News from Notch Consulting, Inc.

November 11, 2008

Cabot Comments on the Current Market, Tianjin, and Contract Lag

Filed under: Carbon Black — Notch @ 8:45 pm

A few excerpts from Cabot’s most recent conference call, held October 30, 2008 and covering the quarter and FY ended September 30, 2008. This is basically an amended version of the transcript from Financial Content. The first excerpt deals with the current downturn, the second with the status of new capacity in Tianjin, and the third with attempts to reduce or eliminate the effects of contract lag in Cabot’s supply contracts.

From Opening Remarks.
Patrick Prevost, Cabot CEO
Demand drivers for the tire sector include the number of global miles driven each year, which drives the replacement tire market, automotive build, which drives the OEM tire market, and commercial activity in government spending, which drives commercial trucking and public transport tire demand. In past economic downturns, the replacement tire market has acted differently than OEM tire demand. Although consumers may decide not to purchase a new car, replacing tires tends to be a safety decision and as such demand for replacement tires has usually been stronger than OEM tire demand during a slowdown.

Global carbon black demand has increased 3% to 3.5% per year over past 10 years. The industry, however, experienced 0% growth in 1998 during the Asian crisis and experienced a 2% to 2.5% decline during the 2001 recession. Clearly there are many differences between this downturn and previous ones. For example, credit availability has put significant pressure on new car sales, and greater volatility in oil prices has put pressure on miles driven. Our long-term view on tire demand growth continues to be — in spite of that — 3% to 4% per year with significant differences by region.

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From Q&A.

Saul Ludwig, Keybanc Capital
I’m concerned about how much, when Tianjin comes on in January how much does that increase your Chinese capacity?

William J. Brady, Executive VP & GM of Carbon Black Business
Well it increases it a fair amount. There is about 150,000 tonnes planned to come on in Tianjin.

Saul Ludwig
On a base of how much?

William J. Brady
On a basis of about 300.

Saul Ludwig – Keybanc Capital
So that’s a 50% increase?

William J. Brady
Approximately.

Saul Ludwig
But with the market down 16% this quarter and you’re about to bring on 50% more capacity is that, do we have something to worry about?

William J. Brady
Let me say a few words about the Tianjin investment. First of all remember that this is part of a global network and so we’ll evaluate that capacity and what we can do with it in the context of our global network. Second, this capacity is going to be some of the most competitive capacity in the world. It’s fairly low cost and it has our latest technology.

Now having said that, we have mechanical completion of that [expansion] due to finish up in the January timeframe, which we’ll do, and between now and then we will watch October, November, December volumes both in China and elsewhere and we’ll make a decision in that period whether we bring that capacity up right away or we have a slight delay in it or any delay at all.

Saul Ludwig – Keybanc Capital
Do you incur the fixed costs of this plant starting in January?

William J. Brady
Let me re-emphasize that this capacity, while it may be a bit mis-timed with the market, will be very powerful capacity, very advantageous capacity and will strengthen our China position over the long-term considerably. So, there might be a little bit of short-term pain associated with the timing of this capacity, but we’ll manage it well and over time it’s going to be very advanced and very important.

Patrick M. Prevost
Perhaps if I may, Saul, what needs to be remembered here as well is that this is capacity that is incremental to an existing site. So, its impact in terms of fixed cost is going to be very much manageable in terms of cash fixed costs, and, again I think the point Bill was making is important.

It is an expansion of our global network and we will and are continuing currently to optimize that global network to make sure that the cheapest possible ton gets delivered to the appropriate customer, and that is an advantage we have and that’s a flexibility that gives us the opportunity to maximize the bottom line and certainly do better than all of our competitors.

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From Q&A.
John Roberts, Buckingham Research
Patrick, at the investor meeting back in Boston you were going to try to shorten the price lag with carbon black costs as contracts renewed, I think. Have any contracts come up for negotiations since that investor day?

Patrick M. Prevost
We are absolutely committed to eliminating or reducing the lag that has been affecting the company, and that has actually brought us to report in the way we are reporting and considering the volatility of the feedstock markets. We believe that this lag has no reason to continue to exist and we’re going to, as I mentioned in the investor meeting in May, we’re looking at eliminating it over a period of 18 to 24 months as the contracts come up for renegotiation.

Some of the shorter term contracts that we’ve renegotiated have actually been adjusted to eliminate the lag and we’re going to have some longer term contracts coming up for renewal at different points over the next 18 months or so, and that will be a significant part of the negotiation and clearly we believe that as Cabot we cannot play the bank for our customers, and we’d rather focus on the things where we really can add value like the quality of the products and the ability to provide reliable service and products. So, I guess the answer to your question is that we’re committed to continue on this track.

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