Cabot Corp (CBT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Cabot earnings conference call.

My name is Keith and I'll be your operator for today.

At this time, all participants are in a listen-only mode.

Raider on we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

And, I would you like to turn the conference over to your host for today, Ms.

Erica McLaughlin, Director of Investor Relations.

Please go ahead, ma'am.

Thanks, Keith.

Good afternoon.

I would like to welcome you to the Cabot Corporation earnings teleconference.

Here this afternoon are Patrick Prevost, Cabot's President and CEO; Eddie Cordeiro, Cabot's Chief Financial Officer; Dave Miller, General Manager of the Core segment; Sean Keohane, General Manager of the Performance segment; Fred von Gottberg, General Manager the New Business segment; Jim Kelly, Corporate Controller; and Brian Berube, General Counsel.

Last night we released results for our second quarter of fiscal-year 2012, copies of which are posted in the Investor Relations section of our website.

For those on our mailing list, you received a press release either by e-mail or fax.

If you are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations.

The slide deck that accompanies this call is also available in the investor relations portion of our website, and will be available in conjunction with the replay of the call.

I remind you that our conversation today will include forward-looking statements, which are subject to risks and uncertainties, and Cabot's actual results may differ materially from those expressed in the forward-looking statements.

A list of factors that could affect Cabot's actual results can be found in the press release we issued last night, and are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly in our last annual report on Form 10-K.

These filings can be found in the investor relations portion of our website.

I will now turn the call over to Patrick Prevost, who will discuss the key highlights of the Company's performance for the quarter.

Eddie Cordeiro will review the business segment and corporate financial details.

Following this, Patrick will provide closing comments and open the floor to questions.

Patrick?

Thank you, Erica, and good afternoon, ladies and gentlemen.

This quarter has been a very strong one for Cabot and we're very pleased with our performance.

Over the last few years, we have maintained our focus on earning growth, through margin and capacity expansion, and from new products and businesses and the results are coming through.

The solid execution of our strategy delivered a 68% quarterly improvement over last year in adjusted EPS.

Our improvement was driven by exceptionally strong business performance that resulted in sequential and year-over-year improvement in total segment EBIT.

We achieved another quarter of record performance in two of our business segments; Rubber Blacks and Specialty Fluids.

As we talked about last quarter, we implemented our Rubber Blacks commercial agreements for calendar-year 2012 and they contributed strongly to our results this quarter.

In addition, our Specialty Fluids segment performed extremely well and we continue to expand into new geographies and with new customers.

We successfully completed two jobs in Malaysia during the quarter, and are pleased to our geographic expansion, as well as customer diversification.

As we indicated earlier in the year, the sequential volume improvement was strong.

We saw increases of 4% in Rubber Blacks, 14% in Performance Products and 17% in Fumed Metal Oxides.

We believe that these volumes reflect a more normalized demand profile, as compared to our volumes at the end of the calendar year, which included some destocking activity by our customers.

While the macroeconomic environment in Europe remains a challenge, we have seen positive momentum in Asia and North America.

In particular, we've seen notable improvements in China and the US in recent months, as we are seeing recovery in automotive production, as well as some of the other industries we serve.

As a reminder, Cabot's revenues continue to be -- to grow preferably in the developing markets around the world.

Today, we are at close to 50% of our revenues in Asia Pacific and South America.

Over the long term, we remain confident in the projected growth of our end markets.

We have seen another $3 billion of announced tire capacity expansions since January.

These will contribute to a growth rate of about 5% per year in tire unit capacity.

The announced expansions are focused in the emerging regions, but we also see significant investment planned for the US.

Outside of the tire and automotive industries, we also remain optimistic about the momentum of Inkjet for use in commercial printing, and continue to see strength in the infrastructure sector in emerging markets.

In addition to the strong operating performance this quarter, we made significant progress in our capacity expansion and energy efficiency investments.

We're on track with our previously-announced capacity expansion plans through 2014.

As a reminder, this plans include an additional 300,000 metric tons, or roughly 15% of Rubber Blacks capacity, approximately 35% to 40% additional Fumed Silica capacity, an increase of 50% to 55% of Masterbatch capacity, and an increase of 20% to 25% of Speciality Carbon Black capacity.

These are, for the most part, very efficient investments at existing sites.

Progress against these plans include the completion of three important expansions during the quarter.

A Rubber Blacks expansion in Indonesia that increased the capacity in the country by 20%.

