Cabot Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Cabot Corporation fourth quarter 2020 earnings conference call. At this time, all participant lines are in a listening mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Steve Delahunt, Vice President, Treasurer, and Investor Relations. Thank you. Please go ahead, sir.

Thank you, Shannon. Good morning. I'd like to welcome you to the Cabot Corporation Fourth Quarter Earnings Teleconference. With me today are Sean Cohane, CEO and President, and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our fourth quarter of fiscal year 2020, 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 last annual report on Form 10-K, in our quarterly report on Form 10Q for the fiscal quarter ended March 31, 2020, and in subsequent filings we make with the SEC, all of which are 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 adjustment 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. I will now turn the call over to Sean Fulhane, who will discuss the fourth quarter and full year highlights. Erica McLaughlin 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 morning, ladies and gentlemen. I'd like to welcome everyone to our fourth quarter 2020 earnings call. I want to begin by recognizing our employees around the world for their continued commitment to the company, to our customers, and to their community. Managing through this pandemic has challenged us on every front, and I have never been more proud of our team. As we manage through this pandemic, we established a set of guiding principles here at Cabot to protect the house first, and prepare ourselves to be ready to win as the recovery takes hold. I believe our performance to date reflects that balance. For the quarter, total segment EBIT was 84 million, and adjusted earnings per share was 68 cents, up 75 cents on a sequential basis. This result was driven principally by improved results in reinforcement materials, which recovered nicely as demand in our key end markets increased sharply as compared to the third quarter. Performance chemicals results also improved in the quarter as automotive-related demand began a recovery and our self-help initiatives took hold. In purification solutions, we took another step forward in our transformation plan with the sale of our mine and the structuring of a long-term supply agreement for activated carbon with ADES, which better positions us to serve the mercury removal market. We continued our intense focus on cash generation, delivering $99 million in operating cash flow in the quarter and $248 million for the second half, well ahead of our previously communicated expectation of $200 million of operating cash flow in the back half of the year. Erica will go into more detail on the segment results a bit later in the call. I would first like to share my perspective on the full fiscal year 2020 results. There is no doubt that fiscal 2020 was a year unlike any other we've experienced as we battled the global public health crisis and the associated economic fallout. The global pandemic severely affected demand from our key tire and automotive customers, especially in the third fiscal quarter, and that impact was reflected in our full year results. On the performance front, we delivered adjusted earnings per share, $2.08. While this result was well below prior levels and the earnings potential of the company, I am very pleased with how we managed through the crisis, and I believe the strength of Cabot was revealed. Our strong balance sheet and cash generation power and our experienced management team allowed us to navigate the pandemic while remaining focused on our advancing the core strategy. As you know, our strategy is built on three pillars. First, investing for growth in our core businesses. Second, driving application innovation with our customers. And finally, generating strong cash flows through efficiency and optimization. In the reinforcement materials segment, the team did a great job delivering necessary price increases in our calendar year 2020 customer agreements. implementing new commercial terms to manage feedstock volatility, and delivering cost reductions to partially offset the pandemic-driven demand reduction. In the performance chemical segment, the team was focused on self-help measures and laying the groundwork to restore profitability to historical levels. In the year, we successfully implemented price increases in specialty carbons to offset the impact of higher MARPOL-related feedstock costs. The segment also executed on a number of strategic priorities during the year. We closed on the acquisition of Shenzhen Sanshun Nano, a leading producer of carbon nanotubes and formulations for the high-growth lithium-ion battery market. And customer qualifications in inkjet packaging applications continue to build momentum. In the purification solution segment, we closed on the sale of our lignite mine in Marshall, Texas to ADES, and entered into a long-term supply agreement for lignite-activated carbon. This transaction improves our efficiency while also removing a significant hurdle to divestiture of the business. While the earnings environment was challenging, we remained intensely focused on cash flow generation and balance sheet strength. During the year, we delivered strong operating cash flow of $377 million and free cash flow of $177 million largely through tight working capital management. The strong cash flow generation allowed us to repay debt, maintain our dividends, fund the San Shun acquisition along with our CapEx commitments, and retain our investment-grade credit rating. And finally, ESG leadership has been a focus of ours for a long time, and it is becoming ever more important to our stakeholders. We recently launched our updated 2025 sustainability goals, which build on our existing leadership position. By expanding our goals beyond a strict environmental focus to include areas such as product development, supplier sustainability, diversity and inclusion, and community involvement, we believe all stakeholders will participate in our success. Overall, I am extremely proud of our team, and I believe we are well positioned and ready to win as the recovery takes hold. Now turning to an update on the current business environment, we see underlying trends in both tire and automotive demand strengthening with month-on-month improvement continuing through October and into November. The economic recovery is unquestionably linked to stabilizing the public health crisis, and this remains the key to bringing consumer confidence and the economy back to its full potential. China is a good example of where COVID transmission has remained low and the economy is strengthening, with GDP up 5% year over year in the September quarter. Looking at our key end markets, the trend is positive. Automotive production represents approximately 25% of our sales, ranging from tires on new cars to a host of applications in performance chemicals, such as structural adhesives, batteries, coatings, and plastics. External forecasting firms report light vehicle auto production down 3% year over year globally in the September 2020 quarter, as compared to a decline of 43% in the June quarter. Current industry forecasts call for an 18% drop in global auto builds for the full year, including a small decrease of 3% for the December quarter. Now moving to tire production. Global replacement tire industry sales are now expected to decline 12% for the full calendar year of 2020, based on estimates from LMC. Light vehicle replacement tire sales improved in all regions in the September quarter, down only 6% year over year, compared to a decline of 31% in the June quarter. As with auto production, the December quarter is expected to approach 2019 levels, with total replacement tire sales projected to be down 2% year-over-year, according to LMC. Building on the V-shaped recovery in the September quarter, we continue to see consistent improvement in terms of mobility and miles driven, and this bodes well for the replacement demand of tires, both in terms of passenger vehicles as well as truck and bus. As a reminder, the replacement tire market has historically been more resilient compared to other parts of the broader transportation sector. I'll now turn the call over to Erica to discuss the financial results of the quarter in more detail. Erica?

