Cabot Corp (CBT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Cabot earnings conference call.

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

(Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Erica McLaughlin, Vice President of Investor Relations.

Please proceed

Thank you.

Good afternoon.

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

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

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

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

The slide deck that accompanies this call is also available in the Investor Relations portion of our website and will be available in conjunction with a 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.

Also, as we typically do each year, I would like to remind you that over the next several months in connection with the vesting of restricted stock awards issued under our long-term incentive equity program, officers of the Company may sell shares to pay tax and other obligations related to their awards.

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 morning, good afternoon, sorry, ladies and gentlemen.

I plan to cover a few areas today starting with our fiscal 2013 highlights.

I will then spend a few minutes discussing the performance of our Advanced Technologies segment.

And then move to our fourth-quarter highlights before turning it over to Eddie Cordeiro to talk about the financial performance of the fourth quarter in more detail.

In fiscal 2013 we delivered a record of $529 million of adjusted EBITDA, which is 5% higher than fiscal 2012.

We achieved this EBITDA level through several means; record-setting performance in Advanced Technologies; growth in our Performance Materials segment, driven by the successful commercialization of new capacity in China and Europe; and the introduction of a number of new products; improving demand in the second half of the year in Reinforcement Materials; and the addition of the Purifications Solutions business, which contributed $50 million to that EBITDA.

Additionally, we increased our focus on cash generation during the last six months and reduced networking capital by $53 million.

In 2013 we saw the advancement and completion of several project to expand our global competitiveness.

In Reinforcement Materials we completed the expansion of our new 130,000 metric ton plant in China this September.

We started up the plant last week and we're now working on product qualifications.

As we ramp up production we plan to sell large-scale volumes from this plant as of the second quarter of fiscal 2014.

In June, we announced an agreement to acquire the remaining 60% of our carbon black joint venture in Mexico.

This will add another 140,000 metric tons to our current capacity of over 2 million tons.

We have received regulatory approval for this acquisition from Mexico and we're working through one last regulatory approval in Europe.

We're hopeful that this acquisition will close by the end of the calendar year, subject, of course, to the obtaining of this last approval.

In Performance Materials we completed our fumed silica expansion in Wales, which is an extension of our long-term relationship with Dow Corning.

The successful commercialization of this new capacity, along with the China expansion we completed in late fiscal 2012, resulted in a 14% increase in fumed metal oxides volumes in fiscal 2013 as compared to fiscal 2012.

And contributed significantly to the improvements in Performance Materials EBIT year-over-year.

This year we also introduced a number of new products to the market, many of these new products were for specialty applications and related to our Performance Materials segment.

They included new fumed silica's and specialty carbons that are used in silicon elastomers, adhesives, toners, coatings, and plastics applications.

A couple of examples.

We've introduced the Vulcan XC Max family of superconductive specialty carbons for use in wiring cable and electrostatic dissipation with a range of performance well beyond that of conventional specialty carbon blacks.

And the second example is our Atlas silica composite particles.

It's a new category of materials designed to greatly improve image quality and consistency of energy-efficient toners in digital printing devices.

In addition to that we also launched carbon- and graphene-based additives for the battery sector.

And the energy storage market is growing fast and rapidly pushing the boundaries of traditional materials science.

And we are happy to participate in that.

Finally, our execution of key business activities further strengthened the Company.

We successfully completed the transfer of Norit onto Cabot's global IT and ERP systems.

The organization has also adopted Cabot's internal controls and HR practices and we're working currently at converting Norit to Cabot's general operating standards in the manufacturing sector.

We also completed the restructuring actions in Advanced Technologies and Reinforcement Materials.

In Advanced Technologies we reduced cost by $10 million in 2013 and expect savings to increased to $12 million in fiscal 2014.

In Reinforcement Materials we closed our Malaysia carbon black joint venture and this is expected to save the venture approximately $7 million in fiscal 2014.

As you can see from these examples we continue to be highly focused on actions to improve the short and long-term performance of the Company.

