Steve Delahunt - Vice President, Treasurer and Investor Relations Sean Keohane - President and Chief Executive Officer Eduardo Cordeiro - Executive Vice President and Chief Financial Officer; President, Americas Region.

David Begleiter - Deutsche Bank Jim Sheehan - SunTrust Robinson Humphrey Inc Jeff Zekauskas - JPMorgan Daniel Rizzo - Jefferies LLC Kevin Hocevar - Northcoast Research.

Good day, ladies and gentlemen, and welcome to the Q4 2017 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference call, Mr.

Steve Delahunt. You may begin, sir..

Thank you, Kevin. Good afternoon. I would like to welcome you to the Cabot Corporation earnings teleconference. With me today are Sean Keohane, President and Chief Executive Officer; and Eddie Cordeiro, Executive Vice President and Chief Financial Officer.

Last night, we released results for our fourth quarter and full fiscal year 2017, 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 statement.

Additional information regarding these factors appears under the heading forward-looking statements in the press release we issued last night and in our 10-K that is filed with the Securities and Exchange Commission and available on our website.

In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.

Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the Investors section of our website.

I will now turn the call over to Sean, who will discuss the key highlights of the company’s performance, Eddie will review the business segment and corporate financial details. And following this, Sean will provide closing comments and open the floor to questions.

Sean?.

one, investing for growth in our core businesses; two, driving application innovation with our customers; and third, generating strong cash flows to efficiency and optimization. The outcome of our strategy will be measured by sustained and attractive TSR and underpinned by clarity and commitment to capital allocation.

Specifically, we are targeting top tier total shareholder return from 7% to 10% adjusted EPS growth over time combined with a capital allocation commitment to return 50% of discretionary free cash flow to shareholders. The results of our strategy are clear, as we continue to deliver on our commitments.

Adjusted EPS grew 9% on a year-over-year basis and the cash generating power of the business was evidenced by delivering $340 million of operating cash flow in fiscal 2017.

We also demonstrated commitment to our capital allocation framework by returning $138 million, or 57% of discretionary free cash flow to shareholders in the form of dividends and repurchases. While we are very pleased with our financial results in 2017, we must continue to invest for the long-term to ensure sustainability of our TSR objectives.

On this front, we strengthened our commitment to the long-term by our actions in 2017. Our commitment to growing our core is best exemplified to our two new fumed silica plants in Wuhai, China and Carrollton, Kentucky.

These projects will allow us to continue to meet the growing market demand for our high-performance fumed silica, while strengthening our relationships with key leaders in the silicon industry, Dow DuPont and HYC.

Both projects will be in construction through 2019, and we anticipate these plants to contribute to significant growth for our fumed silica business starting in 2020.

As I mentioned earlier, our agreement to purchase Tech Blend will not only strengthen our global leadership position in black masterbatching compounds and provide a platform from which to better serve global customers, but it will also support our strategy of delivering more formulated solutions.

Finally, we have numerous expansion and debottleneck projects underway around the world to support capacity growth for our carbon black businesses, which will allow further growth in Specialty Carbons and Reinforcement Materials. Another key facet of our strategy is to drive application and innovation with our customers.

Our applications basis are rich with growth in innovation opportunities, and we are investing in a number of specific projects that can serve as growth accelerators. Our commitment to growth and innovation is best exemplified by our investments in the battery application.

Conductive carbon additives are an essential performance material in battery formulations, both lithium ion and advanced lead acid battery architectures. The application is growing at around 20% compound annual growth rate and the momentum of electric vehicles is only accelerating.

While our sales into this application are modest today, they are growing fast and we have committed resources to the ongoing development and commercialization of this application.

This application can become a material contributor to our growth objectives, as we believe Cabot had a strong right to win, given our application know-how, strength and conductive carbon additive technology and a leading position in Asia Pacific, where most of this development is occurring.

