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spk09: Ladies and gentlemen, thank you for standing by, and welcome to the CABG first quarter 2021 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 before the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Stephen DeLaHunt, Vice President, Treasurer, Investor Relations. Thank you. Please go ahead, sir.
spk07: Stephen DeLaHunt Thank you. Good morning and welcome to the Cabot Corporation First 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 first quarter of fiscal year 2021, 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 the fiscal year ended September 30, 2020, and in subsequent filings we make with the SEC, all of which are also 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 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 Cohane, who will discuss the key highlights of the company's performance. 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?
spk03: Thank you, Steve, and good morning, ladies and gentlemen. Welcome to our first quarter 2021 earnings conference call. I'm very pleased with the exceptional operating results we reported as we saw a strengthening recovery across our end markets. For the quarter, we generated record adjusted earnings per share of $1.18 and segment EBIT of $140 million. The results were driven by improving demand trends, robust unit margins, disciplined operational execution, and strong performance in our targeted growth initiatives. I'd like to recognize the extraordinary employees of Cabot whose teamwork and commitment made it possible for us to meet the dynamic needs of our customers while maintaining the safety of our people and our communities. The COVID pandemic has challenged our normal ways of working, but I believe our strong culture of connectivity and collaboration enabled us to distinguish Cabot in the marketplace, and we will continue to build on these strengths into 2021. During the quarter, we saw strong volumes in the tire and automotive markets as the recovery momentum continued globally with a sharp rebound off the lows experienced last spring. We are pleased to see that miles-driven trends have improved, though still generally lag pre-COVID levels. In terms of automotive builds, a similar trend has taken hold. With both end markets still below prior peaks, we are optimistic about our growth runway as the economic recovery strengthens. As highlighted in previous calls, we experienced real strength throughout 2020 for products sold into the infrastructure, packaging, and consumer sectors, and this continued in our first fiscal quarter of 2021. Our strong product portfolio, global reach, and technical support have enabled us to capitalize on favorable infrastructure trends in wire and cable, pipe, and geomembranes. Additionally, the COVID pandemic has changed certain consumer behaviors and these trends are supportive of our packaging and consumer-driven applications. While the underlying end market trends are favorable, there likely was some level of channel replenishment in the quarter, as the combination of sharply rising demand and low inventories in most value chains created upward pressure on orders. We are also seeing tightness across transportation modes globally, And this supply chain uncertainty is likely causing customers to build some inventory to mitigate disruptions. I would like to spend a little time now on China. The last couple of years had driven some softening in that market. We are seeing real strength there now. China was the only major economy to avoid a recession in 2020, and the market there was very strong for us in Q1. as PMI hit 57 and industrial production surged. As we look forward, our belief in the fundamentals of the China market is strong and our longstanding strategic assumptions remain sound. Given that almost 40% of the world's tires are produced in China and 50% of the world's silicones, our differentiated position there means we are extremely well positioned for growth. We believe that the feedstock markets will be in balance over the long term which should provide a foundation of stability over time. And finally, we expect environmental pressures will continue to ratchet and Cabot's leadership and sustainability will position us in a differentiated way relative to competition. Looking at our segments, reinforcement materials generated record EBIT performance in the quarter, driven by very strong results in Asia, as our focus on margin paid off. Our global footprint and focus on operational excellence are the foundations of our customer value proposition, and I believe we are seeing benefits of that in our results. During the quarter, we completed the negotiation of our reinforcement materials customer agreements for calendar year 2021. We are pleased with the outcome, which was broadly in line with our 2020 agreements in terms of pricing and share. This is a positive development as we negotiated during a period of low volumes and extremely uncertain forward visibility. By maintaining our share, we will participate in a demand recovery with our customers. We were also very pleased to see the significant step up in results in the performance chemical segment. The segment delivered even in the first fiscal quarter of 54 million, up 32% compared to the first fiscal quarter of 2020. This was primarily due to higher volumes across all