Cabot Corp (CBT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Cabot Earnings Conference Call.

(Operator Instructions) Also as a reminder, this conference call is being recorded.

At this time, I'd like to turn the call over to your host, to Steve Delahunt.

Please go ahead.

Good afternoon.

I'd like to welcome you to the Cabot Corporation earnings teleconference.

With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and CFO.

Last night, we released results for our fourth quarter and full 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 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, 2017 that is filed with the SEC 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 on the Investors section of our website.

Also, as we do typically each year, I'd 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 will be selling shares to pay tax and other obligations related to their awards.

I will now turn the call over to Sean Keohane, who will discuss the key highlights of the company's performance.

Erica McLaughlin will review the business segments 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.

We are very pleased with our fiscal 2018 performance as we delivered a record adjusted earnings per share of $4.03, representing a 14% increase compared to fiscal 2017.

In terms of highlights, our strong commercial and operational execution drove outstanding results in Reinforcement Materials as the segment delivered record EBIT of $279 million, up 45% as compared to last year, driven by volume growth, targeted mix improvements, higher pricing and increasing utilization levels.

We continued to make advantaged growth investments in fiscal 2018 as we announced our plant expansion in Indonesia and a global debottlenecking program, which, combined, will add approximately 300,000 metric tons to our worldwide carbon black network through 2021.

In addition, we completed the acquisition of the NSCC Carbon plant in China, which we plan to upgrade to produce specialty carbons.

These advantaged investments will allow us to continue to meet the growing demand for our rubber and specialty carbons products.

Both the Indonesia expansion and the new plant in China will contribute to the future growth of our carbon black businesses starting in 2021.

In addition, our 2 new fumed silica plant investments in China and the United States remain on schedule, with our Chinese plant coming online in the fourth quarter of fiscal 2019 and the U.S. plant scheduled to come online in 2020.

Our Tech Blend specialty compounds acquisition continues to perform well, and we are successfully leveraging the synergies between our leading particle franchises and our unique downstream businesses.

And finally, we continue to make great progress with our investment in energy materials, as evidenced by revenue growth of 70% in 2018 and successful program qualifications with the major global battery manufacturers.

These are all examples of how Cabot is making advantaged investments in our core businesses to drive future growth for the company.

Cash generation remains a core strength of Cabot, and in fiscal 2018, we generated $299 million of operating cash flow despite a significant working capital headwind largely due to higher oil prices.

We generated discretionary free cash flow of $254 million, with a return of $222 million to shareholders through dividends and repurchases.

On a full year basis, this represents $100 million in excess of our 50% target through incremental share repurchases.

We remain confident with the cash-generating power of Cabot, and as such, earlier in the year, we announced the dividend increase of 5% and an increase in our share repurchase authorization of 10 million shares, with the expectation that we will repurchase 400 million of shares over a 3-year period.

In [2016] , we launched our strategy Advancing the Core, which lays out the road map for extending our leadership in Performance Materials.

The outcome of our strategy will be measured by sustained and attractive total shareholder return and underpinned by clarity and commitment to capital allocation.

Specifically, we are targeting top-tier shareholder return from 7% to 10% adjusted EPS growth over time combined with a capital allocation commitment to return 50% of discretionary free cash flow to shareholders.

The results of our strategy are clear as we continue to deliver on our commitments.

In 2018, we grew volumes above the market rate of 4%, realized 14% adjusted EPS growth, generated strong cash flows and returned more than 50% of discretionary free cash flow to shareholders.

These results were achieved while making significant investments to support sustained earnings growth in the future.

The result of our execution was total shareholder return for the year of 15%.

Since the announcement of our strategy in 2016, we have successfully achieved each of our targets through disciplined execution and balancing growth investments with cash returned to shareholders.

Overall, I'm very pleased with our performance in 2018, both in the delivery against our financial objectives in the face of some challenging headwinds toward the end of the year and the balance of strategic investments that we were making to drive long-term sustained performance.

I remain confident in our ability to deliver attractive and sustained total shareholder return based on the combination of EPS growth and cash return.

Let me turn now to China.

With all of the recent commentary about China in the financial press, I think it is important to give you an update on what we are seeing there in terms of market dynamics and the impact on Cabot.

Let's first talk about the market overall.

China is the world's second largest economy and is projected to grow in the 6% to 7% range into the future.

The country is also the largest market for the automotive, silicones and plastics segments, which are 3 key value chains for Cabot.

China produces approximately 40% of the world's tires, and as such, the global tire market is structurally dependent on China.

And with evidence of some slowing in light vehicle demand over the last few months, their strong production in the first half of the year led to vehicle inventory build.

