Q1 2020 Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the Q1 thousand 20 Cabot earnings Conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session you want me to press Star one on your telephone. Please be advised to today's conference is being recorded if we require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Mr., Steve television Vice President of Treasury and Investor Relations. Please go ahead Sir.
Thank you and good afternoon.
Welcome you to the Cabot Corporation earnings teleconference.
With me today are Sean Keohane, CEO, and President and Erica Mclaughlin Senior Vice President and CFO.
Last night, we released results for our first quarter fiscal year 2020 copies of which are posted in the Investor Relations section of our website.
Slide deck that accompanies this call is also available on the Investor relations portion of our website and will be available in conjunction with the replay of the call.
During this conference call, we will make forward looking statements about our expected future operational <unk> financial performance.
Each forward looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Additional information regarding these factors appears under the heading forward looking statements in the press release, we should last night and are left annual report on form 10-K.
As filed with the FCC and available on the company's website.
In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve a just adjustments to GAAP results.
Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.
Non-GAAP financial measures referenced on this call are reconciled most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night in available in the Investor section of our website.
I'll now turn the call them to Shopko Hain, who will discuss the key highlights of the company's performance.
Erica Mclaughlin or are you the business segment in corporate financial details.
So this should provide for closing comments and open the floor to question.
<unk>.
Thank you Stephen good afternoon, ladies and gentlemen.
Last evening, we announced results for our fiscal first quarter of 2020.
As expected our first quarter results decreased as compared to the prior year.
First quarter fiscal 2019 included $10 million of EBIT from our specialty fluids business, which we divested in the third quarter fiscal 2019.
Also contributing to the decrease was lower EBIT in our reinforcement materials segment as compared to the prior year as we experienced unusual levels of year in inventory de stocking by many of our large customers that impacted volumes, particularly in Europe and the Americas.
During the quarter, we finalized the negotiation of our calendar year 2020 customer agreements for the reinforcement materials segment with a positive outcome.
We achieved pricing gains and successfully implemented formula adjustments to protect against Marpol related feedstock differentials.
In the Americas region, we realized price increases while maintaining volumes.
This is particularly important given the environmental capital investments, we're making in the region to provide reliable supply for our customers.
In Europe, the current demand environment is softer and new carbon black supply has come online from Russian producers, which impacted the negotiations.
Despite this we achieved price increases in the region, while making the decision to let go some lower margin tire business.
As a result volumes in Europe are expected to be about 5% lower year on year, starting in the second quarter.
We believe this was the right action and if the environment strengthened this will enable us to supply the sport market and to support the growth of our specialty carbons and compounds businesses.
Results in the performance chemicals segment increased 14% compared to the same fiscal quarter of 2019.
The segment benefited from strong sales volumes in both the performance attitudes and formulated solutions businesses compared to first fiscal quarter of 2019.
Well the business environment remains challenging our management team continued to focus intensely on working capital efficiency cash flow generation and balance sheet strength.
Operating cash flow of $105 million included the benefit from working capital, which helped to fund our capex needs along with $54 million of cash returned to shareholders.
These results demonstrate the strength and durability of the company's cash flow.
In the first fiscal quarter. We also continue to aggressively manage cost and began to implement several actions to enable us to be more efficient and cost effective.
These actions include the reorganization of Cabot's leadership structure, that's what was the creation of a global business services function.
Global business services is a new strategic function in Cabot that brings together many of our enabling and support services in an effort to drive standardization of our processes gain scale and increase efficiency by leveraging the power digital tools.
We've launched a number of priority initiatives, including moving many of our North American shared service activities from the U.S. to Riga, Latvia, where we currently operate our European shared service Center.
These actions will allow us to streamline our organizational structure and drive expected savings of approximately $10 million. This fiscal year, which we will see large we take hold in the back half of 2020.
And finally in the quarter, we announced an agreement to acquire trends and sanction nano a leading producer of carbon attitude. We're excited about the strategic acquisition to accelerate our growth and positioning in the high growth lithium ion battery market.
Let me give you some details on the deal.
Cabot has entered into an agreement to purchase and Sean for approximately $115 million.
As the second largest producer of carbon nanotubes or C. N teas globally, San Shawn has the capability to manufacture both dry powder C N teas, and dispersions and has a proven track record of commercial success in the lithium ion battery market.
The acquisition includes a newly commissioned C N t. plant in China, which has sufficient capacity to support growth over the next several years.
The revenue on a trailing 12 month basis was $28 million and when combined with Cabot's energy materials business total sales in the battery application will be approximately $50 million.
We believe this is a great addition to Cabot because the lithium ion battery industry is moving towards blends of conductive carbon additives in order to do achieve the optimal performance cost ratio and C. N teas are the fastest growing conductive carbon attitude in energy storage.
This acquisition Cabot will be the only carbon additive supplier with commercially proven carbon black CMT carbon nano structure and dispersion capabilities.
We believe this acquisition will not only strengthen our global leadership position in carbon additive, but will allow us to deliver new innovative conductive formulations to enhance battery performance.
This acquisition will be managed as part of Cabot's Global energy materials business within the performance chemicals segment.
The parties are expected to close the transaction in the second quarter fiscal 2020.
Before I turn the call over the Erika I also want to provide an update on our progress in the area of sustainability.
