Cabot Corp (CBT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Q4 2016 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

I would like to introduce your host for today's conference, Steve Delahunt. You may begin.

Good afternoon, I would like to welcome you to the Cabot Corp earnings teleconference. Last night, we released results for our fourth quarter and full FY16, copies of which are posted in the Investor Relations section of our website. For those on our mailing list, you received a Press Release by e-mail. 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.

During this conference call we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading, Forward-Looking Statements, in the Press Release we issued last night, and in our Annual Report on Form 10-K for our fiscal year ended September 30, 2015, and is filed with the Securities and Exchange Commission and available at www.SEC.gov and on our website at www.CabotCorp.com as well as subsequent filings with the SEC.

In order to provide greater transparency regarding our operational performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in the table at the end of our earnings release issued last night and available in the Investors section of our website at www.CabotCorp.com.

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 award issued under our long-term incentive equity program, officers of the Company may sell shares to pay tax and other obligations related to their rewards.

I will now turn the call over to Sean Keohane, who will discuss the key highlights of the Company's performance; Eddie Cordeiro will review the business segment and corporate financial details. Following this Sean will provide closing comments and open the floor to questions.

Sean?

Thank you, Steve. Good afternoon, ladies and gentlemen.

I am pleased to share with you our results for the fourth quarter and full-year FY16. As a Company, we feel very good about our fourth-quarter performance as we delivered strong results driven by higher margins and lower fixed costs.

The Reinforcement Materials segment delivered its strongest EBIT quarter since the first quarter of 2015. While the Performance Chemicals segment had another strong quarter, delivering EBITDA margin in excess of 30%. The Purification Solutions segment realized significant year-over-year growth resulting from the full implementation of MATS, and the Specialty Fluid segment continues to see the benefits of diversifying its customer base.

Now moving to the full-year 2016, on a consolidated basis for FY16, we generated adjusted EPS growth of 16% as compared to the FY15. The Performance Chemicals segment delivered a third consecutive year of record EBIT based on improved margins, lower fixed cost and solid volume growth in both specialty carbons and formulations and metal oxides.

After a challenging first quarter, the Reinforcement Materials segment demonstrated improvement throughout the balance of the year, as we realized the benefit from the calendar year 2016 customer contracts. The Purification Solutions segment had significant volume growth in FY16 compared to FY15, largely from the MATS implementation, while the Specialty Fluids segment saw a year-over-year increase in project activity despite a low oil price environment.

We exceeded our cost savings target of $50 million and generated strong cash flows, which were used to return over $100 million to shareholders.

On the strategic front this quarter, we announced the intention to build a new fumed silica plant and the groundbreaking of our Asia Technology Center in China.

In 2016, we introduced a new vision, corporate strategy, and financial framework. Our vision defines our aspiration for the Company and guides our strategy. Our vision is that we will be the most innovative, respected and responsible leader in our markets, delivering performance that makes a difference.

This vision provides clarity of purpose, and our strategy called Advancing the Core lays out the road map for extending our leadership in Performance Materials by driving three key themes. First, investing for growth in our core. Second, driving application innovation with our customers. Third, generating strong cash flows through efficiency and optimization.

In 2016 we have successfully begun to implement this new strategy across a number of our businesses. For instance, our commitment to growing our core is exemplified through the agreement that we signed with Hengyecheng Silicone Company to form a fumed silica joint venture in China. This agreement will allow us to meet growing demand for our high-quality, high-performance fumed silica enabled by a long-term reliable source of feedstock.

In addition, we also recently announced our plan to open a new Asia Technology Center in Shanghai. The new facility is evidence of our commitment to developing deeper application understanding and delivering innovative formulation solutions to our customers. As China transitions to a period of more moderate growth, innovating and collaborating more closely with our customers is an essential element of our growth strategy.

Our work to improve the efficiency of our operations and optimize our performance is evidenced by our 2016 cost reduction initiative. We reduced costs by over $60 million in FY16 compared to the prior year. This performance exceeded our $50 million target and has improved the competitiveness of our operations and contributed to our strong earnings growth year over year.

