Q2 2021 Cabot Corp Earnings Call
[music].
Thank you for sand the buy and walking from the second quarter 2021, Cabot earnings Conference call.
At this time, all participants on the listen only mode.
After the Speakers' presentation there'll be a question and answer session task of question. During the session you will need to press Star then one and your telephone.
The advice of today's call is being recorded if you require additional systems Press Star then zero switched and operator I would now.
And as you hand, the call over to Steve Delahunt, Vice President Treasurer Investor Relations. Please go ahead.
Thank you and good morning, and I'd like to welcome you to the Cabot Corporation earnings teleconference with.
With me today are Sean Keohane, CEO, and President and Erica Mclaughlin Senior Vice President and CFO.
Last night, we released results for our second quarter of fiscal year 2021 copies of which are posted in the Investor Relations section of our web site the <unk>.
Slide deck that accompanies this call is also available from the Investor relations portion of our website and.
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 is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Additional information regarding these factors appears under the heading forward looking statements and the press release, we issued last night and and our annual report on form 10-K.
For the fiscal year ended September 32020, and and subsequent filings we make with the SEC 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 to GAAP results any.
Any non-GAAP financial measures presented should not be considered to be and alternative to the financial measures required by GAAP.
Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure and of 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 who will discuss the key highlights of the company's performance Erica will review of the business segment and corporate financial results. Following this Sean will provide closing comments and open the floor to questions.
Sean.
Thank you, Steve and good morning, ladies and gentlemen, welcome to our second quarter 2021 earnings Conference call.
And I'm very pleased with the exceptional operating results we generated this quarter as we saw continued strength across our businesses.
For the quarter, we generated our second consecutive record adjusted earnings per share of $1 38.
And segment EBIT of $149 million and.
Adjusted earnings per share was up 79% over the second fiscal quarter of 2020, largely due to strong volumes across all regions robust unit margins disciplined operational execution and strong performance in our targeted growth initiatives.
The Cabot team demonstrated great operational flexibility and the face of continued COVID-19 restrictions weather related interruptions and tightness and the global shipping markets.
This operational adaptability was made possible by the extraordinary efforts of our commercial and supply chain teams and the strength of the Cabot manufacturing network.
During the quarter, we saw strong volumes and the tire and automotive markets and continued strength and our infrastructure packaging and consumer driven applications.
We are pleased to see that automotive builds and passenger car miles driven have improved those still generally lag pre COVID-19 levels on.
On the other hand truck miles driven are very robust driving of large replacement tire market.
With both automotive and tire markets still expected to be below prior peaks on of 2021 and forecast basis, we are optimistic about our growth runway and the coming years.
And the near term COVID-19 cases remained persistently high and certain regions, particularly across Europe, South America and India.
While the vaccines are offering promise the economic recovery will likely remain uneven and challenge to reach its full potential until the public health crisis is fully under control.
Raw material prices continue to rise across most value chains and our businesses we're no different.
We effectively implemented price increases to recover these rising costs, which combined with favorable product mix to drive robust unit margins.
Looking at our major segments reinforcement materials and generated record EBIT performance in the quarter of $89 million driven by road robust customer demand and strong Asia pricing.
Results and performance chemicals were up sharply over the prior year with segment EBIT of $58 million compared to $31 million last year as the business drove double digit volume growth and both performance additives and formulated solutions businesses and benefited from favorable product mix.
Overall I am very pleased with the way we have navigated the pandemic and I believe that Cabot is emerging from the COVID-19 crisis of stronger company.
Our global manufacturing footprint and service capabilities, and leading product portfolio are increasingly valued by our customers.
While the recession of 2020 required and intense focus on costs and cash preservation, we continue to sustain our assets and make important investments and sustainability and growth for the long term.
One of the most exciting growth investments is in the space of batteries and I would like to take a few minutes to update you on our progress here.
We are seeing the real inflection point in terms of demand for electric vehicles and energy storage as pressures to reduce greenhouse gases increase.
Cabot is well positioned and is supporting this transition with our leading portfolio of highly engineered conductive carbon additives and formulation capabilities.
Our business is demonstrating strong growth this year and we expect this will continue into the future.