Our strategic levers of emerging market capacity growth, margin expansion, new business and product development, and portfolio management will enable us to deliver growing levels of performance in the future.

One of the drivers of our fiscal 2013 results has been the record operating income achieved in our Advanced Technologies segment.

We delivered $68 million of EBIT, which is a 39% improvement over last year.

The significant improvement merits a more in-depth review.

In the specialty fluids business we earned $46 million of EBIT this year.

We saw strong improvement in rental activity levels in the North Sea and we expanded into Asia.

As I look ahead we have a robust pipeline of projects and our expansion into new geographies is progressing very well.

This business has significant potential for long-term growth, as we see increased adoption of that technology.

I grouped the rest of the businesses together, they delivered $22 million of EBIT in fiscal 2013, which is an increase from $5 million in fiscal 2012.

The driver of this improvement is our elastomer composites business.

We are transitioning from a product supply agreement with Michelin to a royalty agreement.

We recorded $9 million of royalties and technology fees in fiscal 2013, with $4 million in our fourth fiscal quarter.

We're pleased with the progress made and we expect quarterly performance similar to our fourth-quarter level to continue during fiscal 2014.

The inkjet colorants business also contributed to the growth, as inkjet technology transitions for more mature consumer printing markets to increased use in office and commercial printing.

In the office segment, our pigments are used in many of the desktop OEMs and we expect this market to grow by 15% annually over the next several years.

In commercial printing, we see growth for our pigments as printers transition from traditional printing methods to inkjet digital web presses to reduce cost and increase customization.

The use of pigment-based inks for commercial printing is expected to grow by more than 30% per year.

I feel very good about the future of this business, as we continue to build on our market-leading position.

We have also commercialized new applications using our aerogel, including a unique plaster spray application and also the use in insulated coatings.

Cabot's aerogel delivered superior insulation performance with flexibility and ease-of-use.

Building and equipment installation demands are increasing dramatically, especially in Europe.

And we're developing highly innovative products and systems together with our partners.

We're also very pleased today to announce that Cabot's aerogel technology was awarded the winner of the best overall innovation and the innovation with the best environmental benefit at the 2013 Isis Innovation award.

Isis is the world's largest chemical market information provider and the Isis Innovation awards are designed to recognize companies that have made significant steps forward in technological and business innovation with tangible results.

As I noted earlier, we also completed restructuring actions in this segment, mainly focused in the aerogel and security businesses, which contributed $10 million of savings in fiscal 2013.

Overall, I'm very pleased with the progress we're making in our Advanced Technologies segment.

With EBITDA margins in excess of 30% and the opportunity for long-term growth, this segment is delivering very attractive results.

If we now turn to the fourth quarter, this was the second quarter in a row of increasing volumes, as demand in many of our end markets continue to improve, albeit at a moderate pace.

High volumes across the segments drove the year-over-year improvement and total segment EBIT and adjusted EPS.

Unfortunately, this was partially offset by the Purifications Solutions result.

I'm not satisfied with the Purifications Solutions performance, as we see continued weakness in the gas and air purification end market.

And we experienced higher cost associated with unit outages from the third quarter that extended into this last quarter, the fourth quarter of 2013.

At the Company level, we continue to focus on generating strong cash flow and reduced net working capital by $139 million this quarter.

While this was positive for cash flow, it caused an $11 million unfavorable impact to the P&L through the reduction of inventory.

Important to note as well is that our strong cash generation enabled us to repay $154 million of debt during the fourth quarter.

As I mentioned earlier, we completed the construction of our carbon black plant in China this quarter and this plant has a very competitive cost position and will offer a higher end range of reinforcing products for tires that will be produced for the first time in China.

We have started up the plant and are qualifying products with our customers.

And the new plant is expected to add fixed cost of approximately $20 million in fiscal 2014 and this will start in our first quarter 2014.

We expect large-scale commercial sales to begin in our second quarter 2014 and then we expect to ramp up during the rest of the year.