We also introduced our capital allocation framework, which targets returning 50% of discretionary free cash flow to shareholders. In the fourth quarter, we generated $66 million of discretionary free cash flow and returned $33 million in the form of dividends and share repurchases. In FY16, we generated $252 million of discretionary free cash flow and returned $104 million to shareholders.

Overall, I'm very pleased with the progress we are making, and I'm confident in our ability to deliver attractive and sustained total shareholder return based on the combination of EPS growth and cash returned to shareholders.

I'll now turn the call over to Eddie to discuss the financial results of the quarter in more detail. Eddie?

Thanks, Sean.

During the fourth quarter of FY16, the Company delivered strong year-over-year results driven by higher margins and lower fixed costs. As compared to the prior year, we delivered EBIT improvement in our Performance Chemicals, Reinforcement Materials, and Specialty Fluids segments. Purification Solutions EBIT was flat year-over-year as significant growth in MATS volumes was offset by the negative impact from inventory reductions. We also generated strong cash flows from operations and repurchased 300,000 shares for $15 million.

During the fourth quarter of 2016, EBIT for Reinforcement Materials increased by $11 million as compared to the fourth quarter of 2015. The increase in EBIT was principally due to higher unit margins, driven by improved pricing and mix. The benefits were partially offset by lower volumes in EMEA and Asia, primarily due to our plant closure in Merak, Indonesia.

Sequentially, Reinforcement Materials EBIT increased by $7 million compared to the third quarter of FY16 driven by higher unit margins from improved spot pricing in China and Europe as well as favorable feedstock sourcing in Asia South and South America. In addition, the segment benefited from inventory builds in advance of plant turnarounds that will occur in the next quarter. Higher unit margins were partially offset by seasonally lower volumes in the Americas and in EMEA.

Full-year FY16 EBIT in Reinforcement Materials was down $6 million primarily due to a difficult first quarter. Beginning in January, the business benefited from improved calendar year contracts, spot pricing and cost savings initiatives as the segment delivered progressively stronger quarters throughout the year.

Now, turning to Performance Chemicals, EBIT in the fourth quarter of 2016 increased by $9 million compared to the fourth-quarter FY15. The increase in EBIT was primarily due to better price and product mix and lower feedstock costs in the specialty carbons and formulations business and lower fixed costs across the segment.

Sequentially, Performance Chemicals' EBIT decreased $5 million compared to the third-quarter FY16, primarily due to seasonally weaker volumes partially offset by lower fixed costs and favorable mix. Sequentially, volumes decreased by 7% in specialty carbons and formulations and by 3% in metal oxides.

For the full fiscal year, Performance Chemicals' EBIT improved by $47 million over FY15, which was the third consecutive year of record results for this segment. The improvement was driven by higher margins, strong cost management and a 3% increase in volumes year over year in both specialty carbons and formulations and metal oxides. EBITDA margins for the segment was 32%.

EBIT in the fourth quarter of 2016 in Purification Solutions was flat compared to the same period last year. The segment benefited from significantly higher MATS volumes and lower fixed costs from our cost savings initiatives, which were offset by a $5 million unfavorable inventory impact and less favorable price and product mix compared to the prior year.

Sequentially, Purification Solutions' EBIT increased by $2 million compared to the third quarter of FY16 driven primarily by higher volumes related to both MATS and non MATS demand. The segment also benefited from a $2 million favorable impact from inventory levels, which decreased at a slower rate in the fourth quarter of 2016 compared to the third quarter of 2016. These effects were partially offset by a less favorable price and product mix.

For the full year EBIT in the Purification Solutions segment decreased by $10 million compared to the FY15 due to a $29 million unfavorable impact from reducing inventory levels versus last year's inventory build in anticipation of the MATS implementation, lower prices and a less favorable product mix. These effects were partially offset by significantly higher MATS volumes and lower fixed costs.