Our Fumed Metal Oxides expansion in China, where we tripled our plant production to 15,000 tons.

And our Inkject Capacity expansion where we have doubled the size of our two lines over the last six months.

All of these expansions will start contributing in the second half of this fiscal year.

In addition, we expect three more projects to be completed by the end of calendar-year 2012.

These include, expansions in Brazil and Argentina that will increase our South American Rubber Blacks capacity by approximately 10%, and debottlenecks in Europe that will increase our European Rubber Blacks capacity by about 10%.

And then finally, additional Fumed Silica capacity in Barry in Wales that will increase capacity of that site by roughly 20%.

We will also commence the construction of our new Rubber Blacks plant in Tianjin, China, which will add 130,000 tons of new Carbon Black capacity in that country by the end of 2013.

Along with capacity expansion projects we are also on track with our investment in the energy efficient projects -- energy efficiency projects.

We have put two new projects into production in Asia over the last few months and one of them includes proprietary technology that can be deployed at other Carbon Black plants around the world.

We're extremely excited about this new process technology, as it addresses both our sustainability goals and our superior financial return expectations.

In addition to capacity and energy efficiency, we're focused on developing new products to meet the changing needs of our customers.

During the quarter, we launched a number of these new products and I will highlight just a few.

In our Performance segment, we launched a new Fumed Silica that will be used in special adhesives for the windmill bonding paste market.

Typically, a windmill blade consists of two pieces that are integrated together with bonding paste.

A strong bonding paste can enable the manufacturing of longer blade through more sag resistant composites.

Cabot's Fumed Silica delivers 25% to 30% higher sag resistance and reduces processing time by up to 50%, a great improvement.

Another example from our new business scouting efforts is a conductive performance additive for lithium-ion batteries.

Our performance additive enables Cabot to help car battery and lithium-ion battery manufactures meet tough industry fuel economy challenges, and significantly improve the performance of their products while lowering costs.

We believe this will support the growth of these energy-efficient vehicles, and also consumer electronics in general.

The third example is a specialty high-strength pigment for [waterboard] and coating formulations.

This product represents a major advancement in reducing product production costs while surpassing industry standards for color performance.

Cabot's unique product will enable customers to provide deep black coatings for premium automobiles and motorcycles.

As you can see, we continue to successfully pull all the levers of our strategy; margin and capacity expansion, the introduction of new products, and growth of our new businesses.

I'm extremely pleased with how the global Cabot team is delivering results.

I will now turn it over to Eddie to discuss the second-quarter financial in more detail.

Eddie?

Thank you, Patrick.

For the second fiscal quarter, total segment EBIT from continuing operations was $123 million, which was $28 million, or 29% higher than last-year's second-quarter and $42 million, or 52% higher than the first fiscal quarter of 2012.

The increases, as compared to both periods, were driven by higher pricing, improved product mix and higher volumes that more than offset higher costs from new capacity and spending to support our growth initiatives.

As expected, we saw a sequential increase in our volumes and a substantial contribution from Rubber Blacks commercial agreements that commenced at the beginning of the calendar year.

These factors contributed to a significant, sequential improvement in EBIT for Rubber Blacks and Performance segment.

We also experienced a strong quarter in our Specialty Fluid segment.

Now, I will discuss the details at the segment level, beginning with Rubber Blacks.

During the second quarter of 2012, the Rubber Blacks business experienced its strongest quarter ever, increasing EBIT by $21 million, as compared to the second quarter of 2011.

The increase was driven principally by higher margins resulting from higher prices and a favorable product mix.

This margin expansion more than offset the impact of higher fixed manufacturing costs and 2% lower global volumes.

Sequentially, EBIT increased $17 million from the first fiscal quarter of 2012.

This resulted from higher prices and a favorable product mix and 4% higher global volumes.

The sequential increase in volume was driven by improvement in the Americas, Europe, and Southeast Asia.

The sequential decline in volume in China was due to the Chinese New Year holiday, and our second fiscal quarter.

We believe the new margin structure of the business is more reflective of the value we bring to our customers, and allows us to continue to support them into the future.

In the Performance segment, EBIT decreased by $4 million as compared to the second quarter of 2011.

The decrease was driven principally by higher fixed costs from the start-up of new capacity and the unfavorable impact of declining inventory levels, which were partially offset by higher volumes.

Performance Products volumes increased 1%, and Fumed Metal Oxides volumes increased 4%.