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

Eddie?

Okay, thank you, Patrick.

For the fourth fiscal quarter total segment EBIT from continuing operations was $98 million, which was $2 million higher than last year's fourth quarter.

The increase compared to the prior year was driven by higher volumes partially offset by lower pricing in Asia and Europe for Reinforcement Materials and higher costs from the reduction of inventory levels most notably in Performance Materials and Purifications Solutions.

For fiscal 2013 total segment EBIT decreased $25 million.

The decline was driven by lower volumes and unit margins from a challenging macroeconomic environment and increasing competitive pressures.

We also experienced an unfavorable impact from reducing inventory levels and unit outages this year.

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

During the fourth quarter of 2013, EBIT for Reinforcement Materials increased by $6 million or 15% as compared to the fourth quarter of 2012.

The increase was due to 4% higher volumes as compared to the prior year from a recovery in most regions.

This was partially offset by lower pricing in Asia and Europe and $2 million of higher costs associated with the reduction of inventory levels.

Sequentially, EBIT decreased by $2 million due to higher feedstock costs and continued pricing pressure in Europe and Asia.

Volumes increased by 1%, driven by higher demand in Japan, Southeast Asia and the Americas.

While volumes are improving, our utilization remained in the 75% to 80% range in the fourth quarter.

We have been at this level of utilization for about a year and a half and it is put pressure on our pricing and profitability levels.

We believe that volumes have stabilized and we're seeing signs of improvement.

However, it will likely be a slow recovery.

Longer term we are optimistic about industry trends and our global leadership position in the carbon black industry.

In Performance Materials, EBIT decreased by $1 million as compared to the fourth quarter of 2012.

Volumes in fumed metal oxides increased 8% from new product introductions and the successful commercialization of new capacity.

Volumes were 3% higher in specialty carbons and compounds, though with a less favorable product mix.

The volume increases were also offset by $5 million of higher cost associated with the reduction in inventory levels.

Sequentially, Performance Materials EBIT decreased by $2 million, principally due to a less favorable product mix.

This was partially offset by 3% higher volumes in specialty carbons and compounds and 1% higher volumes in fumed metal oxides.

We were pleased to see an increase in specialty carbons and compounds volumes in the fourth quarter.

We saw growth in the more mature markets of Europe and North America in addition to China.

We're cautiously optimistic about these recent demand trends and the positive impact of what appears to be a gradual European economic recovery.

Fumed metal oxides demonstrated another strong quarter with year-over-year volume growth.

Our China volumes have grown all year with our new capacity, which came online in late 2012.

And we've had increasing success commercializing new products for the adhesives and silicones markets.

Advanced Technologies EBIT increased by $10 million from the fourth quarter of fiscal 2012.

The EBIT increase was driven by higher rental activity and the completion of significant rental jobs in the specialty fluids, higher royalties and technology payments in elastomer composites and cost savings from segment restructuring activities.

Sequentially, Advanced Technologies EBIT decreased $1 million as compared to the third quarter of 2013 due to $5 million of aerogel royalty revenue in the third quarter of fiscal 2013 that did not repeat in the fourth quarter.

This was partially offset by higher volumes, royalties and technology payments in elastomer composites.

Specialty fluids activity levels remain strong this quarter.

Although quarterly variability will continue for this business, we have a strong pipeline of projects that are slated to use our caesium formate.

Inkjet colorants and elastomer composites continue to perform well.

In inkjet colorants we continue to see strong demand for commercial printing and office applications.

For elastomer composites we recognized $4 million of royalties and technology fees related to our agreement with Michelin.

We expect to continue at this quarterly run rate through fiscal 2014.

Our restructuring actions also contributed to the strong quarterly performance.

We are very pleased to see this segment contributing so positively to results.

This quarter we began allocating indirect functional cost to the Purifications Solutions segment.

Having owned the business for one year now, we have developed a clear understanding of the resources consumed by Purifications Solutions.