I will start with some comments about the overall market.
Lithium ion batteries of growing rapidly and expected to grow at a 25% to 30% compound annual growth rate through 2030 with the primary growth driver being electric vehicles as countries established <unk> reduction goals and accelerate the shift away from internal combustion engines.
Further technology improvements and batteries are and necessary enabler of this transition and the materials industry will play a key role and this pursuit to drive down costs and increase range.
Cabot currently serves this market by offering a range of materials and formulations for use and energy storage applications and these.
These materials can be classified into two groups.
Conductive carbon additives, which include conductive carbon black carbon nano structures and carbon nanotubes and.
And non carbon additives, which include products and our fumed metal oxides business.
Conductive carbon additives are a small part of the battery formulations, but play a very important role.
These additives enable electrons to move in and out of the active phase where they are stored during charging and discharging of the battery.
There are two types of connectivity required to make this effective short range connectivity and long range conductivity.
Based on the different shapes and properties of conductive carbon additives, they and part different conductivity performance for.
And for example, carbon nanotubes and more advantaged and providing the long range connectivity, while conductive carbon blacks and more advantaged and providing the short range connectivity.
And therefore, there is no one single best additive for this application.
Having the capability to offer different types of conductive carbon additives and blends of such materials is important and delivering of formulated solution to the customer that addresses their specific needs.
There are a few drivers that distinguished Cabot and the conductive carbon additives space.
First we have and established and unmatched global footprint and application capability to support our customers as they build manufacturing plants around the world.
Over the past few years through the establishment of our Asia Technology Center, and the R&D capabilities acquired from the sand shown acquisition, we have built the leading technical support team.
This capability, coupled with the global manufacturing footprint positions us favorably and the eyes of our customers.
Second through organic and inorganic investments over the past few years, including the recent acquisition of sand, Sean Cabot is the only carbon additive supplier with commercially proven conductive carbon black.
<unk> and nanotubes carbon nano structure and dispersion capabilities is variety of conductive carbon additives enables us to tail of different formulated solutions for our customers and work with them on next generation technologies.
And third Cabot has a rich legacy of innovating and demanding technical applications.
Our experience and the CMP market for semiconductors, and inkjet has offered and valuable practices and protocols that will be critical for the battery market.
In terms of financial performance, we believe that the battery application will become a material contributor to the performance chemicals segment over the next few years.
The current conductive carbon additives market for lithium ion batteries, which includes both <unk> and conductive carbon black is approximately $400 million and material value.
We expect this market will grow to approximately $1 billion and value by 2025.
Our energy materials business is off to a strong start in fiscal 2021 with forecasted revenue of approximately $80 million for the fiscal year.
Over the past five years revenue has grown at a CAGR of roughly 50%, which includes the acquisition of our CMT business in China.
While we are making significant investments to drive qualification and further extend our technical capabilities EBITDA is forecasted to be between 15% and $20 million and fiscal year 'twenty one.
We are excited about the promise of this emerging application and we will continue to focus our efforts to support customers and realize the potential of energy storage.
I will now turn it over to Erica to discuss the financial results of the quarter and more detail Erica.
Thanks, Sean I'll start with discussing results and the reinforcement materials segment.
And the reinforcement materials segment delivered record operating results with EBIT of $89 million, which is up 46% compared to the same quarter of fiscal 2020, primarily due to significantly higher volumes across all regions and improved unit margins driven by favorable spot pricing in the Asia region.
Globally volumes were up 18% and the second quarter as compared to the same period of the prior year, primarily due to 30% growth in Asia, and 10% higher volumes and the Americas and Europe.
The volumes are driven by key end market demand and that continued to recover from COVID-19 related impacts and fiscal 2020.
And also benefited from higher margins from continued strong pricing in Asia, which included a second consecutive quarter of price increases ahead of rising feedstock costs.
Looking ahead to the second half of 2021, we expect volume to remain strong. In addition, we anticipate higher feedstock costs flow through.
And Asia, while our fixed costs are expected to be higher due to the timing of planned plant maintenance spending after delayed spending in 2020 and the first half of this fiscal year.
