Cabot Corp (CBT) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Cabot Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Steve Delahunt, Vice President, Treasurer and Investor Relations.

Please go ahead.

Thank you.

Good afternoon.

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

With me today are Sean Keohane, President and Chief Executive Officer; and Eddie Cordeiro, Executive Vice President and Chief Financial Officer.

Last night, we released results for our first quarter of fiscal year 2018, copies of which are posted in the Investor Relations section of our website.

The slide deck that accompanies this call is also available on 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, in our last annual report on Form 10-K that is filed with the Securities and Exchange Commission, and available on the company's website.

In order to provide greater transparency regarding our operating 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 a table at the end of our earnings release issued last night and available in the Investor section of our website.

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, and good afternoon, ladies and gentlemen.

I am pleased to see the improvement in operating results on a year-over-year basis with segment EBIT up 19% and adjusted EPS up 9%.

The Reinforcement Materials segment delivered a 55% increase in EBIT, driven by benefits from the 2017 calendar year customer agreements and our favorable spot pricing environment in Asia.

The segment also benefited from China spot price increases in advance of higher feedstock cost.

In the first fiscal quarter of 2018, we completed calendar year negotiations with our major tire customers.

The result was a positive one as we realized price gains across all regions while maintaining market share.

Europe remained strong with favorable supply and demand fundamentals, which allowed us to strengthen pricing while achieving volume gains in line with the market growth rates.

In the Americas, North America fundamentals remained positive and the South America economy continues to recover, all of which resulted in us achieving price increases while, at the same time, growing volumes in the region consistent with the market environment.

And in Asia, we achieved significant price increases, bringing our contract pricing more in line with the current spot market, which is how the majority of our volumes are sold in that region.

The Performance Chemicals segment experienced a solid quarter despite continued feedstock headwinds and a step-up in cost associated with investments to drive long-term earnings growth.

We've been successful in raising prices to partially offset higher feedstock costs.

The Purification Solutions segment benefited from growth in the specialty applications and the accelerated receipt of royalty payments, partly offset by lower pricing in the mercury removal application.

Results in the quarter were also impacted by the enactment of the Tax Cuts and Jobs Act in December 2017, which resulted in a tax charge of $185 million in the first quarter.

We expect the cash impact related to tax reform to be minimal due to Cabot's significant foreign tax credit position.

In addition, we generated $45 million in cash from operating activities.

We invested $52 million in capital expenditures in the quarter while returning $36 million to shareholders through $20 million in dividends and $16 million of share repurchases.

Let me talk about China for a minute because it had such a significant impact on the quarter.

As I mentioned last quarter, the Chinese government continues to increase the level of environmental enforcement against noncompliant companies as they focus on the air quality index, particularly during the winter months.

Cabot benefited in the quarter from these actions in a few different ways: first, through improved pricing resulting from environmental-related curtailments of many of our competitors, which impacted supply in the market.

Second, the tight market situation allowed us to achieve price increases in advance of recognizing higher feedstock costs, which will not repeat in Q2.

And third, the limited carbon black supply in China impacted the amount of exports into Asia south, resulting in better spot pricing for our business in that region.

It's hard to say what will happen in the environmental enforcement area coming out of the winter season and what the impact might be on pricing, but overall, we feel good about the China market heading into Q2 and believe we are well positioned for the rest of the year.

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

Eddie?

Thank you, Sean.

I will discuss the segment results beginning with Reinforcement Materials.

During the first quarter of 2018, EBIT for Reinforcement Materials increased by $22 million as compared to the first quarter of 2017.

The increase in EBIT was principally due to higher unit margins and volumes.

The higher unit margins were driven by an improved pricing environment in Asia and favorable 2017 customer agreements.

In China, the business also benefited from the timing of price increases ahead of rising feedstock costs.

Sequentially, Reinforcement Materials EBIT increased by $14 million compared to the fourth quarter of fiscal 2017, driven by higher unit margins primarily due to spot pricing in Asia.

This is partially offset by a sequential decrease in volumes of 2% due to seasonally lower volumes in the Americas.