In 2013 we allocated cost to the business, as we do to other segments, and we recast quarterly segment operating income to include certain functional and indirect costs, which resulted in approximately $10 million of annual cost now allocated to the segment.

This had no EPS impact and resulted in modest cost reductions in the other segments and unallocated corporate cost in prior quarters.

We have not recast any preceding years and therefore fiscal 2012 does not have any allocations included in the figures.

EBIT for the fourth quarter of fiscal 2013 was a loss of $8 million.

Adjusted EBITDA for the fourth quarter of 2013 was $7 million, which compares to $19 million for the similar period last year.

The adjusted EBITDA decrease of $12 million year-over-year was driven by lower volumes and pricing in the gas and air purification end market, $4 million of higher cost associated with the reduction in inventory levels, and $2 million of higher corporate cost allocations.

Sequentially, Purifications Solutions adjusted EBITDA decreased $5 million due to higher cost and the timing of a royalty payment.

The higher costs were associated with asset repairs and the reduction of inventory levels from unit outages that occurred in the third quarter of fiscal 2013 and extended into the fourth quarter.

In addition, the $3 million royalty payment that was received in the third quarter of fiscal 2013 did not repeat in the fourth quarter.

Volumes increased by 5% sequentially, driven by growth in water, food and beverage, and chemicals, but this was offset by a less favorable product mix.

We were not satisfied with the results for the full-year fiscal 2013.

As we look towards next year, we expect performance to improve.

The improvement should come from four areas.

First, we expect the mercury-removal market will show modest improvement.

Second, other end markets should continue to grow by 5% to 10% per year.

Third, we expect to see a benefit from our recent price increases.

And fourth, we do not plan to continue to reduce inventory in 2014 as we did in 2013.

In fact, we plan to rebuild safety stock inventory as we resolve the operational issues experienced in the third and fourth quarters.

I will now turn to corporate items.

We ended the quarter with a cash balance of $95 million, which was an increase of $19 million from June.

Our liquidity position remains strong at $603 million.

During the quarter we generated $135 million of adjusted EBITDA, reduced networking capital by $139 million and spent $69 million on capital expenditures.

Also, during the quarter, $175 million of debt matured and we used cash generated from operations to substantially pay for the maturity.

Therefore, we expect interest expense in fiscal 2014 to be approximately $5 million lower than fiscal 2013.

We recorded a net tax provision of $7 million for the fourth quarter, which included benefits for tax related certain items.

Our operating tax rate on continuing operations for the fourth quarter was 24% and for the full-year was 26%.

We generated strong free cash flow in fiscal 2013 as a result of our record adjusted EBITDA performance, reduction in net working capital and the collection of a portion of the proceeds from the sale of our Supermetals business.

As we look towards 2014, we expect capital expenditures to be between $200 million and $250 million.

We anticipate our operating tax rate for fiscal 2014 will be between 26% and 28%.

We also expect to collect the remaining $250 million of cash from the sale of our Supermetals business in the second quarter of fiscal 2014.

And I will now turn the call back over to Patrick.

Thank you, Eddie.

We're pleased with the positive demand trends in a number of our end markets around the globe.

Our industry demand is improving and even though our first fiscal quarter is normally the weakest seasonal quarter, we expect demand trends to improve as we move through 2014.

The European recovery is likely to occur, albeit at a modest rate.

We're experiencing growth in South America and Asia and the North American replacement tire market is improving.

Local tire production in North America will, however, remain under pressure from import competition.

The Purifications Solutions segment continues to show solid growth in most end applications.

And we have been actively engaged with customers in the North American mercury-removal sector for carbon injection equipment and future supply of activated carbon.

We expect the business to return to more normal historical levels next year.

We expect continued momentum in the fumed metal oxides business and we project improvement in infrastructure related applications in specialty carbons and compounds.

We are pleased with the second quarter in a row of strong Advanced Technologies performance and we anticipate continued revenue growth in this segment in 2014.

We're cautiously optimistic about fiscal 2014 after seeing signs of demand improvement in most of our global businesses.

