Q3 2020 Cabot Corp Earnings Call
[music].
My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Q3 2020 Cabot earnings Conference call.
All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be question and answer session.
Mike asked a question during this time simply press Star then number one on your telephone keypad.
If you effect withdraw your question press the pound <unk>.
Thank you I would now like to turn the call Mr. Steve Go ahead. Please go ahead Sir.
Thank you and good morning, and welcome to the Cabot Corporation third quarter earnings teleconference.
With me today are showing claim CEO and president.
Second Mclaughlin senior Vice President and CFO.
Last night, we were at least result for a third quarter fiscal year 2020 copies of which are posted on the Investor Relations section of our website.
Slide deck that accompanies this call is also available in the Investor relations portion of our website. It will be available in conjunction with a replay of the coal.
During this conference call, we will make forward looking statements about our expected future operational financial performance.
Forward looking statements are not guarantees of future performance and are subject to risks uncertainties and potentially inaccurate assumptions and other factors some of which are beyond our control and difficult to predict.
It's known or unknown risk materialize.
Portion underlying assumptions prove inaccurate or actual results could differ materially from those expressed or implied by our forward looking statement.
Importantly, as we cannot predict the duration or scope of the cobot 19 pandemic the negative impact to our results cannot be predicted.
Factors that will influence the impact on our business operations include the duration and extended the pandemic the extent of imposed a recommended containment or mitigation measures in the general economic consequences of the pin debit.
Other important factors that could cause our results to differ materially from those expressed or implied in the forward looking statements.
Our discussed under the heading forward looking statements in the press release, we should last night.
And in our annual left the annual report on form 10-K for our fiscal year ended September 32019 in our quarterly report on form 10-Q for our fiscal quarter ended March 31, 2020 in subsequent filings, we will make with the FCC all of which are 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 adjustments 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 reconciles the most directly comparable GAAP financial measures and a table at the end of our earnings release issued last night and available on the Investor section of our website.
I'll now turn the call over to Sean Keohane, who will provide an update on third quarter results along with an update on our financial position and market overview in our progress on sustainability.
Erica Mclaughlin will then review the business segment results in our corporate financial details.
Thanks, John will provide some color on the fourth quarter and open the floor to question Sean.
Thank you, Steve and good morning, everyone and welcome to our third quarter earnings call.
As expected the impact from Cobot 19, the third fiscal quarter was significant as we faced an unprecedented level of demand disruption.
I'd like to begin by recognizing the entire Cabot team for the way. They responded to ensure that we remained save support our customers and communities and adjust to a new set of priorities around cash preservation and cost management.
I am specifically very proud that our extensive protocols to ensure that our people and suppliers are safe have worked well Im pleased to report that we've had no instances of work related cobot transmission among our employees.
In the third fiscal quarter volumes and product mix across our businesses declined by over $100 million as compared to the prior year quarter, driven primarily by lower demand in the tire and automotive sectors as manufacturer is temporarily halted production in response to the cobot 19 pandemic as.
The results total segment EBIT was $18 million and adjusted earnings per share was a loss of seven cents for the quarter.
Despite the challenging environment, we're extremely pleased with our cash flow performance in the quarter as we generated operating cash flow of $149 million. This puts us on track to deliver the operating cash flow that we communicated last quarter of $200 million in the second half of the fiscal year.
In addition, we continued our commitment to return cash to shareholders with $20 million in dividends paid in the quarter.
We also made progress on a key strategic initiatives by completing our acquisition of Shenzhen San shown nano the acquisition of this leading carbon nana to producer to the lithium ion battery sector will complement our range of conductive carbon blacks and strengthen our position in this fast growing application.
We also continue to strengthen our are already solid debt and liquidity position.
Cabot has consistently generated strong operating cash flow and since 2015, we've generated over $2.1 billion cumulatively.
We remain confident that our cash flow from operations will be sufficient to fund our current dividend and support the capital expenditure needs of our businesses.
The strong cash flow generation in the quarter allowed us to fund the sand shown acquisition, while at the same time, increasing our cash and bringing our debt balance down.
On the liquidity side as of the end of June 2020, we had $1.4 billion in cash and committed facilities and a debt to EBITDA ratio of 2.9.
Out of an abundance of caution we increased our leverage covenant from 3.5 times to 4.5 times for the four quarters starting in September 2020, which we believe provides ample cushion in these uncertain times.
The cobot 19 pandemic is having a far reaching impact on the global economy with global GDP forecasted to decline approximately 5% in 2020.
In terms of the impact of the pandemic on Cabot's business. We expect the June quarter will be the low point in terms of financial results.
April demand proved to be the low point for us and we saw a month over month improvement throughout the quarter with further strengthening in July.
Additionally, we are seeing the broad mobility data continue to strengthen.
Looking a bit deeper at our end markets developments are mixed automotive production represents approximately 25% of our sales ranging from tires on new cars to a host of applications in performance chemicals, such as structural adhesives coatings and engineered plastic compounds.
This market has suffered in 2020 and is projected to decline about 20% in the calendar year with year over year declines in all regions.
We expect to see improvement in the September quarter based on external forecast, which are projecting a year over year decline in global light vehicle auto production of only 10% in that quarter as compared to a decline of 45% in the June quarter.
Now moving to tire production.