Thanks, Sean. I will start with discussing results in the reinforcement materials segment. Given the global economic environment, the reinforcement materials segment delivered strong operating results, with EBIT down $12 million compared to the same quarter in fiscal 2019, but up $64 million sequentially, driven by improved global tire and automotive demand as compared to our third fiscal quarter. The decrease in EBIT from the prior year was primarily due to lower volumes, partially offset by higher margins. Globally, volumes declined by 11% in the fourth quarter as compared to the same period of the prior year, largely due to the impact of COVID on demand in Europe, the Americas, Japan, and Southeast Asia. Higher margins were driven by improved China pricing and higher pricing outside of China in our calendar year 2020 tire customer contracts. Looking ahead to the first quarter of 2021, we expect an increase in EBIT due to our expectation for expanded unit margins. This is driven by a continued sequential improvement from pricing in Asia as the market continues to recover. Volumes are expected to remain in line with fourth quarter levels, as strength from the recovery offsets normal seasonal patterns. Now turning to performance chemicals. EBIT increased by $4 million as compared to the third fiscal quarter, driven by higher demand in automotive-related applications. EBIT decreased by $16 million year-over-year, primarily due to 9% lower volumes in our formulated solutions business. from the impact of COVID-19, a more competitive pricing environment in our few metal oxides product line, and a weaker product mix in our specialty carbons and few metal oxides product lines from lower demand and automotive applications. In the fourth quarter, volumes increased 2% year-over-year in performance additives, driven by increased volumes related to our recent energy materials acquisition. Sequentially, performance additives volumes increased 3% and formulated solutions volumes increased by 1%. While we're pleased to see the sequential improvement in volumes, segment volumes continue to be impacted by the pandemic, particularly in demand for automotive and construction applications, while the infrastructure and market, including wire and cable and pipe applications, continue to hold up well in all regions. Looking ahead to the first quarter of fiscal 2021, We expect a material sequential step up in EBIT, driven by higher volumes across the major product lines as our key end markets continue to recover, and as we leverage the recovery in the automotive end market to drive product mix improvement in specialty carbons and compounds. We also expect to see a price improvement as the segment benefits from actions to restore pricing in our few metal oxides business, and as we execute higher prices in specialty carbons to offset rising environmental costs. Moving to purification solutions, EBIT in the fourth quarter of 2020 decreased by $3 million compared to the fourth quarter of last year. The decrease was driven by lower volumes in the mercury removal applications and the unfavorable impact from reducing inventory levels to drive improved cash flow results. Looking ahead to the first quarter, we expect to see a sequential volume decline driven by lower seasonal volumes in water and mercury removal applications and higher fixed costs due to a maintenance outage at one of our plants. This is expected to be partially offset by lower depreciation and fixed costs due to the recently announced supply agreement and mine sale. I will now turn to corporate items. We ended the quarter with a cash balance of $151 million, and our liquidity position remained strong at $1.4 billion. During the fourth quarter of fiscal 2020, cash flow from operating activities were $99 million, including a decrease in networking capital of $7 million. Capital expenditures for the fourth quarter of fiscal 2020 were $38 million, and additional uses of cash during the fourth quarter included $20 million for dividends. During fiscal 2020, we generated $377 million of cash flow from operations, including a decrease in working capital of $185 million. Capital expenditures for fiscal year 2020 were $200 million, which included both our targeted growth investments and the spend related to the North American EPA compliance. Additional uses of cash during the fiscal year included $80 million for dividends and $44 million for share repurchases. During the fourth quarter, the operating tax rate for fiscal year 2020 was 28%, and we anticipate our operating tax rate for fiscal 21 to be in the range of 28% to 30%. We expect capital expenditures to be between $175 and $200 million in 2021. And this estimate includes continued EPA-related compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products. I will now turn the call back over to Sean. Sean?

