Cabot Corp (CBT) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q4 2014 Cabot earnings conference call.

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

(Operator Instructions)

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

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

Please proceed.

Thanks, Mark.

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 FY14, 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.

Also, as we typically do each year, I would like to remind you that over the next several weeks 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 would 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 detail.

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

Patrick?

Thank you very much Erika, and good afternoon ladies and gentlemen.

It is my pleasure to share with you today our fourth-quarter and full FY14 results.

In FY14 we delivered a record $593 million of adjusted EBITDA and adjusted earnings per share of $3.43.

We achieved this performance from several factors.

First, we delivered record-setting performance in Reinforcement Materials as a result of the successful commercialization of our new China capacity, the addition of NHUMO in Mexico, growing demand for our products, and the benefit from raw material purchasing savings and energy efficiency investments.

Second, we also delivered record-setting results in our Performance Materials segment.

This was done through close customer interactions to secure high volumes in our key end markets and through the introduction of a number of new products in existing and new applications.

And finally our Elastomer Composites business contributed to the Company's result as we transitioned into the royalty phase of our technology licensing agreement with Michelin.

In addition to our earnings and adjusted EBITDA growth, we generated strong cash flow from operations of $305 million and collected the final $215 million of cash for the sale of the tantalum business.

During the year, we returned cash to our shareholders, we increase the dividend by 10%, and we repurchased $11 million worth of shares.

In addition, we reduced our debt by $226 million.

This reduction in debt, along with outlook for the Company, resulted in Standard & Poor's reaffirming our BBB-plus investment-grade credit rating.

In 2014 we also saw the advancement and completion of several projects to expand our global competitiveness.

In the Reinforcement Material segment we successfully started up our new 130,000-ton carbon black plant in China, and the commercialization of this new capacity has been progressing as planned.

And of course, this is evident in the volume growth we delivered this year.

We also acquired our partner's share of our carbon black joint venture in Mexico.

And this added another 140,000 tons to our capacity -- our global total capacity of over 2 million metric tons.

Another significant project is our lignite mine in Texas.

The mine will be operational in the coming week, and we will begin supplying feedstock to our Purification Solutions operations in Texas.

And finally, we also completed the divestiture of our Security Materials business for $20 million.

We are also pleased to see the launch of a number of new products this past year.

Many of these new products are for highly specialized applications.

They include: fumed silica for adhesives, carbon additives for batteries, carbon black reinforcement materials for tire tread applications, specialty carbons and fumed silica additives for toner applications, and activated carbon for sugar decolorization and oil and gas applications.

The number of our new products is a testament of our innovation and technology capabilities, and is critical in our continued drive to remain the leader in our various businesses.

Finally, we executed important key initiatives, such as the transition of our business service center from Belgium to Riga, Latvia.

This move will reduce our costs and improve our efficiency.

We also progressed our commercial excellence initiative.

Commercial excellence is about strengthening our processes, capabilities, and tools across the Company.

This effort is helping us gain a better and deeper understanding of the overall market environment and of our customers' needs.

It allows us to be more competitive, react faster to market changes, and ensure we deliver a better value proposition to our customers.

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.

We now turn to the fourth quarter.

We delivered another strong quarter of volume improvements in our Reinforcement Materials and Performance Materials segments.

It led to 9% higher adjusted earnings per share as compared to the fourth quarter of 2013.

In addition, Purification Solutions operations have stabilized, and results improved as a result of a one-time $9 million insurance payment.

The insurance proceeds are recovery for businesses interruptions and property damage.

We also continued our strong cash flow generation with adjusted EBITDA in the quarter of $147 million and a $44 million reduction in net working capital.

We used this strong cash flow to turn our debt-to-EBITDA metric to under 2 times after two years of being at a somewhat more elevated level.

As a result of strengthening our balance sheet, we were able to begin repurchasing shares again in the fourth quarter.

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

Eddie?

Thanks, Patrick.

Adjusted EPS for the fourth quarter of FY14 was $0.85, which was an increase of 9% over the prior-year quarter.

Total segment EBIT from continuing operations was $108 million, driven by strong volumes in our Reinforcement Materials and Performance Materials segments.

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

During the fourth quarter of 2014, EBIT for Reinforcement Materials increased by $9 million as compared to the fourth quarter of 2013.

The increase was due to 11% higher volumes as compared to the prior year.

The volume improvement was driven by the commercialization of our new China capacity, our acquisition in Mexico, and growth in North America.

