Cabot Corp (CBT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Cabot earnings conference call.

My name is Sue, 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 at the end of the conference.

(Operator Instructions)

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

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

Please go ahead.

Thank you, Sue.

Good afternoon.

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

Last night we released results for our first quarter of fiscal year 2013, copies of which are posted in the Investor Relations section of our website.

For those on our mailing list, you received 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.

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.

Considering the difficult economic environment and the extremely weak Specialty Fluids results, we nonetheless delivered improved performance this quarter.

Compared to the fourth quarter of fiscal 2012, Specialty Fluids results decreased by $11 million.

Although it is our highest return business and has good long-term growth potential, the quarterly variability led to the business earning only $1 million of EBIT this quarter.

On the positive side, we experienced 25% higher volumes year-over-year in our Fumed Metal Oxides business from the introduction of new products and the utilization of our new capacity in China.

The addition of Purification Solutions, restructuring cost savings in Advanced Technologies and the improved performance in Elastomer Composites were also positive contributors to the improvement year-over-year.

Unfortunately, offsetting these positive contributions was a weak economic environment that negatively affected our volumes and capacity utilization in Reinforcement Materials and Specialty Carbons and Compounds.

We continue to experience weak tire production around the world, which caused our rubber blacks volumes to decline 3%, as compared to the same quarter last year.

Specialty Carbons and Compounds experienced a weak December as inventories at our customers were drawn down for year-end.

In addition, the US coal-fired utility market continues to be challenging due to low natural gas prices and low electricity consumption, which caused a decline in volumes to the gas and air end markets as compared to the same quarter last year.

The improvement in Elastomer Composites is a result of the receipt of a planned milestone payment and royalties related to our technology licensing agreement with Michelin.

Since 2008, Cabot has been working with Michelin to develop the technology and manufacturing operations necessary to commercialize CEC in global tire markets.

Through this agreement, Michelin has exclusive rights to Cabot's Elastomer composite process technology for tire applications and is entitled to build and operate plants.

We have now entered into the next phase of this agreement with receipt of royalties which extend through 2022.

This royalty agreement is a continuation of a prosperous and long-term relationship with Michelin, as well as a significant business opportunity for Cabot.

Cabot's Elastomer Composite technology enables new tire design opportunities for Michelin to improve tire performance.

The agreement highlights Cabot's history of creating value in the tire industry with new and innovative solutions.

Moving to our most recent addition.

With six months of ownership of Norit under our belt, I thought I would take the opportunity to give some of my views on the business and the activated carbon industry.

First, I am more confident than ever that the overall basis for the acquisition is well-founded.

The business fits with our other Specialty businesses like Fumed Metal Oxides and Specialty Carbon even more than I had thought leading up to the acquisition.

It supports our overall strategy to be a technology and industry leader with businesses that have high margins and stable earnings.

Similar to the rest of Cabot, Purification Solutions is a technology leader at modifying the surface area and chemistry of carbon to customize solutions for its customers.

The business serves a diverse set of high growth markets through its proprietary process technology, enabling us to produce a significant number of high value products.

With more than 150 formulations of activated carbon sold, there is significant differentiation among the products for a wide range of applications.

Purification Solutions marketing, applications development and selling activities are closely related to the way we deliver our value added products in our performance materials businesses.

Our Cabot technical teams are pursuing early opportunities to help Purification Solutions with new products in the mercury removal and automotive industries.

At the same time, we anticipate activated carbon may be an additional solution for some of our Specialty Carbons and Fumed Silica customer challenges.

Although we are experiencing near-term weakness in the North American coal-fired utilities market, our overall growth thesis is still very much intact, and a number of activities that have taken place in the last three months confirm that federal regulation will commence in 2015.

With the re-election of the current administration last November, we believe the regulatory efforts to control mercury in the United States will be strengthened.

Having met a number of our key customers in this area, it is clear to us that they are ramping up for implementation in 2015.

We also believe there is substantial upside in the mercury removal area in other regions including China, India and Europe, where coal is a key raw material for power generation.

Just this month at a global United Nations conference in Switzerland, 140 nations agreed to rules called the Minamata Convention which will control mercury emissions on a global basis.

The integration of Norit has been very successful so far.

As identified in due diligence, the Norit and Cabot cultures are an excellent fit.

I believe this is because our business models are very similar.

The culture fit has made it easy for both sides to work together and move the integration forward quickly.

I have met regularly with the business teams and we have already made changes to maximize long-term success.

Importantly, key Norit business leaders have been retained.

One change we have made was to appoint Fred von Gottberg as the General Manager of the business.

Fred is a long-term Cabot senior executive who has a great deal of experience in high growth, technical markets.