Sequentially, EBIT increased by $14 million primarily from higher volumes.

Performance Products volumes increased 14%, while Fumed Metal Oxides increased 17%.

The sequential improvement was seen in both businesses as demand recovered from our first quarter.

We were pleased to see the strong volume recovery this quarter and we continue our diligence in value pricing and our focus on introducing new, high-value products to the market.

EBIT in our Specialty Fluids business increased by $15 million from the second quarter of fiscal 2011 and by $11 million sequentially.

The increases in both periods were due to higher rental revenue from more complex jobs that were larger and longer in duration, and a favorable sales mix driven by a significant product sale in the second quarter of fiscal 2012.

This sale contributed $7 million of margin during the quarter.

Despite the quarter-to-quarter variability in Specialty Fluids, we continue to see a solid pipeline of projects and are winning business in geographic areas outside of the North Sea, including two recent jobs in Asia.

EBIT in the new business segment for the second fiscal quarter was $4 million below the same period last year.

The decline was due to the absence of $3 million of business development milestone revenue recorded in the prior year in our Cabot Elastomer Composites business and lower commercial activity in our Aerogel business.

While the CEC milestone payments vary in timing, we continue to be excited about the future of this business for both tire and non-tire applications.

Sequentially, we saw solid improvement in revenue across all of our new businesses, however, EBIT was flat.

This was due to higher fixed cost related to a planned shutdown at our Aerogel plant during the quarter.

As Patrick mentioned, we completed the capacity expansion of our Inkjet facility this quarter.

Inkjet demand for the commercial and office printing industries continues to grow and we expect our new capacity will be fully utilized in the second half of the year.

In January, we completed the transaction to sell our Supermetals business to Global Advanced Metals, or GAM, for a minimum of $450 million.

We received an initial cash payment of $175 million, and will receive additional consideration of at least $275 million over the coming two years.

The remaining payments are structured as a loan to GAM and have an implied interest component.

As I mentioned last quarter, the imputed interest will be credited through interest income.

While we expect the total amount recorded to be consistent with what we estimated last quarter, the timing of when the interest income is recorded has changed somewhat.

We had initially anticipated that we would be able to record the interest ratably on a quarterly basis.

However, as we finalize the accounting for this transaction, we now will record approximately $1 million of interest quarterly and we will recognize the remainder as a lump sum based on the actual performance of GAM's tantalum business once per year, most likely in the second fiscal quarter of 2013 and 2014.

As a reminder, these imputed interest payments are recognized for US GAAP accounting purposes only.

The majority of the cash payment of $275 million will be received toward the end of the two-year period.

The remainder of the sale has been recorded as income from discontinued operations.

During the quarter, the transaction resulted in a pretax gain of $294 million.

Income from discontinued operations net of tax was $189 million, or $2.92 of EPS for this quarter.

We ended the quarter with a cash balance of $366 million, which was an increase of $178 million from December 31st.

The increase was driven by the receipt of $175 million from the sale of the Supermetals business.

Our strong operating results were substantially offset by capital expenditures of $56 million and a $31 million increase in working capital, mainly due to higher receivables associated with price increases and higher volumes.

We reported a net tax provision of $23 million for the second quarter.

This included a charge for tax-related certain items of $2 million.

Our operating tax rate on a continuing operations for the second quarter was 26% and we anticipate the operating tax rate for fiscal 2012 to be between 25% and 27%.

I will now turn the call back over to Patrick.

Thank you very much, Eddie.

We're optimistic about the improving conditions in North America and China.

We continue to see attractive growth in the emerging economies of Asia and South America, both in the short and in the long term.

Over the last few years we have worked hard, not only to reshape the strategy but also the culture within the Company.

I believe a big portion of our success is attributable to the shift to a performance-oriented culture that includes clear, target setting, accountability for results and alignment with rewards.

We're confident that our strategy is the right one to deliver earnings growth for our shareholders.

We're continuing to increase the efficiency of our operations every day.

Our focus on value pricing and an improved product mix is delivering clear results.

Our capacity additions are in the right locations and designed to make the products our customers need today and in the future.

Our portfolio of new businesses and our new product pipeline are strong.

We have been successful at launching new products and creating strong partnerships so our unique products are used in new and exciting applications.

The combination of all these factors makes me confident that we'll continue to grow the earnings of this Company and achieve our long-term financial targets.

Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

(Operator Instructions) And your first question is from the line of Ivan Marcuse with KeyBanc Capital.