applications, strong product mix from automotive applications and specialty carbons and compounds, and progress in our targeted market growth initiatives. Despite the pandemic, we continue to advance critical strategic initiatives that we believe will create long-term value while staying committed to our balanced capital allocation framework. In Shuzhou, China, we are in the process of converting this acquired plant to manufacture specialty carbons. The strategic project will provide growth capacity for a high-value specialty carbons grade and complement our footprint so that we are balanced geographically. This project is progressing well and we remain on track for completion in early calendar 2022. In the battery space, The integration of Shenzhen Sanshun Nano into our energy materials business is complete, and sales of our conductive carbon additives are growing at attractive rates. Customer adoptions and sales with the top 10 global battery producers continue to build momentum, and we believe this business will grow to become a meaningful profit contributor for Kevin. We are also making important progress to grow our inkjet business. Our investment focus over the last couple of years has been in the space of packaging, as that sector begins a transition from analog to digital printing with inkjet technology. Our sales are growing in the packaging space, and we are well positioned with product adoptions at many of the leading printer OEMs. We expect the penetration of inkjet technology to accelerate over the next three years, and we believe we are extremely well positioned. These investments are critical in supporting our earnings growth targets and we've been disciplined in our choices and execution so that we balance growth along with cash return to shareholders. In addition to our growth investments, sustainability and ESG leadership have long been a strategic priority for Cabot and their importance is growing in the eyes of our stakeholders. I am pleased to highlight two achievements this quarter that demonstrate our industry leading position. First, we received a platinum-level rating in recognition of our sustainability efforts from EcoVedas. EcoVedas is an independent assessment organization that evaluates companies' sustainability programs in the areas of environment, labor practices and human rights, ethics, and sustainable procurement. Many of our customers utilize EcoVedas to confirm performance of their supply chain partners. And our platinum rating confirms that Cabot is ranked among the top 1% of companies in its peer group in the manufacturing of basic chemicals. We are also proud of being named one of America's most responsible companies 2021 by Newsweek Magazine. This is the second year that Cabot has received this recognition, which was developed in 2020 to highlight the most responsible companies in the United States across 14 industries. This accomplishment recognizes Cabot's reputation and programs in corporate governance, community engagement, and management of environmental performance, as well as transparent reporting. Sustainability, leadership, and corporate responsibility are integrated in the business strategy and daily management of Cabot, and by leading in this area, we will ensure that all stakeholders are part of our success. I will now turn it over to Erica to discuss the financial results of the quarter in more detail. Erica?
spk08: Thanks, Sean. I will start with discussing results in the reinforcement materials segment. The reinforcement materials segment delivered record operating results with EBIT of $88 million compared to the same quarter of fiscal 2020, driven by improved pricing and product mix in our calendar year 2020 tire customer agreements and with spot customers in the Asia region. This improvement included our ability to raise prices ahead of rising feedstock costs in Asia that drove strong unit margins. Globally, volumes were up 1% in the first quarter as compared to the same period of the prior year, primarily due to 13% growth in Europe and 9% higher volumes in the Americas, as key end market demand continued to recover along with some level of inventory replenishment from the drawdowns earlier in the calendar year. Asia volumes were down 8% year-over-year, largely due to a schedule plan turnaround and our decision to balance pricing and volume in order to improve margin levels. Looking ahead to the second quarter of 2021, we expect stronger year-over-year EBIT in the second quarter as compared to the prior year, driven by higher year-over-year volumes. Looking sequentially, we expect volumes to remain solid, slightly higher than the first fiscal quarter. We anticipate that margins will moderate from the levels seen in the first quarter as feedstock costs increase and we will not experience the same pricing tailwind in Asia ahead of cost. In addition, we anticipate an increase in fixed costs sequentially as volumes increase and we spend a bit more on maintenance activities. Now turning to performance chemicals, EBIT increased by $13 million as compared to the first fiscal quarter of 2020, primarily due to higher volumes and improved product mix in the specialty carbons and compounds product line. Year-over-year volumes increased by 9% in both the performance additives and formulated solutions businesses, driven by increases across all of our key product