In the fourth quarter of 2016, EBIT in Specialty Fluids increased by $7 million compared to the fourth quarter of 2015 as we benefited from an increased level of project activity in both the North Sea and Asia. Sequentially, Specialty Fluids EBIT decreased $5 million compared to the third quarter of 2016 as we saw reduced rental activity due to the timing of North Sea projects.

For the full year, Specialty Fluids' EBIT increased by $7 million compared to the FY15. Higher project activity levels resulted in higher rental and sales volumes for our drilling fluids in both the North Sea and Asia. In addition, the segment was successful in reducing costs as part of our companywide cost reduction initiative.

I will now turn to corporate items. We ended the quarter with a cash balance of $200 million, and our liquidity position remains strong at $1.2 billion. During the fourth quarter of FY16, cash flows from operating activities were $91 million, including an increase in net working capital of $4 million.

Capital expenditures for the fourth quarter of FY16 were $32 million. Additional uses of cash during the fourth quarter included $18 million for dividends and $15 million for share repurchases.

During FY16 we generated $386 million of cash flow from operations, including a decrease in net working capital of $43 million. Capital expenditures for FY16 were $112 million. Additional uses of cash during the fiscal year included $65 million for dividends and $39 million for share repurchases.

During the fourth quarter of FY16, the Company recorded a net tax provision of $13 million for an effective GAAP tax rate of 19%. This included a tax benefit from certain items of $7 million. The operating tax rate for the fiscal year ended September 30, 2016 was 24%.

As we look towards 2017, we expect capital expenditures of approximately $150 million to $175 million and we anticipate an operating tax rate of 24% and are not currently anticipating a significant impact on LIFO accounting for 2017.

I will now turn this call back over to Sean.

Thanks, Eddie.

Looking ahead to 2017, we remain intensely focused on driving or advancing the core strategy. After three years of record EBIT growth in Performance Chemicals, we believe earnings growth in 2017 will likely moderate. In the year, volume growth in fumed silica will likely be more challenging as the electronics industry continues to migrate away from the use of fumed silica in the CMP application.

However, for most application areas, growth prospects are robust and we continue to see success in new product development across the segment. Furthermore, we continue to strengthen our foundation for the future as evidenced by our recent capacity announcements in fumed silica and specialty compounds.

The market for Reinforcement Materials remains mixed. We continue to see strength in Europe driven by solid demand and the recent plant closure announcements by competition. In North America, the long-term fundamentals for tire growth remain solid, although there may be some increased tire inventories to work through following new Chinese anti-dumping duties in the US.

In terms of emerging markets, South America remains weak, while we are optimistic that we are seeing early signs of improved market conditions in China. Our annual contract negotiations are progressing well, and we will be able to give you a much clearer view at the end of the calendar year.

In the Purification Solutions segment, we anticipate solid performance based on the continued strong growth in the MATS related business combined with an improvement in variable cost and the negative impact of inventory reduction subsiding, all of which keep us on track to deliver the seasonally adjusted $4 million to $5 million of EBIT per quarter that we mentioned on last quarter's call. The first quarter is typically our weakest due to the seasonality of MATS volumes and water purification markets, and we expect the first quarter of 2017 to follow that trend.

For the Specialty Fluids segment, we continue to pursue opportunities outside of the North Sea with a number of projects in the pipeline that support our outlook of continued solid performance in 2017. As always, the performance of this business is sensitive to the timing of large projects, which we expect to be more heavily weighted to the back half of 2017.

Overall in 2017, we remain confident that our strategy will deliver top-line growth consistent with our end-market exposures. In addition, we will continue to invest in new product and process technology, seek to capture the operating leverage from improving utilizations, and pursue growth investments including bolt-on M&A in our existing businesses.

We will continue to target 7% to 10% EPS growth annually over time, which when combined with returning 50% of our discretionary free cash flow, will deliver sustained and attractive total shareholder return for our owners.

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.

Good afternoon, everybody.

Kevin.