Benefits from yield and energy efficiency investments also contributed to the improvement in earnings.

Sequentially EBIT was $5 million lower than our third fiscal quarter, due to lower raw material purchasing savings and a less favorable product mix.

Volumes in the fourth quarter were consistent with the third quarter, as growth in China and Southeast Asia offset declines in South America and Europe.

We are pleased with our record-setting performance this year, as our strategic actions have contributed significantly to improving EBIT by $54 million, or 29%.

Our utilization remained in 80% to 85% range in the fourth quarter, and we have been operating at this level of utilization for the last year.

As we look ahead, we expect a modest level of global growth in 2015.

With declining oil prices in the first fiscal quarter, we anticipate that many of our customers will be managing their inventories down leading into the calendar year end.

Therefore, we expect fiscal year Q1 2015 volumes to decline from the fourth quarter of 2014 as a result of the global macro economic conditions, seasonality effects, and inventory corrections.

In addition to muted volume growth, we are also seeing headwinds in 2015 related to lower raw material purchasing savings and the weakening of various foreign currencies against the US dollar.

In addition, we are currently seeing an increasingly competitive environment as we negotiate contracts for 2015.

All in all, if we do not see an economic recovery early in calendar 2015, we expect the year to be somewhat more challenging than 2014 for this segment.

Now turning to Performance Materials.

EBIT increased by $3 million as compared to the fourth quarter of 2013, due to 2% higher volumes in specialty carbons and compounds and 5% higher volumes in fumed metal oxides, as demand improved in key end markets.

Sequentially, Performance Materials EBIT decreased by $5 million, primarily due to a less favorable product mix.

Volumes in the fourth quarter in Specialty Carbons and Compounds were consistent with our third quarter, while volumes improved by 1% sequentially in fumed metal oxides.

While we are pleased with the record-setting performance this year and looking ahead, we expect to see continued growth in automotive, construction, and consumer applications in 2015.

However, I will remind you that Q1 is also typically a seasonally lower volume quarter for this segment.

Advanced Technologies EBIT decreased by $11 million from the fourth quarter of FY13.

The EBIT decreased was driven primarily by lower sales volumes in the specialty fluids business.

This caused EBIT in that business to decline from $18 million in the fourth quarter of FY13 to $7 million in the fourth quarter of FY14.

Sequentially, Advanced Technologies EBIT increased by $1 million as compared to the third quarter of FY14 due to higher volumes in Aerogel.

In FY14 we delivered an earnings level relatively consistent with 2013, despite lower specialty fluids results due to higher royalties from our Elastomer composites business.

As we look ahead, we expect a lower level of project activity in specialty fluids, and we will continue to optimize our cesium supply by being more selective on projects.

We continue to see opportunities in the European building and construction markets for our Aerogel business, and commercial printing growth for our inkjet colorants business.

EBIT for the fourth quarter of FY14 was $1 million in Purification Solutions.

Adjusted EBITDA for the fourth quarter of 2014 was $14 million, which compares to $7 million for the similar period last year.

The adjusted EBITDA increase of $7 million year over year was driven by the receipt of a $9 million benefit related to business interruption and property damage insurance recoveries for operating issues experienced in late FY13 and early FY14.

Sequentially, Purification Solutions adjusted EBITDA increased $7 million as well, due to the receipt of the $9 million of insurance recoveries.

Volumes increased 14% sequentially, due to seasonally higher water and air and gas volumes, but this was offset by less favorable product mix and the absence of a $2.5 million royalty payment we received in the third quarter.

Over the last few months we have made progress stabilizing operations of the business as a result of our investment in this area.

In addition, we have launched new products and implemented price increases and the non-air and gas applications.

As we look towards next year, we expect performance to improve in the second half of the year as demand for our mercury removal products increases following the MATS implementation.

We entered into two supply agreements with coal-fired utility customers that we announced earlier this week, and we have been awarded another two supply agreements that will be announced shortly.

Based on the agreements that have reached to date with customers preparing for MATS implementation in 2015, we have been awarded approximately 50% of the volume, which is consistent with our target for mercury removal.

We are in active negotiations with many additional customers as the industry prepares for the start of the new regulations.

We also recently announced a capacity expansion in Canada with our joint venture partner to meet the future demand for mercury removal products.

This expansion is for 35 million pounds and will cost the joint venture approximately $80 million, and will produce Cabot's benchmark Darko HG family of mercury removal products.

