Cabot Corp (CBT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 3 2012 Cabot earnings conference call.

My name is Sharon, and I will be your operator for today.

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Miss Erica McLaughlin, Vice President of Investor Relations.

Thank you, Sharon.

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 of the New Business Segment; Jim Kelly, Corporate Controller; and Brian Berube, our General Counsel.

Last night, we released results for our third 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 receive the 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 and the acquisition of Norit.

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.

I'm pleased with our performance this quarter, and this despite a challenging economic environment.

Our continued focus on value pricing and margin expansion has enabled a 32% increase to adjusted earnings per share as compared to the same quarter last year.

While our rubber blacks volumes were unfavorably impacted by the macro-economic environment in Europe and Asia, we continued to benefit from our value pricing initiatives and investments in yield and energy efficiency technology.

In North America, we continued to see strength in certain segments such as the original equipment and off-the-road tire markets, but weakening consumer confidence negatively affected the replacement tire market.

In our other businesses, we saw higher sequential volumes in our performance segment and inkjet colorants business, supported by the new capacity we have brought online over the last few quarters.

We also introduced a number of new products with the unique performance attributes and continued to strengthen our portfolio.

Our Specialty Fluids segment also had another strong quarter with a completion of a number of large jobs and geographic expansion into Asia.

Delivering on our objectives is a key area of focus for us.

This includes capacity expansion, energy efficiency and yield technology investments.

We are progressing well with our announced capacity expansion plans, and the completion of these projects will provide significant volume leverage as demand recovers.

As we discussed last quarter, there are a number of expansions that have been completed, including the addition of rubber blacks capacity in Indonesia, fumed metal oxides and masterbatch expansions in China, and inkjet expansion in the US.

We anticipate the completion of further capacity additions by the end of calendar year 2012, including rubber black capacity in South America and Europe, and a fumed metal oxides de-bottleneck in Europe.

All of the rubber blacks projects will result in approximately 80,000 metric tons of new capacity.

This will be in Indonesia, South America and Europe, and will be completed by the end of this calendar year.

By the end of the following calendar year in 2013, we plan to complete additional rubber blacks capacity of about 140,000 metric tons mainly in China, but also in Europe.

And we also have an efficiency bottleneck of our speciality carbon black capacity in Europe.

Along with capacity expansion projects, we're also on track with our investments in energy efficiency and yield technology.

We have put two new projects into production in Asia and Europe during our third quarter, and we are excited about these new process technology investments as they address both our sustainability goals and our financial return expectations.

They continue to position us as a low cost producer in most geographies.

We have a very attractive portfolio of high value growth and efficiency initiatives, which are progressing nicely.

We review each capital project closely to ensure that we are utilizing our cash optimally.

In order to progress all of our high value projects, we are forecasting capital expenditures for fiscal 2012 between $250 million and $275 million.

The increase from our previously forecasted range of $200 million to $250 million is driven by the timing of spending for some of our significant investments such as the new rubber black site in China.

In addition to our capacity expansions, we are 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 a couple here.

The first that I will talk about is in our performance segment, where we launch a new fumed silica called CAB-O-SIL ULTRABOND 5760.

This new material is a high performance surface treated fumed silica that maximizes adhesive performance, particularly in epoxy formulations.

The material can be used in adhesives for a wide range of industries including automotive, aerospace, construction, electronics.

The fastest growing application is for structural adhesives used in Veco construction where adhesives replace traditional welding or riveting to bond two parts together.

Our new business segment launched Transfinity XD and DF elastomer composite products, also targeted to meet the critical demands of the transportation industry.

These products are rubber compounds which were specifically designed for use in anti-vibration components in the automotive, aerospace, marine and rail industries.

They provide the highest level of durability and enable new parts that are smaller, lighter and more reliable, while tolerating higher temperatures.

I will now spend a few minutes talking about the acquisition of Norit, which I'm pleased to announce we completed yesterday.

Norit is the global leader in activated carbon, and I'm very pleased to have Norit as a part of the Cabot team.