Fred's most recent position was as general manager of the Advanced Technologies new business group.

I have also added two high level resources to the organization where I felt we needed additional strategic focus, a leader of the coal-fired utility business and a leader for the Asia-Pacific region.

There are a number of key functional areas such as engineering, purchasing, human resources and finance that have also been strengthened with Cabot's support.

And beyond the commercial and technical synergies, we have also identified more cost synergies than we had originally anticipated and we are implementing the systems and processes needed to achieve them.

As I mentioned before, we continue to believe that the growth opportunity for the US coal-fired utilities market is significant due to the MATS regulation, which will be effective in April of 2015.

However, the current demand for activated carbon continues to be affected by lower power consumption and very low natural gas prices.

Power generation in the US from coal-fired utilities has declined from roughly 45% of total US power generation in 2011 to approximately 38% in 2012.

Industry experts project that US coal-fired power generation will retain this share level for the next 10 years.

At the same time, the activated carbon industry has added capacity in anticipation of the 2015 MATS regulation, resulting in near-term competitive pressure.

However, by 2015 we believe the industry will be in a situation of significant shortage.

We were well aware of these supply and demand dynamics when we bought the business, and recognized the key strategic question for us.

How will we navigate from an industry dynamic of excess supply, to a situation where capacity is short?

We have permits to expand our North American capacity in Texas and Canada, in order to meet the expected demand growth.

We are ready to add new capacity, but that will only happen as soon as we have sufficient customer commitments.

To strategically position ourselves for the next few years, we are taking a few steps in 2013 that will impact this year's results.

The first is that we are reducing inventory levels in order to better manage our supply chain.

The second is that we are taking commercial steps through contract negotiations to maintain our market share leadership position in both equipment systems and activated carbon despite the challenging environment.

We believe this will position us well for when demand increases.

And finally, we are adding commercial and technical resources to ensure we have the proper kept capabilities to succeed.

The combination of these items results in our expectation for 2013 accretion to be approximately $0.15.

But we expect to achieve our original accretion estimate in 2014 of $0.40 to $0.50 as growth accelerates.

Despite the near term challenges, the coal-fired utility market continues to have tremendous long-term potential both in the US and globally.

The strength of Cabot in Asia will accelerate Purification Solution sales growth in that region.

Beyond the mercury removal market, we are experiencing solid growth for activated carbon for the water, food and beverage, pharmaceuticals and catalyst end markets.

Excluding the air and gas purification sectors, we saw 10% volume growth in all other markets this quarter, as compared to the first quarter of fiscal 2012.

Our technological and feedstock advantages are driving growth demand in these areas.

We continue to be the leader in this industry, and see continued growth in many attractive end markets and are introducing innovative new products.

I believe that the long-term potential for this segment is very good, and expect to double the EBITDA of Purification Solutions in the coming five to six years.

I will now turn this call over to Eddie to discuss the first quarter financial results in more details.

Eddie?

Thank you, Patrick.

For the first fiscal quarter, total segment EBIT from Continuing Operations was $90 million, which was $9 million higher than last year's first quarter.

The increase as compared to the prior year was driven by higher unit margins that more than offset lower volumes.

Sequentially, total segment EBIT decreased $6 million, which was primarily driven by an extremely weak Specialty Fluids performance.

Now I will discuss the details at the segment level, beginning with Reinforcement Materials.

During the first quarter of 2013, EBIT for Reinforcement Materials decreased by $5 million, as compared to the first quarter of 2012.

The decrease was driven principally by 3% lower volumes and higher manufacturing costs, which were partially offset by improved unit margins.

Due to the weak global environment, volumes declined in the first fiscal quarter of 2013 as compared to the same quarter of fiscal 2012 in all regions, except China and South America.

We experienced higher unit margins resulting from our value pricing initiatives and benefits from our energy and yield projects, but we continue to face a competitive environment in China where we are balancing our volume and price management decisions.

Sequentially, EBIT increased $9 million driven by higher unit margins and lower manufacturing costs.

These favorable impacts were partially offset by 4% lower volumes.

Volumes declined in all regions except southeast Asia due to weak global tire production and customer inventory management at calendar year-end.

The macroeconomic environment continues to be challenging and we remain cautious about the near-term.

While our customers are anticipating tire demand recovery in 2013, we believe that they will look for very clear downstream indicators before they ramp up production, and therefore carbon black purchases.

I also want to provide you with a general update on our recently concluded 2013 contract discussions.

You will recall that the majority of our contract business is in the Western Hemisphere.

The competitive environment in rubber blacks differs around the globe, and this is reflected in our contracts for 2013.

