compared with the $16 million cost in the first quarter?

Patrick Prevost

I'm not sure. I can relate to that, perhaps Jonathan?

Jonathan Mason

Saul, if you recall, I think there is also emerging market FX one-offs that hit us in the December quarter.

Saul Ludwig - KeyBanc

How much was that?

Jonathan Mason

Certainly, we didn't have a year ago. We had both, let's just say generally concentrated in South America and those would have been in the $5 million to $10 million range, between the two of them.

Saul Ludwig - KeyBanc

Okay. That answers the question there, and that's done. We shouldn't see that anymore?

Jonathan Mason

It won't, it's related to the currencies there.

Saul Ludwig - KeyBanc

Right. So who knows?

Jonathan Mason

This is something more stable so far in January.

Saul Ludwig - KeyBanc

Okay. Great. That's a good answer to that question. That helps. Thank you. Secondly, you said that you took these inventory write-downs in the first quarter where you were trying to mark your inventory levels to current realized costs. A statement was then made that in the second quarter, you will continue to be utilizing high cost inventory. I'm trying to understand the write-down, which would have brought the inventory levels down to today's levels, and why you would have high cost inventory running through P&L in the second quarter?

Patrick Prevost

Perhaps, I could ask Eddy to take that question.

Eddy Cordeiro

Yes Saul, when you do the write-down, you write it down, so you essentially eliminate the profit for the forward-looking quarters. But you still have high cost inventory. So as we burn through these high costs inventories, it will not be until we eliminate all of them that, we will get to inventories that are more, shall we call it market-looking.

Saul Ludwig - KeyBanc

Okay. Do you know what -- you gave us in the first quarter, the impact of lag, inventory write-down. How much was in the Rubber Blacks area? How much did you have in the way of unabsorbed overhead, meaning fixed costs that weren't absorbed, because you were operating at such a low operating rate?

Patrick Prevost

I think, Saul, in a very simplistic way, if you look at the various moving parts and you basically take the base performance of the Rubber Blacks business, eliminate the lag LIFO and correct for the inventory write-down, you basically can see that the business has at a 30% lower volume rate, than the same quarter of last year, has been operating close to a breakeven level.

Saul Ludwig - KeyBanc

Okay. And…

Patrick Prevost

And that is the reason why we're actually taking the measures. We're taking in terms of restructuring because that is an untenable situation. But firmly, I believe that what we're seeing right now is a combination of destocking and potentially a new underlying demand level. But once, destocking has occurred, we should be at a level of volume that is to be considered more normal.

Right now, 30% in my view is, not a normal level and I believe that the non-discretionary nature of the tire industry, which should be bringing us back to levels that are more acceptable and that with the restructuring that we're undertaking, that should bring our margins and our profitability level to more acceptable levels.

Saul Ludwig - KeyBanc

Do you think, Patrick, that with, a) what you've seen in January; b) what your customers are telling you about their needs for your products in both Rubber Blacks, Performance Blacks and Fumed Metal Oxides; and call it c) Your own gut feel. Do you think the volume decline percentages that we will see in the second quarter will be less onerous than what we saw in the first quarter, just directionally?

Patrick Prevost

It's difficult to provide a forecast at this level. I think this has been unprecedented. I've never seen something like this, and we're still trying to work our way through what we're seeing. I mentioned earlier that, we had seen an increase in the volume in January. So we're close to end of January, versus December. However, the level as such is certainly not satisfactory and nowhere close to where it was in the month of last year.

Saul Ludwig - KeyBanc

December was a disaster for everybody, so to do better than December isn't the saving grace.

Patrick Prevost

Well, correct. And that's why, I'm also very cautious about providing any indication of where things are going. But again, my sense is that we're, one, starting to see potentially the end of the destocking. The big question for me is where is the underlying demand going to stabilize? And how long will it take to see some growth developing?

Now I believe that the second quarter will continue to be a very difficult quarter in that respect. But I'm hopeful that we will see some improvement going into the third and the fourth quarter this year. But again, this is a very, very difficult situation.

Saul Ludwig – KeyBanc

Right.

Patrick Prevost

And I think one anecdote here, which is also a positive is that in the last few weeks, month, we weren't getting any forecasts from our customers, meaning that the orders were coming in weekly without any indication of what the following week orders would be. And we are starting to see forecasts coming through again from some of customers meaning that potentially further down the chain the destocking may have bottomed out as well. But again, I would say much too early to say, and I would feel very uncomfortable providing more than that I've just provided in terms of a sense for the coming quarters.