The addition of Norit to our portfolio supports our ongoing transportation, transformation to a high margin, less cyclical speciality chemicals company.

We chose Norit because we saw the opportunity to combine with a successful, highly profitable company in growing markets with products and processes that are similar to ours, and with whom we could share our technical and business expertise.

Norit is a great complement to Cabot's core strength and existing global footprint.

Both companies have built reputations for being innovative and customer-focused suppliers.

From a manufacturing point of view, both companies have somewhat similar product and process technologies.

The carbon black production process uses a liquid feed stock heated at extremely high temperatures with precise know-how to formulate particles with specific structure and surface chemistry.

While the raw material is different, the process for producing activated carbon is quite similar.

Also, application development and technical service are key pieces for both Cabot and Norit as we develop the offering to the markets we serve.

These common operating platforms allow Cabot and Norit to share technology and engineering expertise and create even stronger businesses.

Norit's strategy fits well with Cabot's vision to deliver earnings growth through leadership and performance materials.

We are uniquely positioned to support Norit's growth in a number of areas.

We intend to grow the Company including into emerging markets like Asia and South America where Cabot has the experience of building and operating profitable businesses.

In addition to meeting multiple customer challenges worldwide, Norit is uniquely positioned to capture the growth from the adoption of mercury removal for the coal-fired utility fleet in the US.

With an assumption that 50% of today's existing coal-fired utility fleet adopts mercury removal, growth in this end market is expected to be 30% per year for the next five to six years.

Norit has a strong share in this end market.

Its products are the benchmark, and is it expected to participate significantly in this growth.

Beyond the potential of the US market, we also see large opportunities in countries like China and India, which have a vast coal-based power industry.

Outside of the mercury removal space, there is also solid growth of 5% to 6% per year in other end markets such as water, food and beverage, and pharmaceuticals.

We recently completed the long-term portion of the financing for this acquisition.

We were able to secure $600 million of debt at highly attractive rates.

This, combined with our revolving credit facility, gives us a very attractive blended rate of 2.6%, which is better than our original estimate.

These low interest rates increase our expected accretion from this acquisition to between $0.40 and $0.50 per share in fiscal 2014.

With the acquisition of Norit, we are increasing our 2014 adjusted EPS target for the company to a range of $4.90 to $5.

Though the transaction will temporarily reduce our adjusted return on invested capital, we are focused on returns and expect to deliver adjusted ROIC of at least 13% over time.

In 2012, we completed two significant portfolio moves.

In January, we divested our super metals business, and yesterday we completed the acquisition of Norit.

Both moves will help us deliver more consistent, more predictable earnings over the long term.

We aspire to be as transparent as possible in everything we do, including how we report our results to our stakeholders.

With the addition of Norit as a segment, we felt it was necessary to make some minor changes to the composition of our segments and give them names that are more reflective of what they represent or what they intend to achieve.

Therefore, we are making the following changes to our reportable segments, and we will start reporting in this way in our fourth quarter of fiscal 2012.

Our Core Segment will be named Reinforcement Materials and consist of raw blacks to use in tire and industrial raw back application.

Our Performance Segment will be renamed Performance Materials.

This segment will continue to be comprised of speciality carbons and compounds and fumed metal oxides for use in adhesives, sealants, toners, coatings, plastics, wire and cable and polishing slurry applications.

Our New Business Segment and our Specialty Fluids segments will be combined into a new segment named Advanced Technologies.

This segment will include our inkjet colorants, our aerogel, security materials, elastomer composites and speciality fluids businesses.

Finally, Norit will be reported as a stand-alone segment called Purification Solutions.

This segment consists of activated carbons to use in the purification of water, air, food and beverage, pharmaceutical products and other liquids and gases.

These changes are designed to give our investors and other stakeholders better insight into our portfolio businesses, especially with the addition of the Norit business.

As you can see, the Company is continuing the progress against its long term strategic and financial objectives, and we look forward to the full integration of Norit.