Wonder if you could help -- you called out Reinforcement Materials sequentially pricing and helping out. Wondering if -- I think you had pricing actions in a lot of areas of the world, in Europe and China and North America. Could you elaborate on where -- which areas are having the most success? Remind us, I think only really spot business was being impacted; what percent of the business was being impacted by those pricing actions?

Sure. Kevin, maybe I will start with Europe. In Europe, the spot market represents about 15%, 1-5, of our business. As you called out, we have had pricing actions in the spot market over the last number of months, and I would say that those have gone well and are consistent with our view of how this market is developing as we are in the contracting season here. Demand remains solid, and there have been some supply-side plant closures that have been announced. I would say that story is developing largely as we have discussed with you on previous calls.

In North America it's basically a contract market, and so there's not really much to say there about spot. The largest single spot market that we have is China, and we are pleased to see that we are seeing at least some early signs of market conditions firming up a bit there, which is positive, and hope that continues as we progress into 2017.

Okay. You mentioned -- I'm not sure what you can say at this point with contracts. I think they typically wrap up over the next month or so. Is there any directional indicators? Maybe you can't give us too many specifics, but do you expect positive pricing, the net result of those contract negotiations in 2017, or what are you able to tell us at this point about that?

A bit difficult to get into any details here, Kevin, as we are in the midst of contract negotiations and obviously this information is competitively sensitive. I can't say much in terms of specifics, but perhaps I can help a little bit in terms of what we're seeing in each of our regional markets. I'll remind you that our annual contracts are largely North America and EMEA. We have some contracts in South America and Japan but largely North America and EMEA.

As I commented on the spot situation in Europe, we continue to see strength in Europe driven by solid demand as well as the impact from some recent plant closures, so that remains, I think, positive and consistent with what we've laid out.

In North America, the long-term fundamentals for tire growth I think remain solid. We've seen announcements over the last several years of a number of new tire plants and certainly seeing those coming online and further ones under construction.

We are watching carefully, however, the near-term impacts from some softness in the OTR market, as well as overall tire inventory levels, given the apparent channel stuffing by Chinese TBR producers in advance of the anti-dumping duties that recently went into place, so something that we are watching here.

South America is continuing to experience a fairly tough macroeconomic environment, but we are hopeful to see some improvement starting in 2017. Then in Japan, where we also have some business under contract, I would say while market growth is fairly flat, the situation is largely balanced.

Hopefully, that gives a little bit of context about the environment.

Very helpful. Last one and then I will jump back in the queue. You mentioned in your guidance a weaker sequential earnings outlook due to normal seasonality and some higher costs from the plant turnarounds. Wondering if you could elaborate that on a little bit more? Because I looked back, and if I look sequentially from 4Q to 1Q the last couple years, one year it was down 35%; one year it was down 6%, in terms of EPS; one year it was up 10%. Wondering if you could elaborate what is normal seasonality here, and what type of impacts you would expect from the plant maintenance?

I'll try to help a bit here. Certainly, Q1 is our lowest quarter in terms of just underlying activity, and I think a couple of things drive that. Number one is a lot of our customers, most of our customers, are on calendar year fiscals, and so we always see a certain amount of inventory management, which in combination with the holiday season causes the quarter to be slower.

Then in Purification Solutions, now as this business after a few years is fully in the portfolio and we've seen the ramp-up of MATS, we definitely see that Q1 is their weakest quarter. That's really because it's a shoulder season in terms of electricity demand, so the combination of that as well as the seasonally slower water market, which is driven more by overall temperatures, that's why at sort of a fundamental level you see this sort of a weaker Q1 from a seasonal perspective. Nothing fundamental, but really just the seasonality that goes along with these businesses.

Now on the cost side, in the quarter, the timing of our maintenance turnarounds are always moving around a bit depending on specific situations, and we do have a bit of a heavier turnaround load in the quarter versus the past quarter. That will have some impact on the quarter. Again, the timing of maintenance turnarounds can be somewhat lumpy and really depend on specific situations at different plants.

Thank you.

Laurence Alexander, Jefferies.