Directionally, we have seen strengthening in North America, but weakening in Europe driven by macroeconomic conditions.

Overall for the business we see 2013 contract pricing down marginally relative to 2012.

We remain very committed to our value pricing strategy as we prepare for future demand recovery.

The construction of our new plant in China is well under way, and we anticipate the new capacity will be completed by the end of the calendar year.

Our plant in Xingtai is designed to deliver high performance carbon black products to meet China's emerging demand for higher performance reinforcing materials for tires and industrial rubber products.

In Performance Materials, EBIT increased by $5 million as compared to the first quarter of 2012.

The increase was driven by 25% higher volumes in Fumed Metal Oxides from new product introductions, and the utilization of our new capacity in China and lower manufacturing costs.

These benefits were partially offset by 13% lower Specialty Carbons and Compounds volumes due to customer inventory management in December.

Sequentially, Performance Materials EBIT decreased by $8 million, principally due to seasonally lower volumes in Fumed Metal Oxides where volumes decreased by 5%, and due to an 18% decline in Specialty Carbons and Compounds volumes resulting from our customers' year-end inventory management.

We were pleased to see another quarter of year-over-year volume growth in Fumed Metal Oxides.

In order to support growth in this business, we expanded our Fumed Silica plant in Wales, where we have a fence-line partnership with Dow Corning.

These uncertain times appear to be causing our customers to be cautious about their inventory levels, and it is leading to more variable purchasing patterns.

This variability impacts us both for through demand for our products and the ability to manage our inventory efficiently.

The weak volumes in Specialty Carbons and Compounds in the first quarter were driven by substantial destocking at our customers in December.

We saw a similar level of restocking in January, and expect to see this demand recovery continue through the second fiscal quarter.

Advanced Technologies EBIT increased by $2 million from the first quarter of fiscal 2012.

The EBIT increase resulted principally from restructuring cost savings and improved performance in Elastomer Composites, which had higher volumes and received both royalties and a technology milestone payment.

Sequentially, Advanced Technologies EBIT decreased by $9 million principally due to an $11 million decline in Specialty Fluids profitability from an extremely low activity levels during the quarter.

While we understand the quarter variability of Specialty Fluids is frustrating, we are seeing improved activity levels as we look out for the next six months.

We are pleased with our progress in Elastomer Composites, and look forward to continuing our valuable partnership with Michelin.

On an adjusted stand-alone basis EBITDA for the first quarter of fiscal 2013 in Purification Solutions decreased by $3 million, compared to the first quarter of fiscal 2012.

The decrease in EBITDA was driven by higher manufacturing costs and a 2% decrease in volumes as a result of lower sales to the gas and air purification end markets.

The decline in gas and air purification volumes was partially offset by growth in other applications.

Sequentially, EBITDA increased $1 million as compared to the fourth quarter of fiscal 2012, driven by a favorable product mix and lower manufacturing costs partially offset by seasonally lower volumes.

I will now turn to corporate items.

We ended the quarter with a cash balance of $91 million, which was a decrease of $29 million from September.

The driver of the decrease was the use of cash for $62 million of capital expenditures, and an $88 million increase in net working capital.

Our liquidity position remains strong at $588 million.

We recorded a net tax provision of $19 million for the first quarter, which included a charge for tax-related certain items of $7 million.

Our operating tax rate on continuing operations for the first quarter was 27%.

We expect our operating tax rate for fiscal 2013 will be between 25% and 27%.

I will now turn the call back over to Patrick.

Thank you, Eddie.

Despite the uncertain economic environment we continue to work on areas within our control, which include margin improvement, capacity expansion, new product and new business development and the integration of Norit into our portfolio, all of which will help us achieve our targeted growth.

We continue to progress our margin expansion efforts and new product launches.

We have been successful at our value pricing initiatives over the past few years, and can see the results in the margin profile of the Company.

During this quarter, we continued our commercialization of new products with the launch of two new Specialty Carbons for coatings applications, and a new Fumed Silica for silicone Elastomer application.

Already in January, we have launched two more new products, one is an aerogel insulation blanket, and the other is a suite of performance additives for lead acid batteries.

I am very pleased with our progress to date in growing our margins and launching new differentiated products.

During this quarter, we started up new Fumed Silica capacity in Barry, Wales where we debottlenecked our local production by 25%.

The project is an extension of Cabot's long-term partnership with Dow Corning.

Our new capacity will help meet rising global silica demand for Elastomer silicones, the latter of which is expected to continue to grow at 5% to 10% per year over the coming decade.

This is another example of the long-standing partnerships we have with our customers.

I also feel very good about the growth of our Advanced Technologies segment.

