Q4 2020 Cabot Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Cabot Corporation fourth quarter 2020, <unk> earnings Conference call. At this time, all participant my son and listen only mode. After the speakers presentation. There will be a question answer session to ask a question there and the sessions and the press star one of your telephone please.
Please be advised and today's conference is being recorded.
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I would now like to hand, the call for them just because the day, he delahunt Vice President Treasurer and Investor Relations. Thank you. Please go ahead Sir.
He said it.
Good morning, and like wasn't EBITDA Cabot Corporation fourth quarter earnings teleconference.
Today are Sean Covey, CEO, and President and Erica Mclaughlin Senior Vice President and CFO.
Last night, we released results for our fourth quarter fiscal year 22 and copies of which are posted in the Investor Relations section of our website.
The slide deck that accompanies this call is also available and 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 and financial performance.
Each forward looking statement and subject to risks and uncertainties that could cause actual results to differ materially from those projected and such statements.
Additional information regarding these factors appears other heading forward looking statement and the press release, we issued last night.
And that are left and report on form 10-K.
And our quarterly report on form 10-Q for the fiscal quarter ended March 31, 2020, and and subsequent filings we 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 adjusted adjusted to GAAP results.
And the non-GAAP financial measures presented should not be considered to be and alternative for financial measures required by GAAP.
And the non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure and the table at the end of our earnings release issued last night and available and the investors section of our website.
I will now turn the call over to Sean Keohane, who will discuss the fourth quarter and full year highlights.
Erica Mclaughlin will review the business segment and corporate financial details following.
Following this Sean will provide closing comments and open the floor to questions.
Well.
Thank you, Steve and good morning, ladies and gentlemen.
I'd like to welcome everyone to our fourth quarter 2020 earnings call.
I want to begin by recognizing our employees around the world for their continued commitment to the company to our customers and to their community man.
Managing through this pandemic has challenged us on every front and I have never been more proud of our team.
As we manage through this pandemic, we established a set of guiding principles here at Cabot.
Protect the house first and prepare ourselves to be ready to win as the recovery takes hold.
I believe our performance to date and reflects that balance.
For the quarter total segment EBIT was 84 million.
And adjusted earnings per share was 68 cents up 75 cents on a sequential basis.
This result was driven principally by improved results and reinforcement materials, which recovered nicely as demand in our key end markets increased sharply as compared to the third quarter.
Performance chemicals results also improved in the quarter.
As automotive related demand began a recovery and our self help initiatives took hold.
And your application solutions, we took another step forward and our transformation plan with the sale of our mind and restructuring of a long term supply agreement for activated carbon with AG, EPS, which better positions us to serve and mercury removal market.
We continued our intense focus on cash generation, delivering $99 million and operating cash flow and the quarter and $248 million for the second half well ahead of our previously communicated expectation of $200 million of operating cash flow in the back half of the year.
Erica will go into more detail on the segment results a bit later in the call.
I would first like to share my perspective on the full fiscal year 2020 results.
There is no doubt that fiscal 2020 with the year. Unlike any other weve experienced as we battled the global public health crisis and the associated economic follow.
The global pandemic severely affected demand from our key tire and automotive customers, especially in the third fiscal quarter and that impact was reflected in our full year results.
On the performance front, we delivered adjusted earnings per share $2.08.
While this result was well below prior levels and the earnings potential of the company I am very pleased with how we manage through the crisis and I believe the strength of Cabot was revealed.
Our strong balance sheet and cash generation power and our experienced management team allowed us to navigate the pandemic, while remaining focused on our advancing the core strategy.
As you know our strategy is built on three pillars first investing for growth and our core businesses second.
Second driving application innovation with our customers and finally generating strong cash flows through efficiency and optimization.
And the reinforcement materials segment the team did a great job delivering necessary price increases in our calendar year 2020 customer agreements.
Implementing new commercial terms to manage feedstock volatility and delivering cost reductions to partially offset the pandemic driven demand reduction.
And the performance chemicals segment. The team was focused on self help measures and laying the groundwork to restore profitability to historical levels.
In the year, and we successfully implemented price increases and specialty carbons to offset the impact of higher marpol related feedstock costs.
The segment also executed on a number of strategic priorities during the year.
We closed on the acquisition of Shenzhen sand shown nano a leading producer of carbon nanotubes and formulations for the high growth lithium ion battery market and.
And customer qualifications and inkjet packaging applications continue to build momentum.
And the purification solutions segment, we closed on the sale of our lignite mine and Marshall, Texas, EPS and entered into a long term supply agreement for lignite activated carbons.
This transaction improves our efficiency, while also removing a significant hurdle to divestiture of the business.
While the earnings environment was challenging we remain intensely focused on cash flow generation and balance sheet strength.