Saul Ludwig – KeyBanc

That was fine and my last question. To get on a good news topic, its very, very encouraging to see the progress in your new businesses with the sharp sales increase and particularly the profit improvement. Which businesses were the ones that contributed to that? And I just wonder within Aerogel was there any unusual payment from Aspen that may have distorted the number on a temporary basis or were the improvements in profitability not related to any single noteworthy item?

Patrick Prevost

Saul, thanks for touching upon one of the few bright spots we have and we've done very well in the new businesses and it's actually across the board. So there is no unusual situation that may have shown a dramatic improvement in the last quarter. It's across the board and what I’d like to do is, I'd like to let Fred perhaps say a few words about the various businesses that are within the new business segment. Fred?

Fred von Gottberg

Okay. Saul, this is Fred. On the Aerogel side, we actually saw a significant boost in revenues as the entire year continued so, over the last calendar year. And so it was actually based on commercial revenues that actually with a solid same cost structure led to actually the improvement in essentially the profitability of that business.

Saul Ludwig – KeyBanc

That means they have lost less?

Fred von Gottberg

Yes. Exactly right. They lost significantly less. In fact, at this stage they have minimal cash burn in that business, which is very positive. And so, we continue to be optimistic about the commercial revenue on that side. As Patrick mentioned, inkjet also saw a stronger revenues year-on-year, this was based on both the OEM and aftermarket segment. And so that was positive and also it had a lower cost structure, which helped the profitability of that business.

And at our CSMP facility, we had stronger revenues in the security area and once again we had a lower cost structure. And that helped reduce the loss we were making in that business.

Saul Ludwig – KeyBanc

And did you make money in inkjet?

Fred von Gottberg

So all in all, the segment as a whole actually was cash positive in the quarter, and yes, we did make money in inkjet.

Saul Ludwig – KeyBanc

Great. Thank you very much, Fred. Thank you all.

Patrick Prevost

Thank you, Saul.

Operator

Your next question comes from the line of Jay Harris with Goldsmith & Harris. Please proceed.

Jay Harris - Goldsmith & Harris

Unfortunately, I'm going to revisit the operating rate now, questions on Carbon Black. You were operating at 60% of capacity in December. What percentage of your capacity are you mothballing and shutting down? Forget for a moment about the fact that you're -- we're not counting the capacities that you could startup in China but are not. And do you have any gauge at all as to what percentage of the decline that you've experienced let's say in December was inventory reduction? Do you have any glimmer of what you think final demand really looks like at this point?

Patrick Prevost

Okay. Hi, Jay. We -- coming back to the mothball and shutdown of Carbon Black facilities, just to give you a sense of the percentage, versus our total capacity, this represents somewhere in the vicinity of 16% of our capacity. And I think the second part of your question was related to…Could you repeat it, Jay?

Jay Harris - Goldsmith & Harris

Well, I'd like to get a feel to the extent that you feel comfortable in sharing it, on how much of the business downturn is associated with inventory reductions as opposed to final demand reductions?

Patrick Prevost

Right. Quite a difficult question, so I'm happy to pass it on to Will Brady.

William Brady

Jay, it's a difficult question. Let me just give you one data point, semi-anecdotal. For one of our global tire customers who was down somewhere around 26, 27% in that October to December quarter, felt that possibly about half of that down -- of that decline was destocking related in that quarter. So I don't…

Jay Harris - Goldsmith & Harris

You were also destocking at the same time.

William Brady

Well, we were destocking at the same time but I can tell you, we had been working hard on our inventory levels well before October. So it was not -- perhaps not as dramatic for us as maybe for others.

Jay Harris - Goldsmith & Harris

We're going to go, when you complete the mothballing and the plant shutdowns, we're going to go to somewhere north of 80% I would think. And how much north of 80% depends upon where the final demand is.

Patrick Prevost

That's right.

Jay Harris - Goldsmith & Harris

All right. Could we get the same kind of a picture on Tantalum and on Fumed Metal Oxide?

Patrick Prevost

I would say that because of the nature of those markets and the competitive environment, I wouldn't be willing to actually go to that level of detail. Carbon Black is somewhat more transparent, and there are more competitors, so we feel much more comfortable sharing this. But I would feel much less comfortable with Tantalum and Fumed Metal Oxides, except to say that we are running at low operating rates. We're not satisfied with the demand and we're applying the right principles to adjust the cost base.