We have already talked about the technology license agreement with Michelin for our Elastomer composite technology.

And we are also doing very well capturing growth in Inkjet carbons for commercial printing.

Specialty Fuel Fluids has also made great strides its expansion out of the North Sea, with jobs completed in both Malaysia and India last year.

The challenging economic environment is putting pressure on our near-term volume growth.

We remain committed to our target of $4.90 to $5.00 adjusted EPS in 2014.

But demand recovery for our key markets in Reinforcement Materials and Performance Materials will need to occur.

We need to see improvement in our rubber blacks utilization rates, which were between 75% and 80% this quarter.

As we learned in 2009, a demand recovery can happen very quickly in our businesses, and we are well-positioned with competitive capacity for when the recover -- the recovery takes place.

In summary, we are seeing mixed results across our portfolio of businesses.

Global tire demand looks like it will remain weak through the second fiscal quarter.

We also expect the US coal-fired utilities market to continue to be impacted by the low price of natural gas.

In our Performance Materials segment, we have seen strong volume improvements in all businesses in the month of January.

Overall, we anticipate demand to recover through 2013, and we are well-positioned to capture volume growth as a result of the investments we have made.

Over the last three years, we have improved our margin structure through our pricing initiatives, investment in operational excellence, and the introduction of new products, which will continue to drive earnings growth.

I would like to thank you very much for joining us today.

And I will now turn the call back over for our question and answer session.

Thank you.

(Operator Instructions)

Your first question comes from the line of Kevin Hocevar.

Please go ahead.

Hello.

Good afternoon, everybody.

Good afternoon, Kevin.

I was wondering if you could talk about the Asian dynamics in the rubber blacks?

In the fourth quarter it sounded like it was a $6 million headwind during the quarter.

So I am just wondering, was it similar here in the first quarter or did things deteriorate in that region?

Well, let me take the example of China to illustrate what's going on.

And again, there's a lot of different countries in Asia-Pacific with different dynamics.

But was we are currently seeing in China is a more competitive environment than we had expected, and a lot of it is due to the tire industry situation.

As we look at on-road tire production in China this -- it has increased about 5%, 5.5% in 2012 over 2011.

But all of this -- and that is really critical -- all of this growth has actually happened in the first six months of the calendar year.

And after that, it's been fairly much flat to declining.

And we have seen especially the truck and bus tire production declining strongly in the fourth quarter, so the fourth calendar quarter.

And that, of course, has affected the environment for carbon black.

So specifically as I look at Cabot's position, we are running our carbon black plants flat-out in China right now or close to.

Because we are really keen on maintaining our share of the market.

We believe our customers are needing us to supply their needs especially in these times.

And as you know, we also have a plant starting up later this year and we want to make sure that, that start-up is successful.

The result of that is our competitive environment has increased.

So with declining volume in China, the local competition has grown stronger.

And we have had and have experienced price erosion as a result of this weaker supply demand environment.

We believe the decision is the right one, in terms of the China market still being a very high growth market in the long run.

And we are bringing up some new capacity for new products that are more in the high reinforcing area, that we believe are going to be growing even faster in the China economy.

So this is somewhat a way to describe the Asian environment, and how we are responding to the current challenge.

Okay.

And could you elaborate a little further too, on the contract pricing going into 2013?

I know you mentioned that the US -- or I guess North America was relatively strong.

Could you elaborate on the other regions that are offsetting this, where is price being given back?

Is it mainly Europe?

I know you said Western Hemisphere is where most of the contracts are.

But is it mainly Europe where you are having to give back price, or is there other regions as well?

Yes, the European environment is the one that is actually affected contract pricing.

There -- the volumes there have stayed weak, continued to be weak, and that has affected contract pricing for 2013.

But all in all, if we look at contract pricing across the globe, I would say the result of the new set of negotiations for the calendar year 2013, is a marginal decline versus the pricing of 2012.

Okay.

And could you elaborate on how much the CEC royalty payment was during the quarter, as well as the milestone payment?

Right.

I don't have the milestone payment here.

But I know that the royalty payment was approximately $1 million.

And we -- and the milestone was $1.5 million, and we will be continuing to receive quarterly royalty from Michelin.

And that royalty will, of course, be somewhat variable because it will be linked to production.

Okay.

And then just a final question.

Could you -- on Specialty Fluids, could you give us a magnitude?

As you have said, you are seeing pick-ups over the next six months, got down to $1 million this quarter.

Could you give us an idea of the magnitude of the increase could be over the next six months?

It is one of the businesses that's the most difficult to forecast for us.

And if you go back to our reporting on this business, you could see that the swings can be dramatic.