Thanks, Erica. As I look ahead to 2021, I expect that it will be another dynamic year. and we'll have to manage any future impacts from the pandemic in much the same way as we did in 2020. Notwithstanding the challenges of COVID-19, we remain focused on executing our strategy, and I would like to share with you our priorities for the upcoming year. First, we'll stay close with our customers to support their evolving needs and continue to differentiate Cabot through our product quality, service reliability, and commitment to sustainability. Second, We'll continue to execute on our strategic growth initiatives, particularly energy materials, E2C, and inkjet for packaging. We are excited about the growth potential of these businesses, and we have sustained our investment throughout this downturn so that we can capitalize on their full potential in the coming years. Third, we'll continue to drive efficiency and optimization across our operations. During fiscal year 20, we established a global business services organization to increase the efficiency and effectiveness of those processes that power our way of doing business. We will further leverage this investment through the deployment of digital tools to simplify and automate our ways of working. And I'm excited about the potential here to complement our strategic growth efforts. Fourth, the role of both on M&A and our existing businesses remains an important part of our growth story. Over the past few years, we have made very important strategic acquisitions in our core spaces, including extending our geographic presence in our specialty compounds business through acquisitions in Canada and Southeast Asia, and by extending our product offering in energy materials to include CNTs through our acquisition of Sanshun. We will continue to look for opportunities to build out our pipeline and execute on opportunities of these types. Finally, in an uncertain and dynamic environment, it will be critical that we keep tight control of costs and working capital in 2021. We feel good about the momentum into fiscal year 21, but we must remain vigilant on costs and working capital. I hope this gives you some color on our 2021 priorities and how they will help Cabot to extend our leadership position. I will close out my prepared comments today by talking about our outlook as we start fiscal year 21. Clearly, we are pleased with the momentum coming out of the fourth quarter of 2020, and we feel very good about how the first quarter is shaping up. As Erica discussed, we expect the materials step up in the performance chemical segment and further strengthening in reinforcement materials, where performance is being driven by strong Asian spot pricing, the feedstock costs rise there, and volume strength driven by stronger underlying demand and some level of inventory replenishments. Based on this, we expect adjusted earnings per share in the first quarter to be in the range of 80 cents to 90 cents. On the cash side, we anticipate that operating cash flow will be strong as year-over-year earnings levels improve in fiscal 21, even though absolute net working capital levels will increase aligned with higher volumes. Looking to the full year of fiscal 21, there is still uncertainty related to the COVID-19 pandemic that impacts our longer-term visibility. Our results will be influenced by the sustainability of the economic recovery, the outcome of our entire customer agreements, the pace of costs returning to the business to support the recovery, and how we manage pricing in this dynamic environment. As the year unfolds, we will be managing these factors carefully to match the dynamic environment. Overall, I feel very good about the way the team has performed and the progress we've made in this unprecedented environment. I'm optimistic about the first quarter and remain confident that the team will respond to any challenges we may face throughout the year. The long-term fundamentals of our businesses are robust, our market positions and global presence is unmatched, and our balance sheet and liquidity provide strength and flexibility. I'm confident in our growth opportunities ahead and our ability to deliver on our strategic objectives. Thank you very much for joining us today, and I will now turn the call back over for our question and answer session.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Mike Lighthead with Starclays. Your line is open.

Great. Thanks. Good morning, guys. Good morning, Mike.

Good morning.