Thank you very much for joining us today and I will now turn the call back over for our question-and-answer session.

(Operator Instructions)

Kevin Hocevar, Northcoast Research

Hi, good afternoon, everybody

Good afternoon, Kevin

I was wondering if you could update us, it sounds like you expect Norit to improve next year for the reasons that you cited.

I think previously you mentioned returning to the $90 million EBITDA level in 2014 and I know there's an additional $10 million in cost allocated to this segment.

So, should we think of that still kind of maybe $80 million EBITDA then in 2014 or did that number change at all based on how the business had been trending?

No.

So, you're correct, Kevin, we're looking at the business returning to the trendline next, so, this fiscal year 2014 and the numbers that you mentioned are correct., We're looking at $90 million without allocations and $80 million with allocations and I think in addition to that the big disappointment this year has been the mercury-removal market and we're continuing to see that that business has been more difficult than we anticipated.

We think we'll see some small improvement in 2014, but the other area that we're working very hard is the area around plant operations.

We had some difficulties in the last two quarters and we're getting through that.

We're applying some of our Cabot operating standards and we'll have it fixed.

And I think the last point I would make is that we're seeing the non air and gas markets continue to grow at 5% to 10% and have seen that throughout 2013 and we're expecting to see that also in 2014 and we've put also price increases through recently.

So, all of that should get us to that return to the performance of 2012.

And with the expectation through the MATS regulation that we're still looking at favorably kicking in in 2015 that we would be expecting the business to reach levels of EBITDA of around $180 -- about $180 million sometime in and around 2017.

Okay, thanks for that color.

And looking at the Reinforcement Materials segment.

Just looking at some of the geographies, it looked like South America showed a big improvement.

Same with Southeast Asia, it showed a strong volume improvements and then conversely China softened a bit.

So, I was wondering if you can explain some of the geographic performance of, particularly those geographies in Reinforcement Materials?

Yes and I realized that the way we report the numbers may cause some confusion, so I'll start with China.

China's continued to grow.

The negative 3% that you're seeing on our table is correct, but is the result of something that's not directly related to China.

As you know, we closed our Malaysian joint venture a few months ago.

And actually two quarters ago and we're in the -- we have had and have been diverting some of the Chinese produced materials to the Southeast Asian markets and as a result our comps on the local sales to market level have actually come down, but it's not a reflection on the growth and demand in China.

And as you know, we've just started up a new plant that will actually pick up and continue to allow us to participate in that growing market.

So, China is a bit of an unusual situation in terms of that table.

The Japan picture is one of recovery from the production problems we had at the beginning of the fiscal year 2013.

So, beyond that I would say we're seeing things going back to normal there.

And the 8% growth in both sequential and year-over-year reflect that.

We've seen some improvement in Southeast Asia.

We're very pleased with that.

We believe that some of these markets are actually not only growing with regard to domestic consumption, but we're also -- we also believe that there is some export opportunities that have picked up again that would move tires into the US and Europe.

Moving on to the Europe, Middle East, Africa markets.

We have seen an improvement on a year-over-year basis, but recently I would say the growth has been more muted.

Although we believe that Europe is on a recovery trajectory.

North America we are continue to see the economy doing better.

We think there's going to be some minor growth and I say minor because I believe that we are seeing and our customers are seeing more import competition of tires into the North American market after the duties disappeared, import duties disappeared.

And then finally, South America strong at the beginning of fiscal 2013 and we're seeing some weakening towards the last, in the last quarter.

Okay, thanks for that.

And just final question.

We're about a month into this quarter just wondering if you could update us on kind of demand trends, particularly in rubber blacks and kind of your expectations for, I'm assuming you're knee-deep in contract negotiations for 2014 for rubber blacks, so kind of an outlook for that as well.

Thanks.

Right.

So, on the contract negotiations we're in the middle of it, so I'm not going to be able to provide any color in that respect, but as I mentioned or as we mentioned in our introductory words, we're still as a whole in the rubber blacks business running at about 75% to 80% operating rate.