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

Thank you, Patrick.

For the third fiscal quarter, total segment EBIT from continuing operations was $109 million, which was $3 million higher than last year's third quarter.

The increase as compared to the prior year was driven by higher pricing and improved product mix that more than offset lower volumes and higher costs from new capacity and spending to support our growth initiative.

Sequentially, total segment EBIT decreased $14 million resulting from decreases in our core and specialty fluid segments as compared to their record second-quarter performance.

General unallocated expense, which is not part of our segment EBIT, decreased $18 million during the third quarter of fiscal 2012 as compared to the same quarter last year.

The decline was primarily driven by lower raw material costs that resulted in a $15 million favorable comparison due to our LIFO accounting.

Now I will discuss the details at the segment level beginning with rubber blacks.

During the third quarter of 2012, EBIT for the rubber blacks business increased by $2 million as compared to the third 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 9% lower global volumes and higher fixed manufacturing costs from lower utilization levels.

Sequentially, EBIT decreased $13 million driven by 5% lower volumes.

Volumes in the third fiscal quarter were unfavorably impacted by the weak economic environment in Europe and slowing growth in Asia.

Despite the impact on volumes from the current economic environment, we continue our focus on margin expansion through value pricing and the investments in energy efficiency technology.

We are progressing our capacity expansion and are poised for volume growth when demand recovers.

In the performance segment, EBIT decreased by $5 million as compared with the third quarter of 2011.

The decrease was driven principally by higher costs from the start up of new capacity and increased investment in commercial and marketing resources.

These decreases were partially offset by higher volumes.

As compared to the third quarter of fiscal 2011, Performance Products volumes increased 4%, and fumed metal oxide volumes increased 3%.

Sequentially, EBIT increased by $3 million primarily from higher volume.

As compared to the second quarter of fiscal 2012, Performance Products volumes increase 4%, while FMO increased 7%.

We were pleased to see the positive volume progression this quarter, and we are poised for growth from our new competitive capacity that has recently come online.

Our value pricing initiative and new product introductions are contributing to our solid performance, and we remain confident in our new product pipeline.

EBIT in our Specialty Fluids business increased by $8 million from the third quarter fiscal 2011.

The increase was due to higher revenue related to the completion of larger and more complex jobs.

Sequentially, EBIT decreased by $5 million, principally due to a significant product sale during the second fiscal quarter of 2012 that did not repeat in the third 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 recent jobs in India and Malaysia.

Over the past year, we have increased prices across all our products, which have contributed to the business' strong results.

EBIT in the New Business segment for the third fiscal quarter was $2 million below the same period last year.

Segment EBIT declined due to lower volumes in our aerogel and inkjet colorant businesses as compared to the record revenue in the third quarter of fiscal 2011.

Sequentially, we saw EBIT improvement of $1 million.

This was due to higher volumes in our inkjet colorants business as we utilized new capacity from our recent expansion at our Haverhill plant.

Inkjet demand for the commercial and office printing industry continues to grow.

We continue to receive validation of CEC superior performance in mining trials, and in the coming year, we expect to reach additional milestones in our CEC Michelin partnership.

We ended the quarter with cash balance of $407 million, which was an increase of $41 million from March.

Our strong operating results and lower net working capital were partially offset by capital expenditures of $59 million.

During the third quarter, we also repurchased 175,000 shares for $6 million and increased our quarterly dividend from $0.18 per share to $0.20 per share.

We recorded a net tax provision of $16 million for the third quarter.

This included a benefit for tax-related certain items of $4 million.

Our operating tax rate on continuing operations for the third quarter was 25%.

And we anticipate the operating tax rate for fiscal 2012 to be between 25% and 26%.

I will now turn the call back to Patrick.

Thank you, Eddie.

We are cautious about the near term due to the economic uncertainty in Europe and slowing growth in other parts of the world.

As such, we remain focused on factors of performance that are within our control.

Our value pricing initiatives continue to be successful.