Good afternoon, it's actually Dan Rizzo on for Laurence. There's a lot of moving parts, but as I recall, there's a $0.10 gain from the debt refinancing, should be about $0.25 and a $0.20 tailwind from -- I'm sorry $0.20 from cost cutting and $0.25 from Norit. Does that suggest that 2017 could be higher than 7.7% EPS growth, or is there some sort of offset that I'm not really thinking about?

Hi, Dan, how are you?

Good, how are you?

Good. Well, I think in terms of 2017, we continue to see the Reinforcement Materials business is progressing well, and we've seen improvement throughout each of the quarters in 2017. We're pleased with that, but a significant amount of the outcomes here will depend on how contract negotiations go, number one.

I think, number two, in terms of Purification Solutions, I'm not sure I followed your numbers there. I think the best way to think about Purification Solutions as we see the impact of inventory effects abating, we are looking at a run rate on a quarterly basis in the sort of $4 million to $5 million range EBIT. There will be some seasonality to that, but that's a reasonable way to think about things.

Then in Performance Chemicals, we are expecting that despite having had three strong years of record earnings growth that the growth rate will moderate a little bit, as I called out earlier. Those are sort of what's happening. As it relates to our targets, while we haven't committed to achieving the 7% to 10% EPS growth rate every single year -- it's more of a longer-term target -- we believe it's something that is within our reach in 2017.

All right. Thank you very much.

Ivan Marcuse, KeyBanc Capital Markets.

Hi. Thanks for taking my question.

Hey, Ivan.

How are you doing? Real quick, in terms of the turnarounds for plants is that all in the Reinforcement business? Sequentially, fourth quarter to first quarter, how much more is planned cost would impact the quarter?

Well, the maintenance turnarounds will cut across both Performance Chemicals and Reinforcement Materials, but there will be a noticeable step-up in maintenance activity in Q1 for Reinforcement Materials. As I said earlier, I think the timing of these moves around a little bit, and this is how the sequence of it kind of flows in 2017.

The other thing that's happening in Q1 is in anticipation of these turnarounds you typically build inventory, which is what we did in Q4; we built some inventory. Then while we're down for the turnarounds in Q1, we will be drawing inventory, which will have a short-term impact on EBIT. The combination of the higher maintenance spending as well as the draw of inventory in the quarter will have some impact. That's what we're getting at when we call this out.

Got you. How much of a benefit was the inventory build?

I'm sorry?

How much of a benefit was the inventory build in the fourth quarter?

A few million dollars is the way to think about it, I think, Ivan.

Okay. Great. The Indonesia plant that you are closing, I thought it was going to close at the end of January 2016. Is this sort of a slow ramp down that we saw in that quarter, and how much of a drag should it be in volumes looking out in 2017?

No, you are correct, Ivan. This closed in January of 2016, so I think that reference earlier was on a full-year basis talking about the volume. That plant is closed, as we communicated January of 2016.

Got it. In the Performance Chemicals, it looks like -- if my math is right -- in the fourth quarter the price mix sort of de-accelerated down a lot sharper than it had in the previous three quarters. Is that more mix, or is that just the pricing getting a little bit more aggressive in that business? It looks like you had a pretty strong benefit from price of the raw materials throughout the year. Should that reverse out as we go into 2017, or should that maintain?

So, I think a couple of things on Performance Chemicals in terms of overall pricing: First of all, I think, as you know, the amount of feedstock linked business that we have is much smaller here than it is in Reinforcement Materials, so it ends up -- while there is some of that, it's more of a spot type of a business.

As we look at the past quarter here, we definitely saw some benefit from -- in unit margins -- from the difference between raw material costs and pricing. That is something that did help us on the full-year basis as well as overall in improved product mix. In any given quarter, you can see some movement in the mix, which you could think about as both a regional mix as well as mix across a diversity of applications.

I would say overall the fundamentals of the business remain really strong here. We are really pleased with the long-term performance of this business, and so we are happy with where things stand.