Please go ahead.

Thanks for taking my question, nice quarter, guys.

Thank you.

Good afternoon, Ivan.

Good afternoon.

The first question I have is the tire shipment data has been -- I guess it's been less than robust, we'd say, over the past couple of -- or few months.

So, how long does that typically take when you see lower shipments going out?

And then it just isn't in North America, I know it's globally, does that impact your volumes?

And, how should you think about volumes going forward with the addition of the capacity that you have coming online?

So, Ivan, I'm going to ask Dave to take that question.

Dave?

Ivan, let me just maybe first answer that question by giving you a view of what we're hearing from the global tire market.

You're right.

In general, our customers have indicated to us that tire demand so far this year has been mixed, but overall, relative to last year, down.

Globally, if you look at the passenger car segment they've seen generally stronger OE tire demand and weaker replacement tire demand.

In the truck tire segment they've seen a similar trend.

But, in the off-the-road segment -- this is mining, earthmover, agriculture -- they continue to display pretty solid growth globally.

Those that have significant exposure to Europe have generally pointed to economic weakness there and the uncertainty in that region being a big driver for slower demand, with North America being a bit stronger and the emerging markets showing more robust demand overall.

Looking forward, they are signaling that they're expecting the rest of the year to be a bit stronger than the first calendar quarter and so we're planning on that basis.

Specifically around inventory management and how long that takes to work through the chain, we generally work on shorter delivery wavelengths through the chain, with maybe a bit of lag, but not a lot.

Great, thanks.

And then, how about lower natural gas costs?

How is that impacting your cost structure?

And does that impact the energy centers or the benefits that you get from those?

And how should I think about that with gas around $2 right now?

I think, Ivan, in general, it's a positive factor across the board.

We use natural gas as a secondary fuel for the production of carbon black and it has benefited us across the board.

It does have an impact on some of the energy centers, but I would say most of our energy centers are outside of the US; therefore, the impact, if any at all, has been minor.

Great, thanks.

And then my last question's on the Specialty Fluids.

You talked about it actually in your release on jobs becoming longer and more complex.

Is this a -- do you think this is just a trend for the quarter, or do believe this will be a continuing trend?

And should you see -- I know it's very lumpy, but profitability in general on an annual basis is probably the best we look at it -- continue to rise with this, with the more jobs or longer jobs?

Could you just give a little more detail about that?

Thanks for taking my questions.

Right.

So, as you can see when you look at our quarterly results the Specialty Fluids segment has been and continues to be somewhat lumpy.

It's a very attractive business from a financial point of view but it's very difficult to forecast due to its -- do the project nature of the locations where we sell or rent our fluids.

I would say in general we believe that there's a strong trend towards more use of our material for two reasons.

One is the continued increase in the complexity of the wells that are being drilled and the technology that our customers are utilizing.

The second one is that our product is the most environmentally friendly drilling fluid out there and we believe that we will continue to see regulations moving in our favor.

There's been a lot of work to make this trend happen.

We're working very diligently with our customers that are -- knowing that the performance of our products very closely.

We're also doing a lot of work to educate a lot of the oil companies and the service companies out there to understand how our fluid can actually provide better performance in the long run, in spite, perhaps, of the perceived higher cost that this fluid has.

And what we're seeing is, albeit a little slower than we'd like, we're seeing increased understanding of the performance and we're seeing actually engagement -- increased engagement across the board in different geographies and with different customers.

So the recent jobs we've done in Asia have been very favorable to us and we'll continue to spread the word that this is a very attractive material.

Great, thanks.

Your next question is from the line of Saul Ludwig with Northcoast.

Please go ahead.

Good afternoon, everybody.

First question, in the category -- well, one, corporate expense of $18 million seemed to be higher than ever -- any other quarter ever.

I'm just wondering is that a new level to expect for unallocated corporate expense?

And then the line below that you had the $8 million expense, was that -- how much of that was LIFO or FX and does that reverse if we see residual oil prices have actually come down in April versus where they were in the (inaudible) March?

So if you could address both the unallocated corporate and the other line?

Thanks, Saul, I'm going to ask Sean to take up on this.

Sure.

So, Saul, on the unallocated corporate expense going year to year from 15% to 18%, really the main difference there is we made a payment for a technology to XG Sciences during the quarter, which really is substantially the big difference between 2011 in 2012.

Otherwise, it would've been flat.