We are expecting similar swings in the future.

But, of course, again quarter-on-quarter, we may see big differences.

Okay.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Ivan Marcuse.

Please go ahead.

Hello.

Thanks for taking my question.

In the reinforcement business, so it sounds like it demand improved in January.

Is there a seasonal impact here?

And what sort of the sequential -- what is your sequential expectations from first quarter to second quarter, in terms of volume?

No.

So -- let me just correct that.

We have seen January -- a significant January improvement in the Performance Materials segment.

Oh, I'm sorry.

Across the board, so not in the Reinforcement Materials business, where we continue to see the type of weakness we have experienced in the first quarter for the second quarter.

So in terms of total tons, you would expect second quarter to look similar to first quarter?

We -- there may be some slight improvement.

But I would say at this stage we do not believe there will be, or we can see any recovery.

Got you.

You mentioned in your release, you expect a recovery in the back -- in the back half.

Is that just based on history?

Or is it tire demand eventually coming back at some point, or is there something that gives you a little bit more confidence?

Well, I think we have been disappointed with where the tire industry has been positioning itself in the last few quarters.

We look at longer term trends, in terms of tire demand against economic activity.

And we believe that currently we are below trend.

And when I mean trend, I am looking at 20 year type data.

And at this stage, we believe that the underlying demand for tires seem to be well below the trend line, which gives us hope that there will be a recovery later this year.

And as I mentioned in 2009, we saw very steep recovery as a result of the return of the economic activity.

Great.

And then when you move through the year, with a compression in pricing and volumes being fairly weak at least in the first half of the year, I mean is there anywhere in the business where you could offset this to improve margins?

Or would you expect some contractions in overall margins for the business, for the year knowing what you know now?

So this is specifically about the Reinforcement Materials business?

Yes.

Well, we certainly are continuing to drive our value pricing strategy.

And within that strategy, we have a product as well as a volume approach.

So we will continue to be very active, driving the differentiated product into the market and looking at ways to gain traction there.

But, of course, the business is a scale business, where volumes are critical with regard to our profitability.

And as I mentioned, our utilization rates have been at least 75% to 80% levels, which, of course, makes it very difficult to gain or achieve the type of profitability we would expect.

Got you.

And then my last question, in terms of Norit the detail was great.

But if you are looking at $0.15 of accretion this year.

And then you look into '14, and you still expect to get the $0.40 or so of accretion, what is going to change between '14 and '13, since the rules aren't going to come until '15, and you are still going to have an over-capacity issue I assume going into next year?

So what gives you the confidence that you are going to be able to more or less triple earnings by that point?

Right.

Well, there is a certain number of factors.

I mentioned that the $0.15 of accretion in 2013 are partially impacted by some inventory reduction effect.

And also we are going to be adding some costs to manage the integration, as well as managing the drive for this two-year transition to the regulatory environment.

We do see some improvements coming from system sales, as the industry is in need of injection systems to deal with mercury removal.

And we have a business that actually deals with that.

So we design and build mercury removal injection equipment.

And we are seeing a tremendous growth in terms of the number of projects that we are asked to develop and manage.

And we believe this is an important part of that transition.

The other thing that we are looking at is capturing some additional cost synergies that we haven't identified, when we spoke to you earlier.

And then finally, I would say that beyond the mercury removal which is about one-third of the volume, we see some really good growth, that seems to not be affected by the slow economy.

So all of these factors together, give us confidence that the $0.40 to $0.50 accretion in 2014 is right in that space.

What is an example -- I guess, just a follow-on to that.

So what is an example of a synergy that you are getting from Norit, and that -- or more than you thought?

And could you quantify that?

So is this more -- is this an offset to, I guess it seems like there is a lot of pressure on pricing or in the competitive environment, or do you think this is going to be an add-on?

I will let Eddie -- Eddie's been very much involved in the details, with regard to the integration here and the synergy captures.

Eddie, would you like to take that question?

So Ivan, we are looking to capture somewhere in the order of $10 million of synergies.

And we would sees these in places like purchasing, transactional capabilities, things that popped up that we weren't expecting.

Insurance costs have come down dramatically.

The ability to buy certain types of chemicals have been reduced significantly.

So it takes us a little while to implement the appropriate structures, and that is why we are looking at being able to achieve those in 2014.

Great.

I will jump back in the queue.

Thanks.

Thank you.

And your next call comes from the line of David Begleiter.

Please go ahead.

Thank you.

Patrick, just on again, Norit.

The reduction in the US coal-fired utilities market, can you quantify what that has been over the last 12 months and versus -- what are your new expectations on market, on a EPS accretion standpoint or some metric going forward?