This slowdown in vehicle demand means that OE tire demand and some industrial rubber products and specialty carbons and compounds demand also slows.

On the other hand, replacement volumes make up 75% of China light vehicle tire production and 85% of China heavy commercial vehicle tire production.

This high proportion of replacement tire production serves both the domestic Chinese market as well as the global export market as Chinese tires supply replacement markets all over the world.

Thus, demand trends for these tires are linked to miles driven trends globally, and this volume picture remains robust.

That's the overall market view.

Now let's discuss Cabot's position.

We have a true market leadership position in China in our Reinforcement Materials segment with 3 world-class carbon black plants, key customer relationships with leading Chinese and multinational tire manufacturers and the most advanced product offering in the market.

Multinational tire companies producing in China have greater exposure to the OE market as their sales are over-indexed to new vehicles, while Chinese tire manufacturers have significant exposure to the replacement market, both in China and for export.

With our broad market participation, we are well positioned, and we have not seen an impact on our business.

In fact, in the fourth quarter, our volumes increased by 6% in China.

This trend has continued into October for us.

As the preferred supplier to the industry, tire companies continue to seek out Cabot as a supplier partner because of our commitment to sustainability, product performance, reliability, quality and service.

In terms of the Performance Chemicals segment, the slowdown in light vehicle demand is a factor impacting specialty carbons and specialty compounds demand.

Volumes in both of these product lines decreased in China in September and October by low single digits.

We believe this to be temporary given the solid underlying fundamentals for further car penetration and the likelihood for government-sponsored stimulus programs to positively impact demand.

In our fumed silica business, demand growth remains robust as the silicone industry continues to expand in China.

After the planned turnarounds in the fourth quarter with our fence-line partner, solid volume growth resumed in October for our fumed silica business in China.

Looking ahead to the winter season, when we expect emission limits to be strictly enforced again, we anticipate that volumes and pricing will remain solid for us and environmental curtailments of our production will be limited due to our best-in-class environmental controls.

We observed continued evidence that China remains committed to stricter environmental enforcement.

Since last year, they have lengthened the winter curtailment period by starting in October, and they have increased the number of cities under the 26+2 emission limits.

While these are strong signals of the government's commitment to environmental enforcement, this is a balancing act for the Chinese government, and we expect the situation to be dynamic as we progress through the winter months.

Finally, with regard to the trade dispute between the U.S. and China, it is important to recognize that there have been U.S. tariffs on Chinese tires for many years, and in fact, there are brand-new EU tariffs on Chinese truck tire imports.

And increasing the level of tariffs typically results in a combination of both higher prices to an end consumer and trade flow changes, meaning imported tires to the U.S. may come from another lower-cost producing country, while Chinese-produced tires will be sold in other countries.

This is what the industry experienced in the first wave of tariffs on Chinese tires.

Given that China produces approximately 40% of the world's tires, there is a structural dependency on Chinese-produced tires that will likely result in a shifting of trade flows and higher prices rather than a significant reduction in tire production in China.

So in summary, our position in China is very strong.

We have advantaged plants with world-class environmental control technology installations.

We've cultivated deep relationships with our customers over 3 decades of operations in China.

And the preference for those companies to do business with Cabot has allowed us to continue to drive volume growth while expanding our margins as we help our customers migrate to the higher-value products that Cabot makes.

We have seen this trend continue into October, and we feel we are well positioned heading into fiscal 2019.

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

Erica?

Thanks, Sean.

Now I'll move on to the results for the fourth quarter of fiscal 2018.

For the fourth quarter, our adjusted earnings per share was $1 and total segment EBIT was $113 million, up 5% on a year-over-year basis.

The Reinforcement Materials segment continued to deliver strong operating results with 33% growth on EBIT on a year-over-year basis, driven by the impact from our 2018 customer agreement, stronger spot pricing and volumes in Asia and a better product mix.

The Performance Chemicals segment results declined as compared to the prior year largely due to higher costs related to partner-driven plant turnarounds in our fumed silica network and spending on advantaged growth investments.

In the quarter, we also completed the acquisition of a carbon black manufacturing facility in China from Nippon Steel Carbon Co.

This bolt-on acquisition will further support our growth objectives and broaden our capabilities as we convert a 50,000 metric ton plant to support our Specialty Carbons product line.

Cash flow was very strong in the quarter with operating cash flow of $163 million, and we returned $103 million to shareholders through dividends and share repurchases.

Moving to more detail on Reinforcement Materials.