And we've been at these rates more or less for a year and a half.

I mean some of the swings in volumes have been absorbed by inventory, either reduction or increase, but we've not seen the supply demand environment improving and that is still creating some pressure on prices in certain geographies.

We still believe that we're somewhat off the long-term trend of growth in demand for tires that would equate to a normal economic environment.

So, we are currently expecting some recovery at some point.

The difficulty is, of course, to get a sense for when that will occur, but let me tell you that we've been working very hard at being ready for taking advantage of a recovery and a rebound in the business

All right, thank you very much.

Laurence Alexander, Jefferies.

Hi, this is George D'Angelo on for Lawrence.

In your specialty fluids business you guys have had two very strong quarters and I was wondering if should this be viewed as a new run rate for the business?

Hi, George.

I think I would take a very big risk at saying that this is the new standard on a quarterly basis.

As you may know, this is a business that is lumpy and we will continue to see that because most of the revenue is driven by projects and it's very difficult to assess when these projects kick in, how long they last.

But what I would say is that in general we're seeing increased adoption of the technology and we've seen more projects lately and we're seeing increased understanding of what our speciality fluids can bring to the drilling of oil and gas in difficult environments.

Okay, thanks.

And just one more.

Do you have any color on sequential demand trends in specialty blacks and in the mining tire market?

On the mining tire market, I believe that with the slow down in the mining environment in general, that will have an impact.

But I would say that the mining tire demand is a small fraction of the total carbon black demand.

It's several percentage points only.

And I think the other point I would make is that there was an enormous backlog in terms of mining tire deliveries.

So, I think what may happen is that we may only see a reduction in that backlog rather than actually a strong reduction in mining tire impact on carbon black.

I'm sorry the other question was related to the specialty blacks, I think, business.

Is that correct?

Yes, just color on that business as well?

So, we look at that business in general as a business that would grow in the 5% or so range in the long run.

However, if we look at the next quarter, we're moving into a quarter that tends to be seasonally weaker.

So, I believe that we're going to be looking at more of a flat quarter from a volume point of view

Okay, thanks.

That was helpful

Thank you.

Ivan Marcuse, KeyBanc.

Hi, thanks for taking my questions.

Real quick I didn't hear the last part of that.

Are you looking for volumes to be -- are they tracking flat on a sequential basis in your reinforcements or is that referring to a different business?

No, I was referring to the specialty blacks business.

So, we're looking at flat volumes for specialty blacks.

What about for reinforcement?

Reinforcement, we may see a small reduction in volume in the -- sorry, I'm missing my -- sorry, I moved to the wrong business here.

So, we're looking at a small increase in volume in the -- so, flat in specialty blacks and a slight increase in Reinforcement Materials in the first quarter of 2014.

How much will the plant start-up impact EBIT in the fourth quarter -- in the first quarter on a sequential basis versus the fourth quarter?

We mentioned that the new plant will impact the business on a fixed cost basis by $20 million on an annual basis.

So, I would say that a good rule of thumb here would be to say that will have a negative impact of about $5 million.

We will, of course, try to sell as soon as possible out of that plant, but right now we're looking really at seeing the first impact to the bottom line, positive impact to the bottom line in the second quarter

And there won't be any working capital charges after this quarter, is that all worked out through or there will be more?

Eddie, could you?

Yes.

I think we've gotten to a point, Ivan, with the footprint where we're reasonably content if we see opportunities we might go for more cash opportunities, but I think at this point we're looking to try to maintain to the level where we've achieved to.

Okay.

So, if you're looking for a little bit of improvement in mercury-removal and you have these working capital charges coming out and then you have demand sort of flat to up, it sounds like in a year and a half lower interest expense, it sounds like your -- should your earnings even with the plant startup be an all in basis, at least on an operating or EPS, be higher in the first quarter versus the fourth quarter?

Are you talking about our corporate earnings, Ivan?