So the case in point here is our shutdown of the powder capacity in Boyertown, Pennsylvania; and we will only be manufacturing Tantalum powder in Aizu, Japan in the future. And in the Fumed Metal Oxide business, as I mentioned we have our Rheinfelden facility that is operating at low or no rates of operation and to help the global system.

Jay Harris - Goldsmith & Harris

When I looked at the Dow Corning results, I think that Corning published it didn't seem to me that the full brunt of the recession had yet hit their volume requirements.

Patrick Prevost

Perhaps, I could ask Shawn Cohane, to pick up on that question.

Shawn Cohane

Sure. Hi, Jay. I think when looking at the Dow Corning results, important to look at -- and they don't really disclose this. But obviously, polycrystalline silicon is a very important part of their business and that business is being driven right now by strong fundamentals in the solar industry, which I think they're a bit disconnected from the general economy.

Jay Harris - Goldsmith & Harris

So that the historical volume sensitivity, probably does not apply anymore?

Shawn Cohane

I think that's correct.

Jay Harris - Goldsmith & Harris

Okay.

Shawn Cohane

So it's a much more important part of their business today than traditional silicones not that, that's not important to them, but clearly this is big for them now.

Jay Harris - Goldsmith & Harris

I guess historically, we've sort of viewed that silicone customers and electronic customer or customers represented about 70% of your Fumed Metal Oxide business. And I presume that the March quarter is starting out weaker than you averaged in the December quarter for that business?

Shawn Cohane

Well I think we are going to see some weakness in the electronics sector. And so that's pretty broad-based if you look at what's happening with everybody, in that value chain from Intel all the way down. So we are very cautious on the electronics, the sale of silica into the electronics industry consistent with what's happening in the entire chain.

Jay Harris - Goldsmith & Harris

And then all right, Fumed Metal and then what's been the -- has there been a downstream inventory, correction issue for tantalum powders, similar to what we've been talking about in Rubber Blacks?

Patrick Prevost

Let me pick up on that question, Jay. Because the actual tantalum business has seen significant increase in pricing, and the feedstock or the ore to manufacture tantalum, the prices of that ore have been coming down. We have not seen any of the effects that we have seen in the Carbon Black business.

Jay Harris - Goldsmith & Harris

I know that the volumes have held up?

Patrick Prevost

The volumes have not held up, no.

Jay Harris - Goldsmith & Harris

I was really addressing volumes. I understand the points, you've just made.

Patrick Prevost

Yeah, I was making the points about the potential write-down of inventory, which have not affected the tantalum business.

Jay Harris - Goldsmith & Harris

So I guess the question is basically, the lower volume of orders are you seeing, is that paralleling final demand or is there an inventory reduction component to that?

Patrick Prevost

Bill, would you like to take that?

William Brady

Sure. Jay, I think it is also a mix. I think our read on the inventory at our customers is a real mixed bag. We have some of our western customers who have quite a bit of tantalum inventory, that's going to last them a while in '09. We have others who are running hard for cash and have very, very little inventory. And then on the other side the Asian customers, I think have been working hard on their inventory, particularly in the last three or four months. So, it's a little bit of a mixed bag. And I think what we have seen is a mix of underlying demand and destocking in tantalum as well.

Jay Harris - Goldsmith & Harris

Thank you very much, gentlemen.

William Brady

You're welcome.

Patrick Prevost

Thank you, Jay.

Operator

Your next question comes from John Roberts with Buckingham. Please proceed.

John Roberts - Buckingham

First, good luck, Jonathan.

Jonathan Mason

Thank you.

John Roberts - Buckingham

Congratulations, Eddie.

Eddy Cordeiro

Thank you.

John Roberts - Buckingham

The non-contract side of the Rubber Blacks business has a price lag as well, it's just not contractually set. Was there a sort of similar benefit of lag in the non-contract side as there was in the contracted side?

Patrick Prevost

Hi, John. Let me ask Bill to take this question.

William Brady

Sure, John. I think you're right. For Asia-Pacific, places in Asia-Pacific that use US Gulf Coast feedstock. You have a lag in that it takes a little bit of time for the feedstock to get across the ocean and to get used. So that was the problem that Eddy had talked about earlier. But conversely, last year as feedstock was on the way up, we had some benefit from that mechanism.

John Roberts - Buckingham

And in the non-contract side of the Rubber Black business, what are the most recent trends in pricing? We had feedstock that was plummeting as you finished the year, then they had a strong rally over the holiday period and we kind of stabilized a little bit now.