Now turning to performance chemicals, EBIT increased by $27 million as compared to the second fiscal quarter of 2020, primarily due to strong volumes across the segment and improved product mix driven by an increase in sales into automotive applications.
Year over year volumes increased by 10% and performance additives and 14% and formulated solutions.
And by increases across other key product lines and higher demand levels and some level of customer inventory replenishment during the quarter.
Looking ahead to the second half of fiscal 'twenty. One we expect overall volumes to remain strong. However, we anticipate demand into auto applications will decrease somewhat due to the semiconductor.
Semiconductor chip shortage, which will unfavorably impact product mix as compared to the first half of the year.
In addition, we anticipate higher fixed costs and the second half of the fiscal year due to the timing of spending.
Moving the purification solutions EBIT and the second quarter of 2021 declined by $1 million compared to the second quarter of fiscal 'twenty and reduced demand and mercury removal of applications was partially offset by a reduction and fixed costs, resulting from the sale of our mine and Marshall, Texas and the related long term supply agreements.
Looking ahead to the second half of fiscal 'twenty, one and we expect EBIT to improve driven by seasonally higher volume.
And I'll now turn to corporate items, we ended the quarter with the cash balance of $146 million and our liquidity position remains strong at approximately $1 3 billion.
During the second quarter of fiscal 'twenty, one cash flows from operating activities were 65 million, which included of working capital increase of $80 million and working capital increase was largely driven by growth related net working capital as accounts receivables increased with higher sales and inventory increase from purchases of higher cost of raw materials.
Capital expenditures for the second quarter were $40 million for the <unk>.
Full year, we expect capital expenditures to be approximately $200 million. This estimate includes continued EPA related compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products.
Additional uses of cash during the quarter included $20 million for dividends.
Our year to date operating tax rate was 28% and we forecast forecast our operating tax rate will be between 27% and 29% for the fiscal year.
I will now turn the call back over to Sean Sean.
Thanks Erica.
We are very pleased with the record results and the second quarter of 2021 with volumes continuing to recover from the COVID-19 related lows, we experienced in fiscal 'twenty and great execution across the organization.
We achieved another record setting quarter and reinforcement materials and very strong results and the performance chemicals segment.
Throughout the first half of the year I am pleased with how well the team has been executing our manufacturing plants continue to operate effectively and the COVID-19 environment to meet the needs of our customers.
Furthermore, we achieved an important milestone on our sustainability journey with the completion of the air pollution control project at our Franklin, Louisiana plant.
We continue the integration of our CMT acquisition, and China, and our investments and inkjet are on track to deliver on the promise of growth and the packaging segment and finally, we continue to renew our ways of working to drive more efficient and effective processes through the implementation of digital solutions I.
I am proud of the Cabot team for their work to strengthen our foundation and establish our platform for sustainable growth.
Moving to our current outlook, we continue to see robust and broad based demand globally, including in our key tier automotive and industrial end use markets. Our current view is that the underlying demand will remain strong during the second half of the year.
Against this demand outlook, we expect some impact from the flow through of higher raw material costs and Asia.
Moderating volumes into automotive applications due to the semiconductor chip shortage and higher fixed costs as we performed some maintenance and turnarounds that are necessary to ensure we can meet customer demand in 2022.
Based on these factors, we expect adjusted earnings per share for the full year to be and the range of $4 70.
To $4 95.
On the cash side, we anticipate our cash and liquidity will remain robust.
Net working capital increases driven by a sharp recovery and demand and a steady increase and oil prices should moderate and the second half of the year.
We expect to see better conversion of our strong EBITDA and operating cash flow as this happens.
We anticipate operating cash flow for the year will cover our cash needs for capital expenditures and dividends.
Our debt to EBITDA ratio was two three times at the end of March and we expect this will be reduced further by year end.
In closing I want to thank and recognize our global Cabot team.
The strength of our culture and the resilience of our employees has never been more apparent than it has during these challenging times.
Thank you very much for joining us today and I'll now open it up for the question and answer session.
And.
As a reminder to ask the question. Please press Star then one with your question asked and answered and you'd like to remove yourself from the queue plus the pound key.
Our first question comes from David Begleiter with Deutsche Bank. Your line is open.