lines from higher demand levels and some level of customer inventory replenishment during the quarter. We experienced strong demand related to automotive applications, which drove the favorable mix in the specialty carbons and compounds product line. These favorable impacts were partially offset by weaker pricing and product mix year over year in our fume silica product line. Looking ahead to the second quarter of fiscal 2021, we expect stronger year-over-year EBIT in the second quarter as compared to the prior year, driven by higher year-over-year volumes. Looking sequentially, we expect EBIT will moderate somewhat from the first quarter as raw material costs increase in the specialty carbons and compounds product lines, and we expect higher costs associated with the drawdown of inventory levels in the quarter. Moving to purification solutions, EBIT in the first quarter of 2021 was flat compared to the first quarter of fiscal 2020. The reduction in fixed costs resulting from the sale of our mine in Marshall, Texas and the related long-term supply agreement was offset by reduced demand in mercury removal applications and higher costs associated with the reduction of inventory levels related to the transition to the long-term supply agreement. Looking ahead to the second quarter, we expect to see a sequential EBIT increase from improved pricing and product mix for specialty applications and lower fixed costs. I will now turn to corporate items. We ended the quarter with a cash balance of $147 million and our liquidity position remains strong at approximately $1.5 billion. During the first quarter of fiscal 2021, cash flows from operating activities were $21 million, which included a working capital increase of $99 million. The working capital increase was largely driven by growth-related networking capital, as accounts receivables increased with higher sales and inventory increased from purchases of higher-cost raw materials. The change in networking capital also included the final payment of $33 million related to the prior year respirator settlements. Capital expenditures for the first quarter of fiscal 2021 were $29 million. For the full year, we expect capital expenditures to be between $175 and $200 million. This estimate includes continued EPA-related and compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products. Additional uses of cash during the quarter included $20 million for dividends. Our operating tax rate was 30% for the first quarter of fiscal 2021, and we continue to anticipate the fiscal year rate will be between 28 and 30%. I will now turn the call back over to Sean.
spk03: Thanks, Erica. We are very pleased with the record results in the first quarter of 2021, with volumes recovering from the COVID-related lows we experienced in fiscal 2020 and the great execution across the organization. We achieved record-setting results in reinforcement materials and much improved performance in the performance chemical segment. This is a great start to our fiscal year. As I look to the second quarter, there are some tailwinds that benefited our results in the first quarter that we don't expect to repeat. Based on the underlying business performance, we expect adjusted earnings per share in the second quarter to be in the range of 90 cents to a dollar. While I expect our second quarter adjusted EPS to moderate from the first quarter, I believe this level of expected earnings in the second quarter reflects how well our businesses are performing in the current environment. January volumes were strong, and we anticipate the underlying demand in our TN markets will remain robust during the quarter, driving year-over-year EBIT growth across all segments. On the cash side, we anticipate our cash and liquidity will remain robust, Networking capital increases should moderate from what we saw in the first quarter, with more consistent volume levels going forward. As the fiscal year unfolds, we expect the environment will remain uncertain, and there are several factors that we will be managing closely. The first is the level and timing of COVID-19 vaccine distribution across the world and its impact on the economic recovery. Infection rates remain very high in many parts of the world, and the stability of economic growth will depend on favorable trends in reducing the level of infection. Next is global logistics, where we have begun to see some negative impact in terms of availability and cost of transportation in our supply chain. This influence is being felt across global value chains and may take some time to fully stabilize. And finally, the movement of pricing and input costs, particularly in the spot markets in Asia. We have demonstrated our ability to execute well over the past year, no matter what the challenge, and I have confidence that this will continue in the year to come. In closing, I want to thank and recognize our global cabin team. Our company's true character has been showcased during these times of adversity. I am proud of how the team has responded with great resilience and a focus on our customers, our communities, and one another. Our exceptional first quarter results are a true testament to our company's capabilities and that position us well for a successful 2021. Thank you very much for joining us today, and I will now turn the call back over for our question and answer session.