There was no doubt that sustainability is important in our industry and is becoming increasingly important to investors.
Account it we strive to be the most innovative respected and responsible leader in our markets delivering performance that makes a difference.
We believe in a modern company must balance the needs of many stakeholders in order to sustainably increase the value of the corporation.
At Cabot, we achieved this through our commitment to operating responsibly, conserving resources and developing innovative performance materials to help our customers achieve their sustainability goals.
I'm proud of our continued leadership and progress in this area.
Over the past year, we've been recognized by numerous organizations for outstanding environmental social and governance transparency and performance.
Notably we were recently named to Newsweek's list of America's most responsible companies for 2020.
As well was recognized in corporate responsibility magazine's 100 beds corporate citizens list for 2019.
I'm also pleased that we received the gold rating from AECO basis for our sustainability program for the fourth year in a row.
These accomplishments demonstrate our deep commitment to transparency and continuous improvement.
I'll now turn the call over the Erika to discuss the business results. Thanks, Sean.
I will discuss the segment results beginning with reinforcement materials.
You bet in reinforcement materials for the first quarter fiscal 2020 decreased by $15 million as compared to the first quarter fiscal 2019. The decline in profitability was driven by lower volumes globally volumes declined 3% in the first quarter as compared to same period of last year, primarily due to a 9% decrease in EMEA.
And a 6% decrease in the Americas as customers aggressively manage your in inventory.
First quarter volumes were down 9% my fourth fiscal quarter 2019, and represented the lowest volume quarter in three years. In addition margins were negatively impacted by lower energy Center revenue as production was reduced and there were so in terms of inventory as a result of lower sales volume.
As we have noted throughout calendar year 2019, the pricing and mix benefits that we achieved from our 2019 customer agreements were offset by the impact of lower margins from the more competitive pricing environment in Asia.
Looking ahead to the second quarter, we expect resulting reinforcement materials to improve as compared to the first quarter supported by pricing gains as customers transition to calendar year 2020 agreements and as volumes return to more normalized levels January volumes were strong and demonstrate that the customer de stocking was short term in nature at the end of the cat.
I Wonder year. In addition, we feel good that the pricing mechanisms in the customer agreement should mitigate the impact from Marpol related feedstock differentials.
We expect these improvements to be partially offset by lower European volumes that Sean discussed earlier and higher cost related to our north American environmental compliance investments.
Now turning to performance chemicals, even increased by $5 million year over year due to higher volumes across the segments, partially offset by less favorable product mix and specialty carbon and lower pricing and our metal oxides product line.
Lower pricing in metal oxides is primarily due to a slowdown in the key transportation and industrial end markets in Europe, and China and increased competitive intensity.
In the quarter volumes increased 13% year over year in performance additives and 20% in formulated solution.
Performance out of designs benefited in the current quarter from a non repeat of the de stocking we thought in the first quarter fiscal 2019, along with additional commercial wins in specialty carbon and higher sales from the new China seems to like a plan.
Formulated solutions volume increases were driven by our specialty compounds product line as de stocking that we experienced last year did not repeat and we realized the benefits from the Masterbatch acquisition in Southeast Asia.
Looking ahead to the second quarter, we expect sequential volume increases in both our specialty carbons and specialty compounds product line due to a normal seasonal increase well. We are pleased with the positive outcome to date for specialty carbons pricing to recover rising marpil related feedstock huh margins are expected to be negatively impacted.
By continued competitive fumed silica pricing in China in Europe.
Until underlying automotive demand improves we expect specialty carbons and specialty compounds product mix to remain unchanged and we also anticipate the volume gains associated with commercial wins from the first quarter in specialty carbons to continue.
Now moving to purification solutions in the first quarter fiscal 2020, EBIT increased by $1 million compared to the first quarter fiscal 2019. This is driven by higher margins from improved pricing and product mix in our specialty application. The business also reduced fixed costs driven by savings from the previously announced transformation.
Plan. These benefits were somewhat offset as the business experienced lower volumes in mercury removal application.
Looking ahead to the second quarter, we expect to see seasonal sequential improvement in the specialty volume and margin improvement from price increase initiative.
I'll now turn to corporate items, we ended the quarter with a cash balance of $173 million and our liquidity position remains strong at over 1 billion. During the first quarter fiscal 2020 cash flows from operating activities were a source of $105 million, which included a decrease in net working capital of 50 million.
In dollars largely due to lower receivables.
Total capital expenditures for the first quarter fiscal 2020 were $68 million and we're now expecting capital expenditures to be approximately 225 million for the full year. We have reduced this forecast from 250 million given current business condition.
As previously discussed we returned $54 million to shareholders do $20 million in dividends and $34 million of share repurchases.
Our operating tax rate was 26% for the quarter and we anticipate the fiscal year rate will be between 26 and 27% the increase in the operating rate from or guidance last quarter is largely due to the impacts of Switzerland tax reform and our projected geographic mix of Arnie.
I'll now turn the call back over to Sean.
Thanks Erica.
This is definitely been a challenging stretch for our industry as the U.S., China trade friction in a slowing macro economy negatively impacted the global auto industry. However, as we think about the auto industry. It is important to remember the long term fundamentals are sound and the downward cycles have historically recovered after a relatively short period of time.