During the fourth quarter and the full fiscal year of 2018, EBIT for Reinforcement Materials increased by $16 million and $86 million, respectively, as compared to the same periods in the prior year.

The increases were principally due to higher unit margins and higher volumes.

Higher margins were driven by calendar year 2018 tire customer agreements, higher spot pricing in Asia and better product mix.

The higher volumes in the fourth quarter were primarily due to strong year-over-year demand in Asia, while the increase in volumes for the full year was due to gains in the Americas and EMEA.

Now turning to Performance Chemicals.

EBIT in the fourth quarter of 2018 decreased by $15 million compared to the fourth quarter of fiscal 2017.

The decrease in EBIT was primarily due to 13% lower volumes and increased costs related to maintenance turnarounds during the quarter for the Metal Oxides business.

While these were planned, the impact was larger than expected due to the longer-than-planned downtime that affected both volumes and costs.

While we were estimating a mid-single-digit million-dollar impact in the fourth quarter, the total impact to Metal Oxides was $9 million in the quarter.

We also experienced higher costs related to new capacity investments in fumed silica and for future growth in our energy materials product line.

Partially offsetting these impacts were 6% higher volumes in Specialty Carbons and Formulations, driven by growth in specialty compounds despite a weakening trend in September.

Volumes in Specialty Carbons and Formulations were trending as expected, with strong growth in both July and August, with September volumes declining.

The September decline was concentrated in China and Europe and driven by a combination of inventory destocking and softer automotive demand.

For the full fiscal year, Performance Chemicals EBIT was roughly flat with a decrease of $1 million compared to fiscal 2017.

This is due to an increase in fixed cost and higher spending for our growth investments that offset higher volumes in Specialty Carbons and Formulations as well as higher margins across the segment.

The segment demonstrated strong commercial execution during the year as specialty carbon feedstock costs rose throughout the year and we successfully implemented price increases to offset the higher raw material prices and expand margins.

EBIT in the fourth quarter of 2018 in Purification Solutions decreased by $3 million compared to the fourth quarter of last year and $13 million compared to fiscal 2017.

The decrease in both periods is driven by the ongoing competitive intensity in the mercury removal and other North American powdered activated carbon applications.

This was partially offset by higher volumes in the specialty applications and lower fixed costs.

In the fourth quarter of 2018, EBIT in Specialty Fluids increased by $7 million compared to the fourth quarter of 2017 due to larger projects in the Africa, Middle East and Asia region as compared to the same period in the prior year.

For the full year, Specialty Fluids EBIT was roughly flat as compared to 2017.

I will now turn to corporate items.

We ended the quarter with a cash balance of $175 million, and our liquidity position remained strong at $900 million.

During the fourth quarter of fiscal 2018, cash flows from operating activities were $163 million, including a decrease in net working capital of $85 million.

Capital expenditures for the fourth quarter of fiscal 2018 were $69 million, and additional uses of cash during the fourth quarter included $20 million for dividends and $83 million for share repurchases.

Sources of cash in the quarter include $26 million of proceeds from the sale of land in India at a location of one of our previous plants, which were used to partially fund our share repurchases in the quarter.

During fiscal 2018, we generated $299 million of cash flow from operations, including an increase in net working capital of $110 million, driven by higher oil costs.

Capital expenditures for fiscal year 2018 were $229 million.

Additional uses of cash during the fiscal year included $80 million for dividends and $142 million for share repurchases.

Share repurchases were partially funded by $50 million of proceeds related to land and investment sales in Asia as we returned this cash to our shareholders.

During the fourth quarter of fiscal 2018, the company recorded a tax benefit of $1 million for an effective GAAP tax rate of negative 2%.

This included a benefit from tax certain items of $19 million.

The operating tax rate for the fiscal year ended September 30, 2018 was 21%.

As we look towards 2019, we expect capital expenditures of approximately $250 million to $300 million.

We anticipate an ongoing operating tax rate in the range of 22% to 24% with the increase largely due to the impact of the U.S. tax reform act.

I will now turn the call back over to Sean.

Thanks, Erica.

Now I'd like to spend some time discussing our segment outlook for 2019.

For Reinforcement Materials, we continue to see a supportive environment with high industry utilizations around the world.

We are very pleased with the results of the 2019 tire agreements thus far, where we achieved price increases and volume growth in all regions.

Despite some signs of softness in the news related to China, we remain confident about our position in China and expect to continue to see solid volume growth and maintain our margins given our investments in world-class environmental controls.

In addition, our debottlenecking projects continue to add capital-efficient capacity to our carbon black network to enable volume growth in 2019.