We also recently commissioned our new Asia technology center in Shanghai, which will serve as a key platform to drive collaboration and innovation with our customers in the Asia Pacific region.

As China transitions to a period of more moderate growth, innovating around new applications and collaborating more closely with customers is an essential element of our strategy.

Overall, I’m very pleased with our performance in 2017, both in the delivery against our financial objectives and the balance of strategic investments we’re making to drive long-term sustained performance.

I remain confident in our ability to deliver attractive and sustained total shareholder return based on a combination of EPS growth and cash return to shareholders. I will now turn the call over to Eddie to discuss the financial results of the quarter in more detail.

Eddie?.

Okay. Thanks, Sean. During the fourth quarter of fiscal 2017, the company delivered strong year-over-year results, driven by higher volumes and margins. For the full-year, we delivered improved operating results with higher EBIT in our Reinforcement Materials and Purification Solutions segments.

The Performance Chemicals segment EBIT delivered solid EBIT of slightly higher than $200 million, despite feedstock headwinds, while the delay of key Specialty Fluids projects impacted their year-over-year results. During the fourth quarter of 2017, EBIT for Reinforcement Materials increased by $6 million, as compared to the fourth quarter of 2016.

The increase in EBIT was principally due to higher unit margins and volumes. Higher margins were driven by both tire contracts and spot pricing, particularly in Asia and Europe. The increase in volumes was due to gains in the Americas and Europe.

Sequentially, Reinforcement Materials EBIT decreased by 3 million compared to the third quarter of fiscal 2017, driven by seasonally lower volumes in Europe. Full-year fiscal 2017 EBIT in Reinforcement Materials was up $56 million, primarily due to higher margins and volumes.

Higher margins were driven by both tire pricing in Asia in Europe, and the increase in volumes was due to gains in the Americas and Europe. Now turning to Performance Chemicals, EBIT in the fourth quarter of 2017 decreased by $3 million, compared to the fourth quarter of fiscal 2016.

The decrease in EBIT was primarily due to lower margins from higher feedstock prices, as well as higher fixed cost due to higher maintenance activities. Volumes were up by 10% in Specialty Carbons and Formulations and 8% in Metal Oxides, as we saw strong market demand across both businesses.

Sequentially, Performance Chemicals EBIT increased by $9 million compared to the third quarter of fiscal 2017, primarily due to higher volumes and favorable mix. The volume improvement was partially due to the unplanned downtime in the third quarter that did not reoccur in the fourth quarter.

Sequentially, volumes increased by 5% in Specialty Carbons and Formulations and by 2% in Metal Oxides. For the full fiscal year, Performance Chemicals EBIT decreased by $24 million over fiscal 2016.

The decline was largely driven by lower margins due to the impact of higher feedstock costs, lower sales of fumed silica in the CMP application and higher fixed costs. Volumes in both Specialty Carbons and Formulations and Metal Oxides businesses were up 5% in fiscal 2017, compared to fiscal 2016.

EBIT in the fourth quarter of 2017 in Purification Solutions was flat compared to the same period last year. The segment benefited from a positive inventory comparison and volume growth in the Specialty applications, which were offset by lower volumes in the North American powder Activated Carbon market.

This market remains highly competitive and we continue to focus on restoring margins before focusing on volumes. In an effort to adapt to the current market conditions in North America, we announced earlier this month that we have indefinitely idled three of seven production units at our Activated Carbon manufacturing facility in Marshall, Texas.

We believe this move helps us to realign our cost to current demand. Sequentially, Purification Solutions EBIT increased by $4 million compared to the third quarter to fiscal 2017, driven primarily by higher volumes from seasonally higher mercury removal demand and lower maintenance costs.

For the full-year, EBIT in the Purification Solutions segment increased by $11 million compared to fiscal 2017, due to higher volumes in the mercury removal and Specialty applications and a favorable inventory comparison from the prior year due to decreasing inventory levels in fiscal 2016 that did not reoccur in 2017.