Are prices going down because of the big decline? This is in the non-contract side. Prices still going down in the non-contract side because of the big decline or have they actually bounced up a little bit with the recent rally that you've had?

William Brady

Well, a lot of our non-contracted business, remember is, in China and in Asia, and prices in both of those areas dropped. Pricing, I would say, was more aggressive in China than it was in the rest of Asia, so it dropped. As feedstock dropped, and I would say right now it's stabilized but not necessarily bounced back up yet.

John Roberts - Buckingham

Okay. So even though feedstock bottomed a few months ago and bounced up, that hasn't hit the pricing side yet?

William Brady

Yes.

John Roberts - Buckingham

And then in the new business, segment revenue slide, would new businesses -- people often look at sequential improvement because the new businesses aren't yet large enough. They have strong seasonal patterns. The sequential decline, is there a seasonal pattern here that's pretty significant in these businesses at this point that accounts for the sequential decline?

Eddy Cordeiro

John, let me answer that. There are two components. One is a seasonal element, which is in the ink jet business, it is the -- the fourth calendar quarter is always weaker since people have built up inventory prior to the fall period where you've got back-to-school sales and things like that. So there is an element in the inkjet that is seasonal.

And then in the aerogel business, to be fair, we work on projects, and those projects come and go and so there's quite a bit of variability in the revenue, based on those projects; and we saw a bit of that in the aerogel business in that quarter.

John Roberts - Buckingham

Okay. And but we should expect not -- what maybe you would not like my comment on the seasonality, Q2 versus Q1, the seasonality is only really the inkjet side then. It's really your Q4 or a calendar Q3 going into the calendar Q4.

Eddy Cordeiro

That is correct.

John Roberts - Buckingham

Okay.

Eddy Cordeiro

It's an inkjet phenomenon.

John Roberts - Buckingham

Thank you.

Operator

Your next question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Mike Judd - Greenwich Consultants

Ah, yes. Thanks for taking my question. I have a question about -- also about the volumes, the changes on a year-over-year basis in the Rubber Blacks. And I guess we've gone through a lot of this and I guess the thought process, if I could summarize here, is that we're due for some sort of bounce-back in that trend. So it's not quite so negative.

But my question is, if we want to look at it sort of, just beyond let's say an inventory restocking in perhaps the March quarter or whenever it occurs. I'm trying to get a sense of maybe longer term, over maybe the full year, this year, and maybe moving into next year, what’s the planning purposes maybe even on a regional basis, what your thought process is?

Because I realize a lot of this has to do with the idea of miles driven and I know that there has been a cutback in miles driven, but I don't think it's nearly as significant as these numbers that we are seeing right now. But on the other hand, these numbers are pretty alarming in terms of the magnitude, so I'm just wondering if there might be some other factors that we should be thinking about other than just miles driven?

Patrick Prevost

Well, Mike I think this is an area where we are still trying to find an answer and we've talked to few of the elements earlier. I believe you are right that the miles driven have not come down as dramatically as the volumes would make you believe, which is why we also think that de-stocking is occurring but then if you look at the value chain, the entire value chain, that is not a very deep chain, meaning that we believe that the de-stocking at some point and there is not that much inventory in that whole chain that we believe that the de-stocking should come to an end in the coming months.

The critical question is, what will be the underlying demand and here I would say that working in our favor, we may also have the lower gasoline prices, which should bring people to drive again perhaps and of course against that could be a lower economic activity reducing the amount of goods being transported. But all in all, I believe that we should be seeing the business returning to what maybe a new underlying demand, and that new underlying demand most likely is going to be at a level that is above that 30% decline, we saw in the fourth calendar quarter of last year. But at this stage, very difficult to assess where we're going to end up.

But let me ask William Brady to perhaps, give some additional comments on that.

William Brady

Mike, I just like to add a thing or two to what Patrick said. As you point out, miles driven is absolutely very important indicator. Usually, the miles driven data that we all see is miles driven in the mature regions of the world, which is important. But there are two other indicators that are very important as well. One is the number of new drivers in the world, and this is particularly in the emerging regions.

And the other is truck freight, and this is particularly important a), because the tires are bigger and b), because, in some emerging parts of the world, for example, China, where the rail system is not as developed, as in mature regions of the world. You have more truck freight to deliver the commerce. So, I'd just point those things out, because I think it's important to take the holistic picture of all these things that can drive the demand overtime.