Hi, This is sales along here for Dave I guess first can you talk about the cadence of Q3 versus Q4 earnings.
Yeah.
I'm, sorry, you said the cadence of Q3 versus Q4.
Net Q Q3, and Q4 versus Q2, you mean.
Yes.
Yes, I think as we commented in the prepared remarks, we're certainly expecting the.
And the volumes will.
All remained strong and the second half, though we will we.
We do expect to see some impact in the automotive driven applications due to the chip shortage and we also expect that the.
The positive benefit that we saw in reinforcement materials in the first half from <unk>.
Pricing ahead of the flow through of higher feedstock costs that that that will not repeat as.
And as coal tar prices and China moderate so those two those two factors will.
We will impact the second half and then finally, we are expecting a higher level of fixed costs and the second half as we catch up on some maintenance and.
And continue to prepare our assets for.
Strong global demand recovery heading heading into the back half of 'twenty, one and into 2022. So I think those are those of the major factors the the underlying demand outlook.
We expect to continue.
And I guess just on the second half impact from raw material shortage and plant maintenance can you probably quantify and break down the three components and you know roughly how much impact on the impact from those are you expecting and the second half or maybe Q3 and Q4.
Yes.
Inc. Let me, let me take take each of those I would say first of all on on the chip shortage.
And about <unk>.
And 30% of the sales of the company go into.
Automotive OE applications.
The.
Bulk of our tire business as you probably know as replacement tire, but about 30% of the the Companys sales go into automotive OE applications and.
And we're following.
The.
And the updated forecast from IHS as they try to roll through the potential impact of.
Of chip shortage and.
At this point.
We see that volumes might be off versus the first half in the five ish percent range.
So not not that large now this is an evolving situation. So we'll we'll continue to watch this closely any moderation and volumes related to the chip shortage and automotive will likely be filled by strong demand and other applications, though there may be.
Our mix of mix impact here.
On the.
On the raw material.
Issue and in reinforcement materials again, we we price because of that market in China as the spot market we price.
And our sort of an instantaneous basis, there, whereas the flow through of the higher raw material costs.
<unk> tends to tends to lag.
A couple of months there and.
And our view is that the feedstock costs will likely moderate that's what has happened most recently.
And therefore, the higher higher costs will.
Flow through we expect the flow through of Asia feedstock costs could be about $10 million.
In in a quarter, we impact versus what you just saw and the maintenance activities of the higher maintenance and the back half.
We will probably be a few million dollars higher per quarter than what you saw.
And in the first half so I.
Those are those of the two.
The two most.
Significant factors as we manage the second half.
Thank you.
Next question comes from Mike <unk> with Barclays. Your line is open.
Great. Thanks, and good morning, guys and congrats on the quarter one of them.
And I guess.
You spent a bit more time and this quarter talking about the battery opportunity for Cabot I guess two things. There one is the market does grow 25% and 30% CAGR over the next decade like you talked about is there a reason cabinets business should grow meaningfully better or worse than that and.
Two I think you've talked about low 20% EBITDA margins for the business. This year is the <unk>.
Market growth over the next few years would you expect net margin to come down or do you think that's a pretty sustainable margin level.
Yes.
So yes, Mike.
We continue to be excited about the.
The opportunity and batteries and as you know we've been building our position here over the last few years and I think.
The putting up some some some real positive proof points here now.
If you if you look at our market share today, it would be in and around 20%.
At at current market size, and if you think about our expectations here, we'd certainly expect that the market share would.
Overtime would be and the range of where our specialty carbons market share is which is in the 25 ish percent range.
Though our our aspiration here is to.
Two to be as big and material as we can be and we feel very good about our our product portfolio. We think we have a unique product portfolio. When you look across our range of specialty carbons.
Carbon nano structures and <unk> as well as blends and dispersions of those so we.
We think that and the global footprint that we have both in terms of assets as well as sales technical service application development labs to support our customers that that's that's.
That's a unique and compelling.
<unk>.
Value proposition, so we're certainly going to.
Play to win here because we think this is going to be a really big market, but hopefully that gives you a sense for where we are.
Kind of what we would see is our minimum expectations, but we're certainly striving.
For more and to play to win here.