During the year, we delivered strong operating cash flow of $377 million and free cash flow of $177 million largely through tight and working capital management.
The strong cash flow generation allowed us to repay debt maintain our dividend.
And the San share an acquisition, along with our Capex commitments and retain our investment grade credit rating.
And finally, EPS GE leadership has been a focus of ours for a long time and it is becoming ever more important to our stakeholders. We recently launched our updated 2025 sustainability goals, which build on our on our existing leadership position.
By expanding our goals beyond a strict environmental focus to include areas such as product development sales.
Fire sustainability diversity and inclusion and community involvement we believe all stakeholders, who will participate and our success.
Overall, I am extremely proud of our team and I believe we are well positioned and ready to win as the recovery takes hold.
Now turning to an update on the current business environment we.
We see underlying trends and both tire and automotive demand strengthening with month on month improvement continuing through October and into November.
The economic recovery is unquestionably linked to stabilizing the public health crisis, and this remains the key to bring and consumer confidence and the economy back to its full potential.
China is a good example of where cobot transmission has remained low and the economy is strengthening with GDP up 5% year over year and the September quarter.
Looking at our key end markets. The trend is positive automotive production represents approximately 25% of our sales ranging from tires on new cars to host of applications and performance chemicals, such as structural adhesives batteries coatings and plastics.
External forecasting firms report light vehicle auto production down 3% year over year globally, and the September 2020 quarter as compared to a decline of 43%.
In the June quarter.
Current industry forecast call for an 18% drop and global auto builds for the full year, including a small decrease of 3% for the December quarter.
Now moving to tire production global replacement tire industry sales are now expected to decline 12% for the full calendar year of 2020 based on estimates from LMC.
Light vehicle replacement tire sales improved in all regions in the September quarter down only 6% year over year compared to a decline of 31% and the June quarter.
As with auto production. The December quarter is expected to approach 2019 levels with total replacement tire sales projected to be down 2% year over year. According to LMC.
Building on the V shaped recovery and the September quarter, we continue to see consistent improvement in terms of mobility and miles driven and this bodes well for the replacement demand of tires, both in terms of passenger vehicles as well as truck and bus.
As a reminder, the replacement tire market has historically been more resilient compared to other parts of the broader transportation sector.
I'll now turn the call over to Erica to discuss the financial results for the quarter in more detail Erica.
Thanks, Sean I will start with discussing results and the reinforcement materials segment.
Given the global economic environment, and reinforcement materials segment delivered strong operating results with EBIT down $12 million compared to the same quarter and fiscal 2019.
$64 million sequentially, driven by improved global tire and automotive demand as compared to our third fiscal quarter, but.
The decrease in EBIT from the prior year was primarily due to lower volumes, partially offset by higher margins globally volumes declined by 11% and the fourth quarter as compared to the same period and the prior year largely due to the impact of coal that I'm going to hand in Europe, the Americas, Japan and Southeast Asia.
Hi, and margins are driven by improved China pricing and higher pricing outside of China, and our calendar year 2020 per customer contract.
Looking ahead to the first quarter of 2021, we expect an increase in EBIT to our expectation for expanded unit margins and.
This is driven by continued sequential improvement and pricing and Asia as the market continues to recover.
Volumes are expected to remain in line with fourth quarter levels and strength from the recovery offsets normal seasonal patterns.
Now turning to performance chemicals, EBIT increased by $4 million as compared to the third fiscal quarter, Kevin by higher demand and automotive related applications.
EBIT decreased by $16 million year over year, primarily due to 9% lower volumes and our formulated solutions business from the impact of close at 19 and more.
Competitive pricing environment, and assay metal oxides product line, and a weaker product mix and our specialty carbons and fumed metal product and metal oxides product lines from lower demand and automotive applications.
And the fourth quarter volumes increased 2% year over year and performance additives driven by increased volumes related to our recent energy materials acquisition.
Sequentially performance additives volumes increased 3% and formulated solutions lines increased by 1%.
Well were pleased to see this sequential improvement in volume segment volumes continue to be impacted by the pandemic, particularly and demand for automotive and construction applications, while the infrastructure and market, including wire and cable and pipe applications continued to hold up well in all regions.
Looking ahead to the first quarter fiscal 2021, we expect and materials sequential step up and EBIT driven by higher volumes across the major product lines as our key end markets continue to recover and as we leverage the recovery and the automotive end market to drive product mix improvement and specialty carbons and compounds.
We also expect to see a price improvement as the segment benefits from actions to restore pricing and I've seen metal oxides business and as we execute higher prices and specialty carbons to offset rising environmental cost.
Moving to purification solutions EBIT in the fourth quarter of 2020 decreased by $3 million compared to the fourth quarter of last year.