So we should think of that is being $15 million-ish going forward?

Yes, it would probably be in the range of $12 million to $14 million or $15 million.

The other thing that runs through there is any projects that may be going on that we don't want to burden the businesses with could flow through that cost center, so that's really what goes on there.

And then on the general unallocated expense, the reduction from 2011 to 2012 was principally a reduction in LIFO expense.

There was still a LIFO expense --

I'm looking at the absolute number, not the change.

Just the nature of the $8 million expense.

Right.

So, in the $8 million expense, roughly half of that was a LIFO expense and the remainder would be either things like FX or it would really be miscellaneous other, so, it should the relatively small.

Should that go or become less negative if the current price -- the current pricing for oil-based products stays the same?

Yes, if we were to actually see a LIFO benefit, then it would be less negative.

Or if it were to stay the same you wouldn't see a LIFO impact.

It would be, obviously, half of that number, all else, equal.

Got you.

And then the second question, Patrick, relates to the Performance black sector.

There I saw that you have a 12% price increase effective, I think, April 20, and you also alluded to having new capacity and new products and also the excitement was impacted, you mentioned, due to unabsorbed overhead as you reduced inventories.

When you look back to the second half of the year, are you finished with (inaudible) inventories, or are you going to get the benefit of the 12% price increase, benefit of new products and the capacities, which would imply that directionally those earnings should be much, much better in the back end of the year than they were in the front end of the year?

I'm pleased to see the picked up on the messages that we had included in our release and the speech and I must say that all of those are messages that you've picked up correctly.

We're continuing to drive the expansion of the Special blacks business and the Fumed Silica business, as well as Masterbatch across the performance segment.

With regard to the price increase in Special blacks, it is actually -- the announcement was that we had -- are intending to increase prices up to 12% and this is because there will be differing increases for different types of products in different geographies.

This is an indication of range and some of that is actually attributable to the fact that we're seeing feedstock price pressures, as well as some transportation costs that we need to recover and one of the drivers for the price increases.

So all in all I would say that we're on a good track with the business, we're back to normalized volumes after significant destocking last quarter.

And, I would say that would be, I think, the takeaways with regard to looking at the next two quarters.

Yes.

So my conclusion about going forward directionally you're agreeing with?

Yes.

Great, and just a quickie.

The aerogels plant shutdown.

Is that back up and running and how much did that cost you?

Let me ask Fred to address the plant shutdown in Frankfurt.

Yes, Saul, so in connection with Frankfurt plant it was a typical regulatory shut down to just check equipment.

The plant is now 10 years old so you do that on a regular basis to make sure that everything is still okay.

The plant is back up and running at this stage.

And in connection with the actual costs associated with that shutdown, it's in the region of a few million dollars.

Great.

Thank you very much, guys.

Thank you, Saul.

Your next question is from the line of John Roberts with Buckingham Research.

Please go ahead.

Afternoon and congratulations on the quarter.

Thank you.

You still call the Core segment the Core segment.

Are you going to be rename it the Rubber black segment, or is there another core business we should think that will be added there?

(laughter)

It's a good question, John.

We're having that debate internally because with the sale of the Supermetals business it's clearly -- and the move of CC into the new business segment, the Core segment has been reduced to Rubber blacks.

So, this is something that we're considering right now and we'll be announcing later this year, potentially.

Related to that, do you have any updated thoughts on the use of proceeds?

I don't know if it's the same answer as before, or fit there's something new you'd like to share with us?

I would say that we're pleased with the cash we've received from the divestiture, and it continues to strengthen the balance sheet.

There's nothing more that I could add at this stage, John.

We're continuing to think about how we can redeploy that cash for growth and as you could see from my speech, we got a very long list of great projects that we're aggressively pursuing and where we're getting results.

We're looking at inorganic opportunities, but nothing to be shared at this stage.

And then, we're continuing to return cash to shareholders through dividends and share buybacks and we've been returning somewhere between $50 million and $100 million year, so I believe that has been well-spent.

And then we need some flexibility for working capital.

But, all in all, I would say not a major change in our thinking, John.

And then lastly, the process improvements that you mentioned in carbon black, does that involve using more BTUs and/or carbon from natural gas as opposed to liquid hydrocarbon?

It's actually a technology that improves the overall use of hydrocarbon in the process, and it goes beyond the traditional energy center, technology, and it is a very attractive addition to our plants.