spk09: 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. Your line is open.
spk05: Great. Thanks. Good morning, guys. I guess first question, the outlook commentary and sequential guidance was very helpful. Just curious, as we think about beyond the second quarter here, would you anticipate further cost inflation that needs to kind of be worked through and absorbed, or is your fiscal 2Q kind of a normalized level of margin and customer buying and inventory levels that we can kind of model going forward?
spk03: Yeah, so, Mike, I think we feel, you know, good about the Q2 guide that we have given. I think visibility right now remains challenging because of the factors that I highlighted that we'll be watching carefully and managing through the balance of the year. But I think the Q2 level, I think, underscores how well our businesses are performing in the current environment and gives you a view of some of the things that we don't expect to repeat from Q1. But again, we'll be managing these factors in the balance of the year. carefully because there's certainly some challenges out there. I talked about one of the factors being transportation. I think globally supply chains are tight, in particular ocean freight. Just getting bookings and the impact of that tightness is something that I think every industry is experiencing right now. So we'll have to manage those things. And if we experience impacts from that, we'll have to work on getting recovery of those things. But I think those are the key factors that we'll be watching as we go through the balance of the year.
spk05: Got it. That's helpful. And then just maybe two related questions on Asia and China in particular. First, your Asia reinforcement volumes, I think, were down 8% in the quarter when I would have assumed China demand is strong. So why was that? And second, with some of the recent kind of Chinese lockdowns and everything going on there, how would you characterize the buying activity for your products in the region heading into Chinese Lunar New Year, maybe this year versus a typical year?
spk03: Yeah. So, I mean, China, in terms of the economy, is performing very well. Obviously, the only major economy to avoid recession in 2020. And I think if you look at the Q4 GDP in China, I think it was up six or six and a half percent year over year. And if you look at some of the other indicators that we find have a good relationship to our business, things like PMI or compositive leading indicators, these types of metrics, those were quite robust in China. And we're seeing our business respond in a similar way. I think specifically to your question in the quarter around volumes in China, as I think we commented on our last call, our focus and emphasis has been on price and margin over volume in the near term here, and so we executed on that in the quarter. And so that's why you saw a bit weaker volume there because of our emphasis on price and margin. But as we go forward, you know, the economy in China right now remains pretty strong. The uncertainty around lockdowns and COVID impacts, of course, is a global uncertainty. And we'll have to watch and manage that as we go through the year.
spk05: Great. Thank you.
spk09: Thank you. Our next question comes from Josh Spector with UBS. Your line is open.
spk00: Yeah. Hi. Thanks for taking my question. And congrats on a solid first quarter here. I guess maybe to follow up on Mike's first question, you gave some explicit kind of items that you bridged sequentially you know, in reinforcement, the feedstock cost tailwind fades and higher fixed costs. And same thing with fixed costs and performance. Are you able to bucket those and give us, you know, more of an absolute number of what that actual impact is sequentially?