We believe this expansion will provide sufficient capacity to meet the growing demand for mercury removal.

I will now turn to corporate items.

We ended the quarter with a cash balance of $66 million.

Our liquidity position remains strong at $786 million.

During the fourth quarter we generated $147 million of adjusted EBITDA, reduced net working capital by $44 million, and received $20 million for the sale of the Security Materials business.

Uses of cash during the fourth quarter included $91 million for the repayment of debt, $56 million for capital expenditures, and $11 million for share repurchases.

We recorded a net tax provision of $40 million for the fourth quarter, which included $18 million of charges for tax-related certain items.

The most significant tax certain item was a $20 million non-cash valuation allowance taken on deferred tax assets.

Excluding the impact of certain items, our operating tax rate on continuing operations for the fourth quarter and full fiscal year was 27%.

As we look towards 2015, we expect capital expenditures to be between $200 million and $250 million.

We anticipate our operating tax rate for FY15 will between 26% and 28%.

I will now turn the call back over to Patrick.

Thank you, Eddie.

We are pleased to have delivered a fifth consecutive year of adjusted EBITDA growth.

Our focus on emerging market capacity growth, margin expansion, new business and product development as well as portfolio management has allowed us to demonstrate continued earnings growth and a strong cash flow generation.

As we look ahead, we expect modest demand growth in 2015.

This is the result of a weak and uncertain global economic and geopolitical environment.

The recent decline in oil prices continues to reflect low expectations with regard to a near-term recovery.

In addition, we're also not seeing a political environment that should boost consumer confidence.

In the near term, the continued weakness in Europe and South America, a slowing demand environment in China, and the recent weakening of various foreign currencies against the US dollars are all headwinds as we enter 2015.

Of course, we will leverage our global reach and industry-leading positions in order to offset these challenging conditions and continues to deliver value to our shareholders this coming year.

In the longer term, we believe fundamentals will prevail and that continued low demand levels cannot be sustained for an extended period of time.

Thank you very much for joining us today.

And I will now turn the call back over for our Q&A session.

(Operator Instructions)

James Sheehan, SunTrust.

James, please proceed.

Please make sure your phone is not on mute, sir.

Okay, I'm going to remove James from the queue.

John Roberts, UBS.

Good afternoon.

Good afternoon, John.

Could you give us a sense of how the surcharge implementation is going on carbon black?

I would suspect that's challenging, given you mentioned that contract associations may be challenging.

As you can imagine, John, there's been varied reactions to the environmental surcharge and this has been, depending on the customer and their situations.

But of course this is just one factor from many.

But clearly we're dealing with a situation where we're slightly ahead of the industry with our EPA settlement.

This is a decision we made because we wanted to be sure that we could offer security of supply in the long run.

And because we took this leading situation where -- when this necessity to implement the surcharge.

We believe that this will eventually impact the entire industry.

What we hear is that all of our competitors are in negotiations with the EPA, and we believe that this will affect everyone.

And we are also certain that our customers will value our commitment to the North American market that we have displayed through this settlement with EPA.

As a follow-up, Eddie mentioned that the Performance Materials EBIT seasonally is down in the December quarter on a sequential basis.

Will it have an inventory correction in the specialty blacks area, like similar to, but maybe more muted than the rubber blacks area so that it might be down year over year instead of just down sequentially?

I think the reference, John, first of all was to volume seasonality.

Occasionally we do see that.

It really depends on the macro conditions.

I think a couple of years ago we saw a sharp inventory drop.

But it really will depend on how the macro environments for those markets play out over the next couple of months.

Okay.

So you haven't seen anything yet in October, and it's really going to depend how November, December goes?

That's correct.

The end markets are quite different.

So they do behave quite differently.

Thank you.

Thank you.

Kevin Hocevar, Northcoast Research.

Thanks.

Good afternoon, everybody.

Hi, Kevin.

I was wondering, in your outlook commentary for the Reinforcement Material segment, I was wondering if you could give a little more color?

It sounds like you're facing some headwinds in terms of non-repetitive, some raw material purchasing savings that you had last year.

And it sounds like the volume outlook is fairly modest.

Do you think you can grow earnings in this segment in 2015, or are we looking at probably a relatively flattish earnings environment?

The environment is, as you could hear from our earlier prepared speech, more challenging than we would like to see it.

I would say that this is reflecting also indications we got from the tire industry at this stage that is looking at a fairly muted 2015 with fairly low growth.