Looking ahead to the second quarter, we expect a benefit from the 2018 customer agreements and a favorable spot pricing environment, partially offset by higher fixed costs and seasonal volume weakness in China.

Now turning to Performance Chemicals.

EBIT decreased by $2 million compared to the first quarter of fiscal 2017 due to lower margins from rising feedstock costs and higher fixed costs, partially offset by higher volumes and benefits from price increases.

Volumes increased by 9% in the Specialty Carbons and Formulations business and 4% in the Metal Oxides business.

Sequentially, Performance Chemicals EBIT decreased by $8 million compared to the fourth quarter of fiscal 2017 primarily due to seasonally lower volumes, partially offset by higher margins due to the realization of price increases.

Sequentially, volumes decreased by 5% in Specialty Carbons and Formulations and by 9% in Metal Oxides primarily from seasonal demand.

Looking ahead to the second quarter, we expect to see a pickup in volumes that will be partially offset by higher fixed costs.

First quarter fiscal 2018 EBIT in Purification Solutions increased by $2 million compared to the first quarter of fiscal 2017 due to higher volumes in specialty applications and the receipt of accelerated royalty payments, partially offset by the unfavorable impact from a prior year inventory build which did not reoccur in the current quarter.

Sequentially, Purification Solutions EBIT decreased by $4 million compared to the fourth quarter of fiscal 2017 driven primarily by a favorable product mix and receipt of royalty payments as compared to the prior quarter.

These favorable impacts were partially offset by lower seasonal MATS and North America water purification volumes.

Looking ahead to the second quarter, we expect higher volumes from specialty applications that will be offset by lower MATS volumes and an increasingly competitive MATS pricing environment.

First quarter fiscal 2018 EBIT in Specialty Fluids decreased by $4 million as compared to the first quarter of fiscal 2017 due to a lower level of project activity.

Sequentially, Specialty Fluids EBIT decreased $5 million compared to the fourth quarter of 2017 as we saw reduced project activity in the North Sea.

We expect a similar level of project activity for the next quarter with an uptick in activity in the second half of the year.

I will now turn to corporate items.

Effective October 1, 2017, we elected to change our accounting related to inventory costing for U.S. carbon black inventories from the LIFO method to FIFO.

This change was primarily made to conform to our accounting for all other carbon black inventories and has been retrospectively applied to all periods presented.

We ended the quarter with a cash balance of $189 million, and our liquidity position remained strong at $1.2 billion.

During the first quarter of fiscal 2018, cash flows from operating activities were $45 million, including an increase in net working capital of $50 million.

Capital expenditures for the first quarter of fiscal 2018 were $52 million.

As we look at the full year, we expect capital expenditures to be approximately $250 million.

Additional uses of cash during the quarter included $20 million for dividend and $16 million for share repurchases.

We recorded a net tax provision of $205 million for the first quarter, and our year-to-date operating tax rate was 21%, which also represents our current forecast for the year.

The $205 million provision recorded for the first quarter includes $185 million of discrete tax charges related primarily to the recent enactment of U.S. tax reform, including provisional estimates for a transition tax on previously untaxed foreign earnings, a revaluation of U.S. deferred tax assets and liabilities, and deferred tax liabilities on unremitted foreign earnings.

No material cash impact is expected as a result of the U.S. tax reform due to our existing foreign tax credits.

As new information becomes available, the company may update these amounts.

I will turn the call now back over to Sean.

Thanks, Eddie.

We're very pleased with our first quarter results, and we feel good about the current business environment.

Looking across the segments.

Reinforcement Materials is well positioned for growth in the second quarter after a successful 2018 tire customer negotiation season and a positive price environment in Asia.

However, we will not see the onetime benefit from China price increases in advance of rising feedstock costs that we experienced in Q1.

We now expect fiscal 2018 segment EBIT to be in the range of $230 million to $250 million.

In Performance Chemicals, we expect to benefit from a stronger second quarter.