And we are confident that we will deliver on our other objectives to drive performance improvement.

A few examples.

New and innovative product introductions that will help us differentiate our offering to our customers.

Implementation of yield and energy efficiency technologies which will continue to reduce our costs.

The build of new efficient capacity, which will provide significant volume leverage when the band recovers, and finally, the integration of Norit, which allows us to participate in the high growth sectors of air and water purification as well as food and beverage, pharmaceutical and catalyst industries.

With the addition of Norit, we increase our adjusted EPS target for 2014 to between $4.90 and $5 per share and remain focused on improving our return on invested capital over time.

Our portfolio of businesses has been strengthened with Norit, the global leader in activated carbon and continues to position us as one of the top tier speciality chemicals and performance materials companies.

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

Thank you.

(Operator Instructions)

Ivan Marcuse, KeyBanc.

Thank you for taking my question today.

If you look at the rubber blacks business, I understand there is seasonality to it and you are also seeing some slow down.

Is there going to be any -- would you expect improvement in year-over-year operating profit margins and going to the fourth quarter and going forward?

Or do you expect startup costs in there to come into the fourth quarter and first quarter that may impact profitability, and how much would those start up costs be?

So we -- as you look forward, as you mentioned, we are experiencing a bit of a slow period, and this is started during our third quarter or the end of that third quarter.

We have been doing quite a bit of work to understand what's going on.

I have been speaking to a lot of our customers.

It looks like a lot of the slowdown is attributable to the replacement tire business.

I have mentioned that earlier during the presentation that was especially true in North America, but we are seeing that elsewhere as well.

And what we think is going on is that people are delaying their purchases of tires.

And the level of that or the total level of sales right now seems to have reached a point where we are questioning continued destocking.

I think we were bottoming out in terms of where the market is going.

And we believe that there should be a recovery coming fairly soon.

So that is with regard to the market environment.

With regard to our own situation, as you saw through the presentation where we are continuing to focus on capacity additions, as you may remember, we restructured our operations in the carbon black in the '08, '09 period, and we are now repositioning some of that capacity, we are debottlenecking on existing sites.

We are focusing on our product mix in a way that we haven't in the past.

And what that will result in is some addition in fixed costs, but because we are looking at debottlenecks or expansion on existing sites, they will be quite limited in terms of their impact.

The only new site really that we are considering or that we have started building is in China, and that is the site that we are building in Jiangxi.

So all in all, I think I would say we are standing in a good position right now with our performance in rubber blacks considering the volume environment, and we are very well prepared in terms of picking up steam as soon as the market recovers.

You expect profitability to continue.

It's year-over-year increasing trend?

I think in the very short term, I think there is, of course, the uncertainty over the summer months.

When I mention that there would be recovery, I think there is still uncertainty in that respect, which is perhaps into September or October.

And secondly, we've seen feed stock costs that decline in the last few months.

And although we have structured our contracts to be very much reflective of the feed stock costs as quickly as possible, it could be that we could see some minor effects from that feed stock location.

But that would be very short term.

And the performance segment tends to have some cyclicality to it.

Are you seeing any slowing down there?

I saw volumes were up year-over-year.

Do you expect that to continue, or is there also some reason to be cautious in the near term in that segment?

I think -- let me tell you that we have the volumes for July.

So the situation right now is that we see no further deterioration from the third quarter into July.

Things have stabilized.

And I would say that when you look at the news around the macro-economic environment, of course, it's very difficult to make any predictions at this time.

Great.

When you look at Norit, is there any seasonality to the revenues or does it tend to be on a quarter to quarter basis pretty consistent?

I think as you can actually see from some of the document or the figures we published, or that Norit published, they had very strong performance in the '08, '09 period, so their business seems to be much less dependent on macro-economic factors.

We do, however, see that in the utilities business -- the clean up of air emission from utilities, weather plays a factor.

And mild winters or cool summers tend to have a bit of a dampening effect on volume.

Got it.

And with Norit being acquired, where do you expect your interest expense to go to?