Yes or however you wanted to look at your EBIT.

So, if you take all the charges that come in and out --.

I think we're starting to get dangerously close to giving much more guidance that we are comfortable with.

Okay.

And then if you look at your -- and then utilization rates you said 75% to 80%, do you think the industry is about in that same level?

I would say that, of course, we only know as much as we can about our competition, but I would say that it would be a good rule of thumb to say that our competitors are running at about the same rates.

And then my last question is you paid down a slug of debt this quarter.

How much -- you should be, it looks like, at least in my estimates, cash -- you should have a pretty decent cash flow going into next year.

So, how do you look at the uses of cash?

How much debt could you pay -- is there any more that you could pay down?

And what's sort of your anticipation of what you're going to do with the $200 million that you're going to get from the Supermetals once that comes through in the second quarter?

Well, Ivan, just from a capability perspective, we have about $250 million of short-term debt that could be paid at any point.

Generally speaking, our capital allocation strategy includes, of course, investment in the existing businesses, returning cash to shareholders through dividends as well as share repurchases, continuing to improve the debt metric.

We'd like to get the debt-to-EBITDA to a more historically consistent level to where we've been.

And then -- and those are really the key elements of the capital allocation strategy.

Great, thanks.

James Sheehan, SunTrust Robinson Humphrey.

Hi, thanks for taking my question.

Patrick, I was just wondering if you could comment on the outlook for replacement tire demand recovering to prior demand trends, the long-term trend.

And you mentioned that you're getting ready for that and you're going to be prepared for it.

I'm just wondering how much inventory do you think your customers have of the different chemicals they need?

I think they been waiting a long time for this to return to trend as well.

Have they already stocked up or how would you assess that situation?

James?

Is that correct?

Yes.

Hi, James.

I believe that our customers similar to us have been very cautious.

We've been expecting a recovery for more than a year and we always feel like we're on the brink of it happening and then we go back into a mode where consumer confidence is holding us back and either at through the OEM or the replacement markets where we're seeing limited recovery.

And additionally we believe it's become a little global in its nature, when in the past we could count on Asia growing steadfastly.

Right now Asia has become a slightly more volatile as well.

If I look at the long-term trend I would say that we've gone through several decades of history and we see a very robust 4% growth trend for tire demand and indirectly, then of course, for carbon black.

And we've seen several periods over those last 25 years that we've studied more in-depth where over periods of one to two years, and in one case actually I think it was three years or so, we saw flattish demand.

And then after these periods we saw fairly significant recovery that basically brought us back to the trendline, which means that we saw growth beyond that 4% level to make up.

Now we believe that we're back in one of these periods of slow to flattish growth and it's been now protracted.

So, I believe that at some point in time demand will kick in.

We believe that on the replacement side people have been stretching the use of their tires beyond a safe level and we have some anecdotal evidence of that.

But, of course, there's no way you can lead a horse to drink if it doesn't want to drink.

So, we're still waiting for that confidence to return and I think that if you speak to our customers on the tire front you will be getting similar indications.

And in that respect I believe that the inventory pipeline is pretty weak right now.

Nobody is going to take a risk considering the false starts that we've had in the last year or so.

And could you also comment on the current pricing environment for carbon black in China?

Right.

So, the Chinese environment is one of high-growth.

We're still seeing the local demand as well as the export demand for tires being fairly robust.

With that we also are seeing robust competition from local Chinese producers and we've been mentioning that the margin environment reflects a more competitive environment.

And finally could you also explain what is the ramp of mercury-removal demand going to look like in 2015?

Do your customers, the utilities, do they have to be in compliance during that calendar year or how -- I understand they have to fully be in compliance maybe a couple of years from then.

How would you describe the demand curve shaping up once the MATS regulation is in place?

So, this is a fairly complex exercise, as you can imagine.

The MATS regulation kicks in in April 2015, in theory.

From that moment the coal-based utilities should be operating within compliance.

So, it's like a cliff.