Through 2018, this segment was operating at an impressive quarterly EBIT run rate between $65 million to $75 million.

With the new calendar year 2019 customer agreements and anticipated volume growth, we expect the quarterly EBIT run rate to increase to $75 million to $85 million starting in the second quarter.

In Performance Chemicals, the underlying fundamentals for our specialty businesses remain quite strong, but we expect to face near-term uncertainty in the first fiscal quarter from the impact of new fuel economy and automotive emission regulations in Europe, higher raw material costs across the segment and the potential for inventory destocking in our plastics applications resulting from moderating polyethylene prices.

We believe that these impacts are temporary and will largely be behind us after the first fiscal quarter, with EBIT growth in the second and third quarters.

In addition, we will begin to see the benefit of our new fumed silica plant in China coming online during the fourth quarter.

Furthermore, growth from new customer qualifications and next-generation products in our energy materials product line is expected to continue to build throughout the year.

In 2018, the quarterly EBIT run rate for the segment was roughly in the range of $45 million to $55 million.

Looking ahead to 2019, we anticipate that after the near-term uncertainty, the segment will see an increase in the quarterly run rate to $55 million to $60 million as we move through the year.

In Purification Solutions, we anticipate the North America powder market to remain challenging.

As a result, we are taking steps to improve the performance of the segment with a transformation plan.

This realignment of the business is to more aggressively focus the portfolio, optimize our assets and streamline our organizational structure to support the new focus.

We expect these steps will begin to positively impact the business in Q2 and will lead to approximately $10 million of run rate improvement in the year.

Thus, we anticipate the business will deliver EBIT in the range of $0 million to $10 million for fiscal 2019.

Finally, the Specialty Fluids segment continues to benefit from key projects in the Asia, Middle East and Africa region, with visibility for solid performance through the first half of the year.

We expect EBIT for 2019 to be in the range of $10 million to $15 million.

Looking forward, I feel very good about the opportunities that lie ahead of us.

We remain in an environment where utilization rates are high globally across the carbon black and fumed silica industries.

Underlying demand is strong, and the ability for the industry to add new capacity remains challenging.

The outlook for 2019 remains quite strong, and results will build as we move through the year.

Therefore, based on our current view of the markets we serve and macroeconomic conditions, we anticipate adjusted earnings per share for 2019 to be in the range of $4.35 to $4.75.

This would mark the fourth consecutive year of strong earnings growth for Cabot as we continue to successfully execute our Advancing the Core strategy.

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 Mike Leithead from Barclays.

I guess to start out, strong momentum in Reinforcement Materials.

Could you help size for us the magnitude of price and volume growth you expect in the segment heading into '19 maybe relative to what you accomplished here in 2018?

Sure.

Well, I think in terms of our overall outlook for demand, we continue to see that this market, on a global basis, should be growing in and around the 3% range, so pretty consistent with what we communicated during our Investor Day deep dive.

So I think the underlying demand fundamentals are quite strong.

And then in terms of how we see pricing develop over the coming year, I would start by sort of characterizing the supply-demand environment and say that it's favorable and expected to remain so -- given the limited new capacity additions and, I think, the toughening environmental standards globally.

So this is certainly driving up cost of compliance and new growth investments that our customers need.

So as a result, we need substantial price increases to generate the appropriate returns on capital.

We're very pleased, as we sit here today, with where contract outcomes are settling thus far.

We've achieved price increases in all regions, along with balanced volume growth at the market rates.

And we've given you the EBIT run rate progression for this business in 2019, and so the magnitude of price increases was included in those expected ranges.

So you can see there's a pretty sizable step-up there, and our outlook here remains very positive for this business.

Great.

That's helpful.

And then on the share repurchase program, you stepped it up a bit here in the fourth quarter.

Is it fair to assume that the rate should remain elevated here given where shares are today relative to the past quarter?

Or are there some other financial considerations there that might moderate the pace of it?

Yes.

Well, I think, first and foremost, I would start by saying that our corporate strategy and our capital allocation framework includes a commitment to consistent return of capital to shareholders through dividends and share repurchases, and so that capital allocation commitment remains.

Now in the previous quarter, we did step up our share buybacks in that period of time and are certainly very comfortable with that decision here given our view of the full value of the firm.

I think as we go forward, we'll be guided by our consistent return of capital to shareholders, and so that target of returning 50% of our discretionary free cash flow remains, I think, the right one for the company.

And certainly, where price levels are today, we think the stock is significantly undervalued.

Our next question comes from Jim Sheehan of SunTrust.

This is Pete on for Jim.

Could you share any visibility you have on any future turnarounds you have planned?