So, hello, David.

So we -- as you could see, we indicated that the reduction in the coal-fired utility has been the main driver for the 2% reduction in volume quarter -- year-over-year on a quarterly basis.

The air and gas purification part of that is approximately 10% to 15%.

So there has been a significant reduction that comes from the -- one, the fact that the coal-fired utilities are actually slowing down production in favor of the gas-fired power plants.

And secondly, which was more interesting, is the fact that total power consumption in the US has actually come down somewhere around 2%.

So there is a double effect that we are currently seeing.

Fair enough.

And just in terms of Norit.

In Asia, I know you have hired new --some new managerial -- management talent in Asia.

What is your Chinese sales today, and what is the Chinese opportunity of the next perhaps three to five years for Norit?

So I don't have the Chinese numbers exactly.

But we are currently in Asia-Pacific, in an around slightly less than 10%, I believe, of the total Norit business.

And we believe that there's significant opportunity to do more there.

I mean, just in terms of the coal-fired utility, this is a market in China that has not been developed.

There is approximately 85% of the power generated in China is based on coal.

And some estimates, in terms of mercury projections into the atmosphere, talk about numbers that are 10 times higher than the US.

US, currently is estimated to emit about 60 tons a year of mercury in the air.

In China, people are talking about 600 tons, and the Chinese government is very aware of the situation.

And we have been in contact with the -- with Chinese delegations that are looking into the situation.

We have a good position in China.

We are well-regarded and have a strong reputation.

And we are engaging with the local authorities to see how we can help them solve this problem.

And just lastly, Patrick, on carbon black in China, how much are prices down, in terms of profitability of your carbon black plants there?

How much has it been impacted by it from a margin perspective?

This is an area we're uncomfortable providing information because of the competitive nature of the data.

So I am sorry, I am not going to be able to help you on that one.

Understood.

Thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Laurence Alexander.

Good afternoon.

Good afternoon, Laurence.

I guess, first of all, on CEC, what scenario would we see a significant uptick in the amount of royalties?

I mean, is there anything that we should be looking for within the next three to five years where it will make a material difference?

Well, I think we that have been working since 2008 with Michelin on developing the technology.

But also on preparing Michelin to apply this technology in their manufacturing processes.

We are at very early stages right now.

The technology provides significant performance differentiation.

But, of course, it also requires the building of tires that then need to be sold.

And I believe that creates, of course, some uncertainty with regard to the speed at which we will see the royalty stream develop.

But we are very confident that the technology is high performance.

And the royalties will, of course, the way the license agreement is structured, ramp up with Michelin production.

Performance Materials, with the strength of the recovery that you have seen so far this year, do you think that Q2 is on track to at least match Q4?

Or can you somehow help us gauge, like how confident you are that this recovery is actually significant?

Yes, it is a little early to give -- to be that certain.

We are only one-third of the quarter on our way.

But let me tell you, the recovery matched the inventory reduction effect that we saw in December, which was very significant.

So we are pleased with the fact that the thesis of destocking was confirmed.

And we are seeing the business in January moving back to the type of volumes and financials that we expect.

Maybe to come at it from another angle.

With the reduced accretion on the Purification Solutions and the near-term pressure in Reinforcement Materials.

Is the recovery in Performance Materials -- do you think in a reasonable case strong enough for you to at least be confident that you can have earnings be at least flat year-over-year for the full year?

Or do you think earnings will actually end up being down?

Laurence, I think at this point it is going to depends somewhat on how we see some of these markets come out of the new year.

We have -- we are certainly seeing some strength on the performance side.

On the reinforcement side one big question will be, how does Asia-Pacific come out of the Chinese New Year which is going to take place in February?

And what happens in Europe quite frankly, which you hear mixed results these days.

I think those will be the key drivers which will determine where we end up at the end of the year.

But I think as you have heard, we are very cautious about the second quarter in view of what we have seen in the last few months.

We have been disappointed by the overall environment, and the ability for us to -- well, the volumes that were given to us by our customers.

And it really looks like this could last a little longer.

We do see some signs that the European economies are improving.

I mean, certainly in the US, there is some optimism.

But it is a bit early for us to be showing more optimism.

Then lastly, just very quickly, the new round of synergies or cost cutting that you found.

Any cash outlays near-term that we should be modeling on the cash flow statement?

No.

We did -- as you remember, we had talked about the restructuring in the Advanced Technologies segment.

That was last quarter.

With regard to the synergies on the Purification Solutions side, there is no cash outlays to achieve those.

Thank you.

Thank you.

Thank you.

And your next question comes from the line of Christopher Butler.