I guess the second question around margins.
I think this market right now is growing very quickly and and I think.
And we'll continue to have a <unk>.
Certain amount of investment in new development programs as well as.
The technology platforms because.
This market will will definitely evolve over time in terms of in.
In terms of needs, but we think the materials space and in particular, our our participation and the role of conductive carbon additives is is pretty important to the battery and relatively small in the overall formulation cost.
So we think the the performance versus percentage of the cost stack is.
It's pretty compelling and therefore.
Should allow us to sustain the.
The margin levels that.
We've talked about.
Great. That's helpful. And then Relatedly I think of the release or on this call and you talked about improving cash flow conversion as we move to the back end of this year with the <unk>.
Working capital build behind US I guess, how are you thinking going forward about the priorities of excess cash flow currently whether it's for other investment either bolt on the organic and battery materials or and carbon black or whether it's just returning some of that excess cash flow to shareholders going forward.
Yes, so in terms of the the.
The cash flow conversion youre exactly right and certainly and if you look at the back half of last year.
We had a significant release of working capital and now with the growth and the business and higher oil prices of certain build back, but we would expect that.
To moderate as as growth rates.
Begin to converge around the more normal level of growth and these underlying applications and and oil prices.
The stabilized and so that should lead to higher conversion of.
EBITDA and operating cash flow in terms of the capital allocation priorities really haven't changed we believe and are.
Our balanced approach of reinvestment and compelling growth opportunities for the company and cash returned to shareholders and over over a longer period of time, we have of capital allocation framework of about 50, 50, where about 50% of our discretionary free cash flow would.
The reinvested and high growth projects and about 50% return to shareholders with our foundational piece being the dividend, which is we believe is important here. So I think that's our long term frame and that hasn't that hasn't changed we are sitting here with some compelling growth opportunities.
And in front of us, whether it's and energy materials are things like converting our carbon.
Carbon black plant in China to specialty carbons things like that that we think are the right investments for the long term and will be good for shareholders. So we're going to stay we're going to stay on track.
And those so I think the the.
And the hierarchy here is we're committed to the strong dividend.
We have really compelling.
And with opportunities that we want to continue to pursue and then.
To the extent that there is excess cash then we will consider.
And share buybacks.
Great. Thank you.
Our next question comes from Kevin Hocevar with North.
Comes from research your line is open.
Hey, good morning, everybody.
I was hoping to dig and a little bit into the profitability of the reinforcement materials business because if we look.
And if we forget about 2020, but if we kind of compare <unk>, 21% of <unk> 19.
Overall volumes are still down.
Versus those levels, but the profitability is substantially higher and I think.
And I understood the comments correctly, it sounds like maybe $10 million of that was.
Timing of price, raws, and China, but but even still it seems like the the profitability of the business is up a lot.
Over the call it two year period, despite having.
Lower volume so could you help me understand what are some of the other moving pieces in there and how sustainable you have the margins reset higher or how sustainable is the profitability of of the business at these levels.
Yes.
So good morning, Kevin So in terms of Youre right I think if you sort of look through 2020 and you compare <unk>.
<unk> 21 to 2019.
I think what you see from a volume standpoint is that the the first half of our year volume levels are are.
Pretty comparable to 2019, so I would say they are in and around the same the same zone, but the the difference and profitability is largely driven by pricing both in terms of our annual agreements.
So.
Those.
In 2019.
And in 2020, those those resets that took place are still there as well as strong Asia spot pricing in 2021 and.
And while there is.
And as you just noted and as we commented some some impact from just the the pricing versus flow through timing and the benefit of that in the quarter. The underlying Asia spot prices are quite strong.
Relative to that 2019 period. So those of the two those of the two biggest drivers and now in terms of.
The sustainability I think you want to look at at both the contract markets.
And as well as the the Asia spot markets.
I would say on the contract side I think a couple of factors at play here and no real changes from our perspective, the supply demand fundamentals remain favorable both in the Americas and Europe and.
And with no capacity additions expected in these regions combined with steady recovery and tire and automotive end markets I think the outlook remains positive for our ability to.
To further move prices and if the other factor at play here is the one we've been talking about for a long time.