And what does the normalized rate per year for turnarounds look like versus what you experienced in fiscal '18?

Well, I think it's a little bit different by business, but the notion of chemical plants having regular turnarounds, annual turnarounds at a plant, sometimes every 2 years, that's a very common phenomenon in the chemical industry.

Now it differs by business, so whether we're talking about carbon black or fumed silica.

And I would say the expectation, as we go into 2019, on turnarounds in our carbon black business would be kind of as we have seen over the last year, no real changes.

But you can see shifts from quarter to quarter, the specific timing from quarter to quarter.

But the full year turnaround profile, I would say, is basically consistent with where we were in 2018.

In Fumed Metal Oxides, the turnaround dynamic is slightly different here because we have fence-line plants with our feedstock partners, and so those turnarounds are always synchronized with our feedstock partners, our fence-line partners.

And the schedule is largely dictated by them.

So when they're doing a major turnaround of their silicones plant, then we would have a synchronized turnaround of our fence-line silica plant.

So the dynamics there are slightly different in that you have this partner relationship thing that has to get managed.

And so certainly, in Q4, we had an elevated level of turnaround activity in the quarter.

We expected this, but we had 3 plants in turnaround during that quarter, and I would say that specific quarterly profile was quite unusual.

But again, if you pull back from that quarterly dynamic and look at it on a sort of a full year basis, I would say it behaves similar to the carbon black in that you have this every year or 2 in every major plant.

And then on the Purification Solutions performance improvement plan, does this primarily involve walking away from lower-margin volumes?

Or is there another element to it?

And what percentage of the business are you targeting?

So the plan is really a 3-point transformation plan, and first and foremost is focus.

And so what we mean by that is being very discerning about which applications we participate in and ensuring that those have the right profit profile for sustained participation.

The second part of it is related, is looking at how our overall assets line up against those participation choices.

And then third, really looking at the structure, the organizational structure to serve this business.

So those are the 3 key points.

And of course, they're all connected, but I think it starts with making real choices around focusing the business in areas that we feel confident have a longer-term profit potential.

Our next question comes from Kevin Hocevar from Northcoast Research.

I wonder if you can comment in terms of contract pricing for 2019.

I'm wondering if you can give -- I know you probably can't give too much in terms of specifics, but if you think about the magnitude of pricing that was realized in 2018 versus what you're realizing in 2019, can you kind of compare it?

I mean, are they similar?

Are you realizing more in '19?

What's kind of the way -- if we just look at that, the contract piece, what you're seeing there?

Yes.

Well, probably, the best place to start, Kevin, is to kind of look at the overall industry dynamics.

And what we see here is a, I think, a favorable and, I would say, sort of progressively more balanced supply-demand situation in the globe, so more balanced this year than last year.

And our outlook over the next few years is that, that will be the case as there aren't any sort of material capacity adds in major parts of the world.

And then, of course, the overarching trend of greater environmental enforcement, I think, is impacting those.

So I would say that's the profile that we see.

And as a result of that, we would expect -- in order to serve our customers, we've got to achieve substantial price increases to cover the cost of those environmental investments and to support them with the long-term growth they need.

So that's the trajectory in the business.

And we saw price increases last year, and we're very pleased with where we've come out this year.

And we've shared with you an expectation of how that quarterly range will step up here, and it's pretty significant.

So our expectations are embedded in that step-up.

And then in terms of Asia, too, it was really helpful to hear the commentary that you gave earlier in the presentation on China.

So wondering, your expectation there, it sounds pretty good, and so I guess I just want to understand the expectation here, you're going to grow volumes and earnings and then, [it sounds like maybe grow volumes and maintain margins in the year.] Is that the expectation?

And also, in terms of the curtailments, could you give us some thoughts on -- that you're seeing this winter?

It seemed like this could be more of targeted curtailments to more of the offenders, whereas I know Cabot is compliant with the regulations.

Are you noticing that others are having to see more curtailments than you are this year?

And do you think you can outperform the market in terms of volumes as a result here over the next quarter or 2?

Yes.

So I think on the environmental front, again, in China, we definitely expect to see the industry, I think, have to deal with winter curtailment, so I think that sort of remains the case here.

And certainly, if you look at -- if you sort of step back from it, Kevin, and look at China's commitment to environmental enforcement, I think the signals are strengthening resolve.

But we are seeing that their approach to implementation is morphing a bit and that it will be based more on emission targets rather than specific production cuts.

So last year, you might remember that there were sort of specific production cuts mandated, and this year, I think they're trying to focus it a little more on emission targets.