I understand the blended rate gets to $22 million.

Is there anything else this there, or should you expect interest to increase by $4 million to $5 million a quarter?

Eddie --

That's approximately right.

We are looking at about $22 million for the year.

Great.

Then would your corporate expense -- how much will that increase or that not really have much of an impact?

You are talking about unallocated corporate-type costs?

Yes.

You know, we are sort in the midst of looking at the business and understanding what the opportunities are there.

I wouldn't expect much of an increase there.

Great.

Then my last question, I will get back into the queue.

With the way you calculate it, where, with the acquisition completed, where is your return on invested capital fall to?

Where do you expect it to go to, and how long do you think it will take you to get back to the 13% to 14% range that you were at?

We are still trying to identify the exact number.

But clearly with the acquisition and its size, it has and will have a negative effect on our ROIC.

It doesn't change our focus on this metric.

I have introduced it when I joined the company in 2008, and then -- we have done very well in that respect over the years.

Our objective is to return to the numbers that we indicated, and I think it will take us -- I would say between 2 and 3 years to get back to being above 13%.

Great.

Thank you for taking my questions.

Thank you.

Saul Ludwig, Northcoast Research.

Good afternoon, guys.

Question on rubber blacks.

Sequentially your revenue fell 3%, your volume fell 5%.

So that meant your sort of price per unit went up slightly on a sequential basis.

And given that you have the contract pricing that you alluded in the past in place, I would assume your variable margin or your price relative to raw material cost would have certainly stayed fairly constant.

But yet, to have a $13 million sequential decline in profit when revenues decline only $17 million, something else must have had a fairly large impact on that sequential profitability decline.

Was it fixed cost absorption?

Was it maintenance?

Could you shed some clarity on helping us understand why the ratio of profit to revenues was so dramatic?

I will ask Dave Miller to answer that question.

Saul, there are a few moving parts in there.

Generally, you can assume our unit margins are quite consistent quarter to quarter.

I think the only thing I would add to this is if you are thinking forward.

Patrick made a general comment about the fact that we will have a bit of -- working through a bit of higher cost inventory in the near term.

And that will become a bit of a factor here in the very near term.

It is only a marginal impact.

Getting back to the third quarter, if the unit margins were consistent third to fourth quarter, what were the other forces that caused the profit to be so dramatic?

Fixed costs were down a bit.

And that I think -- I'm sorry, were up a bit, which I think gets to your point.

Was the unobserved overhead because you ran the plants less full a factor?

Only marginally.

Okay.

Would you say that in the fourth quarter, we are going to have this effect of high cost inventory working through the system?

What -- and last year in the fourth quarter, you had I think it was $10 million of higher than normal maintenance costs.

If we think about the high cost inventory as being sort of a head wind, is the maintenance expenditures likely to be a compensating tail wind?

Fourth quarter tends to be a quarter of higher maintenance for us.

And so that will be a factor in fourth quarter as well.

Same degree as last year?

Let's see.

Quarter -- fourth quarter to fourth quarter, not quite the same degree.

A little less.

Okay.

Great.

Thanks.

Patrick, on the REIT or maybe Eddie, in the fourth quarter when you make this acquisition and the REIT had a certain margin expectation.

And you are going to have it in your results for two months.

What other costs like inventory step up, field costs, help us understand the impact on the REIT might have in your fourth quarter.

Go ahead, Eddie.

So on the two items that you specifically mentioned, we planned to call out the transaction costs, which we did in part in the third quarter.

We will also call those out as a certain item in the fourth quarter to take it out of the operating results.

And on the inventory step up, we expect that to be in the order of $18 million, and that will play out over the next six months, but we also intend to call that out since it's a one-time item.

So when we take those out, our view is that Norit will probably contribute an additional $0.04 or so of EPS for the remainder of the fiscal year for us net of the additional interest.

$0.04 including the interest expense.

Including the interest expense, yes.

And excluding these certain items.