The global replacement tire industry is also expected to decline for the full calendar year of 2020 by approximately 15% based on estimates from LMC with contraction occurring across all regions.
Similar to auto production. The September quarter is expected to show improvement sequentially with total replacement tire sales projected to be down 10% year over year compared to a decline of 34% for the June quarter. According to LMC.
We've also seen clear in steady upward trends in terms of mobility and miles driven and this bodes well for the replacement cycle for tires, both in terms of passenger vehicles as well as truck and bus.
The replacement tire market has historically been more resilient compared to other parts of the broader transportation sector.
Beyond automotive and tires, which are large and important end markets for US. We also serves a diverse range of applications across the infrastructure packaging and agriculture sectors and these end markets have held up well during this time.
Additionally, PMI has rebounded sharply as we exited the June quarter, a further sign that economies are recovering from the low point in April.
In times like these it's important to remain committed to long term strategy a key tenant of our strategy at Cabot is built on sustainability.
We believe our ability to develop innovative technologies to meet our customers sustainability challenges conserve resources across our value chain and grow our position in the circular economy is a key to our shared future and provides us with a competitive advantage.
For more than a decade, we've consistently published a sustainability report to highlight our progress in this area and we recently released our 2019 report.
As is typical for Ross. The report was published in accordance with the global reporting initiative.
And in an effort to further our commitment to transparency and to provide important information to our shareholders. We have aligned our disclosures with the sustainability accounting standards board or SaaS be framework, which sets forth standards for the chemical industry.
We also remain a proud signatory of the United Nations Global compact and are committed to reporting our progress as a key key component of our sustainability report.
I'm also excited to share our expanded 2025 sustainability goals, we have long, we've a long history of focusing intensely on the environmental impacts of our operations and the safety of our employees partners and communities.
We also recognize that long term success requires a commitment to sustainability in its broadest form as well as a balanced approach to stakeholder engagement.
Our 2025 sustainability goals demonstrate our steadfast commitment to this broad definition of sustainability.
This expanded set of goals reinforces our broaden view of sustainability and extends beyond our strong foundation and safety health and environment to include areas, such as product development supplier sustainability diversity and inclusion and community engagement.
In our reinforcement materials segment, we're pleased to report that as of June 2020, all major emission control equipment has been received in placed into final position at our Franklin Louisiana site. This project has completed 90% of the estimated person hours required and remains on track to finish ahead of the industry.
These April 2021 EPA deadline.
Additionally, we've launched another new product within our Cabot engineered elastomer composites business, the new easy to see Dx 90, 640 solution is specifically engineered to improve the performance safety in life span of tires, while reducing the cost and environmental impact of production.
The to see product line was recently named European rubber journals inaugural list of top 10, elastomers for sustainability, which ranks projects that contribute most to raising the environmental profile will be elastomers in rubber industry. We were the only carbon black company recognized in this top 10 list.
I'll now turn it over to Erika to discuss the results of the third quarter Erica Thanks, Sean.
With reinforcement materials.
Certainly endorsement materials for the third quarter fiscal Tony Tony decreased by $77 million compared to the prior year, primarily from lower volumes due to the impact of coded 19 globally volumes declined 42% third quarter, primarily due to the temporary tire and automotive customer shutdowns in your opinion.
Eric.
Designs were down, 51% and 59% respectively.
We were also impacted in Asia with volumes were down 26%.
The unfavorable impact of lower raw material costs on margins was $16 million as compared to the prior year given bias will return of inventory less benefit for new projects and lower energy Center revenue.
Cost mitigation efforts, partially offset the impact from lower volumes and margins.
Looking ahead, we expect that half of the lower raw material cost headwind will not repeat in the fourth quarter.
We anticipate a significant sequential improvement in demand in reinforcement materials, given the customer plans have come back online.
Hi volumes improved sequentially from June and were 9% below July of last year and we believe this includes some level of restocking and our customers.
We expect volumes to be down in the range of 15% compared to last year's fourth quarter.
Now turning to performance chemicals.
Decreased by $16 million year over year, primarily due to lower volumes and the impact of curve at 19, and more competitive pricing environment, and a weaker product mix and our fumed metal oxides product line and weaker product mix in our specialty carbons product line from lower demand in automotive applications.
Third quarter volumes decreased 5% year over year in performance additive and 8% inflated solution.
Included 19 impact designs in both businesses, primarily in automotive and construction end markets, while the infrastructure market, including line cable and pipe applications continue to hold up well in all regions.
As we move through the third quarter, we did see signs of recovery began to take hold in all regions led by China, which has returned to growth in many key end markets such as automotive.
Looking ahead to the fourth quarter, we expect modest sequential improvement in volumes in performance additive as end markets begin to recover from the impact of closing on demand.
Offset somewhat by seasonal patterns and formulated solution.
The benefit of the higher volumes.
Favorable product mix that we are expecting in performance additives in the fourth quarter is expected to be largely offset by higher fixed cost associated with this data by new North American team silica plant.
Synchronized turnarounds in Lansing silica fence line.
Now moving to purification solutions in the third quarter fiscal 2020, EBIT increased by $1 million compared to the third quarter fiscal 2019. This is driven by higher margins from improved pricing and product mix and our specialty application energy fixed costs in the quarter shipment by savings from the previously announced.