And so what that means is that it will, I think, be more focused and targeted at the noncompliant players.

But our view, certainly, is that, that is going to continue.

So right now, we expect that our leadership position here is going to continue to allow us to run our plants with no material or real impact from the curtailments because we've got the emission controls in place, and that should drive, I think, preferentially, customers to the Cabot value proposition.

And we look today where kind of pricing and margin levels are in China, and they're quite healthy.

So that's the current outlook, but I think it's important to remember that this is a balancing act for the Chinese government, and exactly how it plays out will be pretty dynamic.

But they lengthened the winter period.

They've increased the number of cities that are subjected to the 26+2 emission limits, and we're seeing clear evidence that they are, in fact, going after people that aren't compliant.

So I think those trends don't change here.

Our next question comes from Jeff Zekauskas from JPMorgan.

In your description of how much you thought you might earn in Reinforcement Materials, you said, well, maybe we'll earn $75 million to $85 million a quarter.

So if we take the midpoint, so that's $80 million, so that's $320 million for the year, so you would be up about $40 million in Reinforcement Materials if we took the middle of the range.

But in 2018, you were up $86 million.

So why are you so pessimistic about your prospects in Reinforcement Materials in that you seem to think that you'll grow at about half the rate, even though you described the market as being tighter and your volumes are growing?

Yes.

So a couple of things, Jeff.

First of all, obviously, our contracts run on a calendar year basis.

So the first quarter here is the old contracts, so there'll be 3 quarters of benefit of the new run rate that we shared.

And so I think overall, the industry dynamic is very favorable, and we're projecting good momentum in this business.

I think the difference here, first of all, I would say the step-up of $80 million in 2018 is a pretty significant step-up, and so to expect that a business like this is going to have another step-up of the same magnitude, I think, in the long term is not the right way to think about the business.

But the other thing I would say is that a material part of that step-up is then the way that we have outperformed in China as a result of the environmental enforcement here.

And so if, as a result of that leadership position, we can continue to grow our volumes and maintain what our, I would say, reset -- substantially reset economics, that's a really good outcome.

So I think it's important to sort of break it into those buckets.

The long-term contracts part of it, I think, continued really good momentum.

And then the reset in China and how we're balancing that going forward, I don't think you see a similar-size reset this year.

It was quite substantial in 2018.

Okay.

Maybe if I can try one for Erica.

Your working capital use was $110 million this year, and your receivables and inventories were way up.

All things being equal, should you have a working capital benefit next year?

Or do you think you'll have a [use account] given where raw materials are as a base case?

Yes.

So the usage in this fiscal year was largely driven by the rising raw material cost and so the impact of that both in the inventory levels and the accounts receivable balances as we passed the higher cost through to our customers in pricing.

So if we go into next year and if we have a flat oil environment, you would not see a similar step-up that we saw this year.

And if you see oil prices decline, then that would generate a source of cash for us.

So it will depend on if we see a stable oil price, increasing or decreasing to see that level, but I don't think we expect to see the level with which we saw in 2018 repeat in 2019.

Okay.

And maybe you said it already, but how much is left in your domestic environmental spending to be compliant with the EPA regulations?

What was the total spending?

What's left?

So total spending, I think we expect it to be about $130 million for all the plants, are completed 1, largely completed another, and we have 1 left.

So I would say we probably have, in that number, probably somewhere around $50 million to $60 million left for the final plant to be compliant.

So your CapEx should really step down beginning in 2020 then?

That's when that group of -- when the U.S. investments would be largely finished, the last plant, in 2021, when that has to come online.

So after that, we would see that spending come back down.

And then lastly, in your specialty black business that's tucked inside of Performance Chemicals, what happened to the margins of that business in the quarter?

Were they up a lot and similar to what happened in Rubber Black?

Were they flat?

Were they down?

What happened there?

So I think, overall, when you're looking at Performance Chemicals, as you know, it is a blended margin that you see, [so we define as] largely attributable [quarter to the] Fumed Metal Oxide business.

And so as we saw the volumes and the increased spending and turnaround come down, since that is the highest margin piece of that segment, you did see a deterioration in what's the reported EBITDA margin.

I think as we look forward, we expect those EBITDA margins to go up.

I think if you are isolating Specialty Carbons, we have been successful in passing through the rising feedstock costs as we've gone through the year.

And so margins have actually improved in that business when you look at it for the year.

So I think we feel quite confident that going into next year, we would not see the fourth quarter impact with the absence of the Metal Oxides turnaround and then see a rising carbon margin as we move through the year, with the feedstock costs having been offset.