First on the outlook, maybe for Sean, can you give us a bit more color around demand trends into the fiscal first quarter and specifically how your senior customers handle general inventory levels and year-end seasonality? And maybe for Erica related to that, as we think about the first quarter guidance, anything funky or abnormal we should consider as we use that as a baseline kind of building out the rest of the year in our models?

So, Mike, maybe I'll take the first part and then hand off to Erica. So, you know, we're definitely seeing our key end markets improve as we progress, you know, through the quarter here. And so I think that's definitely encouraging. Automotive end market continues to strengthen, as does the tire market. And there's likely some replenishment that is happening in the quarter. It's difficult to see that exactly, but if you look at auto production forecasters and tire forecasters, there's likely some replenishment there because everybody really just paired inventories together. to a pretty extreme level. And so there's likely some of that that is happening here. That being said, we're not at this stage seeing a full-on restocking to historical levels. I think people still are operating with a measure of caution here because The outlook related to the pandemic is pretty uncertain. Certainly, caseloads are rising in most of the world, which is discouraging. Now, that's offset a bit by the encouraging news around vaccine, but timing of all that and how it plays out is still leaving people in a fairly cautious posture, I would say. But that's what we're seeing on the inventory side in our key end markets. But maybe over to Erica for... some further commentary on the Q1 guide.

Sure. So I don't think there's anything terribly unusual, Mike, going on in Q1. But as Sean mentioned, there is some level of inventory replenishment we think happening that may not continue in the latter quarters. And the pricing in Asia is quite strong. And so we often, as our feedstock costs there are rising, are able to price ahead of that. And the flow through Asia enhances the margin. And so that's happening in Q1. As you know, specifically in Asia, it's mostly a spot market and how that plays out for the remainder of the quarter is still a bit unknown. So I would caution not to probably take the first quarter and multiply by four because I think the uncertainty out there in terms of how does the recovery happen, what does the inventory levels look like, pricing dynamics. And then as our volume increases, we will have some cost flow through related to volume come through as well. So those are the factors that Sean talked about that will likely influence the Q2 through Q4 quarters.

Great. Thank you. And then maybe just quickly on purification solutions. In the outlook commentary in the release, you reintroduced some language around exploring strategic alternatives and Obviously, you just sold your mine. You're executing on a transformation plan in that business. Is it fair to say that business is in a better position today to have conversations around monetizing it? Is it fair to say those conversations are probably picking up to a degree as we sit here today? Okay.

So, Mike, I'll take that one. So, as you know, we've been working on the transformation plan for the last couple of years here. And the sale of the mine and the supply agreement for activated carbon is part of that process. And we believe that improves the efficiency of the business, particularly as it relates to serving the mercury removal market. And we also believe that this transaction removes a hurdle from a buyer's perspective. and so selling the business still remains a top priority for Cabot, and, you know, given the current environment, we'll be marketing it when the timing is right, but I would anticipate that to be, you know, more likely in the near term than the longer term.

Great. Thank you.

Thank you. Our next question comes from David Baglider with Deutsche Bank. Your line is open.

Thank you. Good morning. Hi, David. Hi there. Can you just comment on the status of your tire price negotiations? I know they're still not done yet, but any update on where they stand today?

Yeah, so as you know well, David, we negotiate these annual agreements with our major customers in the back half of the year, and that's the case this year as well. As we're still negotiating with a number of customers, I can't share any specifics as that information, I think, is commercially sensitive, and I'm sure you can understand that. What I can say is that we're looking at external indicators, such as increasing miles-driven data. I think the upward revisions in auto production forecasts and tire forecasts that I commented on earlier, and the recovery of order pattern from our customers in recent months. And so this is favorable in terms of tire and carbon black demand. But given that we're still in the middle, I can't comment any further.

Understood. And just on the cost side, Sean, how should you think about costs in 21 versus 20 in terms of some of the temporary costs that you were able to realize in 2020 as they flow back into 21?

Yeah. Yeah. So we obviously, like everyone, I think, managed costs pretty aggressively in 21, implemented a bunch of actions here. to sort of protect the house, as I said. And so some of these are structural and some of them are temporary. So structural things, for example, creating our global business services function and really streamlining our back office processes, et cetera, those types of things would be structural. And then on the more temporary side, you would have things like volume-related costs coming down as well as a rebalancing of our maintenance spend to match that with demand. And so in the full year, we took these sort of base operating costs down by $68 million, and we'd expect to hold on to approximately half of those cost reductions. You can think about it roughly as half-half. Half of them will will likely return if the demand is strong because the volume-related portion will flow back and we'll want to step up some preventative maintenance so that we keep the assets running at the level that's part of our value proposition. So I would say half-half, David, is reasonable.