In the fourth quarter of 2017, EBIT in Specialty Fluids decreased by $2 million compared to the fourth quarter of 2016, as we were impacted by a lower level of project activity in both the North Sea and Asia.

Sequentially, Specialty Fluids EBIT decreased $1 million compared to the third quarter of 2017, as we saw reduced rental activity due to the timing of EMEA projects. For the full-year, Specialty Fluids EBIT decreased by $4 million compared to fiscal 2016.

Lower project activity levels resulted in lower rental and sales volumes for our drilling fluids in both the North Sea and Asia. I will now turn to corporate items. We ended the quarter with a cash balance of $280 million, and our liquidity position remains strong at $1.3 billion.

During the fourth quarter of fiscal 2017, cash flows from operating activities were $157 million, including a decrease in networking capital of $64 million. Capital expenditures for the fourth quarter of fiscal 2017 were $61 million.

Additional uses of cash during the fourth quarter included $20 million for dividends and $18 million for share repurchase. During fiscal 2017, we generated $340 million of cash flow from operations, including an increase in net working capital of $23 million. Capital expenditures for fiscal year 2017 were $147 million.

Additional uses of cast during the fiscal year included $77 million for dividends and $61 million for share repurchases. During the fourth quarter of fiscal 2017, the company recorded a tax benefit of $3 million for an effective GAAP tax rate of negative 2%. This included a benefit from tax certain items of $11 million.

The operating tax rate for the fiscal year ended September 30, 2017 was 19%. The LIFO impact was an expense of $7 million in the fourth quarter and $11 million for the full fiscal year 2017. As we look towards 2018, we expect capital expenditures of approximately $225 million to $250 million.

We anticipate an operating tax rate of 22% and are not currently anticipating a significant impact from LIFO accounting. And I’ll now turn the call back over to Sean..

Thanks, Eddie. Looking ahead to 2018, we remain intensely focused on driving our Advancing the Core strategy. We are making the appropriate investments to position the company for long-term growth and feel the business is well positioned heading into the New Year. The global market for Reinforcement Materials generally remains supportive.

We continue to see strength in Europe, driven by solid demand and high utilization rates. In North America, the long-term fundamentals for tire growth remains solid, with growth rates expected to be in line with GDP and signs of the pricing environment being more supportive.

In terms of emerging markets, South America continues to gain momentum across all product categories, as the local economy slowly recover. In China, pricing remains very firm, as the government continues to increase the level of environmental enforcement against noncompliant companies.

While we view this as a favorable conditions for Cabot, as we have made the long-term emission control investments, the near-term situation prevents some – presents some uncertainty. The Chinese government is intensely focused on Air Quality Index or AQI, particularly during the winter months when coal is burned to generate household heating.

We have seen circumstances where the government has mandated curtailments of all industry to address unhealthier quality levels. As a result, it is possible that we could experience some impact to our volumes in the winter months. One result of these curtailments is lower carbon black supply, which should favorably impact pricing.

Based on our current view of the markets, the dynamic environment in China and the still ongoing tire customer contract negotiations, we expect the annual EBIT of $200 million to $220 million for fiscal year 2018.

In Performance Chemicals, the end markets remain robust with growth rates in excess of global GDP We continue to develop the foundation for future growth in fumed Metal Oxides with our announced investments in Wuhai, China and Carrollton, Kentucky and in specialty compounds with our investment in Tech Blend.

As we mentioned last quarter, we are currently in the midst of implementing price increases to recoup some of the lost margin from higher specialty carbon feedstock costs. Although we are seeing some success, we continue to experience rising feedstock costs. We will look to offset these costs as the market will allow.

Notwithstanding these headwinds, we expect the segment to grow modestly in EBIT in a range of $200 million to $215 million for fiscal year 2018. We anticipate the first quarter will be the weakest through normal seasonality compounded by higher feedstock costs and some customer disruptions caused by the recent hurricanes.