Historical vehicle production data suggests that a typical down cycle last somewhere between four and eight quarters current automotive production has shown year over year declines for the last six quarters.
When auto production does turn positive, we're well positioned and ready for this we have available capacity across our network and plans from recently completed Debottleneck projects and we've continued our strategic growth investments in key businesses in regions to serve the long term demand of our customers.
We've been able to do this while generating strong cash flow returning a significant amount of cash to shareholders and maintaining a flexible balance sheet over the last two years.
In 2018 in 2019, we generated cumulative 661 million, an operating cash flow repurchased 315 million in shares and paid 160 million in dividends, while maintaining our investment grade credit rating.
Now moving to the segments for reinforcement materials, we see an environment with reasonable supply demand balance in most regions.
We have completed negotiations and are satisfied with the outcome the customer agreements for calendar year 2020 with pricing improvements driving higher margins.
With the yearend Destocking complete and the benefit from the 2020 customer agreements in place. We expect Q2 EBIT results to return to Q2 2019 levels and continue to improve as we move through the year as volumes demonstrate seasonal improvements in the third fiscal quarter and cost cutting measures take hold in the second half of the.
Fiscal year.
In performance chemicals, we anticipate similar sequential results in the second fiscal quarter as compared to the first quarter and then strengthening in the back half of the year as volumes are expected to remain solid through 2020, and specialty carbons and compounds.
We expect the fumed silica market to remain challenging in the near term as the key automotive and industrial end market demand remains soft leading to higher competitive intensity.
However, the long term underlying fundamentals of this business remain attractive as feedstock access and strategic integration will continue to determine growth and profit levels.
On this front, we're extremely well positioned with our silicone fence line partners, Dow Silicones, Chem, China and H. why fee.
In purification solutions, we expect to see sequential EBIT improvement from seasonally higher volumes and lower fixed costs driven by savings from the transformation plan.
Full year, even improvement is expected to come from higher unit margins as pricing and mix initiatives in specialty applications take hold.
Based on these factors, we expect adjusted EPS to be in the three dollar and 60 cents a three dollar 90 cents band of our previously communicated range.
The midpoint of this range reflects a growth rate of 4% as compared to fiscal year 2019 result, excluding the specialty fluids segment.
At this point the impacted the Corona virus is difficult to predict our outlook does not include an impact to our business from this but we continue to watch this closely and will provide an update should the situation impact our outlook.
On the cash side, we expect strong cash flow generation and to continue to return cash to shareholders consistent with our long term capital allocation strategy.
As we manage through this challenging business environment, we remain focused on the long term, while taking prudent countermeasures to deal with the dynamic environment.
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 as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question. Please press the pound Keith Please stand by while we compile the Q and a roster.
Our first question comes from Josh Spector with India.
Yeah, Hey, guys. Thanks for taking my question, so I understand you're not quantifying the impact from current a virus just curious at a high level. If you could talk about some of the perhaps locations a supply and demand within the region. So I would if there was a longer term impact from customer shutting.
Alan.
Would you see production also impacted so perhaps there's still be a balanced supply demand or what seems to be lopsided one way or another.
Sure. Thanks, Josh let me.
Let me try to provide a few a few comments around the Corona virus. So I think with respect to that we're obviously concerned first and foremost about the safety and welfare of our employees in China and around the world and we put the appropriate precautions.
In place now the situation as a as I think everyone. Can appreciate is very dynamic and I think the impact is difficult to predict so as a result, our outlook does not include any impact from this but we continue to watch it closely in and we will provide an update as a.
As things as things develop here.
Yes to your specific question a few maybe a few important facts that will help so in terms of Cabot Corp. So we don't have any facilities in lieu Han directly.
And where we're following the the government policies as required which which has extended the Chinese new year through February.
Nine so that's about a two week extension.
Probably read that.
That's a that's been that's been mandated by the Chinese government. So this has impacted our office locations now the majority of our production units.
Our running on has been through the lunar new year period. This is pretty typical for us because we're a continuous process industry and so we typically do run through.
The Chinese new year end and so what the majority of our units have been running through this period.
And we can so we continue to produce I think the challenge in what we're watching here is inbound and outbound logistics because those are.
Becoming more challenging.
Given the actions by the government to contain to contain the virus. So.
There were watching that carefully.
But it remains overall pretty dynamic situation. So we'll have to see how things unfold here in the coming weeks, but hopefully that gives you a little bit of a sense for.
The Cabot specifics at this point.
Yeah, that's helpful and maybe just if I could kind of around the same thing is.
What about your competitors. So I guess some local Chinese production would you say they would take the same approach of continuing to run I guess, what I'm getting a is that is there are risks that you build up some supply in the region from product out there not being able to move our customers taking extended downtime or would there be a different way to think about it.
Well I think most most customers are most competitors would probably take a similar.
A similar posture through through Chinese new year, some you know.
To greater degrees and others, I, suppose, but but most would would would continue to.
To operate because what what you typically see coming out of Chinese new year is a a jump in demand and so.
That that needs to get satisfied so so our expectation here is that you know if.
As soon as demand returns to normal then.
The production gets.
Yes, good gift swallowed up or gets absorbed basically so so we don't we wouldn't see normally any sort of an imbalance.