Thank you very much.

Thank you. Our next question comes from Josh Spector with UBS. Your line is open.

Hi. Good morning, everyone. Good morning. Good morning. So just within Asia, in terms of your volumes for the quarter, I was wondering if you could parse out what the China domestic market did versus the export market versus the rest of Asia, so maybe we could have some granularity around that. Yeah.

So, Josh, I think a couple of things with respect to volumes. I would say, you know, Asia in particular in China was, you know, recovering pretty well in the quarter. And that's, I think, related to, you know, overall, you know, China's handling of the pandemic and, you know, the return of consumer confidence. So I think that was quite strong. Our volumes, and China's the biggest part, I mean, with China making, you know, 35 to 40 percent of the world's tires, that's clearly the single biggest market. Our volumes lagged the market there by design in the quarter, so we were very much focused on pricing and margin restoration at the expense of volume. We think that's the right play at this stage, and as As volumes continue to strengthen there with higher prices and margins, then we think the volume picture will begin to normalize more to market. But this was our habit-specific approach here. I think the other thing I would say is in Asia South, so ASEAN you could think about it as broadly, you know, demand was pretty strong in that region, in part because there's been preferential tire investment into that region over the last few years, and also those producers, some of them, for example, in Thailand, they are concerned about pending duties on tires into the U.S., and so there was There was some, I would say, building of the channel there to get out ahead of any of that. So demand was pretty strong there. But we also oriented more towards price and margin restoration in the quarter. And you could think about ASEAN and China being almost one big market in terms of flows, tires, and carbon black. They behave in a somewhat similar way. And so we were, just like China, focused a little more on pricing. But the underlying demand trends were quite strong because the COVID recovery in China in terms of the public health crisis has been quite good. Cases have been very, very low there.

Okay. Thanks. That's helpful. Sticking on volume, looking at your 1Q guide, my math is maybe you're guiding to volumes up high single-digit percent on the reinforcement side. One, I guess, is that correct? Two, where is it most up by region? Is it catch-up within Asia or within the rest of the world that there's some catch-up on that side of things?

Yeah, so our Q1 volume expectation is pretty consistent with the Q4. So you could think about this sequentially being pretty flattish, I would say. And so we have some continued recovery building offset by some seasonal, traditionally seasonal softness. And so those are sort of offsetting and our view is sequentially that volumes will be pretty flat.

Yeah, and I think if you're thinking about year over year, we'd still be down slightly year over year. We would not expect that volumes would be higher than the prior year Q1.

Thank you. Our next question comes from Jeff Zakakis with JPMorgan. Your line is open.

Thanks very much. Good morning, Jeff. Hi, good morning. Can you discuss what happened to the specialty carbon block that goes into the EV market this year? That is, what were your volumes or revenues last year? What are they this year? Did operating profits go up or down? Did prices change? Did you lose share? Did you gain share? Could you give us a little bit of a review of what's going on there?

Yeah, sure, Jeff. So obviously, the EV market is an important market for us and one that we're investing in, not only for new grades of traditional furnace blacks, but also with the acquisition of our CNTs, the Sanchon acquisition, and we think that complement is the right strategic mix because conductive carbon additives will continue to be a key part of the battery chemistry, but we see a trend towards CNTs and blends of formulations of CNTs and carbon blacks as we go forward. So we think our position there is actually quite unique in the industry. Now, in terms of 2020, a couple of things. One is, obviously, with the automotive pullback in general, the EV market was impacted somewhat by that. But if I try to look through that, because the strength of the EV market has been pretty good here in the last, you know, three, four, five months, we see that the growth rate in the 20% to 25% a year of lithium ion batteries being intact. This was our key assumption in our strategy here, and we see that as being intact. Now, the way to think about our sales, because we've got a transition period here, you might remember that our traditional sales into energy materials was kind of in the $20 to $30 million a year range. We've commented on that before. And then we purchased Sanshun, which had a trailing 12-month sales of close to $30. So you could kind of think about that in the $50 to $60 million run rate sales level. And now that it seems the EV market is is kind of back to a normal run rate. You could call that the, the, the base. And then we would expect to grow that base, uh, you know, uh, consistent or, uh, or better than market as we, uh, as we, as we win share here, uh, in terms of profitability, uh, of the business, we don't disclose that, but we're, you know, very much in an investment phase right now, uh, as we're developing new products, uh, and, uh, with uh the sanshin acquisition you know we they they we acquired a new a new plant that has unused capacity so there's there's kind of a filling up that needs to happen and so the combination of new products qualification costs and uh and you know unused uh capacity uh you know the profits in this business are going to build over the coming years and our view on this remains uh, remains consistent that, you know, we see this market for conductive carbon additives growing over the next five years to about a billion dollars of conductive carbon additive, uh, value revenue. Uh, and so if, if we achieve our, uh, our market share levels that we've had in specialty carbons traditionally, and we have unit margins in the range of where performance chemicals is, and I think both of those are reasonable assumptions, then you can see that over the next four or five years, this should build to a material contribution for Cabot.