In Purification Solutions, we anticipate the North America powder market to remain oversupplied and aggressively priced. As a result, we took steps in the first quarter of fiscal 2018 to realign our cost to current demand and pricing levels by idling three lines in our Marshall, Texas plant.

We continue to see good momentum in the growth of the Specialty applications, all of which keep us on track to deliver EBIT in the range of $10 million to $15 million in fiscal 2018.

The first quarter is typically our weakest due to the seasonality of the mercury removal volumes and water purification markets, and we expect the first quarter of 2018 to follow that trend. Finally, the Specialty Fluids segment continues to make progress in the expansion of the customer base in the Asia, Middle Eastern and Africa region.

Certain large projects were expected to start in the fourth quarter of fiscal 2017, but are now projected to start in the second-half of fiscal 2018. As a result, we expect the first-half of the year to be roughly break-even and therefore, stagnant EBIT for 2018 will be in the range of $5 million to $10 million.

Based on our current view of the market and economic conditions and our outlook for each of our segments, we anticipate adjusted EPS for 2018 to be in a range of $3.50 to $3.90. Overall, in 2018, we remain confident that our strategy will deliver top line growth consistent with our end market exposures.

We will continue to invest in new product and process technology, seek to capture the operating leverage from improving utilizations and pursue growth investments, including bolt-on M&A in our existing businesses.

We’re focused on creating shareholder value through generating strong discretionary free cash flow and reinvesting that into our core businesses, as well as returning cash to shareholders, which will deliver sustained and attractive total return to our shareholders.

We believe this will result in a good balance of long-term adjusted growth of 7% to 10% and a meaningful cash return. Thank you very much for joining us today. And I will now turn the call back over for our question-and-answer session..

[Operator Instructions] Our first question comes from David Begleiter with Deutsche Bank..

Thank you. Good afternoon..

Good afternoon..

Hi, Sean, nice quarter. Just on the volumes in Reinforcement in the Americas and EMEA double-digit.

Can you talk about the what droves double-digit whether there’s industry buying and what you expect in 2018 for Reinforcement Materials volume?.

Sure. So, David, we can see some volume movements quarter-to-quarter. I would first start at the Reinforcement level. If we look at the business globally on a full-year basis, we grew around 2%, which is essentially in line with how we saw the market growing overall.

Now if you look region-to-region, you’ll see some different numbers there and certainly in the quarter, both North America and EMEA were quite strong. But I think, probably best to pull back and look at the full-year level, because you will see some quarter with seasonality depending on order patterns at our tire customers.

And the results in both EMEA and North America were related to outcomes from our negotiating season last year. In terms of next year, 2018, we’re of course, in the middle of tire contract negotiations right now, but maybe just a couple of comments about the overall market.

We see the market continuing to grow in the 2% to 3% range for carbon black and tire and rubber applications, and we expect that our volumes will grow in line with market, as this is an important part of our strategy..

Very good.

And Sean, just on Performance Chemicals what’s the – why can’t we get prices at a more rapid pace to offset the feedstock costs?.

Yes. So the feedstock costs over the last year basically have been ticking up as after, as you know, a pretty dramatic decline, where we saw some margin benefit from that. And I think, the ability to realize price in this segment depends on a number of factors.

I think that price realization in certain applications is much higher as if you look at sort of the more specialty and performance nature of certain applications, we typically see higher realization.

And then on the more core or basic products, you might see a more competitive intensity, where market conditions or competitor behavior drive results in those ones.

I think the other factor here is, because we saw such a steep decline in oil and margin benefit, and then oil somewhat creeping back up, it can make it a little bit challenging in terms of managing the long-term balance with customers around price.

But that being said, oil is an important input factor in this business and one that we have to manage carefully to maintain the long-term margins. And we commented last quarter what we see as the right long-term EBIT margins in this business in 23%, 24% range and we think that is the right target to have for this business.