spk03: Yeah, good morning, Josh. So, yeah, let me try to help a little bit here on the Q1 to Q2. And so I'll I'll try to walk through at least the two major businesses, reinforcement and performance chemicals. So in reinforcement first, Q1 was obviously a record EBIT in the quarter, driven by strong demand and improved pricing and product mix in Asia, and from our calendar year 2020 agreements. So you'll recall that the December quarter was the last quarter of those agreements from last year. But the quarter also benefited from the timing of price increases in advance of the flow-through of rising feedstock costs, as well as we've kept a very intense management of costs here as the outlook in terms of demand has been uncertain, and I think that's been the prudent thing to do. So together, these two factors, the pricing ahead of the flow-through of feedstock in Asia and and tight management of costs amounted to about $20 million of EBIT that we would not expect to repeat in Q2. Now, in performance chemicals, we're obviously very pleased to see the segment recover strongly in Q1, largely due to our work to grow our targeted market segments along with continued pricing actions, controlling costs, executing on our growth initiatives in areas like energy materials and our new FMO plants, and so we're pleased with all that. But in Q2, we expect sequential EBIT in performance chemicals will moderate the bid from Q1 as higher raw material costs in specialty carbons and compounds flow through. We also expect some increase in costs from a planned drawdown of inventory. And we'd estimate the combined impact of that to be roughly 10 million in that segment. So that being said, January volumes are strong in both businesses, and so we anticipate solid volumes for the quarter. So those would be the major movers to bridge you from Q1 to Q2.
spk00: Thanks. That's really helpful. I appreciate that. Just on the performance side and specifically looking at fume silicas, Erica mentioned still price and pressure down year over year, but can you comment sequentially on how that business improved or maybe didn't improve and what your expectations here are for that business over the next couple of quarters?
spk03: Yes, sure. That's right. On a year-over-year basis, you're still seeing that challenge, but on a sequential basis, we're seeing some improvement here. Let me just try to recap FMO a little bit. So we're seeing volumes recovering as demand in end markets like auto and construction are improving, so that's good. We've also implemented actions to restore pricing. I think I've commented on this in the past that this is a focus area for us, and they're starting to take hold, particularly in China, which we're pleased with. So we still have more work to do there, but pleased with what we're seeing so far taking hold. And to pull back the lens a little bit here, I think the fundamentals of the business remain very attractive. The FMO business has historically been a business with very strong profitability and EBITDA margins at the higher end of our portfolio, and this business traditionally grows above if you look at it over a very long term, as silicones have really strong performance characteristics. The fundamentals of the business, we believe, remain strong here in our position in terms of strategic integration with key silicones partners, be it Dow Silicones or ChemChina or HYC. we're really well positioned here. So overall, we remain positive on this business, and we'll continue to work through the near-term challenges, but some pricing action beginning to take hold, particularly in China, which is good.
spk00: Okay, great. Thank you.
spk09: Thank you. Our next question comes from David Bagwater with Deutsche Bank. Your line is open.
spk06: Thank you. Good morning, and have a very nice quarter. So congrats. Morning, Dave. So just on this year's contract tire negotiations, can you just comment on anything unusual in these negotiations? I guess you got a little bit of pricing year over year. Any call you can provide on those negotiations?
spk03: Yeah, so, David, we're pleased with the outcome of the annual negotiations with our tire customers. You know, overall, despite challenges of negotiating during an acute market weakness and with forward trends, looking uncertainty there as a result of COVID. We ended in a position, you know, where we broadly maintain pricing and share as compared to 2020. And so I think that's, you know, on balance an outcome that we're pleased with this year, again, given the challenges in volume during 2020.
spk06: Very good. And just on performance chemicals, obviously a very strong Q1. It'll be a good Q2 as well. Can we get back to prior period earnings of upwards of $200 million in this business in the segment going forward, do you think? Yeah.
spk03: So, yeah, you'll recall if you kind of go back in the 2017, 2018 period, this business, just as you said, was around the $200 million EBIT level period. annually. And so we're definitely pleased to see our hard work and efforts beginning to pay off here. A lot of focus on target market segments, managing pricing, and controlling costs. And all of this is flowing through and helping us in the result you saw. I think for the business to get to you know, back to that sustained level, let's call it in the sort of 50-ish million a quarter, I think we'll need to still see continuing strength in demand. So, for example, in automotive, an important end market here, you know, we're still below peak levels of auto builds, and so I think we'll need to see continued, you know, recovery of the auto sector there as one factor. And then continued progress on my commentary on FMO as we see stabilization of supply-demand economics in FMO flow through and better pricing. That will help. So really, you know, overall volume recovery related to COVID, automotive continuing to improve, which drives an important high-value mix. and continued progress in FMO. When all of those take hold, I think we feel that the business will be, you know, back at that level, at that sort of 50-ish million a quarter, you know, or $200 million type of a rate. Thank you.