We've proven the technology now, and we're looking at rolling it out to the sites where this technology could add value.

So, it is actually retrofittable to some of our sites around the world.

Is there a way to just talk about it as a percent of the carbon input, or as a percent of the BTU input into the plant?

(inaudible) efficiency?

I would say -- John, this is Dave.

The way I would put this is it is significantly more energy efficient in terms of recovery relative to standard, what I'll call energy centers, co-gen type arrangements and it decreases our carbon dioxide emissions, as well.

So, you think about better use of the carbons that are in the system.

Okay.

Thank you.

Your next question is from the line of Laurence Alexander with Jefferies.

Please go ahead.

Good afternoon.

Good afternoon, Laurence.

I guess first question, on Performance black can you give a sense for the order trends in March and April and how they're comparing to normal seasonal improvement?

Sean, would you like to take that?

Hi, Laurence.

As Patrick commented, in the quarter we saw a nice rebound across this segment including in Performance Products, following what was quite significant destocking in the Q1 period.

As you look into the quarter in more detail, we saw momentum build throughout the quarter so that's positive and I would say our outlook is fairly optimistic here.

US seems to be gaining some strength.

China now after coming through a couple of quarters of a slowdown is moving back in a more positive direction.

So, I would say at a macro level we are feeling pretty good.

Of course Europe remains a question, but we did see momentum build throughout the quarter and that's -- I think that's a good signal.

Then on the Core business, if you look at the dynamics that are driving your mix shifts, should we expect average units margin to be improving or declining sequentially just from mix for the balance of the year?

Let me think about that.

I would say in general we're driving product mix across the segment.

We're focused on margin and pricing over volume so I would say a lot of what we've been doing in the last few quarters is coming through in our second fiscal quarter.

I think we will continue to drive some of that, but I do not see much further, or at least some -- perhaps some slight improvement in that average margin through the rest of this fiscal year.

And then lastly, when you think about the process yield gains, your new technologies are enabling in the carbon blacks plants.

If you think about five, six years out how much of an incremental reduction in your feedstock requirements should we be looking for?

I'm trying to think about how to answer that question.

Laurence, one of the issues I have is that I'm uncomfortable with providing that amount of information due to the confidential nature of the technology.

But, we will be looking at implementing this technology across a certain number of our facilities.

It is a major capital project, so it takes about 18 to 24 months to implement.

So, now that we have proven the technology we're going to roll it out other sites, but I think the delivery of a further value should be going beyond the current plant environment.

Fair enough.

Thank you.

Thank you.

Your next question is from the line of Jeff Zekauskas with JPMorgan.

Please go ahead.

Hi, good afternoon, this is [Yo Yo Yen] sitting in for Jeff.

Hi, Yo.

So the Core segment delivered 13,5% of EBIT margin, which is relatively high, so is that widely anticipated by the management, is it a surprise, or how sustainable is it?

Okay, so first of all, we don't really look at EBIT or EBITDA margin because of the feedstock impacts on revenue that actually creates some fluctuation with regards to that percent.

So a lot of what we're focusing on is actually dollars per ton of either contribution margin or gross margin and there, I would say that we're on track in terms of the growth of that margin.

We believe that the business is progressing well in that respect.

We think that there still is potential in the future, but it's going to require us to manage both the operating efficiency side of the business, as well as the pricing and product mix side.

Clearly, we're working both of those areas very hard.

So, I guess to put it another way, this quarter in the Core segment is relatively good, but you're still remaining in your 2012 EPS target of $4.50, so is that -- why isn't that lifted, or how do you see this business going forward?

Well, we set ourselves some earnings growth goals for 2014 and, as you look at where we are through the second quarter of fiscal 2012 I think we're continuing to show that we're on track with regard to the fiscal-year 2014 goals.

And if you followed one of our presentations or some of our presentations over the last two quarters you will know that we have, in terms of improvement of the business, 40% due to volume and new capacity and then 30% that's coming from margin enhancement and 30% from new products and businesses, and clearly, we're on track with regard to all three of these levers.

Okay, and secondly, is your -- what's your CapEx target for 2012?

Is it still the same of -- I think I remember it's $250 million?

Yes, we're are currently looking at a CapEx number for fiscal 2012 of approximately $250 million.

How about 2013?

We believe that beyond 2012 we should be looking at similar numbers at least for one or two years hence.

Okay, thank you.

Thank you.

Your next question is from the line of Christopher Butler with Sidoti & Company.