And then finally, Patrick, in the spirit of transparency, putting the -- two part question -- new business as it was formally constituted was expected to contribute I think $15 million, $20 million or $10 million, $12 million in profit towards your 2014 goals.

Yet in 2010, new business made I think $15 million.

Last year it dropped to $9 million.

This year it's looking like it's break even.

What's going on in new business to see these numbers continue to head south?

Then by combining specialty fluids with that group, isn't that moving in the opposite direction of transparency?

I think so.

First of all, on the transparency side, I think we will be transparent.

It's clearly our objective.

The aggregation of businesses is one that is also related to how many segments we can and should be reporting.

I think there is no way that we can continue to report a segment with $2 billion in sales and a segment with $70 million in sales and put it on the same and weigh it the same way.

We think the decision to move towards an aggregation that is more in line with the balance of the businesses and their impact to the company.

With regard to new businesses, of course, we are not happy with the developments there.

One of the areas that has been most disappointing is the aerogel business where we have not made the progress that we anticipated and expected.

So there is quite a bit of work going on within the aerogel team to change its tack and move things in a different direction.

The other factor within the new business is CEC where we are still somewhat dependent on the development of the Michelin relationship.

And this has been taking a little longer than we would have liked again.

But as Eddie mentioned earlier, we believe that we should be able to provide much more information and see also significant impact in terms of profitability toward the end of this calendar year, early next calendar year.

Within the new business, will you continue to provide us at least the earnings -- I understand your point from a revenue stand point that makes good sense.

Will you continue to provide a earnings contribution of specialty fluids going forward?

We haven't decided that.

We will be back on that.

We encourage you to do so.

Thank you, Patrick.

Thank you, Saul.

Operator.

John Roberts, Buckingham Research.

Good afternoon.

9% volume drop in rubber blacks, would you call all of that macro or is part of that purposeful exiting of lower margin volume?

I would call that mostly macro.

We have over the last few years been working on product mix and customer segmentation, meaning that we have been migrating towards the higher value product portfolio.

But I think if I reflect on your question, I think based on our pretty good market knowledge, we do not think that we actually lost any market share.

Okay.

And should we think about some more capacity rationalization at some point here as you bring on additional capacity with your volumes already down such a large amount?

Yes.

So I think a lot of the capacity rationalization has occurred in the '09 and '10.

And we at this stage believe that we have the right assets in the right places.

And most of the investment that is going on right now is one, around adapting or expanding or leveraging the assets we have to get the better performance and more potential out of those that we have.

Then secondly, increasing our ability to operate at better yields and lower costs, and that's a lot around energy management and feed stock and process technology.

So I would say at this stage, there really no further restructuring projects on the docket.

It looks like the plants actually turn down their operating rates fairly well that the fixed costs don't kill you as you start to get down to below 90% operating rates down into the 80%s or even 70%s in some plants.

The margins are holding up and we are clearly positioned that well and we understand our business much better now than we did.

I would also say that we have multiple units on each site.

And we have ability to adjust operating rates in a way that it does not have a negative impact.

Laurence Alexander, Jefferies.

Hi, this is Lucy Watson on for Laurence today.

Couple of questions on trends in rubber blacks.

You just referenced the effort to move towards higher value product offerings.

Have volumes for your higher value products been better than or held up better than those from other products that you are not as focused on?

Yes, certainly.

What we are seeing is, as you look at the range of products in the carbon black system, we have seen the higher end products behave in a more robust way in terms of their reaction to the macro-economic environment.

Just looking at the regional volume trends, it looks like volumes were actually -- the rate of change was actually getting slightly better in Southeast Asia.

But worse in every other region, particularly China and Europe.

Just wondering in those particular areas, how much you would attribute to destocking versus a clear shift in the underlying macro dynamics.

I think that if we look at China, we are seeing some decline in the demand for carbon black.

But it's been fairly muted in terms of that decline.

Some of it I think is attributable to the lower opportunity to export tires to the European market that is fairly depressed.