spk09: Thank you. Our next question comes from Lawrence Alexander with Jefferies. Your line is open.
spk01: Good morning. Can you give a feel for mixed effects for the balance of the year and how you think they'll play out over the next couple of years? I'm just thinking about are you seeing a faster recovery in lower margin or higher margin products, and then is there an offsetting catch-up effect? And secondly, can you characterize where we are in terms of the growth of the tire replacement market in China? How much of your business there is currently into the replacement market?
spk03: Yep. Thanks, Lauren. So let me talk a little bit first about mix. So the last couple of years, we had had, as we've commented, a negative mix impact because auto has been weak. And with that recovering, that is certainly improving the mix, though we're still short of of prior levels in terms of auto build. So I think there's more runway there, but definitely mix improving. We're also very focused on what we call our targeted market growth initiatives here in the company. And this is really going after key markets where we think we've got a differentiated position and that offer strong margins, and so, you know, clearly applications like energy materials are important, but even inside of what I would call our core product lines in performance chemicals, there's a vast array of applications and opportunities here, and we're always working to upgrade the mix. My sense over the coming period here, the next couple of years, is that mix should strengthen as auto continues to improve and our target market efforts pay off. Directionally, that's what we're focused on to create a value. I think this whole mix question is most pronounced in performance chemicals, so my comments here are related to that. more to that. On the tire replacement question in China, I think in China we've got, of course, passenger car and truck. Both of them have a significant replacement component to it, 75, 80 percent of it being replacement driven. Now in truck, I would say the replacement cycle is pretty mature, but in the passenger car side of things, the replacement cycle is still building as the car park has grown. significantly over the last few years. Not all of that car park has hit the replacement cycle yet, and so we think that the passenger car side of things has some room to go still before it gets to kind of a mature run rate of replacement. In terms of our business, hard to characterize specifically you know, what percentage is replacement as PC and what is truck. I mean, we're very focused on where the target place is for us to participate, whether it's passenger car, truck, or off the road in terms of applications as well as customer portfolio. So, you know, we're very focused on trying to align ourselves with the right customers and the right applications that really value Cabot and what we offer there.
spk01: Great. And just to maybe just follow up on the mixed question, I guess last time that we had such a strong truck cycle, I think carbon black kind of operating leverage to that cycle was a much bigger part of the story. And has something changed in terms of the content per vehicle or how the business is balanced or the kind of mix of product on the automotive side that sort of is tempering kind of the operating leverage this time or the relative dynamics between the two markets?
spk03: No, I don't think so. I think perhaps what you're referring to, Lawrence, was a couple of years ago there was, I would say, the truck tire market in China that got a boost because of regulations that were put in around overloading of trucks. And so that obviously forced more trucks into the fleet in order to carry the same amount of goods. And so there was a bit of a bump to the truck tire market in China. I would say that My view on it is I think that has largely settled out and stabilized here. You'll see a robust truck business in China because of the movement of goods as well as continued strength in infrastructure. China continues to build and stimulate a lot of infrastructure. That requires a lot of movement of steel and cement and industrial goods, and so we think that's a pretty stable outlook.
spk09: Thank you. Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then 1 or your touch-tone telephone. Our next question comes from Chris Cash with Luke Capital Markets. Your line is open.
spk04: Good morning. It's sort of a follow-up to that prior discussion just now, but a bit more on a global look versus China specifically. And just to the extent you have visibility, is there any way you can characterize or distinguish what your RM volumes look like in feeding truck tires versus passenger, bar tires versus OTR during the quarter? It's the extent you have granularity there in terms of the growth by each of those segments.