Transformation plan.
Partially offsetting these benefits were lower volumes in specialty applications related to the impact of coded 19 and weaker mercury removal demand.
Looking ahead to the fourth quarter, we expect to see seasonally higher volumes and concluded 19 recovery, which will be more than offset by lower margins due to an unfavorable product mix.
I'll now turn to corporate items, we ended the quarter with a cash balance of 162 million and our liquidity position remains strong at 1.4 billion.
During the third quarter cash flows from operating activities were 149 million in year to date operating cash flow 278 million.
Total capital expenditures for the third quarter fiscal 2020 were $43 million and we're still expecting capital expenditures to be in line with the 200 million dollar forecast, we provided last quarter.
Also during the quarter, we paid $20 million in dividends.
Given the uncertain business conditions, we did not repurchase shares in the quarter and don't expect to purchased any shares for the remainder this fiscal year.
Our year to date operating rate is 29% and we anticipate the operating rate for the fiscal year TV in the range of 29 to date percent.
I'll now turn the call back over to Sean.
Thanks Erica.
As we talked about last quarter about 40% of our sales are tied to the replacement tire end market, 25% driven by new autos and 35% linked to consumer in infrastructure related applications.
With this mix of end market participation the decline in volumes in the third quarter was anticipated primarily related to the temporary suspension of customer production in the tire and automotive sectors.
We are pleased to see that there is recovery underway and the tire and auto end markets from the low production levels in April leading to whats. So far has been a V shaped recovery for demands in our reinforcement materials product line product line.
Given the longer value chain and most of the performance chemicals applications the decline and recovery was more muted leading to a flatter curve overall.
In addition, many of the applications in the consumer and infrastructure space held up reasonably well during the third quarter and you can see that the diversification of our performance chemicals portfolio led to a more resilient volume level overall.
With these consumer in infrastructure applications expected to continue to perform well, we expect our volumes to remain solid.
With this backdrop of the shape of recovery in our underlying end markets, we anticipate a significant sequential improvement in reinforcement materials demand and a more modest recovery in performance chemicals.
We are pleased to see the improving demand pattern and the strengthening underlying drivers buttons uncertainty remains given the current state of Kobin 19 in different parts of the world.
Cost reduction remains a key focus for us and we are on track to deliver in excess of $60 million of savings across our base operations, which is helping to partially mitigate the impact of lower volumes and costs associated with inflight growth projects.
We expect solid cash flow in the fourth quarter as profitability increases and we continue to manage net working capital tightly. Therefore, we are reaffirming our guidance of our operating cash flow of approximately $200 million in the second half of the year.
Thank you for joining us today, and I will now turn it over to Lisa for the question and answer session.
At this time I would like to remind everyone. If you'd like to ask a question. Please press star Jansan number one on your telephone keypad.
Your first question comes from the line of David Bank.
Deutsche Bank.
Cash flow guidance, you enroll more triangle.
Q4 of Matt.
Can I will timeline ducs $50 million at home or.
Onetime Clive working capital.
In Q4, thank you.
Sure.
As we said we are feeling good about our cash flow and reaffirming that that outlook that we that we talked about last quarter I think the composition will.
We'll change in the fourth quarter as we start to see recovery. So certainly.
The profit contribution to cash flow.
It will be much higher in the quarter and as a demand recovers, we'll we'll see receivables balances beginning to build we have seen oil prices move up from the low point in that we saw in this past quarter. So.
That will that will lead to an increase in some working capital. However, we're continuing to manage our our feedstock and finished product inventories very tightly here to try to.
Constrain the level of.
Working capital build just given.
The the uncertainty around demand.
So I think the composition will change in the fourth quarter, where we will see some the negative impact from from working capital but.
More than offset by an improved earnings profile, leading to to solid cash flow in the quarter.
And just like cost savings will tell you that increases from $45 million to $60 million.
Is that still has carbon have structural and what drove the increase from the 45 to 60. Thank you.
Sure, Yes, so obviously cost cost reduction cost management is important right now and we had a number of efforts already under way heading into the cobot situation.
Many of which were a structural as we.
Created a global business service organization and have been making some moves to improve the the cost and efficiency of our shared service activities.
Consolidation around our our site in Riga, Latvia for example, so many of those activities were already underway and.
We have added to that with aggressive cost containment measures across across all of our businesses I think the right way to so we've just been more intense about it and Thats what has led to the increasing.
Level to around $60 million expected on a full year basis, and I think it's still reasonable to think about half of that as structural and and about half of it as.
General belt tightening elimination of discretionary spend and.
And deferral of.
Of spending I think in the lower volume periods.
You know, we're we're deferring and pushing out.
Maintenance and things like that to try to sink it up better with with volumes, but those are certainly costs that will come back in as as the volume recovers. So I think about half half is still a reasonable way to think about it.
Thank you.
Your next question comes from online, it's Mike light here with Barclays.
Good morning, guys I am I.
I guess first two on the reinforcement business I guess first in Asia can you talk about how volumes have trended in your Asian business, particularly as we kind of go into July as I assume China's in some ways led a bit of this recovery and then just as we think about EBIT recovery into the fourth quarter.