The decrease was driven by lower volumes and the mercury removal applications and the unfavorable impact from reducing inventory levels to drive improved cash flow result.
Looking ahead to the first quarter, we expect to see a sequential volume decline driven by lower seasonal volumes and water and mercury removal applications and.
And higher fixed cost due to maintenance outage at one of our plants. This is expected to be partially offset by lower depreciation and fixed cost due to the recently announced supply agreement and mine sale.
I will now turn to corporate items, we ended the quarter with a cash balance of $151 million and our liquidity position remains strong at 1.4 billion.
During the fourth quarter fiscal 2020 cash flow from operating activities were $99 million, including a decrease in net working capital of 7 million cash.
Capital expenditures for the fourth quarter fiscal 2020 with $38 million and additional uses of cash during the fourth quarter included $20 million for dividends.
During fiscal 2020, we generated 377 million of cash flow from operations, including a decrease and working capital of $185 million.
Capital expenditures for fiscal year, 2020 were $200 million, which included both our targeted growth investments and the spend related to the North American EPA compliance.
Additional uses of cash during the fiscal year included $80 million for dividends and $44 million per share repurchases.
During the fourth quarter, the operating tax rate for fiscal year, 2028 was 28% and we anticipate our operating tax rate for fiscal 21 to be in the range of 28% to 30%.
We expect capital expenditures to be between 175, and $200 million and 2021 and this estimate includes continued EPA related compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products and.
I'll now turn the call back over to Sean Sean.
Thanks Erica.
As I look ahead to 2021 I expected it will be another dynamic year, and we'll have to manage any future impacts from the pandemic and much the same way as we did in 2020.
Notwithstanding the challenges of COVID-19, we remain focused on executing our strategy and I would like to share with you our priorities for the upcoming year.
First we will stay close with our customers to support their evolving needs and continue to differentiate cabot through our product quality service reliability and commitment to sustainability.
Second we will continue to execute on our strategic growth initiatives, particularly energy materials eager to see and inkjet for packaging.
We are excited about the growth potential these businesses and we have sustained our investments throughout this downturn. So that we can capitalize on their full potential in the coming years.
Third we will continue to drive efficiency and optimization across our operations.
During fiscal year 20, we established a global business services organization to increase the efficiency and effectiveness of those processes that power our way of doing business.
We will further leverage this investment through the deployment of digital tools to simplify and automate our ways of working and I'm excited about the potential here to complement our strategic growth efforts.
Fourth the role of bolt on M&A and our existing businesses remains an important part of our growth story over.
Over the past few years, we have made very important strategic acquisitions, and our core spaces, including extending our geographic presence and our specialty compounds business through acquisitions, and Canada and Southeast Asia.
And by extending our product offering and energy materials to include CMTC through our acquisition of sand Sean.
We will continue to look for opportunities to build out our pipeline and execute on opportunities of these types.
Finally in an uncertain and dynamic environment. It will be critical that we keep tight control of costs and working capital and 2021.
We feel good about the momentum into fiscal year 21, but we must remain vigilant on cost and working capital.
I Hope this gives you some color on our 2021 priorities and how they will help cabot to extend our leadership position.
I will close out my prepared comments today by talking about our outlook as we start fiscal year 21.
Clearly we are pleased with the momentum coming out of the fourth quarter of 2020, and we feel very good about how the first quarter is shaping up.
As Eric and discussed we expect the materials step up and the performance chemicals segment, and further strengthening and reinforcement materials, where performance is being driven by strong Asian spot pricing feedstock costs rise, there and volume strength driven by stronger underlying demand and some level of inventory replenishment.
Based on this we expect adjusted earnings per share and the first quarter to be in the range of 80 cents to 90 cents.
On the cash side, we anticipate that operating cash flow will be strong as year over year earnings levels improve and fiscal 21, even though absolute net working capital levels will increase aligned with higher volumes.
Looking to the full year of fiscal 21, there is still uncertainty related to the COVID-19 pandemic that impacts our longer term visibility.
Our results will be influenced by the sustainability of the economic recovery.
The outcome of our tire customer agreements.
The pace of cost returning to the business to support the recovery and how we manage pricing and this dynamic environment.
As the year unfolds, we will be managing these factors carefully to match the dynamic environment.
Overall I feel very good about the way the team has performed and the progress we have made and this unprecedented environment I'm optimistic about the first quarter and remain confident that seem will respond to any challenges we may face throughout the year.
The long term fundamentals of our businesses are robust our market positions and global presence is unmatched and our balance sheet and liquidity provides strength and flexibility.
I am confident and our growth opportunities ahead, and our ability to deliver on our strategic objectives and.