And but I think a lot depends on how quickly the tire producers get.
Get get back into into full production. So I think thats. The that's the thing that.
We'll have to we'll have to watch here.
All right. Thank you.
Thank you. Our next question comes from David Begleiter with Deutsche Bank.
Thank you good afternoon.
Sean looking out the January volumes was there a restocking John where do you think or just a more normalized demand all for DC office with the Destocking in December.
Yeah, Dave we are as we commented in the prepared remarks, we definitely saw a much more aggressive and I would I would say a or unusual.
Pull back at the end of the calendar 2019.
We had we had some customers comment to us that wisdom their most aggressive.
You know inventory management.
Ever or in recent times, so it was pretty pronounced and more than the usual seasonal slowdown now what we saw in January was.
Quite strong volumes and so for sure there's.
Theres, some you know kind of restock their as they as they corrected very aggressive we for.
They are yearend and a lot of these folks are on calendar.
Fiscal year end, so we get we definitely did see.
Some of that return in January.
In addition to the normal seasonal bump, we would expect coming off of the the holiday period.
Pretty good and just in terms of Europe, and the Russian capacity is this a longer term threats.
He could you see additional volume a.
Give backs, but you guys and fish years to deal with the Russian a lower cost a core lower price material.
Yes, so a Russian Russian producers have.
Have been operating and ER and supplying into.
Into Europe, principally for quite some time now and and so you know in in the Grand scheme, the total capacity in relation to.
Needs in EMEA is was not there is not overwhelming by any means as a result with Ben.
Able to generate quite strong profitability in Europe, I think the real challenge here is that Oh, they operate under some I would say different different rules of the game and I think it's important that we continue to educate our customers who care about somebody.
I'd that.
While Europe is under a C O two trading schemes and certain levels of emission controls the Russian producers or not and so in effect there.
They are exporting pollution into into Europe, and it's important that we continue to educate our customers who care about sustainability too.
To reflect this properly so so it's something it's not it's not new we've been operating in this dynamic for quite some time my entire time with the company now which is starting to push 20 years.
They had been Russian producers that have had impact in Europe. So it's something we we manage but I think.
Yes, there is quite a contradiction between what our customers need in terms of sustainability, what we do in terms of sustainability as a company and and the rules that they operate under and Thats something we have to we have to continue to.
May clear and advocate for the right thing to do here.
Thank you very helpful.
Thank you. Our next question comes from Jim Sheehan with Suntrust.
Yes. Thank you regarding your performance additives volume growth a pretty strong 13% number this quarter was that growth evenly spread across the world or was it more pronounced in China.
Yeah, Hey, Jim.
So, yes, pretty a a pretty strong.
Volume picture.
In performance additives I think it a couple of things are worth remembering year. The same quarter. This time last year, we saw some fairly pronounce destocking in particular across a specialty carbons and specialty compound.
And and so the the non repeat of that could certainly contributed to to the strong.
The strong numbers in terms of the the distribution of that I would say it was fairly.
It was fairly balanced around the world and we definitely saw a destocking all around the world This quarter last year and as our improvement.
All around the world, So I would say fairly fairly balanced Jim.
Would you say more of your growth came from the specialty carbons business, where from the new fumed silica capacity.
So we saw volume growth across all of the three major product lines here specialty carbon specialty compounds.
As well as a as well as fumed silica.
So I think there was there was definitely contribution from from all all three here in the period.
Thank you and could you comment on where you stand on you're considering of strategic options for purification solutions and if you're maintaining.
That business for the long term what is your strategy for taking a larger share the automotive carbons market.
Yes, so ER, Jim Nothings changed here in terms of our you know our strategic portfolio choices. So with respect to the purification solutions business. It is one that.
We believe.
It is a is best in the hands of a more strategic owner that is that is not Austin. So nothing has changed in terms of that posture and as we've commented in the past our primary focus here has been around improving the performance of that business and so that we are.
In a.
In a better position in the future too.
To execute a transaction so I think the strategic a direction here hasn't changed at all I think with respect to the automotive.
The automotive application, we have been working in this one for quite some time and having.
Some some success I would say it is.
It is a little more long wave one in nature in terms of getting specified ends you might recall, where a number two player.
In the world in this space, but but making progress getting qualified into into new applications and that continues to be a an important strategic focus for the business, but the timeline or the onset period.
Is a little longer in terms of the nature of it.
Thank you.
Thank you. Our next question comes from Mike, We head with Barclays.
Thanks, Good afternoon and John.
I guess first started reinforcement materials I think your commentary was you expect flat EBIT into Q year over year. So call. It about 15 million better sequentially can you just help quantify how much of that is price versus volume recovery.
Yes. So you know the if I if I look at the the results in the quarter.
Jim I mean, Mike sorry, the the.
The results year over year, we're down around $15 million and they were all volume related.
And so.
We definitely saw weaker.
Weaker volumes because of the aggressive.
Activity in terms of customers managing inventories and then what I would call some volume related impacts in the quarter.
In terms of our energy centers and the flow through of of inventory. So the those three results might drove about the 15 million dollar.
Decline and they were sort of roughly equal in terms of.
Value so as we as we roll forward here and we see volumes in Q2 return to a more normalized.