Sure the comments from Eric you are helpful about getting some of that cost impact back, but if we do hit let's say that down 15% volumes, how should we think about the margin profile or the incrementals are decrementals on that.
Sure.
Well, let me make a few comments first Mike about.
The recovery in in Asia, and what we're seeing there and then and then maybe Erika Ken can comment on the.
The incremental.
Analysis, so that that topic.
So we're definitely seeing China rebound, which is positive of course, they came out of co bid first and by you know all reported statistics seem to be.
Managing things pretty well and life on the ground has as somewhat returned to.
To normal so they seem to be containing things.
Pretty well and if you look at general economic activity. PMI has has moved up very sharply in over 50 now in China, and we've seen our end market sectors respond. Accordingly, so automotive has has swung back and the domestic.
Tire market has as well and our volumes have.
So I think thats been.
That's been a real positive I think.
We are there has been some.
Delay I would say in seeing a full recovery in China relates to the export markets. So China does export.
A lot of tires, they make up close to 40% of the world's tire capacity and.
Of course with.
The more delayed recovery in the.
The late onset and delayed recovery in the western markets that that export market has been.
I think slower to recover but that is beginning and we are beginning to see that so so I would say overall volumes have.
Have improved I think pretty nicely.
In China and are on a pretty good trajectory and hopefully if there is sustained recovery in the western markets that that export sector of the market.
Continues to gather gather strength.
I think in terms of the Incrementals, maybe I'd ask Erika to pickup on that one Mike Ashley So.
Obviously as you look at the incremental or decremental margin a bit different depending on what segment you look at so in terms of that percentage Q3, you could look at reinforcement materials lastly, about 30%. If you look at performance chemicals, a bit higher in the low 40 and so.
Thats a Q3 big here when you think about this so I'd say remember given the nature of our business in the link between oil and how it moves through the revenue line that these percentages can move quarter to quarter, just based on the movements in feedstock right.
So we think about this I think more in terms of that incremental EBIT dollars based on the change in volumes and so if you're going forward to think about Q4.
I think looking at the dollar impact of the Q3 volume change is important and so we talked about reinforcement volumes trapping 42% year on year and that was a 75 million dollar impact to EBIT in the segment and so dramatic change in results obviously with the.
Operating leverage in that business and the significant change in volumes.
As we thank you for the expectation would be at only 15% below prior year.
And then for performance chemicals.
Impact was much less on volume, we talked about 5% decline in performance add it is an 8% in formulated solution and that totally EBIT impact of that was $7 million in the quarter.
So here that the more diverse set of applications in customers has resulted in a much lower level of overall volume decline and so not nearly as significant in terms of dollars as reinforcement materials and we talked about for Q4 that there'd be a modest improvement in volumes expected in this segment. So it gives you.
The magnitude we'd be talking about in performance chemicals in terms of dollars as well.
Great that was Super helpful. And then Sean could you maybe just level set where we are in terms of the fumed metal oxides market. It seems like pricing has been a bit of an issue. The past few quarters. You guys are still bringing on a bit of new supply you just level set where we are today and hopefully how you see that recovering over the next six to 12 months.
Sure yes so.
Definitely the environment in in Fms, though has been a bit more challenging.
Because we faced in 2019, even pre coated the first year, where we actually saw some decline in global fumed silica volumes at a point when some capacity was coming on stream. So that has has led to I think more competitive price intensity in the in the near term.
I'm here of course, that's been.
Exacerbated a bit by the cobot situation for for sure I think as we see demand recovering than that will be much more supportive of getting prices moving them back up to.
The historical levels and historically in this business you have seen that feedstock and fumed silica demand has been very well in balance and.
Of course, because this is a feedstock you can't just go out on the market and bye.
There are.
I think sort of structural barriers to entry here, but historically the the feedstock balance.
And this fumed silica demand has been.
Has been in in a very good state of balance and that has led to.
I think the strong the strong margins in for this for this industry and I think the combination of demand recovering and there's a shakeout happening right now globally in the Tcs industry and and that industry is one of the feedstock sources into.
Into the fumed silica market and I think as that.
Shakeout takes hold and becomes more clear our view is that things will come back into balance here. So I think what we should see Mike over the coming year as demand improves is that pricing kind of incrementally begins to climb back up.
And I think the shake out on the poly industry is a little bit more difficult to call, but we can clearly.
I see that it's happening if you look at for example in over occurs.
Announcement, where they took a significant impairment on their poly.
Assets and you saw the same from OCI in Korea.
And clearly see that.
There is a or rebalancing our array.
Kind of a realignment that's happening here and our view is it's a little bit difficult to call exactly when that comes into into balance again, but I can certainly see the signals of that happening. So I think we'll see incremental improvement as we progress through the year with demand improving giving support for pricing.
And then the next tranche of recovery coming as the poly industry stabilizes and the feedstocks that come out of that industry stabilized as well and and get back into that historical balance that we've always had.
Great. Thank you.
Your next question comes from the line of Josh Spector with UBI, Yes.
Yes, hi, good morning.
Related actually would that prior question.
Just curious where you talk about sequential mix and performance of overall is that mostly fumed silica is getting slightly better or is that mix within the rest of that portfolio.
Yes, so it's a little bit of both Josh So what what we will see for sure is as automotive begins to.