Thank you very much for joining us today and I will now turn the call back over per our question and answer session.
Thank you as a reminder to ask a question we need to press star one and your telephone to withdraw your question and press the pound key please stand by what we can tell the Q and a roster.
Our first question comes from Michael Nice with Barclays. Your line is open.
Great. Thanks, Good morning, guys reported.
Good morning, Mike and I guess first on the outlook, maybe for Sean can you give us a bit more color around demand trends into the fiscal first quarter and specifically how you how you're seeing your customers handle general inventory levels and year end seasonality, maybe for Erik and related to that.
As we think about the first quarter guidance anything funky or abnormal we should consider as we use as a baseline kind of building out the rest of the year and our models.
So Mike maybe I'll take the first part and then and then hand off to to Erica So we're definitely seeing.
Our key end markets.
Improve as we as we progress.
Through the quarter here.
And so I think that's that's that's definitely encouraging automotive end market continues to strengthen.
As does as does the tire market.
And.
There's there's likely some replenishment that is happening in the quarter. It it's difficult to to see that exactly but if you look at it.
And auto production forecasters and.
And and tire.
Forecasters, there's there's likely some replenishment there because everybody really just paired inventories to a pretty extreme level.
And so there's likely some of that.
It is happening here and that being said we are we're not at this stage seeing.
A full on restocking to historical levels I think people still.
Our operating with a measure of caution here because.
The outlook related to the pandemic is pretty uncertain certainly.
Certainly case base loads are rising and most of the world which is discouraging.
Now, that's offset a bit by the encouraging news around vaccine, but timing of all that and how it plays out is still leaving people and a fairly cautious posture I would say, but that's what we're seeing on the inventory side.
In our key end markets, but maybe over to Erica for.
Some some further commentary on the Q1 GAAP.
Sure. So I don't think there's anything terribly unusual Mike going on in Q1, but as Sean mentioned there is some level of inventory replenishment, we think happening that may not continue in the latter quarters and the pricing and Asia is quite strong and so we often.
As as our feedstock cost there are rising or able to price ahead of that and the flow through enhances the margin and so that's happening in Q1 as you know specifically and Asia, it's mostly a spot market and how that plays out for the remainder decor and there.
It's still a bit unknown, so I would caution not to probably take the first quarter and multiply by four because I think the uncertainty out there.
In terms of how does the recovery happening what is the inventory levels look like pricing dynamics and then as as our volume increases we will have some cost flow through.
Related to volume come through as well so.
Those are the factors as Sean talked about that.
That will likely influence that the Q2 to Q4 quarters.
Great. Thank you and then maybe just quickly on purification solutions and.
And the outlook commentary and the release you reintroduced some language around and exploring strategic alternatives.
Obviously, you just sold your mind, you're executing on and transformation plan and that business is.
Is it fair to say that the business is in a better position today to have conversations around monetizing. It is fair to say those conversations are probably picking up to a degree as we sit here today.
So.
Mike I'll take that one so as you know we've been working on the transformation plan for the last couple of years here and this the sale of the mine.
And the supply agreement for activated carbon is part of that process and.
We believe that improves the efficiency of the business, particularly as it relates to serving.
The Mercury removal market and we also believe that this transaction removes or hurdle from a buyer's perspective.
And so selling the business still remains a top priority for Cabot.
And given the current environment, we will be marketing it when the timing is right, but I would anticipate that.
To be more likely in the near term than the longer term.
Great. Thank you.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.
Thank you good morning, Hi day.
Hi, there.
Comment on the status of the other tire pricing glaciation is I know their thoughts on yet, but any update on where they stand today.
Yes, so as you know well David we negotiate these annual agreements with our major customers and the back after the year and and Thats. It Thats. The case this year as well as we are still negotiating with a number of customers I can't share any specifics.
As that and information I think is commercially sensitive and I am sure you can understand that.
What I what I can say is that we're looking at external indicators, such as increasing miles driven data I think you know the upward revisions and auto production forecast and tire forecast that I commented on earlier and and the.
The recovery of order patterns from our customers in recent months and and so this is this is favorable in terms of tire and carbon black demand but.
Given that we're still in the middle I can't I can't comment any further.
Understood and just on the cost side, Sean how should we think about costs and 21 versus 20 and trim. Some are somewhat to the temporary costs that you were able to realize and 2020 as and flow back into 21.
Yes, yes. So we we obviously like everyone I think manage manage costs pretty aggressively and 21 implemented a bunch of actions here.
To to sort of protect protect the house as I said and so some of these are structural and some of them are temporary.
So structural things for example, creating our global business services function and really streamlining our are.
Back office processes et cetera, those types of things would be structural and then on the more temporary side you would have things like volume related costs coming down as well as a rebalancing of our maintenance spend to match that with.