With our with our customers and and.
That is our cost and those of our competitors are going up driven by the higher environmental and regulatory.
The cost and so in order for us to support customers and a sustainable way, we definitely need to earn a fair return on the east and so in order to do that pricing is necessary. So.
I think those.
That story really hasnt changed and our assessment of the supply and demand.
Situation Hasnt changed on the on the spot pricing in the in Asia.
<unk> as you know this is this is the spot market, especially China and in Southeast Asia and those markets are very very strong right now China GDP continues to grow nicely and I think the fundamentals for robust demand remain quite good there.
And our long term investment thesis around China is that they may close to 40% of the world's tires the <unk>.
Car Park is maturing and really beginning to penetrate its replacement cycle.
And then the long term outlook on feedstock costs are that.
Given the Virgin steel production has kind of peaked and beginning to come down that means that coal tar availability over time will become more and more scarce, putting a floor on pricing. So we think that long term view.
New on China remains and we are therefore very positive about China and now it is the spot market and so.
The quarter to quarter things can be a little more dynamic, but our outlook on China. It remains a very important market for us and for the tire industry and and.
And we believe those fundamentals remain intact. So I guess, that's how I would think about it Kevin.
Okay very helpful very helpful and.
And in terms of on the rubber side.
The what type of utilization rates are you guys. The operating at and how do you see that going forward into.
The later parts of this year and and.
And in the next year.
Yes, I mean demand is very strong right now.
And so therefore utilization rates are pretty high right now and.
And the high <unk> close to close to 90% in the most recent quarter and with demand.
Outlook continuing to be favorable.
I would not expect those to move and any material way, particularly and in the more mature markets of the Americas, Europe, and <unk> and even even north Asia.
And the markets that can move around a little bit, our China, and Asia, south, but but on balance across our network the whole circuit of.
The plants as.
Is running and that sort of high <unk> close to 90% of and I don't see any any any material change there absent some big demand.
The surprise.
And we don't see at this point.
Okay, great. Thank you very much.
Our next question comes from Laurence Alexander with Jefferies. Your line is open.
Hey, guys, it's Dan Rizzo on for Laurence how are you.
Dan how are you.
We think about the Chinese spot markets.
Would they ever would you ever go to the annual contracts is that something that the.
And the more mature markets I was just wondering of the dynamic that would set up for that there just given how volatile it can be sometimes.
Yes, yes.
Good question, Dan I mean, I think over time that is likely the direction it goes in but.
The market is more fragmented.
I would say number one on the supply side and and.
And then.
There is a quite diverse range of.
Of quality needs and the market and a diverse range of producers I would say as markets mature naturally.
Quality levels move up and while there's always of tearing of.
And the tire market tier one tier two.
And big box store tires, you always have customers across that preference spectrum, I would say and general quality requirements move up over time, which which leads to.
And generally some sort of consolidation and strength around the better players I think the second thing I would say is as growth rates moderate.
Normally there is some consolidation as scale and efficiency become.
More important to earn good returns and are in a slower growth market and China still high growth relative to other options and the world, but down off of a long stretch where it was growing and the double digits range and so I think that naturally would lead to that and then and then finally.
<unk>.
Environmental <unk>.
<unk> and ability to add capacity over the long term.
China seems to be on a path of.
Better environmental stewardship, and if that happens then I think.
And that sort of leads to higher quality players.
Gaining gaining strength, so I think as the supply the supplier set changes over time to adapt to the more mature market in China, then I think contracts become potentially more valued by customers, but over the long period of time here they've had plenty of <unk>.
Spot options to go after and therefore, the need for them to contract has been lower I think that balance will change overtime, but not likely not and the short term.
Okay, Thats actually Thats very helpful. Thank you for the color and then I was just looking at the conversion of Youre doing from a plastic and rubber black the specialty Black I was just wondering what the cost and timing goes into that because if we can expect more of that going forward just given the different dynamics in the tire market versus some of your other more specialized high margin markets.
Yes, yes, so maybe just a quick recap on that one so youll youll probably recall.
We purchased this plant from the.
Nippon steel they had a carbon black.