Improve in the September quarter, a lot of the higher value products are associated with that that that industry sector, and so and that's true in both across carbons specialty compounds as well as fumed silica. So we should see some improvement.
From.
From.
A rise in in auto production levels, it's possible that there's a slight delay in when we experienced experience it because the value chains are a bit deeper in this segment, but but that will be a driver.
Over the coming of one or two quarters here, assuming that the auto builds improve.
So I would say that's that certainly.
A significant one probably the most significant one.
In in this business our view on the infrastructure related applications as those should continue to hold up pretty well, so I would say that will be.
Clearly consistent with what we saw.
In Q3 here.
And then as the economic recovery takes hold some of the consumer driven applications should.
Should improve some of these products go into consumer durables and those have been.
I think more.
More impacted recently and so as the as the recovery takes hold some of those applications.
Should should improve for example, things like fumed silica are used in.
Vacuum insulation panels in refrigerators and things like that so there is some of these products go into consumer durables that.
That should start to should start to pickup.
Thanks, Thats helpful. I guess last quarter, you talked about maybe a 15 to 20 million dollar impact of this quarter from lower oil and feedstock cost. So there's a bit of a lag pricing. There I'm just curious how much of that did you actually realize in this quarter was it better or worse than what you expected.
And with energy prices moving the way. They have is there any type of impact that we should consider freight for the next quarter.
Yes, so with respect to the impacts from oil last quarter, we did.
Project a range of 15 to 20 million and we came in right inside that range at 16.
In the in the third quarter and again the drivers just to remind.
You were.
Slower turn of inventory as demand dropped very quickly and oil prices collapsed and so a bit of timing mismatch and then the other drivers are win win when oil prices drop we get less benefit from our yield projects and and then the energy.
Centers have.
Have a negative impact both driven by the lower oil prices.
And the lower production volumes in our plants. So the 16 was right in the zone of what we had talked about now as we as we go forward here Erika commented that about half of that will not repeat.
In the fourth quarter, that's basically the slow turn of inventory does not repeat and so we feel that we are back in in imbalance. There. So that's good.
And there is some some recovery in the energy center in yield front because volumes are higher energy center Utilizations are higher.
And then oil prices have bounced off the bottom there is still down on a year over year basis, but have certainly bounced off the bottom that we saw in the kind of April time period. So so those those will be improving but the right way to think about it is about half of that 16 will is expected to not repeat.
In the next quarter.
Great. Thank you.
Your next question comes on line of Jim Sheehan, What's for Securities.
Thanks, Good morning.
Can you talk about the reinforcement material contracts with tire customers I know you usually finalized.
Patients towards the ended the year can you talk about your expectations, where you sit today and also give us a sense for inventory levels and reinforcement materials and where your utilization rates are as of July. Thanks.
Yes, good morning, Jim So let me, let me say three three questions. There let me, let me try to tackle them in the order that you you opposed them. So in terms of the contracts as we typically negotiate the annual agreements with our major customers in the back half of the year starting about now.
Is when those discussions began and so I think the schedule is no different this year.
We're just at the beginning stages of those.
Those discussions it's hard to say, how our negotiations will play out between now and finalizing the agreements later in the calendar year. We're certainly looking at external indicators, such as miles driven data and seeing some some some positive signs there for for the tire and carbon black industry. So this is good.
But there is still some uncertainty with regard to the cobot pandemics. So I think much of the answer will depend on the timing and shape of the recovery that's expected into 2021, but the recent signs of improvement in terms of mobility certainly are.
Encouraging for US I think the other factor at play here.
Is that of costs and on both our costs than those of our competitors, which are going up driven mostly by the environmental increasing environmental and regulatory costs and and so in order for Cabot and other carbon my producers to support our customers in a sustainable way, we need to earn a fair return on knees.
Required investments and.
The higher costs that are associated with them and so.
In order to do that additional price increases are necessary, especially in those places where costs are going up most quickly and that's how we're approaching our our negotiations here. So this is an industry wide issue and in the one that we've been working on hard over the last few years and can.
Continue to be a central theme in terms of.
Providing stability for.
Long term stability for our customers.
We are we're working hard to make sure that our UK.
We can control compliance investments come on stream. So that we can give our on time. So that we can give our customers the supply security that they desire and.
In return for that we need to have a fair price.
For.
These higher costs, so I would say that's.
It's early in the process, but that's how we're thinking about it and I think it's quite important that.
As an industry, we we work with our customers to.
Get a recovery for these higher investments.
Let me, let me just try to comment quickly on the inventory.
Question that you asked and so our sense is that we've just come through a really really weak period of demand and we think inventory levels are quite low end. Following some of the tire manufacturers recent earnings calls.
You can see that they commented specifically about that so why I think inventory levels had been taken down across the chain.
And of course, we took ours down aggressively and so I think we were in sync with what was happening across the the value chain. So I think as demand levels improve we should see that improvement flow through pretty directly to us.
I don't think there will be a big distortion here.
But given that inventories are very low there probably will be some restocking now some of which we may have likely already seen in July.
It's hard to tell but it wouldn't be surprised if there was a bit of that beginning in July but it should be a fairly.
Yes, it should be more visibility, Jim I would say on that front because inventories are low.
And then finally I guess your last question on on utilization you know our our utilization levels are going to are going to track.