Demand and so in the full year.
We took these sort of base operating costs down.
By $68 million and and we'd expect to hold onto approximately half of those cost reductions you can think about it roughly is half half half of them will will will likely return if the demand is is strong.
Because the volume related portion will flow back and we'll want to step up some.
Preventative maintenance, so that we keep the assets running at the level that part of our value proposition. So I would say half half day that is reasonable. Thank you very much.
Thank you. Our next question comes from Josh Spector with Yes. Your line is open.
Hi, good morning, everyone.
Good morning, Jim.
Great. So just within Asia in terms of your volumes for the quarter I was wondering if you could parse out what the kind of domestic market did versus the export market versus the rest of Asia. So they will give some granularity around that.
Yes, so Josh I think couple of things with respect to to volume So I would say.
Asia in particular.
In China was.
Recovering recovering pretty well.
In income.
Quarter, and that's I think related to overall China's handling of the the pandemic and.
The return of consumer confidence so I think that was quite strong our volumes and China is the biggest part I mean, with China, and making 35% to 40% of the world's tires, that's clear and we the single biggest market our volume's lags the market there by design in the quarter. So we were very much focused on.
Pricing and margin restoration.
And at the expense of volume and.
We think thats, the right and the right clay at this stage and and as as volumes continue to strengthen their.
With with higher.
Prices and margins and we think the volume picture will begin to normalize more to market, but this was our cabot specific.
Approach here I.
I think the other thing I would say is in in Asia South.
So as the on you could think about it as broadly.
Demand was was pretty was pretty strong in that region in.
In part because.
As Ben preferential tire investment into that region over the last few years.
And also those producers some of them for example, and Thailand. They are.
Concerned about Penn.
Pending duties on tires into the U.S. and so there was there was some some I would say building of the channel the channel there.
To get out ahead of any of that so demand was pretty strong there but.
But we also oriented more towards price and margin restoration.
In the quarter.
And you could think about.
And the on and China being.
Almost one big market.
In terms of flows tires and carbon black day behave in.
In a somewhat similar way and so we were just like China focused a little more on pricing, but the underlying demand trends, where we're quite strong because the cobot recovery in China and in terms of the public health crisis has been has been quite good cases had been very very low there.
Okay. Thanks, that's helpful and I guess I mean sticking on volume looking at Q1 Q Guide.
And that is maybe you're guiding to volumes up high single digit percentage on the reinforcement side. One I guess is that correct and to like where where is it and most up by by region as a catch up within Asia or within the rest of the world that there's some catch up on that side of things. Thanks.
Yes, so our Q1 volume expectation is pretty consistent with the Q4. So you could think about this sequentially being being pretty flattish I would say.
And so we have some continued recovery building offset by some.
Seasonal traditionally seasonal.
Softness and so those are sort of offsetting.
And our view is sequentially that volumes will be will be pretty flat.
Yeah, and I could get if you're thinking about year over year.
We'd still be down slightly year over year.
I would not expect the volume should be higher than the prior year Q1.
Thank you and our next question comes from Jeff Kauffman with JP Morgan Your line itself.
Thanks.
Thanks very much.
And Jeff Hi, Good morning can you discuss what happens.
The specialty carbon black that goes and the TV market this year.
It is what were your volume will serve revenues last year or what are they this year that operating profits go up or down and price has changed you lose share to gain share could you give us a little bit of a review of whats going on there.
Yes, sure Jeff. So obviously the market is and important market for us and one that we're investing in and not only for a new grades of traditional furnace slacks, but also.
With the acquisition of R C and tease the Accenture and acquisition.
And we think that complement is is the right strategic Ms.
Mix, because conductive carbon additives will continue to be a key part of the battery chemistry.
But we see a trend towards.
C N Tees and blends of formulations of C and Tees and and carbon blacks as we go forward. So we think our position there is actually quite unique and the industry now in terms of 2020, a couple of things one is obviously with.
With the automotive pullback in general the TV market was impacted somewhat by by by that but if I. If I try to look through that because the the strength of the market has been has been pretty good here and the last the.
Three four or five months.
We see and we see that the growth rate.
In the 20% to 25% a year for lithium ion batteries being being and tap. This was our key assumption and our in our strategy here and we see that as a as being as being intact now the way to the way to think about our sales because we've got a transition period here.
Remember that our traditional sales into energy materials was kind of in the $20 million to $30 million per year range. We commented on that before and then we purchase and Sean.
Which had a trailing 12 month sales of close to 30, So you could kind of think about.
About that in the Super Bowl 50.
50 to 60 million run.
Run rate sales level and now that it seems the market is it's kind of back to normal run rate you could call that the the base and then we would expect to grow that base.