The mitigating factor here is the fact that some of the utilities or the utilities have the ability to ask for deferral on meeting the regulations up to one year.

And we've heard that some of those utilities have done that, but it is not going to be an across-the-board process.

So, we believe that the combination of people working today already towards meeting that April deadline and the people that are asking for a delay would provide a little smoothing of the curve.

And we've got our projection and our plans to basically develop a better understanding of what that curve will look like.

But, in any event, we believe that the environment will be very tight in the beginning of 2015 and the middle of 2015.

Thank you very much

Thank you.

Christopher Butler, Sidoti & Company.

Hi, good afternoon, everyone

Hi, Chris

I apologize if I missed it, but did you indicate what an apples to apples volume number would have been in China if not for the mitigating circumstances?

No, I did not.

With growth of 16% year-over-year in the third quarter were you double digits?

Could you give us a range or an idea?

Why don't -- I don't have that number off the top of my head here, Chris.

So, how about we'll get back to you separately.

Of course.

And then just to clarify, you're talking about the generating some returns out of the new plant in the second quarter.

Were you indicating that we are going to see some operating income growth out of that or were you indicating that you were going to offset the $5 million overhead and see a little bit on top of that?

Yes.

So, we're looking at the business EBIT offsetting the $5 million of fixed costs in the second quarter.

And a few times during the presentation you talked about the imports slowing, the US market for car tires.

How much of an impact does that have on you as a global player?

Or is that just sort of adjusting or something that factors into your US numbers?

I would say as a global player, we will participate one way or another.

So, that's one of the advantages.

I think the disadvantages, of course, that we believe that we'd like to support our customers in their domestic markets and it creates some additional complexity with regard to planning.

But I would say in general we believe that the growth in imports will be a factor, but should be a minor factor with regard to the situation in 2014.

I just finally looking at the Norit business, how much maintenance costs were there in this quarter?

Let me -- I am just checking my numbers here.

I think we're expecting the cost to be in and around $2 million.

Okay.

So, $4 million of higher inventory and about $2 million of higher maintenance cost were in your fourth quarter?

That's correct.

I appreciate your time.

Thank you.

Jeff Zekauskas, JPMorgan.

Hi, good afternoon.

Good afternoon, Jeff

In Reinforcement Materials are your raw materials inching up?

And might that lead to a little bit of margin pressure in the short term?

I would say that we see some fluctuations, some of it recently, that created the situation that in the fourth quarter we were unable to pass through some of the raw materials, but we didn't see anything that was significant and that would show a change in trend.

We think it's more the bumps and the cycles on a monthly or quarterly basis.

Okay.

And you've talked about or sort of 2012 was the year of very good pricing in Reinforcement Materials.

2013 was less strong and you're growing at a slow rate of volume growth, but there's been some price erosion.

So, order of magnitude, when you think about 2014 do you think your margins will be up or down versus 2013 in Reinforcement Materials?

Or, can you not tell?

Whatever -- we'll be speculating no matter what, Jeff, but I think what we're dealing with is an extended period of low utilization for our plants and we've taken an approach that the carbon black business is not a commodity business and there's multiple products and multiple specifications and technical needs and we've taken an approach of price leadership.

By doing that, we have, of course, especially in the weak economic environment allowed ourselves to lose perhaps some volume to maintain margin.

And this is a bit of an art rather than a science in trying to manage to maintain that price leadership in expectation of a more favorable environment is what this is all about right now.

And again I think we have done well considering that we've been at very low utilization rates for quite some time.

We're hoping that in 2014 we're going to start seeing change in the right direction now.

The latest volume developments are giving us some hope, but I'm not at the point where I'm going to say, yes, we're seeing a recovery.

A strong recovery next quarter.

Okay, thank you very much.

Thank you.

Ladies and gentlemen, we have no more questions in the queue.

Right now I turn the conference back over to Patrick Prevost, please proceed

All right.

Thank you very much for joining the call today and I'm looking forward to speaking to you again next quarter.

Bye bye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.