Please go ahead.

Hi, good afternoon, everybody

Hi, Chris.

You had mentioned from your Performance segment that added fixed costs were a bit of a headwind there.

Could you give us an idea of what you were looking at in that segment, or maybe for the Company overall for the fixed costs that got added?

I think mainly the fixed cost in the Performance segment were related to incremental structural costs related to new capacity being brought on stream.

These are costs that we had forecast; that we knew about.

And we had these startups occurring last quarter and if you think about it there's a small amount that's one time and we're just planning for incremental fixed costs as most of these new capacities are actually on existing sites.

So just to give you an idea, we would be talking into the lower single-digit millions of dollars.

And as you -- it sounds like as you continue to attract capacity that you might better utilized past assets, but you'll be running into additional costs, as well?

Well, not really, no.

I think the plan is to very quickly absorb these additional fixed costs through additional business.

The LIFO that was discussed previously, is that primarily here in this Performance segment as well, the declining inventory part of it?

Any --?

I'm sorry, Chris, I'm not --.

The LIFO that we discussed is in the unallocated costs so you wouldn't see it in the segment results and it for carbon black, generally both Rubber blacks and Performance blacks.

Of course, of course.

And so, then what would the declining inventory impact be for this segment?

I don't think we quantified the exact amount, but that's essentially drawing down inventories and the unfavorable impact that is on the P&L.

Shifting gears to new products, at your investor day you had mentioned that you're looking for about $10 million to $15 million of savings here for 2014.

Understanding that you have a lot of things changing and some things with the CEC that didn't occur in this quarter, do you feel that you're still on the path to achieve that for 2014?

Yes, we're still right on track with this.

I appreciate your time.

I thank you, Chris.

Your next question is from the line of David Begleiter with Deutsche Bank.

Please go ahead.

Hey, good afternoon, this is actually [Ron Sitaling] sitting in for David.

Most of my questions have been answered, could you just opine on your outlook for raw materials going forward to the rest of the year given limited exposure to cheap natural gas costs in the US?

We typically don't forecast our raw material cost, mainly because it's -- we've not had a lot of success in doing so; I don't think anybody does.

But, I think what's important to understand is that in the majority of cases, the way we have structured our business we're recovering the cost of energy and feedstock in our products almost immediately so that there's actually very little lag, if any at all nowadays, and I think that we're somewhat agnostic to the absolute level of energy or feedstock costs.

The helpful.

Thank you very much.

Thank you.

Your next question is from the line of Jay Harris with Goldsmith & Harris.

Please go ahead.

I have roughly two questions.

The easier one is, in your elastomer composites, I presume -- where revenues are up, I presume that's the business that you didn't get any milestone payments for?

And, with the rising revenues, what are the costs are going up with those revenues?

Okay, so Hi, Jay, this is Patrick here.

I will take the easy question.

On the elastomer composites business, we're doing well, we're in track with Michelin and we're also continuing to progress well in non-tire applications.

And we just recently had a very positive response to some testing done by some mining companies that we're working very closely with.

So, we're very pleased with the development there.

With regard to cost developing in that business, if there are any increases in cost they would be minor.

Well, then how on higher revenues are you not showing any benefit in the New Business segment earnings?

Jay, This is Fred, let me try and answer this for you.

So in this quarter, the revenue you saw was all based on product shipments, so obviously with product shipments you've also got the cost associated with the product shipments.

If you compare it to last year, it was essentially a milestone payment which almost those directly to the bottom line.

So that was the big impact (inaudible) impacts you see.

It's 100% margin on milestone payment (inaudible).

Now, the challenging question.

If I look at the changes from the first quarter to the second quarter, in terms of profitability, is there a way for you to provide us with some insight as to which changes or the magnitude of the changes that were fully reflected in the quarter?

And what changes or magnitude of the changes were partially reflected in the quarter where in subsequent quarters we might get a full quarter out of it?

Conversely, you referred to the sale of fluids -- drilling fluids, which is not necessarily a repetitive item and you had perhaps some other benefits that went in the other direction.

And can you give us any further insight as to how an application of -- from a continuing operation basis in the second quarter would affect subsequent quarters before we looked to sell those additional volumes?

So, Jay, as I said I'll pass on the difficult questions, (laughter) so, Eddie, if you could help me with this one?

I think I understand where you're going, Jay, and just to -- won't speak business by business or segment by segment, but, things like where we achieve additional margin through pricing, that's substantially achieved in a quarter so you wouldn't see additional benefits going forward.