Plant in China, and so we purchased this for actually a little less than $10 million. So a pretty favorable acquisition always with the intention of converting it to produce specialty carbons and so that conversion is underway and when we look at the acquisition cost of the plant.
The conversion.
We feel thats, a compelling tranche of capacity to support our specialty carbons growth the conversion capex is in and around $50 million.
And that'll be up and running in 2022. So next next year in terms of impact on.
The supply demand and the rubber blacks markets I would say not really.
Irrelevant issue because the plant was relatively small when we acquired it and it's been going through a conversion right now so in.
In the Grand scheme, no no real impact on the supply demand fundamentals for rubber blacks.
And it will give us capacity and our global specialty carbons network to support growth and a whole range of applications, including as we build out energy materials.
Thank you very much of the color.
Our next question comes from Josh Spector with UBS. Your line is open.
Hi, guys. This is Lucas Beaumont answer Josh.
Wanted to touch on.
Inventory channel inventories and reinforcement and.
And now that you didn't call out any restocking benefit and the quarter do.
Do you of any visibility into when inventories are at this point of I.
And sort of above or below normal and do you expect any restocking benefit and the next couple of quarters.
Yes.
Yes so.
I think this is a popular question I am sure in earning season right now I think when we think about restocking.
Try to understand the differences between passenger car tire demand and truck and bus demand and off the road tire demand.
As well as the difference between OE tires and replacement tires, which as you know is the much larger part of the business and OE. So.
And while there has been some impact.
<unk>.
And tires from the global chip shortage of.
On the OE side as it relates to OE tires.
We've seen continued really strong demand for replacement tires, because freight miles remained very strong globally.
And passenger car miles have recovered to 2019 levels in certain geographies. So I think this.
Coupled with pretty low inventories and the chain has meant that many of our customers I think continue to just directly fulfill orders rather than rebuild inventories and the replacement market. That's the the sense. We have as we talk to customers. They tell us that they continue to work hard to catch up to the orders they receive.
Moving from the distribution partners on the replacement side.
Especially I think on the OE side visibility remains challenged given the continued chip shortage and the global transportation challenges, which are causing issues on component supplies and general into the automotive market.
And so while that might not be.
They may not be of specific constraint and the tire market. If theyre short of any components then they won't they won't be able to build as many new cars. So so we think about it through those different layers, but.
I would say the general sense and the replacement market, which is again the much bigger part is that customers are really working hard to catch up and directly fulfill orders rather than the building inventory stocks.
Great. Thanks, that's helpful. And then just on the updated guidance just wanted to touch on.
And if you had changes to your tax rate assumptions or anything else. That's below the EBIT would be impacting the second half. Please.
Yeah, why don't I ask Erica.
To take that one the Erica.
Sure. So for the tax rate, we had previously guided a range of 28% to 30% and now we're guiding 27% to 29% so a bit below the line.
Given the strength of the earnings and the forecasted geographical mix of earnings. So that has changed I would say other assumptions as we forecast foreign exchange rates to remain generally in line with the current levels.
And we usually use.
Looking at a forward curve in terms of oil and feedstock prices, which is what we've all seen.
Alright, thank you.
Our next question comes from Chris Capps with loop capital markets. Your line is open.
Yes, good morning.
Hi, good morning, gentlemen.
Framing up the the opportunity addressing the.
The batteries into the EV space, just curious about your visibility into its future platform designs.
Given that I, followed that and market pretty closely and clearly the theres and accelerated.
Demand ramp over the next few years.
And as you.
You pointed out.
And so just curious if.
Where you get specced in.
And at the battery level is there any instances, where youre talking to the Oems is the confidence level over that and if you.
I'm curious of.
If that's the confidence that contributes to the confidence and maintain this market share and then if you.
Roughly triple of your business by 2025 by maintaining and growing share a little bit does that are you going to need investment and capacity.
Yes.
Yes, thanks for the questions Chris.
Chris and so.
So maybe just to start so are our customers are the battery oes.
Rather than.
The automotive producers.
And we work directly and sell directly to the battery.
Oes now the lines are beginning to blur, a little bit as you see many automakers make investments in.
In battery producers.
But but but thats the general structure today is.
As you know well again, some blurring of the lines as you see.