While we have made progress with price increases, future success in recovering fully the rising feedstock cost in specialty carbons will depend on market conditions.

Our fiscal 2018 segment EBIT expectation remains in the range of $200 million to $215 million.

The Purification Solutions segment continues to experience positive momentum in the specialty applications but also faces ongoing competitive pressure in mercury removal pricing and volume, so we continue to expect EBIT of $10 million to $15 million for the fiscal year 2018.

And finally, in the Specialty Fluids segment, we have had a series of significant commercial successes, but project delays will result in a slow second quarter and a wider segment EBIT range of 0 to $10 million for the fiscal year 2018 with the majority of earnings occurring in the fourth quarter.

Based on our current view of the market and economic conditions and our updated outlook for each of our segments, we have raised the expectation of adjusted EPS for 2018 to be in the range of $3.80 to $4.20.

In closing, we remain confident that our strategy will deliver top line growth consistent with our end market exposures.

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.

And finally, we continue to focus on creating shareholder value through generating strong discretionary free cash flow and reinvesting that in our core businesses as well as returning cash to shareholders.

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) Our first question comes from Laurence Alexander from Jefferies.

Could you touch on 2 things: first, so with the Rubber Blacks contract settlements, how you think about how that will lap through this year and implications for maybe the first half of next year?

And secondly, can you give us a view on working capital uses this year and what that will lead to in terms of your free cash flow conversion for the year?

Sure, Laurence.

Let me talk a little bit about the tire contract.

So we're pleased with where the results came out this year.

And as we think about it, we see that the medium term, I would say, is pretty positive for this business.

When I think about the fundamentals here that drive it, we're talking about overall economic activity, and we're certainly in a pretty positive environment there.

And so that is leading to solid demand growth pretty much everywhere around the world.

So I think that's positive.

And then when we think about the supply side, there are -- certainly have been no material supply side additions planned at this point.

So given the time line for investments like that to come on, we would expect that the environment should remain similar to slightly better as we progress out through the next period of time here.

So I think that's overall a fairly positive view.

I think the wildcard will be how things play out in China.

Certainly, we expect and believe that the environmental enforcement across all of industry in China is a trend that is here to stay, but exactly how implementation happens is always -- can be a bit volatile in China and somewhat opaque.

So I think the long-term trend is clear but how it plays out in the near term.

So I guess just wrapping all of that up, I see a pretty good outlook here as we look out over the next period.

I think on the working capital question, we saw our step-up this quarter, and that was in part because, as you know, as oil goes up, which it has been quite a bit, we're sitting right now -- I think Brent is in the $70 range so probably a high of the past few years.

And so that creates kind of a onetime step-up in the balance sheet, and so we saw a certain amount of that flowing through this quarter.

But I think as you look at our expectations for discretionary free cash flow generation that we communicated when we rolled out our new targets, we feel confident that we'll be in that range for the full year.

And then lastly, I guess, just with your comments about sort of the relatively favorable conditions for the next period, what are -- can you speak a little bit to how you think about your criteria or industry criteria, whichever you think is more appropriate, for capacity additions?

And has that -- has the industry changed its focus compared to what we saw in, say, the 2000 to 2005 or 2008 period?

Yes.

I do think the situation is changing with respect to investment.

I think a couple of things are different this time around.

If you look over the last, I would say, 15 years, the bulk of capacity that came on in this industry came on in China, and I think the environment has changed there in terms of environmental enforcement, emission controls, things that either weren't enforced and certainly not part of the investment case.

I do think that, that trend is very different today, number one.

And I think this overall trend around environmental enforcement everywhere in the world is here to stay.

And so that means that in order to get recovery on those emission control investments, then we need more price realization in order to have good returns on invested capital for our shareholders.

So I do think the fundamentals are different.

I mean, the way that we think about it is, first and foremost, from a quality of returns perspective for our shareholders.

So we're certainly looking at the returns on invested capital in these projects and making sure that they are at or better than our cost of capital so that we have quality first in returns and growth second.

I think that's the way to think about it.

Our next question comes from Jeff Zekauskas from JPMorgan.