Mike Judd - Greenwich Consultants

Okay. And then just lastly, I apologize for the nature of this question ahead of time. But, I mean we've seen some actual surprises as it relates to bankruptcies for customers, even industrial gas companies, and where there have been some surprises.

So the reason I'm asking this question is I don't know as much as I would have like to know about the tire companies globally. But are there any of our customers that are, in any kind of a tough situation and is there any situations where you've, where there could be any issues in terms of write-offs of inventory or anything like that?

Patrick Prevost

Bill, would you like to take that?

William Brady

Yeah. Mike, I would just tell you on that point that we are managing our receivables very closely. And we have not only in the field do we have these contacts going on every day, but with our bigger customers, we have CFO to CFO discussions ongoing. And so we are very close to it.

Mike Judd - Greenwich Consultants

Okay. Thanks for the help.

William Brady

You're welcome.

Operator

Next question comes from the line of Jason Miner with Deutsche Bank. Please proceed.

Jason Miner - Deutsche Bank

Yes. Thank you, good afternoon.

Patrick Prevost

Good afternoon, Jason.

Jason Miner - Deutsche Bank

Couple ones for Bill and Shawn. These dramatic volume declines, are there significant market share shifts going on in the Rubber Blacks or the performance markets? And what about after you curtail capacities as you plan to do?

William Brady

We had a little trouble hearing the question. But I think the question was what is going on in terms of market share today and what do we thing is going to happen with market share after the curtailment or the shutdowns that we make. Is that correct?

Jason Miner - Deutsche Bank

That's right. Sorry, is that better?

William Brady

Yeah, it's okay. Why don't I take it first and then Shawn can add his. I think the question today I think it's pretty stable, actually. I do think there are some parts of the world I will point out in particular, North America, where we have customers coming to us for a little bit more than they've usually taken from us. So there maybe some mild positive market share shifts going on for us.

And then with regards to the curtailment and after we take our restructuring actions, we have done the planning on this and it is our full intention to make sure we've got the capacity, the most competitive capacity in the right places to serve the growth. And so we are very confident, that we're going to be able to at least maintain our market share, even through and after the restructuring in rubber. Shawn?

Shawn Cohane

Sure, a couple of comments. With respect to market share, we also view it as quite stable at this point in time. And I think a few important points maybe to add a little color on the volume decline in performance segment. The first is to understand the importance of the broad plastics value chain to this segment, and it's quite significant. We sell a lot of specialty grades of Carbon Black, as well as, masterbatch into this chain.

And polymer prices over the last couple of months, three, four months, had the bottom has fallen out on those. And when that happens in the plastics industry, you get a massive pipeline effect going on, and we've seen this across the board. So we think there's a fairly pronounced inventory destocking phenomenon in the plastics industry in general.

The other thing is that we sell into a broad range of applications, and the supply chains end up being typically longer. There are a lot more intermediaries, and as a result, it can take longer for the pipeline to empty. So a couple of just important aspects to this business that I think should be understood to put the volume story a bit into context.

Jason Miner - Deutsche Bank

That's very helpful. Thank you. Just a last one, focusing back on tires, if I recall correctly, three quarters of your volumes of your sales are to replacement, which I know has been more resilient in past downturns. But I wonder if that's also the case now or if consumer pressures are manifesting themselves a little more dramatically this time?

Eddy Cordeiro

I think you're right. I think it has been resilient in the past and I think tires are a discretionary buy for some period of time but at some point people have to replace them. And so we are hopeful that this time it's just it's going to be just as resilient as it was in the past.

Jason Miner - Deutsche Bank

That's very helpful. Thank you.

Eddy Cordeiro

You're welcome.

Patrick Prevost

Thank you.

Operator

Your next question comes from Saul Ludwig with KeyBanc. Please proceed.

Saul Ludwig - KeyBanc

Just a couple quick follow-ups. Fred, could you just comment a little bit about what's going on in the high-speed sector of inkjet? Are you seeing any increased activity in sales by HP or other people in the high-speed area and how did that affect your results?

Fred von Gottberg

Saul, let me comment on that. First of all, in the high-speed area in general, this is where people are using essentially colorants more in the office market etcetera. We are seeing a modest pickup. Part of that is associated with people preparing to launch new printers in the office segment and we have seen so in the first quarter, we did see a pickup from some of those volumes.

However to be frank, the volumes have been disappointing in that segment and it's taken a lot longer than we've anticipated and there's a significant hurdles to actually penetrating that segment in a large way.