We, in addition to that, are facing some pressures with regard to lower feedstock savings.

We're seeing that these opportunities have gone away, and these opportunities that we were able to seize the last three quarters.

And then in addition to that, we're also seeing, this is for the entire Company, the foreign exchange pressures coming from a stronger US dollar.

Now, if you go to the various geographies you certainly are aware of a Europe environment where after some pick-up at the beginning of the year, we're seeing a serious flattening of the economic picture.

The South American environment is quite difficult, will most likely not be improved by the reelection of Dilma Rousseff.

We're certainly looking at an extended weak environment.

And then China will likely see some deceleration, although I think we're going to see some more short-term effects in China which could be related to the -- and will be related to the build-up of exports to the US to deal with the tariff situation, which could lead to weaker sales in China, and will also affect the North American tire environment for a while.

So these are all factors that we're taking in and we're trying to draw into a picture.

And I would say that the picture currently for the quarter is a declining environment.

So this is our first fiscal quarter of 2015 compared to the fourth quarter of 2014.

And as I mentioned earlier, fairly muted growth for next year.

Of course, things can change fairly quickly.

But right now I would say not a highly optimistic environment ahead of us.

Okay.

And then in terms of the Purification Solutions segment, I would imagine the visibility is fairly good with all the contracts you've been getting at this point.

So do you have a sense for what type of swing in EBITDA we can expect from the $35 million or so you earned in 2014?

Well, we're certainly looking at a pick-up in the EBITDA performance in the second half of our fiscal year.

We're very pleased with the development of the markets and our ability to capture business.

We're capturing business at the rate of market share that we had targeted for the business, in and around the 50% share.

We still have a number of contracts to be negotiated, but things are on track here, and we will -- and we're continuing to see requests for quotations coming through to us at a fairly rapid pace.

As you remember, the implementation is April -- middle of April 2015.

So a lot of the utilities are now getting organized.

We've got a bunch of tests going on as we speak to make sure that our products are perfectly aligned with the needs of our customers.

So all in all, I would say things are nicely on track with regards to the MATS implementation.

Okay, and then just final question.

With where the oil prices have gone recently, are you seeing any pressure in your specialty fluids business in terms of job quotes?

Has that reduced the amount of deep-sea drilling that you're seeing?

So of course, the oil price is a factor, but just as a reminder we are an ultra-niche play in the oil and gas industry, and we tend to be used in very specialized applications.

So creating a direct correlation between the recent oil price decline and the activity is quite difficult to make.

In general what we;ve said is that we've got a slightly lower project pipeline ahead of us.

But as you know, and you've been following us for some time now, you know that the business can be fairly uncertain in terms of quarter to quarter, and we're just going through a weaker phase as we speak.

Okay, thank you very much.

Thank you.

Laurence Alexander, Jefferies & Company.

Good afternoon.

Two questions.

First, can you give us a sense for how to gauge the possible ramp in the CC business over the next couple of years?

Is there anything externally that we can look out to sort of be the tailwind when that business should have a step-up in profitability?

So Laurence, the business is structured in a way where over a period of time we're going to receive royalty payments of about a $4 million level a quarter.

But there is no factor that would ramp this up in the medium term.

And I guess secondly, as you think about the -- can you walk through a little bit as you think about the contracts negotiations you're seeing in Reinforcement Materials?

And your longer-term goal of having a fairly stable unit margin, excluding raw material pass-throughs?

How well can you reconcile those two, or should we expect some degree of margin erosion, even as the feedstock costs come down?

I would say we -- clearly our intent is to work closely with our customers and provide them with a powerful value proposition.

In the near term, you can see some competitive pressures developing as the environment changes.

We are going through one of these periods as we speak.

If I look at the fundamentals of the business, I would say that we've not seen any increase in supply in the last year or two of any significance.

And growth is continuing, although at a lower rate than we've seen historically.

So at some point we believe there's going to be a pick-up in that annual growth rate, just because of general factors.

And we've still think that a lot of the consumers out there are delaying any purchases of tires.

We think that we're running at a low, low rate of consumption.

As we look forward, we think that the supply/demand environment should be returning to a favorable, or continue to be favorable for the carbon black industry.

But again, as I said earlier speech, we're concerned right now because we're seeing the combination of oil prices coming down and the potential destocking that tends to happen in conjunction with that in the first fiscal quarter.