Level than we would not expect that that these things that these things repeat.
Got you I guess, what I'm trying to get a just I mean, the pricing benefit you kind of no at this point versus volume and the associated cost from that can be somewhat variable. So I guess, what I'm trying to get confidence in is kind of this quarter as anything from the seasonal low and one Q just kind of.
How much is kind of locked in at this point versus what we still kind of maybe you're hoping for some more macro pickup in twoq you. Yeah. So I think the or the customer negotiations. So I think are.
There there there's sort of I would call embarked in at this point. So we know what those new prices are and have been operating and invoicing and shipping under those so the new arrangements around the formulas and protections the Mark will all that stuff is in and we're operating.
We're operating to it and we normally see a seasonally higher.
Q2, then Q1, so I think those are.
Those are fairly a fairly known at this point I think the though the wildcard here is of course Q2, we always have a Chinese new year, which is nothing.
Nothing new but the question will be what are what our impacts.
How does how does the Corona virus play out and as I commented earlier, just it's just too early and uncertain to to comment on that but if I just put that aside for a minute and look at.
At this sort of a main drivers here.
I think there they're fairly known at this point, if I put that went aside.
Got it and if I could just squeeze in one quickly on the fumed metal oxides business. My understanding is the top three producers, including you guys make up cost 70% of the market, which typically means a fairly constructive rational market. So when you talk about competitive pricing is it really due to that other 30% or I guess.
Any incremental color you can give on what's going on in that market might be helpful. Yes, sure. So let me just try to describe a little bit the demand side here and then what we what we're seeing in terms of the current environment. So the demand environment has definitely been softer, particularly in your.
Were up in China.
The key end markets here, our automotive and construction those are two big end markets and so if we look at this business in calendar year 19, we estimate that the market for fumed silica contracted versus 2018, so we haven't seen that in quite some quite some time. So this weaker.
Demand definitely resulted in some more competitive intensity overall, but again it was more is more acute in Europe and China.
Given the negative environment in those regions and at the same time. Some supply has come on stream recently, I think thereby pressuring near term pricing I think the you know these factors definitely presented a near term challenge for us, but the fundamentals of the business.
Remain attractive you commented on.
The industry structure, but if you if you look at this business historically, it's been one that.
Has had very strong profitability in the sort of 30% EBITDA range and demand as has steadily grown at had something above GDP kind of one and a half times GDP and this is because silicones.
A major application market for fumed silica has really strong performance characteristics.
And then finally feedstock access and strategic integration our are critical here. So there isn't there isn't sort of a market for feedstock like there is in carbon black where you can buy in the Gulf coast, and and and have access to feedstock the market for feedstock in fumed silica.
Is quite strategic and requires a strategic integration with our silicones or poly silicon player. So so so given those factors.
We're we're extremely well positioned here with our fence line partners, Dow Silicones, Chem, China and each why seat.
And so that the industry has historically been I think very well balanced in terms of feedstock supply in silicon demand.
Which has led to limited new entrant risk here.
And again, the feedstock as a byproduct of either the silicones production process, where the Tcs production process. So these strategic fence line relationships are essential.
But the the strategic that capacity adds can be a little lumpy given the economic scale of investment.
But demand growth has historically, so this up and relatively.
In a relatively short period of time, so I think the combination of some some near term softness in a in demand and some.
Strategic capacity coming online has created a more.
Higher level of competitive intensity I think China.
China, specifically is a slightly different industry.
Structure, while some of the major global players are present, they're not all our and there are some local players so.
That kind of 30% you talked about is more concentrated in China.
And again the week.
Demand environment in China.
In in auto for example that.
That.
That is providing some some pressure in terms of.
The the overall sort of pricing environment in the in the business, but in the long term, we see the balance of.
Feedstock and demand for silica to be.
To be in a in a good balance as it has been historically.
Great. Thank you.
Thank you. Our next question comes from Kevin Hocevar with Northcoast research.
Hey, good afternoon, everybody I Kevin.
Wondering.
It sounds like the specialty carbons was doing a pretty good job in.
Passing along.
Pricing. So wondering if you could give.
Some color on what you're seeing out of input costs, especially with IMO 2020 in effect I think there's certain product lines that have to use low sulfur fuel oil. So can you talk about what you're seeing on the input cost side down the raw material side.
Some of the the volumes this quarter were good but the end markets overall were.
Generally been challenging in automotive and some of those key higher end to end markets that might be using that low sulfur fuel oil. So could you describe what youre seeing on input cost side. How successful you are in the pricing side and you expect to be able to continue to largely offset any inflation with with pricing you expect it to continue to be.
Neutral or.
Stable Yep Yep, yeah. So.
So to the.
The 1% or the half percent sort of the lower sulfur indices.
Our definitely climbing and have been climbing as we've moved towards the the Marple regulations here in the beginning of.
2020, and so that.
That has.
With was pretty sharp in the back part of the year as traders and people were assuta speculating on what was going to happen. So and so in fact, the 1% has moved up quite a bit now the team in specialty carbons has been working hard here too.
So to manage this and get a gift prices up.
And have been largely successful here so I.
I think that's a that's a positive it remains.
One important strategic initiative for the business too.