I think back in maybe 2013, you took an $85 million environmental charge connected with emissions in carbon black in the United States.

How much of that have you actually paid so far?

So you're right, Jeff.

When we first announced the settlement, the consent decree with the EPA, we gave an estimate.

I think in subsequent filings, we raised that estimate to reflect what our latest view is there.

And now you'll notice that, recently, the EPA has settled with the remaining carbon black producers in North America, which I think is an important outcome.

And so I think now we see expectations around emission controls all in a very similar place in terms of both the degree of emission control and the timing of schedule.

Now because that settlement came later for some, our schedule has been revised to match that.

So I would say there's equivalency, but there has been some spending that has already occurred at Cabot.

I would say, of our estimate, probably somewhere about 1/3 of it has already been committed, and then the balance will now be realigned with the settlements for the rest of the industry.

And committed means spent or will be spent in the future, I'm sorry?

It basically means spent.

It means spent, okay.

So you said that negotiations in price in carbon black went well in the United States.

So what does that exactly mean?

And my understanding of carbon black contracts is that companies have a raw material pass-through on a contractual basis, and so my guess is that it means that you have a greater return above raw material cost or greater price above raw material cost.

Is that what that means?

Or does it mean something else?

No, that's what it means.

So you're right in that there is a pass-through of the raw material movement, and so the price increase is often described as a base price increase.

So you could think about it in a high level as there's a base price and then there's the pass-through of the feedstock cost on a formula.

So when we talk about price realization here, we're talking about a real base price increase to reflect where market is right now and, I think, also where it needs to be to deal with further investments such as your earlier question around environmental controls, et cetera.

So that's how it works.

Okay.

And you didn't really get a benefit from that price increase in this quarter because -- in the quarter you just reported because the prices are really effective as of January 1. Is that right?

That is correct.

We -- where we saw price benefit in this quarter was in the spot markets, which is principally Asia Pacific.

There is some spot market in Europe, very little to speak of in North America.

So it's principally Asia, and we did see a benefit there from spot pricing increases in both China as well as rest of Asia.

So while Rubber Black margins or Reinforcement Material margins are widening out, is it the case that specialty carbon margins are contracting because there isn't as successful a price dynamic and raw materials have moved up?

So raw materials have moved up, and we're definitely chasing that right now.

I think with feedstock costs rising in this business -- as I said, Brent is kind of near a 3-year high right now.

I think it's imperative that we move prices up and preserve the underlying margin structure here.

We're in the process of doing that.

You might remember from earlier calls we announced, sometime in the last summer, 2017 had some limited success here; more recently, have had more progress in implementing to recover.

And we're continuing to do that.

So I think while raw materials are not kind of a reflex adjustment in a specialty business like this, it is an important input factor here and one that has to be managed.

And given where oil is going, I think it's imperative that we continue to go after this and move the prices up, and we're in the process of doing that already with some success underway.

Okay.

And then lastly, your minority interest was $10 million for the first quarter, and I think maybe it was $4 million last year.

Is that, I don't know, an Indonesian joint venture and this reflects the high spot pricing in China market?

Or why is the minority interest up so much year-over-year?

Jeff, this is Eddie.

Good question.

And really the bulk of that is the fact that our China business is up.

And so we have joint ventures there.

In 2017, there was also a couple of areas where we had some, call it, onetime benefits which really depressed that $4 million.

On a like basis, the $4 million would have been closer to $6 million or $7 million, and that difference is really the growth in China.

Our next question comes from Jim Sheehan from SunTrust.

In Performance Chemicals, it looks like your specialty pricing is lagging a bit behind feedstocks.

In what quarter do you expect that to catch up?

Jim, so as I just said, I think managing this is critical for this business, and we're in the process of that right now with some success under our belt and I think more that needs to happen in order to recover this.

So we'll be expecting over the next quarter or 2 that we'll continue to work to recover this.

The challenge we're facing is we're, in a bit, chasing oil because oil has been sort of steadily marching up as we've been out increasing prices.