You know consistent door or better than market as we as we as we win share here.
In terms of profitability of the business, we don't disclose that but we are.
Very much and an investment phase right now.
As we are developing new products.
And.
With this and share an acquisition, we they we acquired a new a new plant that has unused capacity. So this is kind of a filling up that needs to happen and so the combination of new products qualification costs and.
And unused.
Capacity.
The profits in this business are going to build over the coming years and our view on this remains.
Remains consistent that we see this market for conductive carbon additives growing over the next five years to about a billion dollars of conductive carbon additive.
Value revenue.
And so if if we achieve our.
Our market share levels that we've had and specialty carbons traditionally and we have unit margins in the range of where performance chemicals is and I think both of those are reasonable assumptions then you can see that.
Over the next four or five years this should build two and material contribution for per Cabot.
Okay and that.
Thank you. Thank you for that complete answer.
Historically, what Cabot tens.
Tends to do with it tends to take its cash flow problem.
Carbon black business, and invest and new businesses like the old formulated solutions business.
When you when you think Sean of the strategic path forward.
Is is Cabot really focused and.
Carbon black and fumed metal oxides, and sort of small acquisitions in that matrix or do you feel you need to go further afield in order to create.
Create value.
Yes, yes, a good question, Jeff and you follow the company for a long time and I would say our advancing the core strategy is really to.
Taking a.
The best parts of of previous strategies and Cabot. So number one we believe our core businesses of carbon black fumed silica specialty compounds. These these businesses have a good underlying fundamentals to them and we want to continue to invest for growth and those.
Businesses, So we're not in a position and harvesting to to drive.
New business is the way that.
Sam Bodman executed the strategy some years back where it was more of a harvests and invest in a broad portfolio of new businesses, New chemistry businesses. We think these core businesses. We we want to continue to invest and strengthen our our leadership position there that being said.
And we are making.
Some targeted.
New business investments and so this is calling on some of the bits and brilliance from from Sam strategy and this is but but in places that make sense. So.
Energy materials, given the importance of conducted carbon additives is clearly one of those places.
As packaging evolves and moves from analog printing to digital printing, we think exploiting our inkjet position clearly makes sense and then E. Two C is another one where its skill and the tire business, but.
As the tire industry moves towards more and more sustainable solutions.
We believe this one clearly makes sense for us so are we going as far afield as in the past with with things like era, Joe and stuff like that no. We're we're doing things that are.
Very good fit with our core businesses and what we want to do is strength in our core businesses and and then get the leverage of these targeted growth investments. That's that's the and tend to have the advancing the core strategy and what we're pursuing okay.
Okay, and then and then lastly.
Maybe this is for Erica.
The revenues and reinforcement materials were 325 million in the quarter.
And your.
Our segment earnings were roughly $60 million.
And if you go back to last year, you were earning 60 million was 460 million net revenues.
So can you talk about why the level of EBIT is more or less saying, even though the revenues are lower by 125 million, what and what is the real dynamics that that allow us to understand these changes yeah. So the major driver Jeff is really.
Just the price of oil on the revenue so.
That drives the top line as we adjusted pricing, but as you know as we think about.
The EBIT, what we try to do with axle and the rise is while we adjust for the input price, we would be holding on margins hole and so that's essentially what you see and you see that the revenue decline.
Because of the raw material input costs, and then I'd say the other factors, obviously volume and lower so the volume has declined eight and waste and 11% year on year, and but we've been able to offset that as best we can with.
Cost reductions so that helped the EBIT line offset some of the volume impact.
Do you have lower raw material costs rippling through your income statement, because raw materials fell so much earlier in the year and now you're getting the benefit of those loans lower raw material cost or no.
If you just looked at the revenue line, yes, we had lower raw material cost flowing through that but in terms of the margin profile I wouldn't say no I don't think we have our pricing and our cost are not miss match to our benefit at this point, but.
But we've been able to hold those margin as our find those are intended to do while the input costs have come down and so you see the revenue come down but not the margin.
Okay, great. Thank you so much share.
And.
Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.
Good morning, guys two quick Corp first.
First off.
And for specialty business for specialty Blacks do you have a mix effect to be positive or negative next year.
And secondly, with respect to the amount of restocking and that might happen.
In a car in the rubber reinforcement blacks.
Not so much the timing, but can you give a sense for just the sheer volume that needs to be dealt with the industry would be to recalibrate or need to bring back into the system to get back to kind of and more normal range.
Yes from a from a volume standpoint, Lawrence on that right right just how much how much are they behind us behind so to speak are underwater so to speak.
Yeah, Yeah. Okay. Good so let me let me take the in the order that you presented them first of all good morning, and so.
In in terms of specialty carbons, we would expect a mix improvement in in 2021.