Okay. I may have missed it in your prepared remarks, and/or I misunderstood what Dan just said. If you look at the refinancing that you are doing for the debt, what should your interest expense be for -- or where you're expecting to be for your FY17, how to think about it through FY17 versus what it was in 2016?

Ivan, maybe I would ask Eddie to help with that question?

Hi, Ivan. I think, based on the lower rate we were able to achieve on the long-term debt offset by maybe some slight increases we are seeing in some of our shorter-term debt, you'll probably see something in the $3 million to $5 million less of interest for the year, as we sit here today. Obviously, that will depend on if rates change on the short-term stuff.

Okay. Great. Thank you. I'll jump back in the queue.

Jeffrey Zekauskas, JPMorgan.

Hi. Thanks very much.

Hi, Jeff.

Hi. How much did specialty carbons grow in volume this year, and how much did Reinforcement Materials grow in volume for the full year?

Specialty carbon formulations grew 3% on a full-year basis, and we feel that is consistent with where market was. Reinforcement Materials was, on a full-year basis, down 2%.

Down 2%. Do you have a sense of how much the overall carbon black market will grow, if it grows at all in 2016?

You're talking in 2017, Jeff?

2016, and then if you can forecast 2017 for the market as a whole, and why the growth rate might be a little different in 2017? That would be great.

I think it's useful to look at this in terms of specialty carbons as separated from our Reinforcement Materials. So, I think, in 2016, market growth in that 3% to 4% range is probably about what's happening when you look at the composite of different applications in specialty carbon. So, I think that's a reasonable way to think about it.

As we go forward into 2017, it's difficult to project with great specificity, but if you look at the applications, auto builds, the trends on polymers, since a lot of this goes into plastic applications, I think something in that range is a reasonable thing for 2017.

In Reinforcement Materials, I think it's important to first, when you look at the overall number, reflect on the fact that for most of the year we had the closure of our Merak, Indonesia facility impacting our numbers. This is largely explaining the negative down.

As we think about growth in this business over the longer term, we do see the fundamentals are intact there, and it's something that does typically trend towards a GDP type of a number. I think that remains the case here because you're seeing that miles driven and the level of industrial activity would be what would be kind of underpinning that.

That remains our long-term outlook, and I don't see any change there. But quarter to quarter you can see some movements as regional flows, and depending on how inventory chains feel on empty, you can see some movement there.

Okay. In Purification Solutions, how much did volumes grow in 2016? Is your expectation for improved profits next year based more on your cost structure or on volume gains?

Say it again, Jeff? In terms of -- I didn't catch the second part around costs.

So I was wondering how fast in volume terms did Purification Solutions grow this year? In terms of your optimism about profit growth in that area next year, does that depend more on additional volume growth or cost reduction or what's behind your belief that it will improve?

Sure. With respect to the volume profile for the business on a full-year basis, it increased 6% on a full-year basis in FY16. As we roll forward -- I realize a lot of moving parts here in this business, if you step back and look over the last couple of years with the uncertainty around MATS and then the implementation of it as well as the strategic inventory build that we did to support that ramp up, there are a lot of moving parts here.

I think the best way to think about it is that this business should be looking forward here delivering in the sort of $4 million to $5 million EBIT a quarter. There will be some movement seasonally, depending on volume, so some quarters a little lower, some quarters a little higher. That's going to come from a few different components that give us confidence there on a year-over-year basis.

One is that we'll see a full year of MATS volumes, whereas we didn't have a full year this year. We also are expecting, based on the operation of our raw material mine, that we will see some improvements in the variable costs coming through. We are seeing that today, but as we started up a mine some time ago, the initial costs were a little higher and those are rolling through the numbers. So we'll see some improvement there.

Then on an absolute basis in 2017, we are not expecting any impact from inventory. But on a comparable year-over-year basis, we would see a tailwind of about $10 million, so that would be appearing 2017 versus 2016.

When you add all that up, those would be the components that give us confidence in that $4 million to $5 million a quarter number, again with seasonal variation in it.

Okay. In the prepared remarks, there was talk about Cabot would distribute I think 50% of its discretionary cash flow back to the shareholders. What happens to the other 50%? Where does that go?