So I think our challenge here for the year will be to continue to implement.

And over the next quarter or 2, we should see continued implementation here.

And I think effectiveness of pricing will, in some ways, come down to market conditions and how that plays out.

And on the consent decrees in the U.S., would you expect that to result in any capacity reductions in the United States?

Well, difficult for me to say because I sit in here inside of Cabot Corp., and everyone else is inside their own company.

So it's hard for me to tell.

The only thing I can say is that it's a significant investment, as you know, and it's an investment that needs to be recovered.

I would -- without some price recovery, it's an unproductive investment, and so, therefore, that needs to happen.

And I think the cost of environmental controls is going up across the carbon black industry, across chemicals in general.

And so that ultimately will have to result in pricing getting passed on through ultimately down to the consumer, and I think that's what needs to happen here.

But I suppose everybody goes through their own calculus of the cost of environmental controls relative to the scale and efficiency of the plant, and there are differences between scale across different plants and efficiency across different plants.

And so I could imagine running through that calculus and you kind of reach a plant-by-plant decision.

So that's how I think about it.

Your U.S. and European volumes were very robust this quarter.

How sustainable is that through the rest of the year?

And also, in Asia, do you see volumes recovering there after some of the environmental shutdowns are resolved?

Yes.

So I think the important thing, there can be movement quarter-to-quarter, Jim, on the tire volumes.

And so you can see, certainly, as you point out, in Americas and Europe, they were strong growth rates over the prior quarter, but you can have some funny comparisons there.

The way to think about it is we're trying to grow at the market growth rate, and we would expect the full year to converge on that when all is said and done.

And I think in Asia Pacific or particularly China, there probably will be some lingering impact across the industrial landscape from this whole environmental impact.

We've certainly seen some tire companies have been impacted by this as well as just sort of general and industrial players.

So we'll have to see how that plays out there in the coming year, but my expectation is that, probably over time, the demand remains robust, but there's some shakeout on the supply side across all of the different industry players, whether it's at the tire level of the chain or upstream, at the sort of chemicals and raw materials level of the chain.

In China, is your feedstock inflation more intense than in rest of the world?

So in -- I mean, in China, it's principally a coal tar market and -- whereas rest of the world tends to be a decant oil market, and so you have different drivers going on there.

So in coal tar, that's largely driven by the steel value chain.

More steel, more coking; more coking, more coal tar is kind of the way it works.

And so in the steel market, we're certainly seeing that China is shifting now from less virgin steel to more recycled.

And in recycled, you don't need coking, so less coal tar.

So we're certainly seeing the fundamentals in China tighten up around coal tar supply/demand, which is pushing coal tar prices up.

On balance, we view this as a favorable thing because our China investments support China, and everybody is on a coal tar basis there.

But it takes away the export advantage that they had when there was a coal tar [Arab open], and they were exporting carbon black to Asia south and Japan and Europe.

We see that, that has diminished significantly.

And our view structurally is, if you look back at the steel value chain, we don't see that really changing at this point as we look at it.

And our next question comes from David Begleiter from Deutsche Bank.

Sean, just on the MATS pricing, given the pressure, are you considering idling any more capacity like you did, I think, late last year?

I think our efforts there have been appropriate at this point to kind of realign the cost structure and capacity to where we see things, but it's something we'll have to continue to watch very carefully here.

So at this point, we think it's appropriate, but we have to keep watching it.

And just on CapEx, I know a big increase this year to support the 2 fumed silica plants.

But going forward, should we see -- how do you expect CapEx to trend maybe in '19, even '20 based on your current plans?

Yes.

So what you see this year compared to the last couple of years is a different profile of growth capital.

So if I could sort of bring you back to our long-term targets and our TSR objective, we're going to invest about half of our discretionary free cash flow in growth and about half return to shareholders.

And so you're starting to see the growth part of that come through.

We've got a couple of fumed silica projects going on right now as well as some other debottleneck options across the carbon black network.

So I think that growth profile is a good thing.