Of course, what the expectation is for.
For tire production now.
We we more aggressively our utilizations were lower in the last quarter.
We are volumes were.
Were down 42%, but our utilization rates, our operating rates in the plant, we're probably down more in the 50% range across the quarter, because we were pulling inventory is down aggressively.
And and so I think now with inventories down our utilization levels going forward should reflect the expectation of volumes.
That's that's sort of how how I see it at this point.
Very helpful. Thank you and could you also comment on your conducted carbons business given the state of the electric vehicle market.
Yes, sure so as I commented in the.
In the prepared remarks, so we were really pleased to close the San shown acquisition in in the quarter. So I think that's.
Thats, a real positive I mean the market.
You know has been impacted just as the broader automotive market was.
Most most recently in the most recent quarter here, but as recovery takes hold.
That debt in the auto plants are backup that that two should recover our underlying view of.
The market hasn't changed in terms of the expectation of significant growth over the next five to 10 years.
As east capture a bigger.
Bigger share in the market and we're really excited about the San showing.
Acquisition, because they're a leading CNT producer in China, serving this market with a number two market share position in our view certainly China is the biggest TV market in the world and and so this investment was quite strategic on on that front and.
We think theres a lot of synergy here.
Over time between their CN teasing their ability to formulate.
Dispersions with conductive carbon additives and then our.
Conductive furnace blacks the formulation. The combination of these we think is is going to be important in next generation product development and so.
You May you may follow one of our our key competitors here in China companies see nano.
Recently, IPO within the past year and with the about 50 million of revenue so.
Maybe 40%.
Well, maybe close to double what ours is with our sanction acquisition. There currently sitting with evaluation of $1.7 billion in China right now so.
I think we feel really good about this long term strategic investment in San Sean.
But there is some short term impact here.
As the auto plants were shutdown.
Thank you very much.
Your next question comes from the line of Laurence Alexander with Jefferies.
Good morning, two questions. Please one is can you give a sense of the scope of the resources you are putting into the CTC marketing efforts.
And how.
Any drawn talent for capital should evolve over the next few years.
And then can you talk a little bit about mix.
As your end markets recover how should mix evolve and how should that doesn't flow through to.
Pricing and margins over the next three four quarters.
Laurence just on the first one on CE CE in the marketing efforts. The second part of that question would you mind, just repeating that for me.
Well, there's the personnel component and then there is just the longer term capital component working capital.
No we investments in infrastructure to help customers with their research efforts.
Moment efforts and so forth Yep Yep no got it okay.
So yeah we're.
We're very pleased with continued progress here.
On the CDC front.
It is still immaterial in relation to the broader reinforcement materials business. So it's something that is going to build over time and and the adoption.
Of this by the tire makers and building that to materiality.
Will it will take some time here, but we are in in an investment phase here, where we're investing in both marketing.
As well as further technology development.
Two.
Further build out and extend.
The product line here.
So if you if you think about it on a.
On and on a sort of a cash basis.
There's some.
Cash burn right now in this business as we.
As we make these investments for for the longer term, but.
But it's in the low single millions.
Kind of a kind of a number in terms of the burn of course, there's revenue and margin from sales, but we're also investing in.
In the longer term.
Development and so when you net all that together that's a gives you just a sense.
So something very important some modest cash burn but.
But I think the right the right balance here because I think this this one has a transformational potential for this business. It will take some time, but it does now as as we see the importance of sustainability.
In our in our customer base in the role of materials to drive sustainable products in tires is.
Is really critical it's going to be in materials question.
With respect to with respect to mix.
How that should evolve I think the single biggest drag on on mix for us has been.
A week auto because many of the.
Most high value products are in the portfolio, particularly in performance chemicals are specified products into the automotive chain and so I think as as that improves.
Then we should see.
Mix of flowing through positive mix flowing through.
Over the next three four quarters say it will be it should follow maybe with a slight timing offset it should basically follow improving numbers out of the auto industry in terms of production levels.
And then I commented a bit earlier, I think as as demand improves.
In the fumed silica side of course this is a high margin product line.
And so as demand improves will.
We should get some further pricing support there and I would expect that that would be incrementally ratcheting up.
Over the coming three to four quarters as well so those would be a couple of the major drivers Lawrence with respect to sort of price and mix.
Thank you.
Your next question comes in the minus yes, the caucus with JP Morgan.
Thanks very much.
We'll go into your emissions spending in the United States be completed by April of 2021 and in the aggregate.
How much do you think you will have spent 10.
How much will review.
10, 2020 fiscal two.
Yes so.
Jeff with respect to the the PPA consent decree we now have.
The industry or under a similar implementation timeline.
The next.
The plant to come online for Cabot and all of the competitors are.
Obligated to have a plant online by April 21.
And that leaves us with a a final completion date in 2022, where we have one final plant in 2022, and so the implementation schedules are now synchronized for.
For the industry and all players or are obligated.
To to to meet those or or.
The.
Deal with the consequences and penalties and impacts of from from the EPA Indio Jay.
With respect to our.
Our cost we have had an estimate.
There that in total this will.
Be in the range of 175 to 200 million once all plants are implemented and we continue to feel that that is the right range for completion of these these projects so that will be to the capital cost range. Once all of them are completed.
How much of these stance so far.