I guess what I'm getting at, is are you looking at a structural change in your contracts?

So once you back out the near-term fluctuations, should we be thinking about a lower unit margin benchmark for 2016/2017 until the supply/demands picture sort of improves [in mark] (inaudible)?

Also just as a reminder Laurence, we contract somewhere in and around 50% of our business, and most of these contracts are annual.

So they get reset after a year.

I would say there's a lot of factors that get into this picture.

Some of these contracts are regional, some are global.

There's a range of different products from more specialty products to the more mature products.

I would say it's a fairly complex environment as we move forward.

I look at this as a temporary situation that we're going through, and we're clearly looking at optimizing the arrangements that we have with our customers.

Thank you.

Thanks.

Ivan Marcuse, KeyBanc.

Hi.

Thanks for taking my questions.

First one is, what drives the mix reduction in rubber blacks?

Is it a certain tire, or what sort of the -- what changes quarter to quarter that would drive the mix up and down?

It's typically, Ivan, specific products in specific geographies.

Got you.

So it's not a function, more truck tires versus more passenger tires?

I'd say that's probably more consistent across time.

Okay.

And your cash flow for the quarter, what was the biggest delta between this year and last year which drove the reduction of, I guess, $150 million in cash from operations in the quarter?

If working capital was a $44 million source?

Yes, from a year ago's quarter, Ivan?

Yes.

So like a year ago, your cash flow from operations was --

I don't have the number at my fingertips, but we had quite a strong working capital push of the end of last year, which I'm guessing would have driven a much larger improvement.

Okay.

Which is well over $100 million.

So was the working capital -- why were you seeing -- I think you saw it also the year before that, you also saw sort of a similar type of working capital reduction.

So why would that not happen this year?

No, no.

I guess what I was saying is, we had a very strong push a year ago to reduce working capital for year end, and we did not have as strong a push this year.

Okay.

Then if you look at your -- the mercury removal that you've -- these contracts that you've signed, and you mentioned 50%.

Is that market share, or would you expect volumes to rise 50%?

I didn't follow what you said there.

No, the 50% number, Ivan, is our share of the US -- North American market.

If that was to say -- how much would you expect your overall volumes to increase next year?

We're looking at, in the long run, so we've mentioned that the total mercury removal market is and around 100 million pounds this calendar year, 2014.

We believe that sometime in the 2017 period, we believe the number will be in the vicinity of 400 million to 500 million pounds, total market.

Okay.

And then my last question is, if you look in 2015, I understand that there's not a lot of growth and there's some puts and takes, but Norit should be a pretty big swing to the positives.

Do you think -- should you expect to see EPS growth?

We, as you know Ivan, we don't provide that guidance.

What I could say is that we're certainly looking at strong performance from the MATS implementation and the Purification Solutions business, as well as new products that are coming to market and price increases that we've initiated.

I would say on the Performance Materials side we're continuing to see strong performance into next year.

The end markets that we're looking at, such as automotive and construction, are coming off a fairly weak period.

So we're continuing to see good potential there.

And then if I look at Reinforcement Material, I think we're going to need to see how, over the coming months, the global market and the regional markets develop.

At this stage we're taking a fairly, let's say stable approach.

We're not sure that the market will grow at the traditional expectations of around of 3% to 4%.

Indications are for the tie industry of about 1% to 2%, perhaps, next year.

Okay.

Great, thanks.

Thank you.

Jeff Zekauskas, JPMorgan.

Hi.

Good afternoon.

Good afternoon, Jeff.

What do you plan to do with your free cash flow next year?

Jeff, I think the answer that we have typically given is that we put free cash flow towards three or four key things.

One is reinvestment in the business, which is obviously CapEx.

Right.

Second, obviously will be things like dividends, returning cash to shareholders.

Things like dividends and share repurchases.

And then the third is, obviously to the extent there are growth opportunities, M&A-type opportunities.

You'll see that in the fourth quarter we continued our dividend payment, and we were able to buy back a small amount of shares.

Given that we've now strongly returned back to BBB-plus credit rating, I think we have a bit more flexibility in terms of what we can do.

And I think we feel good about that.

Right.

You sort of -- that is, if you take down all the debt you're going to pay down, absent -- and you, I don't know, you increase your dividend to some degree.

You're still going to have, I don't know, a couple of hundred million, at least, in free cash flow.

So will you build cash on the balance sheet or will you keep your cash more or less where it is and, buy back shares with it or will you build cash?