Because we are seeing a recovery and the automotive end market and our higher margin products tend to Orient more there things like automotive coatings high and engineered plastic applications things like structural adhesives.
Those those are those would be higher margin products.
Products and those would will be flowing through as we see the auto recovery. So, yes, too and improved mix and I think that will probably be accented or even a bit more by.
Our participation and energy materials as that and that continues to grow as the battery piece of it. So that's the first the first point on the on the volume question.
I think the best way to think about it in some ways is to try to look through 2020, because it's such a you know and.
Year full of distortions and so if you if you look at it.
What LMC is projecting in the tire industry.
21 versus 19, certainly a very sharp recovery off of 20, but if you look 21 versus 19, it will still be down.
You know maybe somewhere in the order of five 6% something in that.
In that range and and so I think that's probably the cleanest way.
To look through so we're seeing very sharp recovery and now which is a which is good.
And that that recoveries.
Likely are going to continue as long as we don't have a big reversal in terms of Cobiz related.
Economic impacts but.
They will still be a little further ground and covered to to get back to what you call it normal or what I might say with and 19 volume levels.
Okay. Thank you very much.
Thanks Lawrence.
Thank you loans given some if you wish to ask a question at this time. Please press Star then one and you touched on telephone and next month.
And comes from Chris cash with capital markets. Your line is open.
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Hi, good morning.
Good morning growth.
Good morning, and so I also had a follow up on the on.
The comments you made about the fundamentals and the Chinese market and.
From what I can see that been acquired and surge and carbon black spot prices.
But the most pronounced portion of that increase is been and in the fourth quarter.
But I'm just wondering if you could further characterize you provide color on what's going on you mentioned some linkage to the.
The underlying feedstock costs being a push but obviously it was a strong ongoing recovery there as well I think everybody sees monthly auto sales have turned positive year over year.
So just really wondering I guess, if the the move and carbon black spot price is it more about demand pull price move or is it more of a cost push price move and then I have follow up.
Yeah, So I would say its demand led Chris so demand has improved sharply there and.
After all so a very sharp pull back and now they experienced a little bit earlier than the rest of the world. So they experienced it.
More and that March quarter, but it was a very sharp pull back and demand and as a result volumes declined but also prices and margins declined across across the industry, but what we're seeing now is that demand led recovery, which is good the.
The linked to feedstock is just a function of how this market operates because its a spot market we tend to price every month and as a as coal tar prices.
Have moved up a we we price sort of instantaneously I would say, yes, you see the flow through from an accounting standpoint, you know would would lag that a little bit because of the the inventory we have and in feedstock and finished product. So it's sort of in accounts.
Owning lag and so as a result, we get some positive benefit, but that's a function of how we we we play in the spot market.
Whereas the in the in the contracted part of the market, which is really not in play for China.
Those tend to be matched more.
Got it and then.
In the past you know the the characterization of the competitive landscape and China's been you competing with.
Pretty fragmented array of smaller regional or even mom and pop players and I know a lot other mom and pops and sort of shuttered permanently.
But at some point.
I think in the past you characterize your positioning is having an advantage in terms of sourcing feedstock visa visa local competitors that may not be and sophisticated and had to lean on the solely on the crude coal tar and I'm just wondering with this dynamic now is there any opportunity for you to.
You still have that competitive advantage or is there any opportunity to further take advantage of that and is there any even some raw material cost arbitrage given the the and the moving feedstocks over there and any color around those dynamics would be helpful. Thank you.
Yeah, so so our competitive position, we lead and the industry.
And are the most profitable player.
In China, and I would say our advantage comes from our.
Our scale and at almost 500000 tons of.
Of carbon black something in that range. So.
So scale technology, and and how we dry.
Yields throughputs and energy recovery and all of that.
Is an advantage for us and then on the on the feedstock side China is.
Predominantly a coal tar based carbon black market ourselves included I think the the the important strategic lever around feedstock management is is is how you have arrangements with.
With your suppliers and and strategic partners and so in some cases those are.
Our just a strategic purchasing relationships and other cases there.
They're fence line relationships with.
With our joint venture partners, who are in the coking and coal car related businesses and so we think the combination of these gives us.
A strategic advantage here, so I think the benefit in China, and why we outperform our competitors is because of those.
No those those primary primary forces in terms of the and our.
So the the arb.
The story is really one of coal tar related to.
D. can't oil.
And so coal tar inside of China, decamped oil outside of China and at times when the prices have disconnected for example, when coal Tar was very low relative to fuel oil and you saw Chinese carbon black flowing out.
China.
What you see right now is actually the Arb is closed it's actually kind of the opposite where.
The coal tar prices are higher than fuel so we don't see any.