Thank you for that complete answer. Historically, what Cabot tends to do is it tends to take its cash flow from carbon black business and invest in new businesses, like the old formulated solutions business. When you think, Sean, of the strategic path forward, is CapIt really focused in carbon black and fumed metal oxides and sort of small acquisition in that matrix? Or do you feel you need to go further afield in order to create value?

Yeah, yeah. Good question, Jeff, and you follow the company for a long time. And I would say our advancing the core strategy is really taking the best parts of previous strategies and cabots. So, number one, we believe our core businesses of carbon black, fume silica, specialty compounds, these businesses, have good underlying fundamentals to them, and we want to continue to invest for growth in those businesses. So we're not in a position of harvesting to drive new businesses the way that Sam Bodman executed the strategy some years back, where it was more of a harvest and invest in a broad portfolio of new businesses, new chemistry businesses. We think these core businesses, we want to continue to invest and strengthen our leadership position there. That being said, we are making some targeted new business investments. This is pulling on some of the bits of brilliance from Sam's strategy, but in places that make sense. Energy materials, given the importance of conductive carbon additives, is clearly one of those places. As packaging evolves and moves from analog printing to digital printing, we think exploiting our inkjet position clearly makes sense. And then E2C is another one where it's still in the tire business, but as the tire industry moves towards more and more sustainable solutions, we believe this one clearly makes sense for us. Are we going as far afield as in the past with things like aerogel and stuff like that? No, we're doing things that are, you know, very good fits with our core businesses. And what we want to do is strengthen our core businesses and then get the leverage of these targeted growth investments. That's the intent of the advancing the core strategy and what we're pursuing.

And then lastly, maybe this is for Erica, the revenues in reinforcement materials were $325 million in the quarter, and your segment earnings were roughly $60 million. And if you go back to last year, you were earning $60 million with $450 million in revenues. So can you talk about why the level of EBIT is more or less the same, even though the revenues are lower by $125 million. What are the real dynamics that allow us to understand these changes?

Yeah. So the major driver, Jeff, is really just the price of oil on the revenue. So, you know, that drives the top line as we adjust our pricing. But as you know, as we think about the EBIT, what we try to do with our formulas is while we adjust For the input price, we would be holding our margins whole. And so that's essentially what you see, and you see the revenue decline because of the raw material input cost. And then I'd say the other factor is obviously volume is lower. So the volume has declined. You know, we said 11% year on year, but we've been able to offset that as best we can with cost reductions. So that's helped the EBIT line offset some of the volume impact.

Do you have lower raw material costs rippling through your income statement because raw materials fell so much earlier in the year and now you're getting the benefit of those lower raw material costs or no?

If you just looked at the revenue line, yes, we have lower raw material costs flowing through that. But in terms of a margin profile, I wouldn't say no. I don't think we have our pricing and our cost are not mismatched to our benefit at this point. But we've been able to hold those margins as our formulas are intended to do while the input costs have come down. And so you see the revenue come down, but not the margin.

Okay, great. Thank you so much.

Sure.

Thank you. Our next question comes from Lawrence Alexander with Jefferies. Your line is open. Good morning.

Two quick ones. First, for specialty blacks, do you expect the mixed effect to be positive or negative next year? And secondly, with respect to the amount of restocking that might happen in the reinforcement blacks, not so much the timing, but can you give a sense for just the sheer volume that the industry would need to recalibrate or would need to bring back into the system to get back to kind of a more normal range?

Yeah, from a volume standpoint, Lawrence, on that matter.

Right, right. Just how much are they behind, so to speak, or underwater, so to speak?