What do you plan to do it?

I think we will see how that plays out over the next several months, particularly as it relates to things like working capital.

Right.

Capital investments and those opportunities to return cash to shareholders.

Okay.

In terms of your working capital, I think year over year your inventories went from something like, call it, $460 million to $500 million and your receivables went from $635 million to $686 million.

Why is that?

Is your working capital efficient now, or is there room to improve it?

I know you said that you had a big push in the previous year.

What led to the pull?

A couple things.

One is we acquired a fair bit of working capital with the NHUMO acquisition, which I think we've discussed throughout the year.

We've also built some working capital because of the growth associated with bringing our new Chinese Jiangxi facility online.

There was some bounce-back that took place in the beginning of the year related to the push that happened the year before.

So all of those things combined, our working capital days are actually down almost 10% year over year.

So from a working capital management perspective, what we typically do operationally is look at the number of days and try to manage those.

Okay.

In your Chinese facility, you ramped up the facility through course of FY14.

What utilization rate did you get to?

And are there economic benefits to Cabot because you're now at a higher rate of utilization?

Maybe my memory doesn't serve me right.

I think you used to say that it was costing you something like $20 million a year, and you should be able to get some benefit as that drag reversed.

Yes.

I would say that we have probably gotten it to 80%-ish.

I don't have the exact number.

We ramped it up relatively quickly, and we were able to cover those fixed costs by sometime, I would say halfway through the last fiscal year.

I think we had transitioned from it being negative to being not a negative carry.

The plan for the Jiangxi ramp-up and commercialization was to get close to full utilization about a year after start-up.

This is what we've been experiencing with our operations in China over the years, and Jiangxi has been falling into that frame.

Okay.

In Purification Solutions, exclusive of the insurance reimbursement, I think this year you lost a little bit more than $25 million on EBIT on, call it, $320 million in revenues.

Why do you lose money?

Why isn't the margin in the business intrinsically better?

Do want me to take it, Patrick?

Yes, why don't you take it.

Jeff, one of the issues -- a couple of the issues.

So obviously we've had a number of operational issues, which we believe are behind us.

And so we ought to be able to get costs in better shape going forward.

The second is, over the last couple of years we lost some of the -- the mercury removal market actually declined in North America, which I think we have been explaining over the last couple of years.

As that turns around, the fixed cost absorption becomes much better in the business.

We had to deal with some of the asset write-ups, and quite frankly, when you write up the asset and then something breaks, there is typically a small write-off that is associated with it as well, which contributes to some of the fixed cost issues.

So it's been a bit of a struggle, particularly having lost some of that volume early on and having been hit with the cost issues.

We would expect to start to see some of that get quite a bit better starting in April of 2015.

So you've had operational issues, but the amount of EBIT that was lost in the fourth quarter was more than in any other quarter, or about equal to the first quarter.

So why was it at -- why was it the case that the EBIT really hasn't improved, even though your operational issues are smaller?

We typically look at it, Jeff, to try to normalize for some of acquisition-related write-ups on in EBITDA basis, but your analysis is not too far off either way.

And so we have been plagued by the cost issues for pretty much the entire year, which is why you didn't see anything go away in the fourth quarter.

When we tell you that we feel like it is behind us, it is because we are looking forward and saying okay, we think that things are running in a very stable way now.

And that we feel pretty good, knock on wood, that going forward we won't be having those types of cost issues.

Will we see the improvement in the first quarter, or will that take a longer period of time?

I guess the way I would like to describe it is, we'll start to see some substantial improvement come April of 2015 when we see the volume growth and we get a lot of these issues behind us.

Okay.

And lastly, I think your average prices in your Reinforcement Materials are down.

Can you talk about what's created that?

Is there a geographic bias to the downward movement in price?

Is it competitive conditions?

Is it pushback from the suppliers?

Sort of what's behind the price and that might have been stronger?

So Jeff, this is Patrick.

What we're seeing there is the rapid pass-through of feedstock into the final prices.

So that's the effect you're seeing there.

So it's not really so much of a net downward movement as it is the reflection of raw material price changes?

That's correct.

Okay, good.

Thank you so much.

Thank you, Jeff.

Christopher Butler, Sidoti & Company.

Hi.

Good afternoon, everyone.

Hi, Chris.

Sticking with purification.

As we look at the sequential volume improvement from third quarter, which is typically heavy water treatment quarter to the fourth quarter, what was it that you saw the -- with seasonality kind of working against you a little bit?