Oh about half about half right now.
Uh huh.
How much how did the specialty block of business behaving quarter, how did it behaves in July that as what was the volume decrement.
In the June quarter, and what Paul Paul.
Hello.
Yeah. So.
In our reported numbers.
We have performance additives, which is both specialty carbons Nf ammo, we reported performance additives down 5%.
In the in the quarter. So you know a more a more modest decline certainly than reinforcement materials and what we saw there was that certain infrastructure.
Packaging AG related as well as art just our specific book of business with with customers held up better was more resilient, we certainly had the impact from auto being.
Extremely weak in the in the quarter, but when you balanced it out against some of those other things.
It was it was a more modest decline of in that sort of 5% range for performance additives.
I think what we're seeing in July.
Is and what we would expect over the.
The balance of the quarter is.
Is some modest improvement off of that and.
Maybe down.
No.
A few percentage points over last year.
Same quarter again, the same largely the same factors driving it Jeff we will see some improving auto, but it'll probably be a little bit delayed in terms of how it hits us because of the depth to the value chain that might be.
You might be seeing that.
A little bit more in in beginning in Q1, but we will see some improvement from auto and then the infrastructure related.
Packaging AG related should continue to hold up well on our specific customer book of business.
And who we are aligned with they seem to be doing pretty well. So I think those those are helping us also.
What percentage of performance at ADESA specialty block the specialty block all of that more or is that a part of that.
No. It's it's a part of it because we have in performance additives, we have fumed silica and right. That's why I wanted to know what happened to specialty block.
Yeah, I would say specialty blacks moved in about the same direction as the overall performance additive so my commentary.
Is reasonable for that.
Okay, and then lastly have you been monitoring on what's been going on with search developments hydrolysis.
Okay, Yes.
Sure.
In Europe.
Differing truck drives to produce hydro Chad.
Yes.
Yes, resulting would be resulting carbon black produce like have you have you reached out 20 of these companies.
Have you looked at what's going on there and then do you think it will touch the carbon black industrial.
Yep.
We certainly follow this very closely and and in in a in a a long ago time.
Cabot.
Had a production capacity tied to natural gas in fact, our plans and Pampa, Texas was originally built on a on on on a gas based feedstock. So we certainly understand.
The the technology, well NR are tracking various developments across the.
The spectrum of reinforcement materials everything from alternative feedstock sources like.
Natural gas conversion.
Two.
You know.
Alternative.
Producers like model with to things like.
You know people trying to take recycle tires and reclaim.
Carbon black from them. So we track all of these.
Very closely.
To inform our point of view around.
Either new entrants or potential substitutes I think each of them, it's probably a conversation for another day, but I think each of them based on our analysis have.
Have real challenges in terms of.
Either economics or scale up or making product that that actually performs in the application you you get a very different product.
And and its performance in application is is quite different than I think this is one of the strength of of our company is our deep application knowledge here in our ability to to take what is in theory, a carbon black and see how it performs in application so something we watch very closely.
Jeff and.
And we've put our bets on a on on the formulation angle around.
C C or what we now call easy to see because we think it's going to be the formulation handles.
That are going to drive performance here.
No carbon black is.
Is a great product and but it's really hard to realize its full potential.
Because when you try to disperse it. It's you have to apply a lot of sheer and you degrade the underlying polymer and so this is where the the formulation handles and things like CE CE are quite compelling. So we've put our our money and effort around that angle, but we do track closely the emerging technology.
Okay, great. Thank you so much.
Your next question comes on line of Korea catch with <unk> capital markets.
Yeah. Good morning. So my first question you touched a little bit upon the expectations you have around.
Pricing in the reinforced materials business going into this contract season, but my question really more about just.
No bigger picture the overall competitive intensity of the carbon black industry as we're coming through the spend dynamics have you seen any shifts that you've noticed by region and then maybe a little bit more specifically on pricing how has that been and the in the PC segment, that's not dependent on annual contract to supply agreements Im just wondering how that pricing has held up.
Against the weaker demand backdrop.
Yep.
So you know Chris in terms of.
Pricing in a in Aram with.
So much of it under contract certainly in the west and the more mature economies.
There hasn't really been any change because that's that's been.
That's been agreed and and honored now in the more spot markets.
Like China for example.
With a very weak demand over during his they were working through the co. Good phase that certainly resulted in more and more price intensity or more price competition here because people were fighting for.
For volumes that had dropped.
Precipitously as we see demand coming back then we're starting to see.
You know pricing power restore and so I would say that.
Those if that trend continues and we should see.
No incremental restoration of of pricing in in China, which is the biggest spot market.
So thats, how I would sort of characterize reinforcement materials.
On the.
On the specialty carbons side of things.
We have not had any.
Impacting pricing.
So with respect to price and the relationship of price and Raws you know of course in this business. It's it's more performance in application driven but the feedstock is an important input factor and and when it moves up we've we've got to we've got to deal with that and when it moves down there.
Is there is normally some some room for margin expansion. So we look at this relationship between price raws and I think thats been.
Thats been holding up quite well I think the the the challenge has been a bit more mix oriented rather than get pricing oriented.
Just because the the exposure to auto and the very high margin stuff that comes with that.