But, areas for where, for example, we've built capacity that's come onstream where we have recognized the cost for that, the fixed cost, the depreciation, the addition of whatever people we need, but the capacity hasn't either been commissioned, started up, fully loaded or hasn't been sold, then we'd start to see those benefits as we're able to sell that through to the customers going forward.

And then the last one you called out I think was a reasonable one, the specialty fluids, we did call out that we did have one rather large sale as opposed to rental, which was contributing about $7 million worth of margin, which would go the other way.

And so unless we had similar type sales like that, which are very difficult to predict, we wouldn't see that type of benefit.

Well, coming back again, you indicated there were start-up expenses absorbed in the March quarter.

You obviously can't respond to the question on this call, but where you have a big jump in consecutive quarterly performance it would be very helpful if you could provide an aggregate of expected benefits in the subsequent quarter for everything put into place in the particular quarter we are talking about.

I understand.

Just at the high level, Jay, the jump we saw in the Core segment, from Q1 to Q2 was a little bit of volume but really margin.

Due to price?

Yes.

And the jump we saw in the Performance segment was quite a lot of volume, because if you remember we said going into the December quarter that we were concerned about some destocking and we saw very nice volume rebounds.

We were quite happy to see that.

In both of those segments we did see some capacity coming on in the last three to six months, which will start to take hold later on in the year, and I think that is a high level.

But we'll consider your question going forward and if we can do something with that.

Thank you.

And then you have a follow up from the line of Saul Ludwig with Northcoast.

Please go ahead.

I have a quickie.

With the residual fuel oil rising steadily through Jan., Feb., and March, did you have any lag impact in the Rubber blacks segment, albeit $2 million, $3 million, $4 million that may not reappear, or was there any lag there?

No.

You had none?

Nope.

Okay, very good.

And then, you mentioned you're expanding in Europe by 10%.

I'm trying to reconcile that comment with your other comments about Europe and tire demand in Europe and you're going to find yourself with a lot of excess capacity that you don't need, at least in the short term.

Well, I think the situation there, Saul, is that we just don't know what's going to happen in Europe.

I think we're -- and I think our customers are in the same boat with us.

I think there's a lot of concern about the recessionary environment developing.

I think UK, Spain, Holland, are in recession and I think I've missed a few other countries.

And with that, we believe that disposable income will affect potentially the tire demand.

But, Dave, would you like to add anything to that?

I would just add a couple points.

First of all, there's a long-term question, which is the investment that we're making versus the short-term environment.

Our customers are still talking about tire production and tire production marginal growth in Europe longer term.

That's one.

And two, our investments in capacity in Europe come after we've made actualization decisions in that market.

And they're also about producing the products that our customers need in that market going forward.

So a higher performance product to support higher performance tires, which are the bulk of what the European tire production is today and will be going forward.

Got you.

And then the final carry on to that is you've got the 300,000 tons of additional capacity coming on between now and 2014.

I'm sure you try to keep score as best you can and all the other announcements that have been announced by all of your -- anybody else in the carbon black business.

What do you think the aggregate amount of additional capacity in addition to your 300,000 that appears to be coming down the pike?

I think, Saul, there are announcements that are continuing for new carbon black capacity.

Most of those remain focused around Asia.

And, so our capacity expansions, our 300,000 tons, are focused really on meeting incremental demand growth globally.

Do you think the aggregate of all this others is another 300,000 tons or 200,000 or 500,000?

I don't --

Approximately.

Saul, I think the takeaway and we've done some work on that is over the next two to three years we do not see more capacity being built in carbon black, including ourselves, then we see actual growth in demand of carbon black increase.

So, we think that the supply/demand environment should stay fairly stable along the lines we've seen recently.

Got you Thank you very much, guys.

Thanks.

And we have no other questions now so I'd like to turn it back over to Mr.

Patrick Prevost for closing remarks.

Thank you very much for joining us today.

I think the results speak for themselves.

We've had a very good quarter and it's confirmation of the success of our execution on the strategy and we're pleased with our performance.

I believe we're on track with meeting our long-term targets and we're, as a team, very confident about what will be happening over the year -- the coming years.

Thanks, again, for joining us, and looking forward to speaking with you next quarter.

Ladies and gentlemen, that'll conclude today's conference.

Thank you for joining us and you may now disconnect.

Everyone have a great day.