To manage this carefully but between our announced price increases in what we've gotten a plus as we've gone through certain larger customer negotiations, while we don't have the same level of contract business that.
The reinforcements segment as there is there is some in this business we've been.
Really.
Focused on making sure we get some level of sort of mitigation protection in there in terms of.
The the Marpol regulations and the impact of that on the low sulfur feedstock. So I think on balance, Kevin where we're doing pretty well and.
And getting.
Getting the recovery in the teams done a good job here, helping customers understand.
Why this is why this is important now you know the B b the mix the mix impact on this business, which has been.
Pretty pronounced over the last kind of year to year and a half.
Is principally driven by.
Weakness in auto and so a lot of the higher end.
Applications.
Those those continue to.
I think suffer from weak fundamentals in in auto, but hopefully that will.
Begin to turn year to my earlier earlier comments, but but overall I feel like where Ah we're handling this.
Reasonably well and specialty carbons.
In terms of the the contracts for reinforced materials could you give a little color on the adjusters that you put in I think you have delivered cost adjustments are I think every manufacturer carmike heard it a little different.
What's the.
Were you able to to get to implement those all over the glow.
Just the U.S.
And in terms of how they're going to function I know that theres been some I guess I'm trying to understand there's been some differential headwinds last year a couple of years here.
Are these.
Just as being.
Reversing out any of those differentials.
Meaning that there could be a tailwinds from these being implemented in the contract for the mainly just being implemented saying, Okay 2019 was the base for what the differentials are they're not going to get any better or worse from here as the so this adjustment will eliminate that I'm just trying to understand.
Yes, those things sure sure.
So let me let me provide some you know some sort of Cabot specific commentary here, Kevin. So you will recall as we were heading into 2019 were.
Looking forward, we could see.
The the IMO with the Marpol regulations coming our way, we took some proactive steps to get.
DC A's and and similar mechanisms in place and so as a result.
You know as we look at our 2019 performance there was not immaterial impact from that on our business. So we managed it.
Quite well and we're I think pretty aggressive and out out out in front seeing what was what was coming here now as the year progress then as we got closer and closer to.
The implementation of the new regulations, you started to see the low sulfur indices climbing and climbing pretty sharply.
And as we're now into 2020, you know you definitely see.
And that the differentials have.
Have moved again, so our our mechanisms that we put in place for the new 2020 agreements we feel good about how they will mitigate that.
But we had already covered a lot of ground and done done a lot of good work in 2019 too.
Tim limit.
To limit the impacts there so thats, perhaps more of a cabot specific story, but thats.
That's that's how it has.
Played out for US and then you know these mechanisms there are various forms a and so each one is you know a little bit customer specific in certain ways, but the concept of.
Either a delivered cost adjustment or a move to a more appropriate index now that the marpol regulation is in and we see what the low sulfur indices are doing.
You know the we have a range of the it kind of depends by customer, but we have implemented around the world on these.
On our contracted business and we feel good about.
Where this where this has come out.
Okay, and then last one for me on the just wondering if you could talk on China profitability there.
Kind of equate your minority interest line with China profitability, just because most of your joint ventures are in China and that was $5 million this quarter, which was the lowest within a couple of years. So wondering if you have some comments on how China I know, there's more and then just add some maybe there's some other explanations in there, but wondering what you're seeing out of.
China at this point.
In terms of business conditions, there and profitability there and as you look out I mean, I know that they use a different feedstock coal tar based feedstock.
And I think I've heard that that hadn't seen the same level deflation at say high sulfur fuel oil feedstocks, which.
Might make China products less competitive on the world stayed with Mike China product within China.
I'm wondering if that's something that you.
Could be an impact here.
As you think it like supply and demand in that region is that a challenge or is that not really something you're seeing are expecting yes, yes. So I guess a couple of things Kevin first it is important while the majority of our joint ventures are in China, We do have a fairly significant joint venture.
In the in the Czech Republic that.
We'd be would be in those minority interest numbers that you're talking about but your point around.
The majority of our our Jvs being in China.
That is that is that is the case. So a couple of things I think China in terms of the macro environment.
Is definitely.
More more challenging I mean, we've seen the headline numbers in terms of.
GDP slowing and we know that overall automotive production.
Has been.
He has been really weekly they had 16 straight months of of year over year declines in if you look at in total for 2019, I think the industry decline somewhere somewhere close to 10% if my memory is.
Is correct here. So it was a pretty a pretty challenging environment in terms of.
In terms of overall auto production and then the impact of the trade friction in particular on.
This sort of industrial sectors, I think is something that we've been been battling here so the environment.
Hasn't been great.
That being said, we are still quite profitable in China, even even in this even in this environment. So.
I think that's a that's an important point and one that I think speaks to.
Our business, our assets and and we know based on.
Publicly available information around the carbon black industry that that's that's not really the case for the industry. So.
We really do feel like we have.
Strong assets and the business team there, but the environment no doubt is weak now.
We have started to see a couple of positive signals here in auto production.
In both November and December.
Those turned positive now they were off we comps, but but they turn positive so.
So that is.
That is encouraging and we'll have to see.
See how that develops here and then secondly, the the trade dispute at least with a phase one deal in place does that.
Begin to.