As we had outlined on Investor Day, Jeff, I think our strategy here, called Advancing the Core, is about growing and growing from our core areas of strength. When we laid out our capital allocation framework, we said 50% will be invested in ourselves for growth and 50% will -- of the discretionary free cash flow -- will be returned to shareholders in the form of dividends and share repurchases. That's our capital allocation framework.

The 50% that we're investing in ourselves is things like driving growth in our businesses in terms of the underlying market growth, making investments in things like the new fumed silica investment that we just announced, continuing to drive investment in efficiency gains, yield, energy recovery, things like that as well as new products. All of those things we will continue to invest half of our GFCF to grow our core and about half to return to shareholders.

We feel that that combination, that balance, of driving EPS growth and cash returned to shareholders is going to put us in a very good spot in terms of being a very attractive TSR package for our shareholders.

Thank you very much for that. Lastly, can you comment on the longer-term outlook for Specialty Fluids? That is, how long do you have sufficient inventory or sufficient production, or can you frame the three- to five-year picture for that business?

Sure. First of all, with respect to inventory and reserves to drive growth in the future, we are in a good position here and have outlined that we've got a pretty substantial reserve here. We've done some projects to access additional cesium in our mine and feel comfortable about that.

While that's much more clear, I think the challenge is trying to project the demand side in this business. We've certainly come off -- with high oil prices, there was a much higher level of activity, and the oil shock has certainly had some impact on this business.

That being said, a couple of things I think are worth noting. Even in today's sort of relatively low oil environment, and we seem to be kind of range bound in the $40 to $50, we are seeing improvements in the activity level in the financials. That says something about even today's oil environment the value proposition here.

The other thing we are trying to do is diversify outside of the North Sea and have had intensive market development efforts focused in Asia-Pacific, India, Middle East, and we're seeing progress on those starting to show in our numbers.

I think the longer-term fundamentals in terms of the demand side are there, and we see plenty of evidence of that in terms of the value proposition. The inventory on the supply side, I think we're in good shape on. The difficulty here will be quarter to quarter trying to project the project activities, just very difficult in this business.

Okay. Great. Thank you so much.

Chris Kapsch, Aegis Capital.

Hi. Good afternoon. I had a couple questions surrounding primarily the feedstock differential subject. I was actually knocked off the call for a few minutes, so if you addressed this already I apologize.

The question really is how those feedstock differentials and recent trends may influence the ongoing contract negotiations in the RM segment, And your ability to manage price, as you put it, which is, I think consistent with the core strategy you've laid out, Advancing the Core. In the last couple of quarters, you talked about differentials being still sort of a headwind in Europe, more benign in North America, I think it's mixed elsewhere, but typically more benign than maybe it was a year ago.

I'm just wondering if that's still the backdrop as you go into these annual contract negotiations, and if so, how does that affect your ability to go after price? Can you only get pricing if there is a scenario where the feedstock differentials are working against you? If that's not the case, what is the conversation like for your ability to get pricing and that value proposition for customers?

Sure. Let me try to tie off a little bit on the feedstock situation. I think you've got it largely right, Chris.

As we've commented in the last few quarters, we have seen that the differentials in North America have kind of largely reverted back to the long-term historical norms. We certainly saw some favorable peak differentials a couple of years ago. If we look at where they are today, we see that back in line with the long-term historical norms.

All of that makes sense because what you see today is that more Asian carbon black producers are buying their feedstock out of the Gulf Coast, which is putting a little more demand-side pressure on things and therefore favorable differentials disappear a little bit. That nets back to largely long-term historical norms.

In Europe, we have called out, in recent quarters, that we felt there was a little more of a structural issue here as the formulas that we have with our customers were no longer approximating our feedstock costs. We discussed our intention to address this in the contract negotiations, and we are in fact doing that. I think it's something that is pretty important and understood by our customers that this has to be addressed. That situation, I think, is moving in a positive direction.