Yeah, yeah, okay, good. So let me take in the order that you presented them. First of all, good morning. And so in terms of specialty carbons, We would expect a mixed improvement in 2021 because we are seeing a recovery in the automotive end market and our higher margin products tend to orient more there. Things like automotive coatings, high-end engineered plastic applications, things like structural adhesives, those would be higher margin. products, and those will be flowing through as we see the auto recovery. So yes to an improved mix, and I think that will probably be accented even a bit more by our participation in energy materials as that continues to grow as the battery piece of it. So that's the first point. On the volume question, I think the best way to think about it in some ways is to try to look through 2020 because it's such a year full of distortions. If you look at what LMC is projecting in the tire industry, 21 versus 19, certainly a very sharp recovery off of 20, but if you look 21 versus 19, it will still be down maybe somewhere in the order of 5-6%, something in that uh in that range um and and so i think that's probably the cleanest way uh to look through so we're seeing you know very sharp recovery and now which is uh which is good um and that that recovery is uh you know likely uh going to continue as long as we don't have a big reversal in terms of covid related you know economic impacts But, you know, there'll still be a little further ground to cover to get back to what you call normal or what I might say was the 19 volume level.

Okay. Thank you very much.

Thanks, Lawrence.

Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then one or you're touched on telephone. Our next question comes from Chris Cash with Luke Temple Markets. Your line is open.

Hi, good morning. Good morning, Chris. Good morning. So I also had a follow-up on the comments you made about the fundamentals in the Chinese market. And from what I can see, that's been quite a surge in carbon black spot prices. But the most pronounced portion of that increase has been in the fourth quarter. But I'm just wondering if you could further characterize or provide color on what's going on You mentioned some linkage to the underlying feedstock cost being a push, but obviously there's a strong ongoing recovery there as well. I think everybody sees, you know, monthly auto sales having turned positive year over year. So just really wondering, I guess, if the move in carbon black spot prices, is it more of a demand pull price move, or is it more of a cost push pricing move? And then I have follow-up. Yeah.

So I would say it's demand-led, Chris. So demand has improved sharply there after also a very sharp pullback. Now, they experienced a little bit earlier than the rest of the world, so they experienced it, you know, more in that March quarter. But it was a very sharp pullback in demand, and as a result, you know, volumes declined, but also, uh, prices and margins declined, uh, across, across the industry. Uh, but what we're seeing now is that demand led recovery, which is good. The, the, the link to feedstock is just a function of how this market operates because it's a spot market. We tend to price every month. And, uh, as, uh, as coal tar prices, have moved up. We price sort of instantaneously, I would say, yet you see the flow through from an accounting standpoint, you know, would lag that a little bit because of the inventory we have in feedstock and finished products. So it's sort of an accounting lag. And so as a result, we get some positive benefit. But that's a function of how we play in the spot market, whereas in the contracted part of the market, which is really not in play for China, you know, those tend to be matched more.

Got it. And then in the past, you know, the characterization of the competitive landscape in China has been you competing with, you know, pretty fragmented array of smaller regional or even mom and pop players. And I know a lot of those mom and pops have been sort of shuttered permanently. But I think in the past you've characterized your positioning as having an advantage in terms of sourcing feedstock, vis-a-vis the local competitors that may not be as sophisticated and had to lean solely on the crude coal tar. And so I'm just wondering with this dynamic now, is there anything, opportunity for you to, um, do you still have that competitive advantage or is there any opportunity to further, um, you know, take advantage of that? And is there any, even, um, some, you know, raw material costs, uh, arbitrage given the, the, you know, the moving feed stocks over there, any color around those dynamics would be helpful. Thank you. Yeah.

So, so our, our competitive position, we, we lead in the industry, uh, and, and are the most profitable player. uh, in China. And I would say our advantage comes from, uh, our scale at, at almost 500,000 tons of, uh, of carbon black, something in that range. Uh, so scale, uh, technology and, and how we drive, uh, yields, throughputs and energy recovery, uh, all of that, uh, is, uh, an advantage for us. And then on the, on the feedstock side, China is, uh, uh, you know, predominantly a coal tar-based carbon black market, ourselves included. I think the important strategic lever around feedstock management is how you have arrangements with your suppliers and strategic partners. And so in some cases, those are just strategic purchasing relationships. In other cases, they're um their fence line relationships with uh with our joint venture partners who are in the the coking and coal tar related businesses and so we think the combination of these gives us a strategic advantage here so i think the benefit in in china and why we outperform our competitors is is because of those um you know those those primary uh primary forces in terms of the and our So the ARB story is really one of coal tar related to decant oil. And so coal tar inside of China, decant oil outside of China. And at times when the prices have disconnected, for example, when coal tar was very low relative to fuel oil, then you saw Chinese carbon black flowing out of China. What you see right now is actually the ARB is closed. It's actually kind of the opposite, where the coal tar prices are higher than fuel. So we don't see any ARB there. So China will be for China, and the flows of carbon black out of China right now are not being enhanced by any open ARB.