A move some of the uncertain sentiment that's been kind of clouding thing. So these would be positive near term developments.
But.
I think we'll we'll have to see and of course, the whole thing is a bit.
Confounded by the the uncertainty around the impacts of Corona virus. So so it's a dynamic.
Situation here, but we continue to I think manage it well and given the long term in terms of how much of the world tires, China produces.
The the feedstock situation in terms of coal tar being pretty much in balance with carbon black.
Production needs the continued environmental ratcheting in China overtime, we think that and having the largest car park in in the in the world. The these things are the right long term fundamentals and we don't we don't feel that those have have changed so we've got to we've got a battle through the near term here.
Okay, great. Thank you very much.
Thank you. Our next question comes from Jeff Zekauskas with JP Morgan.
Thanks very much.
Hi.
Was there something unusual that drove up your SJ costs in that.
On an adjusted basis I think your question a costs were down a couple of million, maybe 66 to 64, but your revenues were down 95 million.
Sure Jeff This is Eric so if you're looking at the unadjusted figures in there we had a good amount of restructuring charges that related to what John talked about primarily in terms of ER.
The global business services move North America to here at so in the on adjusted figure you have charges there that are offsetting some of the ceiling.
Randy would otherwise see.
So what so when you adjusted what's the year over year change.
So the restructuring charges that you would see would be $8 million in the quarter.
Okay. Thank you for that.
In the your Capex I think your Capex last year was supposed to be 250 to 300 and maybe you came in at about 25.
Does that mean, you have to do extra spending for this year or what's your capex range.
And what are your big projects this year.
So we when we kicked off the year, Jeff We we had articulated a a range of between 250.
And to 75 and as the year as we progressed here in the current environment.
We're estimating that that will be.
Around to 25 for.
For this year, so where we're trying to take given the current environment. We've taken a hard look in terms of prioritization.
And making making the right the right choices here in terms of the environment and then we continue to scrutinize every project in terms of capital efficiency and make sure that even if it's a project. We makes it that it makes sense to do that where we're we're squeezing it down and being as capital efficient as possible.
So that's our current expectation for this year now all of that number.
You know you will see around 150 million of it is in the sort of sustaining and compliance space as we continue to have.
Environmental investment in the us occurring and then there's.
A normal amount of what's called sustaining our maintenance capital. So then the balance of it said call. It 75 ish.
Would be.
Growth related capital and.
And this would be projects related to.
The Carrollton fumed silica plant.
The conversion of the.
Peejoe carbon black acquisition, we did in China, where we're converting that to make specialty carbons.
To have growth capacity over the long term some of these projects would be in that 75 ish of growth number. So that's that's kind of where we stand in terms of the total one below.
How we're thinking about it in terms of the current environment and what the mix is between.
Between sort of sustaining compliance and growth.
Okay and then then.
Lastly in your performance business.
You've always described.
In very positive terms piece over the fence relationships you have with your fumed silica customers.
It's it's a case that when silicones prices go down that your profitability.
False as well or as adjusted downward because for the profitability of your customers or.
Or your contracts independent overall silicones pricing.
Yes, so the feedstock if we look at the silicones part of it Jeff the feedstock bid we have to produce fumed silica is under long term.
I would call it sort of fixed price contracts, so that doesn't move.
With with Silicones.
Or so OCC, saying pricing, whether they're going up or down so either way. They don't so the input costs are are not moving in our known and then the silica that we produce some of it goes back to our fence line customer and they incorporated into their field compound and.
That is on a fixed or a known.
Price as well eras independent of whether.
There there there are so oxaydo their silicone prices are going up or down. So so that is very well known where but then there is a portion of the fumed silica that goes into whats called the niche market. So it doesn't go to the over the fence customers. It goes out into the open market.
For non silicones applications, principally and and those those markets are more driven by.
The current environment and how demand looks and then how competitive intensity plays out. So that's that's sort of the makeup of these these arrangements.
So year over year in performance chemicals operating income you were up 5 million.
Yes.
Both businesses grow that is.
Maybe see it three ways to specialty carbon blacks masterpass actions.
The fumed metal oxides.
Which ones crew and operating profits and which ones Frank.
How did the five how did you kept the 5 million more yep yep. So.
We don't comment on this specific profitability of each.
But definitely yes, you can see that the.
The carbons and compounds businesses saw pretty strong volume growth and and as a result profitability.
Improved in those over the prior period.
And less so in fumed silica that that would be kind of how I would say it okay. Good. Thank you so much.
Thank you. Our next question comes from Laurence Alexander with Jefferies.
Hi, This is Adam view this on for Laurence Alexander.
Hi, I was wondering how should see see in battery materials ramp will be like lumpy path or more linear.
I'm, sorry, Adam could you repeat that how should Alaska elastomer composites battery material ramp.
A lumpy path or more linear.
Okay. So so cabot elastomer composites and energy material so.
So both of these.
Our important strategic growth investments that we've been.
Making over the last several years and where we're very bullish on both of them. So in terms of Cc. This is a unique.
Elastomer material that drives much better tire where performance.
And.
We've commercialized this with a major tire producer already on our in the process.
Of.
Of further commercialization in the in the industry that is something that generally takes some time because the qualification period is somewhat long and then it will be a little bit lumpy because it will be customer by customer application by application. So I think its something were.