And if you look at it over a long period of time, those margins have grown up to that level and we think that’s quite a strong level and a durable level.

So something we’ll have to manage here David and it will be a key focus for us throughout this year as oil it looks like it continues to tick up, I think I saw it today Brent was around $61, so that probably puts at a high for the last couple of years..

Thank you very much..

Our next question comes from Jim Sheehan with SunTrust..

Thanks for taking my question.

On your strong volume growth that you saw in the Americas and Europe, do you see that level as being above replacement tire demands and if so why?.

Hey Jim. Well, I think if you look at the overall market growth rates, I think both of them we see as being both North America and Europe as being in that sort of 2% to 3% range. Now again you’ll see some movements quarter-to-quarter, but we think that a reasonable place.

For example, I mean if you look in Europe, I think underlying economic growth is supporting tire growth and then for carbon black in that range. And then I think in North America, we are I think finally swinging to a period where we will see growth in this 2% to 3% range.

We certainly haven’t, the market hasn’t over the last few years in North America in part because of significant tire imports into North America. I think that has now stabilized and as we see tire investments ramping up in North America, I think we’ll see a shift towards more local production here that will support growth rates in that range.

So I wouldn’t get too caught up in sort of quarter-to-quarter moves here and look at those sort of long-term fundamentals, that’s how we think about it..

Great and in terms of the masterbatch acquisition, can you give us an idea of the relative size of your existing masterbatch business? And also how does this acquisition play into your growth opportunity in conductive carbons? Is that a major focus of the acquired business today or you are thinking of shifting their focus more in that direction?.

Yes, sure. Jim maybe I’ll just pull up a level first to try to address the question around Tech Blend and our excitement in how this fits into our strategy.

I think as you know well, our strategy is built around driving three key themes; one is investing for growth in the core businesses; second is driving application innovation; and the third is generating strong cash flows. And the acquisition of Tech Blend really supports all three pillars of the strategy.

We are a leader today and in black masterbatch and compounds and this bolt-on acquisition really gives us a strategic entry into North America. It’s a market that we know very well, we’ve been manufacturing and selling black masterbatch and compounds for nearly 50 years with the facilities in Europe and Middle East and Asia.

I think on the application innovation front, our strategy here is to focus on attractive markets and invest to develop application and formulation solutions. And I think here is where this business is quite strategic as we combine Cabot’s upstream particle and chemistry expertise with Tech Blend’s formulation and downstream value chain.

I’m confident that we’ll be able to bring impactful innovations to the plastics market. So the role of specialty compounds and masterbatch in our Performance Chemicals segment is quite strategic because of its linkage to upstream specialty carbons.

We do have a real focus on building out our conductive application, specialty carbons, one of the key functionalities of specialty carbons is conductivity and the role of conductive formulations in plastics is an important focus for the company and so we think this platform in North America with Tech Blend gives us an ability to accelerate our focus there.

Tech Blend has a small position in conductive formulations today, but the platform here combined with our product platform from Europe and Asia that we think we can import onto this platform, we think is going to accelerate our growth here.

And so in terms of current size of the business, we don’t disclose that number publicly, but we have four plans today, this will be the fifth and you have some sense given the size of this announcement in terms of revenues and EBITDA of what this business looks like..

Terrific and if you could just comment on M&A more broadly, do you plan to do further M&A a in this masterbatches business? And secondly, there was a major deal in the activated carbon space recently, do you see activated carbon as core to your business going forward?.

Let me comment a little bit on the role of bolt-on acquisitions broadly speaking.

As you know when we rolled out our new strategy we explicitly called out the role of bolt-on acquisitions as a part of the strategy and I would say that applies across each of our businesses and we are quite active here in looking at opportunities that make sense for us.

Specifically in terms of this acquisition in North America and its role in our specialty compound strategy, this is something we’ve been looking at for quite some time for the right North America market entry. And so this opportunity to developed and I think will be a good one for us.