Hello.

Good afternoon, everyone.

Good afternoon, Chris.

Starting with Norit, you had mentioned that market share was a big part of the strategy now with some new contracts.

Could you -- has that changed from where you were in 2012, and how you approach customers?

Well, market share changed -- or the strategy changed?

The strategy towards holding onto market share versus what I assume to be price.

I would say that the -- with the decline in the total volume available, we've seen a more aggressive competitive environment, which we will most likely continue to see through the course of this year.

We had to make the decision to maintain our position in this market.

We are still the leading player with regard to coal-fired utilities, because of our technology lead and our early engagement in this market.

And we have in and around 50% market share, and believe that, that is still is where we are today.

We are, of course, now planning for the ramp-up in demand that will occur over the coming two years to meet the regulatory hurdle of 2015.

And in that respect, we are adding resources in the organization.

And we have a plan in place to manage the challenges, both at the technical and commercial level.

And I mentioned earlier, that implementing and selling new systems is part of the work we are doing within the next two years.

But we are also having to engage very actively with the various utilities around the US to help them develop their plans, and help them prepare for the new regulatory environment that they will face.

And as we look at it today, there will not be enough capacity around in 2015 to meet the needs of the market, even on a conservative basis.

And that means that there will be new capacity needed.

But this new capacity can only be built, if we get a certain amount of commitments from the customers in the long run.

So this is the work that we are actively engaging, in as we speak.

As we look at the marketplace for Norit, others in the space are looking for ways of cutting costs without reducing capacity for the eventual regulation.

And yet, you are moving in the other direction.

Should we look at that as Norit was probably a little bit too lean before you took over?

Well, I would say that Norit was well-managed.

But if you think about Norit being owned by private equity, the longer-term approach and the strategic engagement around creating value was certainly a different one compared to what we are looking at.

And their exit strategy and timing was such that the -- there was certainly less worry about the 2015 hurdle.

So I believe that part of that is correct, yes.

I guess, Chris, just to follow-up on that and make sure.

We are looking at adding a little bit of cost in places where we think it is strategically important to accelerate the growth opportunity.

But if you look at that relative to the synergies we are expecting to achieve by 2014.

They are quite a bit lower than that.

So just a way for you to think about that.

I see.

You had also talked about strengthening regulations.

And if I remember last time that regulations got strengthened, the compliance date got pushed out by five years.

So could you give me a sense on what you are seeing as far as that is concerned?

No, we are seeing a very strong commitment by the current administration to implement on April 1, 2015 or April 15.

I am not sure exactly the date.

There could be, and there will be, perhaps for certain utilities up to 12 months to implement.

But all in all, I believe that it is very much in early 2015.

And just finally, last quarter you had higher feedstock inventories on the reinforcement business.

Any lingering headwinds on that, that we saw here in the first quarter?

In the first quarter, we eliminated most of that.

But there was some that was still evident in the first quarter.

But the higher margins that we reflected were in part due to the fact that we did not have those -- as many of those headwinds in the first quarter as we did in the fourth quarter.

It was $6 million in the fourth quarter?

Was it $1 million or $2 million in the first?

It was in that - 50% of the fourth quarter range.

I appreciate your time.

Thank you.

Your next question comes from the line of Jay Harris.

Good afternoon.

Good afternoon, Jay.

As you move to achieve your -- we will call it a $5 earning power over the next whatever period it takes to get there, what kind of organic top line growth rate should we be thinking of, for the Company as a whole?

Okay, Jay.

So the -- I am trying to think.

Perhaps the best way to anchor this is to think about our last Investor Day, where we talked about the move from $3 per share which was achieved in 2011, to $4.50 per share which was the target of the legacy Cabot portfolio in -- so this is the growth that we had projected.

And the $5 -- or $4.90 to $5 that we are currently targeting is a result of the addition of Norit, which is still today planned to be $0.40 to $0.50 accretive in 2014.

So looking at that, you are looking at 10% or so earnings growth per year.

I am talking about revenues.

Revenues, sorry.

(Multiple Speakers)

Jay, just right or wrong, we have conditioned ourselves not to focus on top line percentage growth.

Because it moves significantly with raw material costs that get passed through.

So I think the way we have tried to articulate it is that, when we initially set the goal of $4.50 from $3, pretty much all of that was organic.

And if you remember, some of that, about 30% was coming from the margin, about 40% from capacity, and another 30% from new products.

The other $0.50 that gets us from $4.50 to $5 is really the Norit acquisition.

So that would be inorganic.

So that jump is basically 75% organic, 25% inorganic.

I would have to take a step back, and think about how to normalize for raw materials costs and what that would translate into, in terms of top line revenue growth.