It'll ensure that we can drive the long-term delivery of our targets, and I would expect you to see kind of a similar mix over the next year or 2 as we have a healthy amount of growth investment.

Our next question comes from Chris Kapsch from Loop Capital Markets.

Was just hoping to get a little bit more color on the affirmative price realization that you got in the base oil pricing as a result of the annual contract negotiation.

Can you parse out that outcome?

Maybe quantify it in terms of the magnitude by region.

Was the net realization North America comparable to what you might have gotten, say, in Europe and Latin America?

So maybe a little bit of color on the contracts.

And as you know, they sort of break out by region.

So I'll start with Europe.

And in Europe, we continue to see steady growth on the demand side, which is good.

I think fundamentals there are pretty good in terms of miles driven and vehicle registrations and just overall economic activity.

So that's good.

And on the supply side, we saw no additions and, in fact, last year, some net reduction.

So the utilizations remain high in Europe, and so as a result, market pricing overall did move up and moved up stronger than, let's say, North America and Europe.

But that would be, I think, expected and consistent with what we've been talking about.

Now in the Americas, we see the fundamentals here looking good but something that will play out over the next couple of years as we see the tire investments kind of come on fully.

And then we also see where things go around the EPA consent decrees and investments that have to happen there to support emission control.

So on balance, we were able to realize stronger pricing in the Americas than we were, I think, perhaps thinking might be the case.

But I think the fundamentals support it, and so that's positive.

But I would say not at the same level of Europe.

And then in South America, it's really a question of the economy improving there, and we're definitely starting to see that.

So there are differences by region and -- kind of directionally, how I laid them out there.

Okay.

So then just to follow-up on that.

So it sounds like the affirmative pricing in North America, say, is better than you would have expected, even if lagging Europe.

But -- so I'm wondering about the dynamic in North America specifically.

And as it was associated with the negotiations, was -- the ability of the industry to get pricing this year, was it a function of the tire customers feeling good about their outlook that is allowing the industry to get pricing?

Or is it more a function of like it just so happened that coming into the end of this season or calendar 2017, essentially all the players knew they were going to be settling with the EPA and having to be making these environmental investments, and so there's a little bit more of a push to get pricing?

Was it more the former, a function of improving visibility on demand for the tire guys, or the latter?

I would say it was probably a mix of those things, Chris.

I think, certainly, our customers care about quality and supply reliability, number one.

And with the fundamentals in North America trending in a good direction for them, having the right suppliers and the right supplier relationships in place is important to them.

And then I'm sure that there's also a factor related to the EPA capital because

you have to earn a return on that capital, and so ultimately, that does have to get, I believe, passed through all the way down to us as consumers in the price of our tires.

And so I'm sure that there was some of all of those factors playing out here.

Okay.

And then, I mean, another nuance perhaps, and it follows up on comment you made about the Chinese carbon black industry and being less competitive and unable to export regionally at least because of higher costs.

I think the same could be said for the low-cost tire industry in China with its costs sharply higher suddenly, the competitiveness of them to export to the U.S. maybe.

So I'm wondering if that is also playing into the outlook for the tire companies if they're seeing less competition from low-priced imports, which is allowing them to feel better about their domestic growth forecasts.

I would say it's possible, but I think that that's probably over a bit longer arc, Chris, because the world has become structurally dependent on China for tires.

China makes somewhere around 40% of the world's tires.

And so those moves don't -- they took a long time to play out, and I think they would take a long time to change.

You'll see some on-the-margin stuff going on, where you might see some tire production move to Asia south or somewhere else, but I think there's a longer-term structural move there that doesn't happen quickly.

So are the tire customers looking to rebalance their regional production and supply chains a little bit as a result?

I would say probably, but I -- you can't make those sorts of moves given how structurally dependent the world is on Chinese tires.

Okay.

And then if I could, just one follow-up on the -- your market in China.

Like do you have a sense for what percentage of local capacity was taken out by these government actions?