We’ll look across each of the businesses continue to look for for the right bolt-on acquisitions. I think in your second question I think related to – I think you’re referring to the Kuraray, Calgon deal. I think, as with all of our businesses here, Jim, we don’t comment on the strategic options for those businesses and what we may or may not do..

All right, thank you very much..

Our next question comes from Jeff Zekauskas with JPMorgan..

Thanks very much.

What was the revenues for the Tech Blend?.

Revenues for Tech Blend were in the $30 million range..

$30 million, okay.

And I think early in the call Ed said that he didn’t expect much LIFO change for next year, does that mean that the $11 million LIFO hit you took this year will – does that mean that there will a $11 million benefit all things being equal or there is no benefit? What does no change mean?.

Jeff, since that we’re early in the year and when we look out at sort of the predations for oil futures, they are all relatively flat. We’re not forecasting any significant LIFO impact either positive or negative.

So that would mean that there would be no benefit or no headwind unless of course oil prices and our inventory levels would change, so I hope that answers the question..

Yes, so in carbon black, I think your year-over-year incremental margin in the fourth quarter was a little less than 8%.

Why was it so low or do you see that as a representative number or what happened?.

Say it again Jeff, so you are referring to reinforcement materials or?.

Yes, so reinforcement materials, your revenues I think were up $78 million and your EBIT was up 6%, so the incremental return was a little less than 8%.

So, like where do you make that?.

Yes, well I think a couple of things in terms of how the numbers flow here, I mean we certainly will see movements quarter-to-quarter in terms of how our maintenance spending activity happens as well as how inventory builds and draws and cycles, and so that can obviously does flow through the EBIT line.

I think, if you look overall at the business on the full-year, we’re really pleased with where the earnings have gone here. I think, the EBITDA margins are at very healthy levels. And I think, we’re delivering the results with the right balance of volume, price management and cost management.

So when I pull up to that level, I feel really good about it. And again, quarter-to-quarter, you can see some things in the numbers that can either exaggerate or depress a particular quarter..

Okay. And I think on the last conference call three months ago, you described Performance Chemicals as having a 23% to 24% EBIT margin.

So have you moved that down now to maybe 22% to 23%, given business conditions?.

Well, we still think that this is the right target for the business, Jeff. And certainly, we have a further challenge to try to get price realization here, given that that specialty carbon feedstocks continue to move up, and so that will be our challenge.

But I still think that’s the right target we saw an improvement from last quarter to this quarter, and we’ve got to keep pushing here in order to do that. The other factor to be understood here is that, we are making some investments for the future that are being expensed in the current period.

For example, when we build new plants, there’s a certain amount of SG&A expense that is associated with activities like that, and we’ve got quite a bit of activity going on in this segment right now.

And then, of course, some of the emerging applications like lithium ion batteries and advanced lead acid batteries where we’re making some SG&A investments for longer-term growth. So I think, that that’s another important factor here.

But what we’re trying to do is balance what we think the right margin level is in this business with the right investments to make sure we can sustain the growth over time..

Okay. And then lastly, when you gave that assessment of your EBIT and Reinforcement Materials being between $200 million and $220 million next year.

Is that inclusive of your price forecast in Reinforcement Materials, or is that range more indicative of current business returns and current volume conditions?.

Yes. So you’ve seen this year, Jeff, our range has been pretty consistently in the sort of $45 million to $50 million range. Now as we look forward at this stage, as we sit here today, we see this as the right range to think about the business.

It’s always a difficult time of year to comment in too much detail as we are in the middle of our annual negotiation cycle. But perhaps, I can try to provide a little bit of color in order to give you a sense for what might push the different ends of the range. I think, first of all, there are the tire contract negotiations.

I think, you’re pretty familiar that this is largely a U.S. or Americas and Europe phenomenon, Asia is largely spot. And as we look around each of these regions, we continue to see strength in Europe as there’s robust growth and a tightening of the supply demand and utilization picture. So that continues to look quite supportive.