Are there so China will be for China, and the flows of carbon black out of China, right, now and not being enhanced by by any open or.
So.
That's helpful. Thank you Sean Okay.
Okay.
Thank you. Our next question is follow up from Jeff Spector with CBS. Your line is open.
Hey, Thanks for taking my follow up just a couple of quick ones.
Erica I guess the question on tax rate.
And for next years the simple.
Similar to hire for this year I guess, what are you thinking that medium longer term without the tax rate for Cabot.
Yes, so I think we guided this year is 28% and.
In 2020, Israeli where 28 to 30 for next year.
You know I think probably you know that the big sensitivity. There is geographic mix of earnings and so that's what's could help drive that down so as we get to a full recovery and state I think you could see that sorry can move down a bit and 28 to 27 and there. So it's probably a lot.
And that can take rate.
Once we get back to I think and that has a more normal demand.
Nick.
Okay and that thanks, that's helpful and I guess earlier.
The comments around the cost savings and that rolling back some of the temporary cost actions just trying to think about.
How much of the temporary costs are already rolled back in year, one in Q guidance and how much is left to come back and the rest of the year.
Yeah, I would say, there's probably very little coming into Q1, I think we have very very tight cost control is still in place.
And most of that would be more of a Q to Q4.
Got it thank you.
Sure.
Thank you. Our next question comes from Kevin How stubborn with Northcoast Research. Your line is open.
Hey, good morning, everybody and.
Morning, Devin outlook.
I was hoping to reconcile a couple other comment made specifically on Asia, because it sounds like Sean you get given some good comments in terms of the underlying strength of that market and and strong pricing there, but you know your volumes were down 16% in Asia in the quarter. So I guess can you.
He understands what did that.
And it because it sounds like the markets were overall fairly strong so what do you think that.
The market did versus where your volumes were.
And it sounds like you were firmer on price and maybe others are you starting to see others, maybe catch up to you in terms of pricing as the quarter progressed and into the first quarter and and maybe to the point you'll start seeing the GAAP narrow in terms of your volumes versus the.
Industry, I guess I'm, just trying to reconcile to the you know the good commentary and the underlying volumes and pricing versus where your volumes are at currently.
Yeah, Yeah. So.
Kevin I think much.
As I as I as I already commented I think the demand the underlying demand in China was strong and and as I said, we lags that from a volume standpoint by design and because we.
We wanted to given the pricing and margin pressure that occurred in 2020 across the carbon black industry in China because of the collapse and demand.
We oriented first on on on restoring too.
Good strong historical price and margin levels and and so that that that the initially comes at the expense of volume now given this is a spot market.
Your ability to toggle volumes as things firm up is there it's not like you're boxed out you're you're back in the market every day every month, but the right place to start with price and margin and I would expect.
That I can't comment on and what others are doing but there are some published indices on pricing for carbon black and China and that clearly up.
So.
You know it it appears that and.
And this wouldn't be a surprise to me that maybe others. The industry, we track and the industry was not making money in 2020.
So they.
They need to have a healthier margin level and so when I connect those dots I think prices are clearly moving up and get our orientation initially window and margin restoration and I would expect and.
As things progress in 2021 that our volume performance normalizes.
Normalizes.
With where market is.
Okay, Great and and then on the I.
I think and the the performance chemicals segment I think last quarter, you indicated that the fourth quarter would see a fairly sizable headwind from.
I believe some turnarounds that some of your customers and and I think you know maybe some cost associated with ramping your new facility. So curious how big of a headwind that was in the quarter.
And is that over so when you think about the sequential improvement that you're you sounds like you expect a pretty strong sequential improvement and ended the first quarter is are those things behind you at this point.
Yeah, So where were expecting a materials step up.
Sequentially and in profitability and this in.
In this segment and where we've been focused on.
The self help measures too.
Move us back to more historical levels of profitability and we're definitely expecting a material step up there I think a few things are driving that.
One is clearly automotive recovery and the pull through there both volume, but more importantly mix.
And that being firmer in the December quarter, while that began.
In the September quarter, I think it'll be more pronounced in the December quarter, So that will.
Definitely help we're moving pricing up and fumed silica, particularly in China, and that's beginning to take hold and then.
We're still maintaining a pretty tight posture on cost management.
As just as Erica commented.
Kind of more broadly we're still maintaining that.
And so those would be the major drivers that would be.
It would be pushing there.
Cereal step up for Kevin.
Okay all right. Thank you.
Thank you and I'll kind of showing no further questions at this time I turn the call back over to Sean claim for closing remarks.
Great. Thank you again for joining us and free support of Cabot and I look forward to speaking with you again next quarter have a great day.
This concludes today's conference call. Thank you for participating and now disconnect.
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