spk03: Yeah, Chris, we don't break that out in terms of reporting. So, I think no specific further commentary there.
spk04: Okay. And the comment about the quarter may have benefited from inventory replenishment demand. Looking for some color there. You know, my sense is that There must be some threshold that you reach given that you're shipping the carbon black into your major customers via rail car, I believe, and so there must be limited space for them to increase inventory. So I'm just wondering if you could provide any sort of color as to how much you think that dynamic may have contributed during the quarter.
spk03: Yeah, yeah. In terms of the restocking question, Chris, I think there was likely some level of inventory replenishment in Q1, although I think visibility here is challenging. There's very little published data. We have very good visibility, of course, into the point you just raised, which is when we're selling to our customers and filling up silos, we've got good visibility there. Often in restocking, the question is more what happens downstream. of our customers, and that's where there's unfortunately very little sort of consistent published data. But what I can say is that customers really pulled down their inventories in 2020 to manage the pandemic, and they seem to be working hard to catch up on orders, which tells me that they're chasing real demand signals here. I think companies are still Pretty cautious about rebuilding stocks until trends in the pandemic improve and the economic recovery stabilizes here. If I look at this question across our segments, I would say there was likely only a modest amount in reinforcement materials given that the value chain here is a bit shallower. I mean, us to the tire maker and then the tire maker either to the auto OE or into their retail channels. It's a little bit easier to see through and we don't see but a modest amount likely in reinforcement. In performance chemicals, we likely saw a bit more in the quarter as the value chains are deeper here and visibility gets tougher given the layers in the value chain. Probably a little more in the performance chemicals applications because of that. All that being said, if we just sort of piece together what we see as we talk to customers, what data we can gather, all of the different inputs here, I don't believe restocking was a material part of the story in Q1. It was definitely some, but I don't think it was a material part of the story.
spk04: Okay, that's helpful. And then finally, I guess... I think it was Department of Commerce implemented some tariffs on imported tires from some Southeast Asian countries, Thailand, Korea, a couple others. Do you have any sense for if and how that may affect, you know, I guess, tire production in the U.S. and therefore your volumes domestically? Sure. Or is this just like a zero-sum game where to the extent that you're getting benefit in the U.S., there's an absence of benefit over there? Any sense for how that dynamic may play out? Thanks.
spk03: Yeah, sure. So, you know, in terms of impact around tariffs, you're right. There has been a preliminary determination against some tariffs. countries in Southeast Asia. I would say this is pretty similar to what we saw against China some time back. But in terms of impact for us, given our broad footprint of manufacturing locations, tariffs on tires in one geography may cause a little bit of a shift in demand from one region to another. So while there may be an impact on our regional earnings, we don't expect our corporate earnings to be significantly impacted. So I think that's a function of our global footprint. But if I just sort of pull the lens back a bit around tariffs in general as it relates to the tire industry, as I've shared before my view on this, I think the supply chains for tires, they're pretty structurally set, at least in the medium term. And so tariffs only likely result in higher prices for consumers. I mean, when you look at the structural reliance of the U.S., for example, on imported tires, that doesn't change overnight. And while there's some, I would say, on-the-margin capacity expansion in a place like the U.S., the U.S. still requires tariffs. imported tires. And so I think it ends up really just being a bit of a zero-sum game, and ultimately you and I as consumers pay higher prices here. But that's how I see it at a big picture in terms of the cabin-specific impact. You know, we would not expect, you know, any significant impact here because of our geographic balance.
spk04: Got it. And sorry, one last one. that came to mind. Just in your formal comments, you talked about strength in China. But if you look at your RM segment volumes, they're, you know, up in Europe and America, but down in Asia. So I'm just trying to reconcile that. I know you talked to it a little bit saying that you're focused more on, you know, higher margin products and not chasing volume in China, but it seems like a big delta in the volume variances vis-a-vis the formal commentary about China being as strong as it has been.