In North America, we are in this period of transitioning to what I think is going to be a stronger fundamental period for North America, because we’re seeing higher investments beginning to ramp.

We’re seeing higher imports stabilizing, which means a shift towards more local production and no new capacity and the looming investments around environmental compliance here. So I think, over the next couple of years, we see this trending in a pretty good direction.

And then South America, I think, is definitely, we’re seeing things pick up a bit there. So overall, we see the pricing trend in the market as is up. But we won’t really be in a position to comment in more detail until discussions are complete. But the range would reflect different pricing outcomes, as we sit here today..

Okay, great. Thank you so much..

Our next question comes from Laurence Alexander with Jefferies..

Hi, guys, this is Dan Rizzo for Laurence.

How are you?.

Hi, Dan..

Hi. So corporate costs, how should we think about them going forward, it ticked up a bit in 2017.

I was wondering if this is more of the sustainable rate as we look out the next few years?.

Yes. So we have bumped up our corporate costs here as we are working through a number of different projects. And so as we do that, as the project activity to grow the company increases then typically that is what happens.

And so things like the Tech Blend announcement that we just made, for example, the projects like that would get supported from out of this corporate cost. So I think, given the current run rate, I think is a reasonable way to think about it for now..

Okay, thanks.

And then if we think about the idle plants in our Purification Solutions, one is, I mean, can I at some point be converted to maybe more specialized uses, or is it just too much capacity? And two, are there other thoughts of potentially having to idle more plants down the road if things weren’t not to pick up in mercury?.

Yes. So we have dedicated specialty plants and feel good about our capacity positions in those plants and those units to drive this shift that we’re making in this business towards more specialty and have a number of different projects here that I think we’ve talked about in the past in biogas and catalyst, as well as in the automotive application.

So I think we’re in shape near the challenge. The challenge is really around, what I would call, the North American powder market, and this encompasses applications like mercury removal and some of the core water applications. And in these markets, we have seen that the competitive intensity has gotten to a level that we don’t think is sustainable.

And so as a result, we have taken out some capacity to right-size the cost structure. And as we move forward here, our focus is around price realization, because we think we need to see pricing and margin levels at a more sustainable level. So that that’s where our focus will be as it relates to this mercury removal and water markets..

All right. Thank you very much..

The next question comes from Kevin Hocevar with Northcoast Research..

Hey, good afternoon, everybody..

Hi, Kevin..

I’m wondering if you could comment on what – if you could walk us around the world in Reinforcement Materials, what’s your – your utilization rates look like around the world and what it looks like on a global scale?.

Yes. So I think, probably not a lot has changed here, Kevin, in terms of what we have talked about over the last quarters, several quarters. But let me just try to summarize again here. So starting in Europe, we continue to see things in a pretty good position in terms of balance. And so utilization rates would be quite high for us and for the industry.

And as a result, we have seen that translate into better pricing throughout this past year and would expect that to continue as we head into next year. In North America, I think, it really comes down to sort of a pace question.

We really see the fundamentals in North America as building pretty nicely to a lot of tire announcements, as you know, and as those come on stream, that will require additional locally produced carbon black. And I think we’ve now seen passenger tire imports hit a level of, I would call it a more stabilized level.

And so, therefore, we should start to see growth in North American carbon black. Over the last several years, we haven’t – the industry hasn’t seen growth in North America, because it was consumed by tire imports.

So I think that that transition is beginning to happen and will play out, some of it’s playing out, as we speak, but it’s something that does play out over the next couple of years. In South America, we definitely are seeing demand begin to pick up here off of what had been a pretty tough year over the last, I would say, over the last year or two.

And so that’s a place where the utilization levels are beginning to get to a more reasonable level. And then in Asia Pacific, it’s largely a spot market, as you know, and China is the biggest market here.