Where did you see the volume growth sequentially?

In water and gas and air.

Seasonally the fourth quarter is stronger in water.

I'm sorry.

I thought that the spring quarter was a stronger water quarter.

No, It's the summer quarter.

It's our fourth quarter, our fiscal fourth quarter.

As we look out to April and the compliance, could you give us an idea of how many coal plants do you think are going to need to comply in April versus April of 2016 versus plants that shut down?

The current assessment that we have, and we track every one of the utilities in the US, is that we think roughly 60% of the utilities have asked for a stay and a delay into 2016.

So what we're currently seeing is that approximately 40% of the utilities will be requiring activated carbon in April of 2015, and then the remainder will kick in in 2016.

And as we look at your specialty fluids business, looking at your full-year numbers from that, about $37 million of EBIT by my calculation.

Is that the good starting point to then think about the 10% to 20% adjustment for the rental business?

Or has that adjustment started already and therefore I'd be a little bit heavy-handed with the cut?

I think it's a good starting point.

We have implemented a more strict selection process with regard to which projects we would engage in.

We're going to be favoring, of course, all of the rental type projects where we think we can minimize the loss of material.

We're certainly believing that a stronger conservation approach to the cesium atom is what's required here going forward.

It does not change the fact that the visibility on the projects is still, and the project pipeline is still very dependent on many factors that are not related to the cesium formate.

We're a little bit at the whim of when our customers decide to engage in a completion or a drilling phase.

That pipeline right now is slightly weaker, but it can change fairly quickly.

I appreciate your time.

Thank you.

Jay Harris, Axiom Capital.

I want to apologize for this question before I go into it.

You're in so many different businesses, and I guess we're at inflection points in many of them.

Let me sort of go through the issues, and if you'd like me to pursue it offline, I'd be happy to do that.

Carbon black, raw material costs, crude oil's come down from $20 a barrel.

Why isn't cycle oil getting cheaper?

Are we, to the extent that you're getting raw materials out of coke ovens, have coke activities declined?

Fumed metal oxides, that business sort of has flattened out.

Why?

Inkjet colorants, what were the reasons for the decline in revenues?

I know you're looking for commercial printing to pick that up.

Aerogel, when do you see a turnaround in projects?

I presume the elastomer composites are on a sort of a steady course of growth, and the difference this year is the lack of progress payments.

And finally, specialty fluids.

What is that business capable of sustaining on a revenue basis if your customers have presented you with the projects?

How do you want to handle all of that?

I think we're going to handle that offline, Jay.

But let me just say that, against the -- first of all, it's our business to run these operations and it's a complex enterprise.

And we're paid to manage the challenges, but I also against all of these challenges can that we've had a lot of successes.

So, I do want to remind everyone that we've had five years of consecutive EBITDA growth in a fairly muted economic environment.

And I would say that this certainly proves that the Cabot team knows what it's doing.

But there were just too many factors here, Jay, for me to engage on.

And I would suggest that we take that offline because we have limited time this afternoon, if that's okay with you.

That would be fine.

Thank you.

Kevin Hocevar, Northcoast Research.

Thanks for taking my question.

Can you -- I was just curious in terms of the -- you mentioned that you've (inaudible) sequentially a softer Reinforcement Materials.

Is that strictly a volume question, or that also an earnings question?

Because I believe that there is a good amount of maintenance typically in the fourth quarter.

So just curious if you could -- if it's both, or if it's just strictly sales and volume?

So Kevin, so maintenance is going to be kind of in line with last quarter.

So the first fiscal quarter will be fairly close to the fourth fiscal quarter.

In terms of looking at first fiscal quarter, we're seeing potentially lower volumes, and I also mentioned that the feedstock savings that we've seen in the past will not be most likely captured this quarter.

Okay, and I was wondering too if you could quantify how much these -- between Reinforcement Materials and Purification Solutions, the one-time kind of raw material savings that you had in Reinforcement and one-time issue costs that you had in Purification Solutions.

Eddie, do you --

Kevin, I don't think we've gone as far as to quantify on Reinforcement Materials, raw materials, in part because of we view that as a strategic activity for us.

Okay.

All right, thank you.

Thank you.

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

So thank you very much for joining us this afternoon, and we're looking forward to seeing you over the course of the quarter and engaging with you at the next earnings call in January.

Thank you very much.

Thank you very much.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.