I think the broader question around discussions with customers around contract negotiations really comes down to a basket of different variables in terms of overall products: Product performance that they're looking for. Things like how is supply and demand in a given region? How do various customers value quality, consistency, supplier reliability? All of these factors -- what sort of product development activities do we have with certain customers? All those play into the overall negotiation mix.

Okay. That value proposition, which is the direction, you think about that in more North America which is predominantly I guess under contract? Can that conversation be beneficial from a pricing standpoint without adverse differentials also in your -- on the table as part of the discussion?

I think if there are adverse differentials, as we are addressing in Europe, those are things that have to be addressed with customers, and we are doing that now.

With North America having largely returned to sort of long-term historical norms, we see that that that's not really a structural issue so much as we do see in Europe. I mean to the extent that those things do diverge, then we absolutely have to have those conversations and help our customers to understand this, that this is important in terms of ensuring long-term viability of their carbon black supply.

Okay. We'll look forward to hearing more on that on the outcome of those discussions. Could I just follow up one on the PC segment and specifically the metal oxide? You mentioned -- I know there is this shift going on from fumed to colloidal silica in the CMP application. How big a piece of that overall business is your fumed silica for the CMP application currently? Then to offset that, you cited that the opportunity of the new plant in China, just wondering how big an offset is the weakness on the fumed silica side in the CMP application? And is that opportunity, is it a typical on-site sort of take-or-pay fixed margins sort of opportunity? How do the economics flow for that new plant? Thanks.

I think, on the CMP application, it's not a huge piece of the overall volume but it is a good business for us. If you think about that application and the performance and quality demands in that application, it commands a certain value price as a result. This is going into the semiconductor industry, and so things like quality, consistency, management of change, these sorts of things are really paramount here. It is something that we are dealing with as that application moves away from fumed.

That being said, the segment and the metal oxide business in total has a diverse set of applications. We continue to have success developing new applications. An example, it's underpinning some good momentum in 2016 and into 2017, is fumed silica in gel batteries, which are used in e-bike applications in Asia, China and India, for example.

This is a relatively new and growing application. Part of running this business well is dealing with churn and constantly developing new applications, so this is precisely what we are doing. The impact in 2017 of this CMP falloff might be a bit of a temporary thing as we come behind that with new applications.

Just order of magnitude on the plant in China, if you can put any parameters around that? Will that on-site customer take all of your production, or will it be just partially loaded upon start-up?

The way to think about that is we have a long-term agreement with our silicones partner and that partner does a couple of things. Number one, provides a long-term stable source of feedstock to our fumed silica production, and then, to a certain extent, will consume some of the offtake out of that plant for their downstream elastomer compounds.

A significant portion of that volume will also be sold by us out in what we call the merchant market to third-party customers. Over the last few years, we have had really strong momentum in the fumed silica business in terms of volume growth, and this capacity underpinned by a competitive feedstock structure is important to continue to keep growing this business. This is a great business for us.

Okay. That's helpful. Thank you.

(Operator Instructions)

Jim Sheehan, SunTrust.

Hi, Sean. Could you tell us what Cabot's rubber black utilization rates are by region?

Hi, Jim, how are you? Overall, our utilization rates are in the low 80%s in Q4, but there are differences by region. In certain regions we're tighter and on certain asset classes, while others we have some available capacity; so we don't typically comment on the regional picture. I think, based on my earlier comments, you can probably get a sense for how things kind of shake out regionally.

Great. How much pricing would you need in the 2017 contract season to enable you to reach maybe the 7% to 10% long-term earnings growth target?

I'm not going to get into a specific there, Jim, because we are in the middle of negotiations right now. I think safe to say that we have a lot of activities that are underway right now, and we feel that long-term target combined with the cash return is the right financial framework for us. We feel, as it relates to 2017, that that is something that is within our reach here.

All right. Thanks a lot.

Okay.

I'm showing no further questions at this time. I'd like to turn the call back over to Sean Keohane for closing remarks.

Great. Thanks, everyone, for joining us and for supporting Cabot, and look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.