Were the Specialty Carbon margins up or down in the quarter year-over-year?

They were largely flat in the quarter year-over-year.

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

I had a couple of follow-ups.

Just on the contracts that -- it sounded like they're largely in place for calendar '19.

You mentioned higher price and volumes.

The question is, the volume increases that you're seeing, are those consistent with the way your customers see the market developing?

Or did you actually also pick up some volume share as those contracts have concluded now?

Chris, this is Sean.

So I would say they're largely in line with the market, the market growth rate.

Okay, got it.

And then -- so as you bracketed your -- the outlook for fiscal '19 in terms of the EPS, could you just maybe talk about some of the things that -- some of the levers that you think are more uncertain right now that could sway the end result towards the high end or, conversely, towards the low end of that range that you provided?

Sure, sure.

So I think there are a number of factors here that could move things in and around inside that range that we talked about.

I think, first and foremost, how we progress through the winter season in China because China is such a big part of the global carbon black market and the global tire market.

How that plays out, I think, is a factor that's fairly significant and can have you with different outcomes across that range.

Now we were very successful in managing that in 2018, and so we feel good about our ability to manage that.

But how exactly China plays this out is a balancing act for the Chinese government and is a bit dynamic, and so we'll just have to see.

But I would say that's one fairly significant variable that could swing things here.

I think another one is, in our Performance Chemicals segment, we have seen, as Erica commented, in late in the quarter and September, some destocking and demand softness.

And as we look across in the applications here, many of them are into the plastics markets, and when polymer prices either moderate or accelerate, you typically see a pipeline emptying or rebuilding.

And so right now, with them moderating, we're seeing some pipeline depletion, and if that persists, then that could impact you on the downside.

If it reverses, then you typically see people accelerate their purchases.

And the reason for this is pretty simple, that the people downstream of us are converters, injection molding, things like that.

They tend to be smaller enterprises, and they're concerned about getting caught with high-priced polymer in the face of declining prices.

And on the flip side, when polymer prices start moving the other way, they try to buy a little bit and trade on that anticipation that prices are going up.

So that's another factor, and a pretty significant part of Performance Chemicals goes into this sort of broad plastics value chain.

So that would be a second one that I would say that we are always watching and trying to manage in a very dynamic way.

And then a third one would be how overall feedstock levels, particularly in Specialty Carbons, play out.

As you know, we're chasing this for pretty much the full fiscal year 2018.

As Erica said, on a full year basis, we got full recovery there, so that's good, but we were chasing it throughout the year.

And if we find ourselves in that position again, then that could be a challenge.

If the prices moderate a little bit, then that could be a margin benefit as we can hold on to pricing there better because it's a more value-oriented set of markets.

So those would be a few, Chris, that I would say are the most prominent ones to be thinking about and what we think about as we lay out a range.

Yes, that's very helpful.

I appreciate that.

And then if I could just follow up quickly on the Fumed Metal Oxide business and the shutdowns, which were, I guess, more extended or more acute in terms of impact than you expected.

Are those -- to the effect there, is it your fence-line partners, they shut down their siloxane production and you just didn't have enough fumed silica?

Or did they also curtail their production of elastomers?

As I understand, a part of the relationship there is feeding back fumed silica as a filler to the elastomer production, and so I'm wondering if there's weakness on their behalf in that business.

Or is it really just a function of having enough of your raw material available to service a broader mix of customers?

Yes.

So I think 2 big factors here that impact -- impacted the result in the quarter.

One is that the turnarounds were a bit longer than expected.

And anytime you have a synchronized set of activities, it's not uncommon that you uncover the things on either side of the fence that need to be dealt with.

And so the length was a little longer, which drove up costs a bit higher.

And then you also have the volume impacts because these customers then consume a certain amount of that silica in their own elastomer compounds, as you mentioned.

That's exactly right.

There's a volume impact and a cost impact.

And while all of these turnarounds were planned, the fact that they were a little longer and the volume impacts of coming back online were a little more pronounced, that was a bit unexpected for us.

Our next question comes from Laurence Alexander from Jefferies.

Could we go back to the discussion about outages?

And, I guess, can you characterize it from 2 angles?

One is, given the utilization rates that the industry is running at now, are you seeing any change in the risk of significant outages that could change your regional supply-demand balance?

And related to that, when you talk about -- when you discuss pricing with customers and they see the same trajectory that you do, do they take the attitude of, "Okay, well, there's a point in the calendar where it makes sense to move pricing up to a reasonable return on capital to incentivize the new project"?

Or are they waiting for the industry to be tight enough to create the kind of fly-up that we see in other much more commodity businesses in order to then incentivize new capacity builds?