Saul Ludwig - KeyBanc

Okay. And then in the Rubber Blacks area, your volume was down 29%. What were the components of price and FX that got you to your revenue numbers?

Patrick Prevost

Saul, not sure we understand the question. Would you mind…?

Saul Ludwig - KeyBanc

How much was your revenue change in Rubber Blacks was a $440 million versus…Was it 463, so it only went down about 5% --so we had -- 29% down in volume. So there was also a price component and an FX component that would explain the -- of this 5% change.

Eddy Cordeiro

I am not sure we have that data, Saul, so can we pick that up at a later stage, if that is okay with you?

Saul Ludwig - KeyBanc

Sure. And then the last question is, your contract with your tantalum supplier ended at December 31. How much benefit do we see in your cost in this quarter and subsequent quarters, compared to what you had to pay in your fourth quarter? And would the implication be that even with weak volume in the electronics industry, as you had in the first quarter that your profitability would trend higher from what your first quarter was? Because of the elimination of the contract that you've had burdened for so long.

Eddy Cordeiro

Right. Saul, so on the tantalum side, we've come to the end of that ore contract that we had, actually mentioned in the previous calls and what I can say is that the -- in general, ore prices have come down for us as a result of the environment in which we are operating in, and as a result of us not having that contract. But I wouldn't be able to provide you any more information on that at this stage.

Saul Ludwig - KeyBanc

Anything wrong with my logic? I mean that, if you raised prices in October, you're getting better prices and your costs are coming down, and your volumes stay lousy. Why wouldn't that be a net plus versus where you've been?

Eddy Cordeiro

I mean, prices have come up, unfortunately volumes have declined and as you could see, from the first quarter results, one offset the other so unfortunately we're not in a much, much better position and…

Saul Ludwig - KeyBanc

Not necessary a better position. How much were your volumes down in the first quarter in the Supermetals?

Eddy Cordeiro

We don't actually disclose that.

Saul Ludwig - KeyBanc

You've done that always historically. Is that new that you're not going to?

Susannah Robinson

We were doing it about two years ago.

Eddy Cordeiro

Okay. No, we've stopped doing that two years ago is what Susannah told me here.

Saul Ludwig - KeyBanc

You don’t. Thanks very much.

Eddy Cordeiro

Okay, Thanks, Saul.

Operator

Your next question comes from the line of John Roberts with Buckingham. Please proceed.

John Roberts – Buckingham

Just to follow up on that. Closing Boyertown, is there a lot of inventory or sales from inventory that occur over the next one two quarters, as you move whatever is there into the marketplace?

Patrick Prevost

John, let me ask Bill to answer that question.

William Brady

Sure, John, obviously for the customers who are buying products from Boyertown today and then will buy them from Aizu in the future, there will be a transition period and we would probably supply them for some period out of Boyertown until they switch.

John Roberts – Buckingham

It might not a lower ore cost flow through the P&L or at least be diluted as it went through the P&L because Boyertown is still using up higher cost materials?

William Brady

Could be.

John Roberts – Buckingham

And is your carbon elastomer composite project with Michelin being affected at all by this market environment?

Patrick Prevost

Well, Bill.

William Brady

Let me take that.

Patrick Prevost

Absolutely go ahead though.

William Brady

John, I would just report that the CEC project is going full steam ahead and is actually going quite well. At this point in time, there are a number of tests going on the road and in other places and we're also doing scale-up work to prepare for the future in the project. So I'm really pleased to report that that's going very well.

John Roberts - Buckingham

Great. Thanks.

Patrick Prevost

Thank you, John. I believe this was the last question, and I wanted to thank the people who've joined the call today. I just wanted to say a few words to close on this earnings call. First, I wanted to say that the environment is a difficult one, but Cabot is a strong company. We have very good franchises. We have good relationships with our customers.

And we're ready to move in terms of adapting our cost base to this new environment. I believe this also gives us an opportunity to strengthen our footprint, basically operate on a leaner mode in the future, without taking undue risk, with regard to being able to adapt to potential recoveries. So we're very helpful in that respect. We think that strong companies can take advantage of difficult environments, and we're getting ready for that.

Our cash flow is strong. Our balance sheet is robust and we have a strategy in place. So I just wanted to close in terms of saying that we're responding, and we believe we'll come out stronger. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a wonderful day.

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Source: Cabot Corp. F1Q09 (Qtr end 12/31/08) Earnings Call Transcript
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