That's helpful. Thank you, Sean. Okay.

Thank you. Our next question is a follow-up from Josh Spector with UBS. Your line is open.

Hey, thanks for taking my follow-up. Just a couple quick ones. Erica, I guess a question on tax rate. Your guide for next year is similar to higher for this year. I guess what are you thinking in the medium-longer term about the tax rate for Cabot?

Yeah, so I think we guided this year's 28% in 2020 is where we were, 28% to 30% for next year. I think probably the big sensitivity there is geographic mix of earnings, and so that's what could help drive that down. So as we get to a full recovered state, I think you could see that start to move down a bit, 28% to 27% or so. is probably a longer-term type rate once we get back to, I think, a bit of a more normal demand mix.

Okay. No, thanks. That's helpful. And I guess earlier, you know, the comments around the cost savings and that rolling back some of the temporary cost actions, just trying to think about how much of the temporary costs are already rolled back in your 1Q guidance and how much is left to come back in the rest of the year.

Yeah, I would say there's probably very little coming in through Q1. I think we have very, very tight cost controls still in place. So most of that would be more of a Q2 through Q4. Got it.

Thank you.

Thank you. Our next question comes from Kevin Hossifer with North Coast Research. Your line is open.

Hey, good morning, everybody. Morning, Kevin. I was hoping to reconcile a couple of the comments. made, specifically on Asia, because it sounds like, Sean, you've given some good comments in terms of the underlying strength of that market and strong pricing there. But, you know, your volumes are down 16% in Asia in the quarter. So I guess, can you help me understand what did the – because it sounds like the markets were overall fairly strong. So what do you think that the market did versus where your volumes were And it sounds like you were firmer on price than maybe others. Are you starting to see others maybe catch up to you in terms of pricing as the quarter progressed and into the first quarter and maybe to the point you'll start seeing the gap narrow in terms of your volumes versus the industry? I guess I'm just trying to reconcile the good commentary on the underlying volumes and pricing versus where your volumes are at currently.

Yeah. So, Kevin, I think much as I already commented, I think the demand, the underlying demand in China was strong. And as I said, we lagged that from a volume standpoint by design because we wanted to, given the pricing and margin pressure that occurred in 2020 across the carbon black industry in China because of the collapse in demand, you know, we oriented first on restoring to, you know, good, strong historical, you know, price and margin level. And so that initially comes at the expense of volume. Now, given this is a spot market, you know, your ability to toggle volumes as things firm up is there. It's not like you're boxed out, you're back in the market every month. But the right place to start was price and margin. And I would expect that I can't comment on what others are doing, but there are some published indices on pricing for carbon black in China, and that's clearly up. So, you know, it appears that And this wouldn't be a surprise to me that others, the industry we track and the industry was not making money in 2020. So they need to have a healthier margin level. So when I connect those dots, I think prices are clearly moving up. But our orientation initially was on margin restoration. And I would expect then as things progress in 2021, that our volume performance normalizes where market is.

Okay, great. And then I think in the performance chemicals segment, I think last quarter you indicated that the fourth quarter would see a fairly sizable headwind from I believe some turnarounds at some of your customers and I think, you know, maybe some costs associated with ramping your new facility. So curious how big of a headwind that was in the quarter. And is that over? So when you think about the sequential improvement that you're, it sounds like you expect a pretty strong sequential improvement in, you know, into the first quarter. Are those things behind you at this point?

Yeah, so we're expecting a material step up sequentially in profitability in this segment, and, you know, we've been focused on self-help measures to, you know, move us back to the more historical levels of profitability, and we're definitely expecting a material step up there. I think a few things are driving that. One is clearly automotive recovery and the pull through there of both volume, but more importantly, mix, and that being firmer in the December quarter. While that began in the September quarter, I think it'll be more pronounced in the December quarter, so that will definitely help. We're moving pricing up in fume silica, particularly in China, and that's beginning to take hold. And then, you know, we're still maintaining a pretty tight posture on cost management, just as Erica commented, you know, kind of more broadly. We're still maintaining that. And so those would be the major drivers. It would be pushing the material step up, Kevin.

Okay. All right. Thank you.

Thank you. And I'm currently showing no further questions at this time. I'll turn the call back over to Sean Cohane for closing remarks.

Great. Thank you again for joining us and for your support of Cabot. And I look forward to speaking with you again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.