spk03: Yeah, so two things there to recap, Chris. One is definitely our focus of price and margin over volume in the near term and restoring margins back to the level where we think they need to be. And it's important to remember this is a spot market in China, so as we get margins restored and things improve, then the volume participation can follow. But we think this is the right short-term emphasis. But we also called out a turnaround in the period that took some of our production capacity, a scheduled turnaround offline. So now with that maintenance work done, the capacity to support higher volumes will be there. So it's really a combination of those two factors.
spk04: Thank you.
spk09: Thank you. Our next question comes from Kevin Josever with North Coast Research. Your line is open. Thank you.
spk02: Hey, good morning, everybody, and nice quarter. I want to ask about on the timing of pricing benefits that you're seeing in Asia. It sounds like it's a pretty big benefit that you got in the first quarter. And if I remember correctly, the last time this happened was in the first half of your fiscal 2018, where you had a nice, again, pricing in China moved up ahead of the raw materials flowing through the P&Ls. So, And I think at that time it was expected that it would only last a quarter, and it ended up lasting two quarters. So I guess I'm curious if – it sounds like you mentioned earlier that – to an earlier question, the $20 million benefit between that and another factor that will go away. I'm curious, has that gone away at this point? Like in January, is there no timing benefits anymore? Or could you still potentially see some benefits from that – in your second quarter?
spk03: Yeah, so we would not expect to see the benefits. It's not that the pricing's gone anywhere, it's that the costs are flowing through our P&L in Q2, and so you've basically got a matching. So that's really it, but the pricing remains in a good place. The last time that we saw a run-up like this, you're right, was in 2018. I think a combination of some factors there. One is raw material costs moving up sharply, and because it's a spot market, the pricing would have to follow that very quickly. So I think that factor is similar. One that is slightly different, I would say, is that in 2018, There was a very aggressive ratcheting of environmental enforcement in China, and China has moved through different periods or sort of degrees of level of enforcement. I would say it was very strong in 2018 as the trade friction kicked in with the U.S. It moderated a little bit as they were trying to deal with the impacts of, again, the trade issues. As we look at it now, clearly China has come out with some pretty aggressive targets from an environmental standpoint, peak carbon in 2030 and everything that flows from that. So our view is that the environmental enforcement will will continue to ratchet over time here. But in 2018 that enforcement was very pronounced and that provided some benefit to us because of our sustainability position and our ability to run and serve customers and differentiate on the basis of sustainability. That was a bit of an extra bump I would say there in 2018.
spk02: Okay, and then on the rubber, and reinforcing materials. You know, obviously volumes seem to be getting better. It sounds like you expect some sequential improvement in your second quarter. How, you know, if we kind of forget about 2020, you know, in 2021, how close do you think you can get to 2019 volumes? Do you think you can come within an arm's length of it? I'm curious, just trying to think of how you're thinking about what the recovery looks like here in 2021. Yeah.
spk03: Yeah, so our best view there, Kevin, would be to take a look at what we see from those that forecast the tire industry. And so if I look at what expectations are in terms of tire production in 2020, it would still be probably 4% or 5% below what the prior peak was. So 2018 and 2019 were pretty flat globally in terms of total tires produced. So let's call that the most recent peak. And if we look at where the forecasters are for 2021, it's, of course, a nice bump off 2020, but still a little bit below in that, you could kind of think in that five percentage range, something like that. So that's our best visibility into it right now.
spk02: Okay. All right, great. Thank you very much.
spk09: Thank you. And I'm currently showing no further questions at this time. I would turn the call back over to Sean Cohane for closing remarks.
spk03: Great. Thank you very much, Shannon. Thanks, everyone, for joining our Q1 call today and for your continued support at Cabot. We look forward to speaking with you again next quarter. Have a good day. Stay safe. Thanks.
spk09: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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