And those investments being made by carmakers and probably the most prominent one is certainly tesla while they have of battery partner of partners today.
They've been they've been on record as wanting to have their own internal battery capacity as part of their solution. So that continues to evolve and we're staying close to that I think the the markets over time or the products will will evolve technology will evolve at this.
Point of lithium ion batteries in their current chemistry.
We will have a good a good growth run here, but over time, there will be shifts and having a strong incumbent position is generally important. So that you are working with customers. During these technology shifts and so I think our building position will.
We will hopefully help us there.
I think probably the most talked about technology change that could come and batteries is moving from current chemistry to water called solid state batteries.
They are thought to be safer and higher energy density than conventional lithium ion products are today.
For a couple of reasons one is solid state allows materials like metallic lithium is and anode, which might significantly increase the energy density.
And then also solid state batteries won't have liquid electric lights that are susceptible to thermal runaway and that has been a.
Challenge for the industry, although it seems more under control now so the thought to be safer.
But solid state batteries will will use either of ceramic or polymer as the electrolyte and neither of which is conductive. So.
Theoretically solid state batteries will need even more conductive carbon additives in the.
In the and the overall formulations. So look there are still many challenges with solid state battery and the market view is of the technology is still many years out, but we continue to stay on top of it.
And again, if you have and incumbent position with the leading battery makers and then youre going to be part of their development efforts as technologies.
As technologies change here.
I think the second part of your question was just around.
Outlook here and so the.
The market is growing quickly.
And building our share position.
And our expectation is that.
There is more share of runway to at a minimum get to our natural and specialty carbons share.
But with our strong portfolio and global footprint here, we have we have <unk>.
Aspirations than that and we're going to we're going to play to win here.
In terms of the capacity I think you had a question about that.
And so a couple of things, yes over time, there will be capacity additions required.
And I recall, when we purchased sand show and we said that the utilization rate was around 50%. So there was untapped capacity there and we will continue to.
Fill that out through market growth and and then obviously, we always look for improvement opportunities in terms of efficiency debottleneck things to squeeze out more on the conductive carbon black side of the portfolio.
This conversion of Soochow is important because it adds capacity and.
Into our specialty carbon network, which then allows us to rebalance things. So that we can continue to support growth and in the conductive carbon additives for battery so.
For sure something that will continue to evolve but.
We feel we feel good about it and we'll always be looking at our network for the most efficient way to add capacity to support this growth.
Thanks for that Sean and then as my follow up.
And you think about the automotive OEM accelerating the transition away from the internal combustion engine to Evs, there's implications obviously.
Carbon black book.
And tires and other applications have you recalibrated on what you think the net effect of all of that is because in the past you said sort of net neutral with the may.
Maybe a sturdy of heavy or tires being.
Beneficial to the carbon black loadings, but theres some under the hood of applications that go away. So any way to think about recalibration of the of the net to carbon black and the shift from that transition. Thanks.
Yes, our view still remains the same there Chris and so.
Pretty much all of the applications and specialty carbons that go into the car.
Won't won't really change with the pivot to evs, so the windshield still needs to be bonded with the structural adhesive the same with the body parts of the finished coatings all of that so no real change I think where some of the under hood rubber hose type applications.
Would be impacted from the conversion.
And to Evs and when we look at it in total for Cabot.
Our sense is that it's sort of neutral to positive for us I think what what will likely happen and the tire side of the business is as Evs proliferate youll start to see tire makers designing specifically for.
For the performance needs of the electric vehicle and because of the weight and torque is very different and therefore the performance needs.
And we'll we'll.
And we'll need to be addressed that's beginning to emerge and and certainly we'll stay close to our tire partners here in their development efforts and we will continue to.
Look for ways to.
Exploit our.
<unk> composites of <unk> technology here.
Because ultimately I think there is a play for new formulations in for tires for Evs, but thats still probably a little ways off.
Thank you.
And no further questions I'd like to turn the call back over to Sean Quinn for any closing remarks.
Great well, thank you very much for joining us today and thanks for your continued support of Cabot and we look forward to speaking again next quarter have a great day. Thank you.
Ladies and gentlemen, this does conclude the conference you may now disconnect.
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