That's helpful. And then follow up you you mentioned in China and actually in response to another question you talked about at least qualitatively the trends in China is just wondering if you're getting a little more granular on.
No I'm trying to answer at least in the RM segment. The magnitude of the demand degradation you saw there and how that how those comparisons have looked on a monthly basis quantitatively on a monthly basis sequential through the June quarter, and how Thats look so far into July. Thanks.
Yes, yes, so well certainly at a at the low point.
Volumes were down you know very sharply, but the low point in China was experienced.
A little bit earlier than than we saw in the west, but I would say volumes have.
Have come back pretty strongly and there within spitting distance of where we were a year ago.
So I think that is.
That is positive and if that.
If that continues to sustain itself and the export market continues to improve.
Then I think.
The capacity utilization in the industry should move up in pricing.
You know should incrementally tick up as well so.
I think from a volume standpoint.
Things are things are recovering.
Fairly fairly well in China, but the competitive intensity is still.
Somewhat high because the export market is.
Is the is only in the early stages of recovering and so people fight for volumes a little bit more.
But we see that.
We see that trend incrementally improving here.
Thanks.
One last one.
And.
Yes in China you at your.
Last Investor Day, you spelled out what your exposure there was by Oh, we.
And replacement and market is there can you I know.
The car park, there matured and.
Is there way you can update that OE burqas replacement power, but also.
Birth.
Export because you mentioned how that that sorta the export related demand is lagging. So just what your exposure is over there by those sort of buckets. Thanks.
Yeah, well I'll I'll I'll try to help you a bit here, Chris. So so I mean, if you look in China in total.
About 60% of the tires in China, our domestic and about 40% get exported so there's a heavy component of tire exports.
And again about they make you know they have almost 40% of the world's tire capacity. So.
So thats sort of at the.
At the top of the house level now what you see in China is that.
The truck and bus market is a bigger in China in relative terms versus the passenger car. The passenger car Park has been building of course over the last five to 10 years with quite a bit over the last kind of five years.
And so that is not yet at the proportion or relative to where we see the rest of the world. So it's a little heavier on the truck and bus side of things. So our exposure into a truck and bus is a little higher in China as a result of that.
But as the car passenger car fleet.
Our car park continues to build and they get to the replacement cycle than then you'll you'll probably see that balance in China that that make up in China start to look a bit more like the.
The rest of the world. So that's that's that's kind of how it's structured and how we see it.
Thank you.
Yeah.
Hey question.
Your next question.
Hope you guys seem you sound like you're sitting out there for a second.
No were no. We're still we're still here I wasn't sure if it because it's gone past top 30 hour. If they were they were shutting it's off here, but no we're still here.
Okay.
Great.
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Quick question on the.
Sean you mentioned cost going up related to the EPA spend curious if you could help us frame up how much those costs.
Will impact or.
How much operating costs go up as the result of installing this equipment.
So what we've been able to gather I, it's not we it doesn't seem like it's immaterial. So I'm curious your thoughts in terms of how much those costs go up once you flip the switch on on this equipment and you mentioned.
All players having some plants.
Supposed to becoming comply in April 2021, do you know my understanding is it you know the costs will be different associated with if its sox Nox is it just knox.
So so curious.
How you when you look at the consent decrees, you know with the other companies or what.
We're aware of that the other companies are becoming compliant April 21, it will your coffee going up similar to the other companies or more or less just kind of curious how you're thinking about all that.
Yeah sure.
So I think.
In general the shape of the each producers consent decree.
The shape is similar Kevin and so you have a mix of some plants that have a smaller investments. So for example, you know the first plant that we.
Did had.
Had certain nox and and feedstock restriction. So it was a lower capital investment.
And then what you find is that the consent degree also has certain plants that require more complete controls both sox and Nox, So I would say the shape.
Of the consent decree across the producers is effectively a it's a it's effectively identical and the timeline of implementation.
His synchronized as well.
And so with respect to if you just take a plant that has to have for example, full socks and full nox controls on it.
I think you'll see.
Costs in a in a in a fairly similar range.
Although I have seen some.
Reports from competition recently that their cost estimates are going up we have we've reaffirmed ours, but I, but but in general they should be in the same.
Zone, because the while the technology has to get adapted for.
Our particular gas stream.
It is you know more generally known technology. So so that's what I would say about that now in terms of operating costs. So there's two types of cost here. There is the capital cost of putting in the control equipment.
And getting a recovery in a return on that capital cost and then there's the operating costs of.
Of running.
The the equipment and.
And that is a that is an important cost that.
We need to also get.
Get recovery for here and so hence we've been.
We've been working hard to App this for the last.
Couple of years as as we've been bringing plants on and incurring these cost and we need to continue that in our.
Pricing negotiations with customers here, because we simply wont be able to to be a sustainable supplier for them without this now we're doing our part no we're going to have our plants online and we're going to have them ready and we're going to provide that supply reliability to customers, but you know I can't speak for others, but.
But we need to we need to have a fair return on that.
Okay, great. Thank you very much.
At this time.
Sean.
Great. Thank you Lisa and thank you all for Ah for joining today I hope, you're you're all remaining safe and.
And beginning this this journey back to some sense of normal here, but thanks for your time and attention and supportive Cabot and look forward to talking to you again next quarter.
This concludes today's conference you may now disconnect.
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