Well, I would like to encourage you to do that.

Because I think the earnings growth prospects will get you a higher multiple, with revenue growth rates -- higher revenue growth rates than with lower revenue growth rates, adjusted for pricing, if you will.

So we will take a look at that, Jay.

It gets complicated for folks because we have to make adjustments for you raw materials but we will take a look at that.

Coming back, if you don't mind my using old language, carbon black, are all the -- it was obvious that there were customer inventory adjustments around the world from your comments in first quarter.

Are there any yet to be accomplished that you are aware of?

So the question is, where do we feel we are, in terms of inventory in the chain?

Yes.

So I think certainly from the Performance Materials side, the carbon black side of that, the special black side so-to-speak, we feel as though we've gotten to very low levels in the chain and we are now seeing some restocking taking place.

And we think on the Reinforcement Materials or the rubber black side, it's also at a very reasonable level.

So we wouldn't expect to see much destocking there, given where we are right now.

And you indicated that you wanted to do some destocking.

What order of magnitude?

That was really more just on the Purification Solutions.

Ah, okay.

So we feel as though we can run the supply chain a little better than what we have seen going in.

That will generate some cash for us.

But will be a P&L hit, of course.

And that's in part why we took down the accretion for this year.

But we will be through that by the end of this year.

And what order of magnitude are we talking -- you had $587 million of inventories at the end of December?

Are we talking $50 million?

Are we talking $90 million?

Well, generally, I believe that the working capital is a bit too high right now.

We tend to see a bit of a spike in the December quarter, because we pay out some year-end accruals.

Which took place earlier, I think in the order of $100 million, in terms of the overall Company's working capital.

We can lighten up, depending on feedstock costs of course.

But we would like to see about $100 million improvement there, and that includes all businesses, of course.

Coming to drilling fluids.

That was a rather large drop in activity levels going from September to the December quarter.

Something different happened this year than in prior years.

Can we get a little more detail?

It's not really a -- it's not a year or a seasonal thing.

It is unfortunately -- because of the way we have to record the revenues, we had low activity levels, and also no real events that created a recording of revenues.

And so, we believe we will see some improvement here in the next six months.

As I sit here today, I can't give you an exact forecast, because of just the nature of the business, even for the second quarter.

But we do expect a substantial improvement in the second quarter.

Are there activities on the horizon that get you back up to former peak levels or above?

I would say so, yes.

Okay.

(Multiple Speakers)

And we would look at it quite -- through an 18 to 24 month period.

Right.

And the -- as you can imagine, Jay, we are very close to a lot of the customers, and the service companies and the oil companies that use our product.

And we have visibility on the projects that would use Cesium Formate.

And that visibility is fairly extended, in terms of several years ahead.

I think the biggest challenge is really the project nature.

And sometimes it gets accelerated, sometimes it gets delayed, and we suffer from the lack of clarity.

And we can swing from one quarter to the next very quickly, and that affects the way we can record the sale.

It was rather dramatic.

Yes.

Absolutely.

Are you opening up any new geographic areas for Cesium Formate?

So as I mentioned earlier, we have been making headways in Asia.

And we are very pleased because we have seen adoption of the use of Cesium Formate in Asia, in India, in Malaysia and, I believe, in Borneo.

We are also qualified and have some very interesting prospects in Azerbaijan.

But all in all, what I see is a continued recognition of the performance of this material over other alternatives.

And although the price tag is often seen as a hindrance for more growth, we still see the performance in the end prevailing.

And we are very optimistic about the continued growth of this business.

And then final question I have is on the new products in the Fumed Metal Oxides.

Are these just the same materials with new applications?

Well, we have launched some new products, that are extensions of our existing portfolio of products, but that provide higher performance in adhesives, in sealants, in applications that -- the wafer polishing applications.

So in these very important areas we see strong needs, and we have been ramping up our R&D and application development efforts.

And as we see the need for us to differentiate as our customers become more sophisticated with regard to their needs.

And I am really pleased with how things are developing there.

And we are also seeing in general, a positive developments in the housing sector.

This is an area -- except, of course, for electronics.

But for example, silicone sealants are very much driven by housing, and US housing and even housing in Europe is improving.

And we are seeing that starting to affect our business positively.

Thank you, gentlemen.

Thank you, Jay.

Thank you.

I would now like to turn the call over to Patrick Prevost for closing remarks.

So ladies and gentlemen, thank you very much for joining us today.

I am looking forward to speaking to you again in about three months.

So, again, thanks, and good-bye.

Thank you for joining today's conference.

This concludes the presentation, and you may now disconnect.

Good day.