And given the conversation about the crude coal tar feedstock move, I mean, isn't it fair to say -- I understand there's some aspect of a onetime benefit, but aren't the moves in spot pricing over there for carbon black more than accounting -- more than making up for the feedstock increases that you're seeing?

Yes.

I mean, I think in China -- well, first of all, it's difficult to sort of put a specific number on what was taken out because, in China, you have a lot of producers and then you have implementation that's happening really at different provincial and, even in some cases, municipal levels, where you're seeing curtailment behaviors play out.

So it's not so easy to sort of put a number to that.

But I think it's pretty clear it's happening.

And we saw it in the marketplace, and we saw it in our engagements with customers.

And it resulted -- has resulted in higher pricing.

I just want to clarify one point.

So the nonrecurring piece that I talked about was simply just that we had some benefit in Q1 related to very swift pricing actions ahead of the accounting flow-through of the raw material.

And so it's simply that, that benefit that won't occur (sic) [recur].

The price movements up because of the environment will remain at least as we sit here now so...

Our next question comes from Michael Sison from KeyBanc Capital Markets.

This is Connor Cloetingh on for Mike.

So first, I was wondering if you could bucket the different levels of your EBIT margins for the grades that you sell in Reinforcement Materials?

And by any chance, was there any change in mix in the quarter that helped with some of the margin improvement?

Yes.

So I won't break out the margin structures in the business, but I think what's important to understand is, yes, you're right, there are a range of different products that we sell into the tire and Reinforcement Materials -- both industrial products and tire applications, and there are sort of ranges of performance and ranges of value and, therefore, ranges of price.

And we continually look to try to improve the mix.

That's an important lever we have in the business, and we certainly saw some of that play out in Q1.

For example, in a tire application, the more highly reinforcing tread grades are more valuable than carcass grades.

And so trying to, through new products, manage the mix in a favorable direction, that's something that we consider ourselves to be very good at and something that's really important in this business.

Okay, great.

And then just on the specialty carbon side, you got 9% volume improvement in quarter.

Can you tell us what the price improvement was?

So I won't specifically talk about that, but I think the key thing here is that raw materials have continued to trend up, and so it's really important that we continue our efforts here to recover that and maintain the margin structure in this business.

And I think there's still some further work to do there to reach that objective, and we'll be pursuing that over the coming quarter or 2.

Okay.

And then just to follow up on that, is there any raw material pass-through in the specialty carbon side?

Or is that all just more pricing that is on an annual contract basis, more or less?

Yes.

So there is some, but I would say the majority of this business really is, first and foremost, sold on a kind of performance or value and application basis.

But the feedstock costs are an important input factor, and so when they move as significantly as they've been moving, they have to be managed in terms of pricing.

So it's not kind of a reflex price movement the way that you would see with the formula pass-through in Reinforcement Materials, but it's an important input factor.

And again, when you see -- when you just have some kind of volatility but it's staying largely in a band, then you see pricing here more on a value basis.

But when you have a sharp move, as we've had, it's an input factor that has to get managed.

And so that's what we're out trying to do.

Okay.

And then, I guess, just lastly, with the strong volume increases you've been seeing in specialty carbons, are there any plans to increase capacity on the specialty side?

Yes.

So a couple of things on this front.

I think one is we intend to support the continued growth in this business, and so we're looking at a range of different options and executing a number of different projects from things that we're doing today on converting certain units.

So there are certain units in reinforcement that either can be used or modified to produce certain ranges of specialty carbons, and we're always looking at those and acting on those.

And then as we go forward to support growth, the next thing we would do is look at what are the most cost-efficient debottlenecks that we have in our system.

And then the third thing we would do over time is look at completely new units.

And I think over the long arc in this business, we'll probably see a mix of all of those.

But right now, quite a bit of effort around optimizing our units and modifying capacity to support growth in specialty carbons and looking at good, smart debottlenecks to support the growth.

And I am showing no further questions from our phone lines.

I would now like to turn the conference back over to Sean Keohane for any closing remarks.

Great.

Thank you, Crystal.

Thank you, everyone, for joining today and for your support of Cabot, and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a wonderful day.