In Southeast Asia on the contrary, we are seeing the local market continuing to be very strong and picking up.

And we believe that we will continue to support our opposition in Southeast Asia.

Okay.

On the Norit acquisition, it sounds like a lot of the one-time accounting issues are going to be called out as stand alones and not part of ongoing.

Getting to the $0.40 to $0.50 of accretion by 2014, should we assume that will be fairly evenly spread out and in terms of growth or will there be certain chunks of benefit or will it be more lumpy?

Not sure if I understand the question, Lucy.

Do you mind repeating?

I guess are you factoring in a constant growth rate for Norit?

Or do you expect business to be layered on in a more lumpy fashion through -- to get to your accretion target by 2014.

So over the next two years, how the accretion will develop.

I think we provided some numbers for 2013.

We indicated the EPS accretion to be between $0.30 and $0.35 in fiscal 2013, and then $0.40 to $0.50 in fiscal '14.

And of course you have to understand we closed on the business yesterday.

So we are still getting very much up to speed.

Although we have a very good understanding of the business, we need to get much closer, and that's happening as we speak.

Okay.

Then one last one.

To reach the prior $4.50 target on the underlying business, do your planned capacity additions need to reach full utilization to get there?

No, actually that was one of the things we mentioned during our last investor meeting was that the $4.50 that we had indicated as a target for the business ex-Norit was based on a mid-cycle economic environment.

We did not include any wind in our sails to achieve that.

Thank you.

Jeff Zekauskas, JP Morgan.

What are the demand trends like in specialty blacks?

What do the July volumes look like there?

Do they resemble carbon black or not resemble carbon black?

I would say on -- as I mentioned earlier, we've been -- we just had our July volumes come through.

And we have not seen any deterioration in July versus the past quarter.

So I would say a stable month, and I would say that there is nothing special with regard to those volumes.

So the way that you described carbon black, at least as I understand it, whatever happened in July was weaker than what happened on average during the June quarter.

No, no.

Forgive me?

I think that may have been misunderstood here.

What I said is that we didn't see any further deterioration in July versus the third quarter.

Oh, versus the third quarter.

Okay.

So in -- and you're speaking on a year -- on a rate of change on a year-over-year basis?

This was sequential.

This was sequential.

Okay.

So normally your volumes in carbon black fall off in September in the September quarter?

What is it normally -- is there a normal volume fall off between the June and September quarter in carbon black?

I would say that it's not a very large effect, but we do see some seasonality due to the European holiday season.

And as you know, a lot of the manufacturers in Europe close their plants in August.

And most likely, we are going to see that this year to perhaps even a greater extent.

Then maybe a question for Ed.

Will we see pro forma revenues by quarter for Norit any time soon as far as their history goes and operating profits and some sort of 8K that relates to Norit or no?

Jeff, so what has been filed is the pro forma financials.

There was an 8K filed in late June which was our first view of what the purchase accounting would look like and what the pro formas would look like.

And then once we finalized the purchase accounting, we will let you know what the final numbers look like.

Okay.

And then lastly, in your fumed metal oxide business, the margins have held up relatively well on sequential basis.

Do you see sort of further margin progression or margin stability in that area?

Sean, would you like to take the question?

Sure, Jeff, I think our outlook here is for certainly margin stability and you have seen that play out on the year-over-year and sequential comparison.

I think there is no reason to think differently.

Now our objective, of course, is over time to enhance those margins through introduction of new products as well as the adoption of new competitive capacity like we brought on in China and that will be our focus.

Okay.

Thank you very much.

David Begleiter, Deutsche Bank.

Patrick, just on the two new energy and yield projects you mentioned, are you able to qualify the benefits of those two projects and once these projects are completed, are there additional opportunities available amongst your various sites for these types of projects?

So we see -- we indicated in the past that the energy investments that we make, and here I'm talking about specifically energy, tend to cost -- they are very different site by site, but they tend to cost around $20 million to $30 million a year of capital.

And we look at returns in the [15 to 20 IRR] on each of these projects.