I mean, how are they thinking about managing the tightness that's evolving in the industry given the rising costs you have for building plants?

Yes.

So maybe the first part of your question, Laurence, I'll try to address first and then hit the second part.

So in terms of outages, given the high utilization rates in general, the outages, whether they're planned outages or unplanned outages, have a more pronounced effect because the industry is just operating at a much tighter level.

And so it certainly then does put a premium on being very well organized and well structured and disciplined around your planned outages because you don't have slack capacity somewhere else to fill that demand for customers.

So it definitely gets more pronounced.

A few years ago, when there was more capacity in the industry, a player that might have an unexpected or unplanned outage could rebalance their supply chain and source from another plant, and customers had options to do the same.

That dynamic has really narrowed here.

Now, I mean, in terms of how customers are thinking about the long term here, I think, clearly, given their growth investments -- and I'm talking about Reinforcement Materials here.

Each business is, of course, a little bit different.

But in Reinforcement Materials, what we're seeing is customers are concerned about long-term supply reliability and are concerned about having suppliers that have the right sustainability profile because those environmental pressures are becoming more and more clear and pronounced.

And each of our customers have their own sustainability commitments and expectations as well.

So who they align with is becoming more and more important for them and for their value set.

So I think as a result, they are engaging in a different way around the need for price increases and why those are necessary in order to support reinvestment-level economics, and I think that only if that happens in a sustained way will the industry build capacity to support their growth.

So I think this is a sort of a logical progression in conversation: first, realization of the supply-demand balance; second, I think a full realization of the long-term sustainability trajectory that, I think, the industry is on; and third, the need to get reinvestment-level economics in a good, stable place in order for suppliers to be encouraged to expand in a prudent way and help them.

So I think we're in a fairly logical conversation at this stage.

And then just to clarify or confirm that your -- in your view, the current levels are adequate for what one might call debottlenecking economics but not reinvestment economics?

I would say, in general, yes, but it depends by region.

So certainly, the debottleneck economics are very capital-efficient.

And given where the EBITDA margins are in this business in relation to the capital cost of a debottleneck, there's absolutely no question.

Those are highly attractive projects.

Then depending on where you are in the world, your comfort with reinvestment level economics changes.

So for example, our plant in Indonesia given the supply-demand environment; the changes in China and the fact that, at this point, there are not the same level of emission control requirements there; the capital return on that project, which is a brownfield, makes a lot of sense for us, hence, we're doing it.

But if we were to sort of, hypothetical, say, are the economics yet in North America at a point they could support greenfield economics plus the emission controls, we would say no.

And so, therefore, we need higher pricing in order to get to that level.

So it a little bit depends on where you are in the world, but for sure, on the debottlenecks, those are very attractive projects to do at current levels.

Our last question comes from David Begleiter from Deutsche Bank.

Sean, given where your stock price is and your leverage, which is not that high, would you consider front-end-loading the share buybacks in 2019, perhaps?

Well, we certainly, David, believe the stock to be significantly undervalued, and our commitment here is for consistent return of capital.

And so we'd liked the share price in relation [to some of the parts this past year, and we really like it now] . So I think we'll certainly be committed here in the year to return that capital.

And again, looking at where it is right now, it's pretty attractive relative [to our sum of the parts] .

And just quickly on Performance Chemicals.

In Q1, I was just curious, should this business be up on a segment earnings basis year-over-year?

Sorry, David.

Say it again?

Performance Chemicals, should segment earnings be up year-over-year in Q1?

Up year-over-year or you mean sequentially?

Year-over-year.

Well, so the Q1 is a seasonally -- traditionally seasonally weak quarter, so that's true, but that doesn't affect your year-over-year comparison.

That's more of how things progress throughout the year.

On a year-over-year basis, it really comes down to how growth is developing.

And as we sit here today in -- looking at Q1, we see that there certainly were some effects in late Q4 from destocking, and we wouldn't be surprised if those persist into Q1.

So our view at this point is that if they persist in Q1, then we'll see a step-up in Qs 2 and 3 as that impact diminishes, and then we head into what are normally very strong seasonal volume quarters of Q2 and Q3.

So that's how we see the year developing at this point.

Thank you.

This concludes our Q&A session.

At this time, I would like to turn the call back over to Sean Keohane for closing remarks.

Great.

Thank you again, everyone, for joining us on the call and for your support of Cabot.

And we look forward to talking again next quarter.

Thank you.

Thank you, ladies and gentlemen, for attending today's conference.

This concludes the program.

You may all disconnect.

Good day.