We expect to start to see material contribution from it you know over.
Over the next five years.
But in in a short term here, we're in more of an investment cycle as we work through customer qualifications and the technical development associated with that so those are a couple couple of points. It just maybe help you understand the shape of and the nature of this.
And then on on energy material, we have.
Business today.
That.
It was in the $20 million to $30 million of sales range.
And and now with the sanction acquisition upon successful.
Closing is going to put the the combined revenue in the in the range of $50 million. This one will move a little more linear Lee.
Because we were already building some significant revenue here and while there is a qualification.
Customer by customer sort of battery application by battery application qualification process here.
It's more diversified across a range of customers and applications and so I think it'll it'll take on more linear.
Literally a little more linear flow here. So if you look at at the market for conductive carbon additives in total.
This is a market that for lithium ion batteries. It today is between 350 and $400 million of market value for conductive carbon additives.
And we expect this is going to grow in the 20% range over the next five years, so that that sort of pushes the total market value up somewhere somewhere close to $1 billion.
And again.
The 350 to 400 market today, when you combine our business and San Sean's, where we'd be in the range of 50, so that kind of gives you a sense.
For what that looks like and overtime as we as were successful here and grow our position.
Expect the margin structure in this business to.
Look something similar to performance chemicals segment, so thats kind of a way to think about that one.
Okay got it thank you very much.
Thank you line is final question will come from Chris caps with <unk> capital markets.
Thank you I missed some of the initial formal comments, so I apologize, but on the de stocking.
Dynamic that you experience.
Reinforced materials did you can you characterize that by geography, which regions did you.
Feel that more pronounced versus others and then Conversely, the volume snapped back a little bit.
And you worry.
Was that similar to what were you experiences destock or was that more pronounced sir yes.
Sure Hey, Chris So yeah, the destock that we saw.
As was principally in Americas.
In Europe, and so you saw the first quarter year over year changes in Europe were down 9% in the Americas were down 6%. So was it was very pronounced in in those those markets and the major customers that operate.
In those markets and.
And as we saw volumes improve in January and some of that snapped back. It was it was spread similarly in terms of sort of region and customer.
Okay, and then just on the.
The marpol the IMO 2020 in that.
Delivered the DCH.
You Express confidence that you have those in place now to cover I guess differential blow out associated with with IMO 2020.
And since I guess slower so for diesel or lower feed stocks have have become more expensive.
And since you're comfortable that your covering that presumably that's higher raw material costs. Your customers. So just wondering since they're seeing effectively price increases there.
Did that undermine your ability to get based price increases in these annual contract that you.
Otherwise would have hoped to get if not for Marpol 2020.
Yeah, so well I mean in terms of.
The the feedstock cost moving up because of.
The rising differentials in the issues related to Marple you know, there's a there's no doubt that that resulted in higher higher pricing component for.
For customers here I think if you if you take a look at.
At the overall negotiations here I think where we're pleased with with the outcome.
The market was a bit softer than last year, but but again overall, we achieved price increases in Americas in Europe and these are the primary contracted regions.
So our overall pricing efforts here had a combination of based pricing actions as well as this strategic objective to.
Include pricing adjustments for from our Paul.
And differential riskier that needed to be mitigated. So if you look it at all of that if you still get sort of straight pricing or invoice impacts the customers the pricing and.
And and and and mix topline benefits were probable approximately about $15 million per quarter.
Now we needed some of that pricing to cover the forecasted feedstock differentials.
From the transition to the new Marpol regulations, and then we did.
We did shed some lower end.
Paean volume. So so the net of this is somewhere in the order of maybe $7 million per quarter margin benefit from from these agreements that's maybe a way to to think about it so overall.
Quite a bit of.
Topline pricing movement or some of it based price some of it.
Pricing that customers will see that did needs to be.
They are to cover the the rising differentials.
That's helpful. Thank you and then finally just in.
The performance chemical segment, you alluded to.
He referred to in specialty carbons market share gains and so that.
That part of that market is part of the carbon black markets generally characterize as more.
Mark.
Validated.
In competitive landscape pure competitors, and so I haven't sort of.
Hadn't really thought about that as much in terms of the competitive intensity of.
And the reinforcement materials. So just wondering if you could provide any color on the.
The share gain there was that.
Just a function of expanding the addressable market was it specifically.
Taking share on performance.
Of your especially compounds or specialty carbon blacks versus competitors anything there would be helpful. Thanks.
Yes, so so a real mix here, Chris so while.
You know there are.
No.
A number of players that participate across the specialty carbon space and the specialty carbon space is made up of a lot of different applications and all of those applications are.
Served by.
I would say kind of a common set of assets, there's there's opportunity to move between.
Rubber blacks tire industrial products and specialty carbons, and we always look to optimize across that and so as we were working through.
Commercial actions.
We have.
We have emphasized some of that capacity towards more specialty carbon so we try to look at it with a one Cabot view.
And and the result of that is that we we have we have picked up some targeted share.
In specialty carbons, but it's pretty spread.
Both geographically and across the range of applications and customers.
Okay. Thank you.
Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr., Sean Keohane for any closing remarks.
Great. Thank you very much for joining us today and look forward to speaking with you again next quarter have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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