That kind of gives you a sense for the potential impact on the Company.

The other work that we are doing is also has an impact with regard to energy but tends to be more driven by yield and process technology interest.

And here we have got projects in motion.

We do not provide more specifics in terms of what they are and what their returns are.

Let me tell you that they are higher than the traditional energy center returns.

And there is the possibility of rolling out that technology to most of our other sites over time.

So this is going to be continued work on our side to bring these technologies and get the energy efficiency that we can achieve to be pervasive across the asset portfolio.

But we, of course, need to pace the capital spending here.

These are very high return projects that we are going to be pursuing.

Understood.

And just on the new capacity projects, are these designed to gain share in those regions or grow with the market going forward?

I would say that they are going to be about growing where the markets in to a great extent.

Although there may be areas back to the product mix statement earlier where we are actually building reactors that are going to be making products that are unique in a certain way and that where we are actually looking at capturing more than our fair share.

And in your rubber black portfolio, what percentage do you think is in the higher margin portion of your overall market?

Dave?

I would say about 30%.

Where was it a year ago perhaps, David?

It's growing from about a quarter.

It will be growing even more into next year.

Thank you very much.

John Roberts, Buckingham Research.

The LIFO benefit you had in the quarter, does that start to go away when adding in Norit and inventories step up to the higher value and diversity of the feed stocks now?

Or will we have these LIFO pluses and minuses quarter to quarter going forward?

I suspect we will still have the same type of LIFO issues given the size of the carbon black business.

Okay.

Thank you.

Saul Ludwig, Northcoast Research.

Just a quick follow-up.

Patrick, in the volume trends and rubber black, you said the July was trending level with what you saw in the third quarter, but you expected the seasonal influences of Europe in August and September to actually then bring about the normal seasonal down trend from the third to fourth quarter.

And that down trend might be more pronounced this year because of the European weakness.

Did I get that right?

Yup, you got that right.

Second question, on the high cost inventory that we will have to flow through in the fourth quarter versus if raw material cost had stayed stable, what order of magnitude do you think we were talking about?

Is that a $5 million headwind?

A $10 million headwind?

And I know you can't be precise.

What sort of planet is it on?

It will be the way we look at it right now, we've eliminated the lag to great degree.

So here, the effect is going to be much lower than what it could have been in the past.

I would estimate it to be several millions of dollars, not much more.

Several, does that mean three or four?

Single millions of dollars.

Terrific.

Thank you very much.

Christopher Butler, Sidoti and Company.

I was hoping you might be able to give us the, an idea how Norit did in their June quarter understanding that springtime is important for water treatment.

So as we are getting, of course, visibility on the financials, the -- this is calendar year, they are operating under and I would say that the calendar year first six months were somewhat in line with our calendar year 2011 which is of course, lower than we expected.

But we had a mild winter.

And that has had an effect on their growth potential.

We are expecting a higher run rate in the second half of the calendar year 2012.

And we were looking at catching up in that respect.

And looking at your performance segment, we almost have a year in the books now, and the margin in that business has taken a step back from last year.

I know from previous calls there was talk about fixed costs absorption, but you have seemed confident that volumes will make that up pretty quickly.

Why haven't we seen that yet?

Where can we get back up to that 16% threshold for this business quickly?

Chris, I think you are referring to the EBIT margins which of course we have been talking about now for the last few quarters needing to absorb some higher fixed costs.

And the volumes have come a little bit more slowly than expected given some of the uncertainties in the macro environment.

We are feeling more reassured seeing the sequential growth in volumes in the business there from Q2 to Q3.

And so we are still comfortable with the position and having added capacity and the additional costs.

I appreciate your time.

I'd now like to turn the call over to Patrick for closing remarks.

So I wanted to thank you for joining our call today.

We are on track with our execution of our strategy, and we are seeing our financial results at a higher level and a fairly robust state considering the macro-economic environment.

So we are confident about the future and we look forward to speaking to you next quarter.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.