And I would say, things are pretty firm in China right now largely because of the pressures around environmental enforcement, around noncompliant players, and I don’t see that picture changing in anyway. I think, China is committed to this path, and so should remain tighter and more imbalanced as we go forward..

Gotcha, okay. And so looking at the – back to the Reinforcement Materials EBIT guidance of $200 million to $220 million in 2018, you – EBIT and Reinforcement Materials is up $56 million this year. And I believe that was primarily driven by contract pricing and spot pricing in Asia. And the guidance implies a lot less growth in that in 2018.

It seems like utilization rates are as good as not better than they were last year on a global scale.

So wondering, does the guidance bake in your worst case and best case scenario in pricing, or – because it seems like if we can match the levels that you’re able to do last year, I guess, next level of improvement that there could be some upside of that.

So I just wanted to get a sense for, if that’s baking in the full scale of outcomes on pricing that you expect?.

So a couple of things to recap the year. The improvement was very significant in Reinforcement Materials this year, and so we’re really pleased with that. But I think unrealistic to expect that sort of a further increase. But let me just sort of walk you through that in a little bit more detail. So the results this year were driven by three factors.

One was outcomes from customer contract, the second was a very healthy spot market in both Europe as well as in Asia Pacific, and so the improvements were driven by those three things. Now let’s talk a little bit about Asia Pacific.

The significant contribution from Asia was in part you could think about it as a bit of a reset or resetting to a new normal in Asia, given how things have tightened in terms of the utilization. But to expect then a reset on top of that is probably not the right way to think about it.

If we look at margin levels today in Europe, they’re quite competitive globally. So that means, there is a room for further movement there, but you shouldn’t think about it as another significant step up. And then as we look at the other parts of the world, we are seeing the utilization levels continue to tighten.

And we’ll work through pricing on those during our both customer negotiations, as well as our spot market actions throughout the year. I think, the final thing I might say, Kevin, around the range is that, we will manage through, I think, a period of uncertainty here in China over the winter months.

I had commented earlier that China has continued to ratchet environmental enforcement against noncompliant players, and we view this as a very favorable condition for Cabot as we’ve made the long-term emission control investment. But the Chinese government right now is intensely focused on managing air quality, particularly during the winter months.

During the winter months, especially in the Northern part of China, they burn coal to provide heating. And this along with industrial output has created some of the bad air quality that I’m sure you’ve read about over the years. And at times you can see China take somewhat draconian actions to try to curtail industry in order to improve air quality.

And so we’re going to have to manage through that challenging period here during the winter and we’ll see. So I think, that’s another factor here that’s on our mind as we manage the year..

Okay, gotcha. And last one for me just back to the Europe 11% growth in the quarter, it sounds like things are incredibly tighten not just for you, but also for the industry there.

So I was just wondering if there’s anything to read into your ability to grow 11%, because it seems like you’re very, very tight, but I think the rest of the industry is there as well. So I know, some competitors took some capacity offline over the last year, too.

So curious if – have they bumped up against capacity and you were able to benefit since you haven’t taken capacity offline, or giving in the summer months, I think, things slow in Europe just seasonally.

So the things just run harder than usual in the summer months just kind of curious if there’s anything special that that happened during the quarter to allow you to grow that or just as what it is?.

Yes. So well, I think a couple of things you’ve hit on, Kevin, that last year there was some capacity that was taken out. And so as a result of that, customers did become more and more focused on supply reliability. And so that that did result in some volume gains for Cabot on the full-year, as well as some price realization.

I think, in any given period, you can see significant moves as order patterns change at customers, and as we build and draw inventories depending on how those water patterns look and how our maintenance schedule actually plays out.

So I wouldn’t read too much into that the high-level takeaways you have are right, which is the market is growing and the market is pretty tight. And so we’re focused on supporting our customers with reliable supply and managing pricing appropriately. So I think, you’ve got the right high-level points..

All right, great. Thank you..

And I’m not showing any further question at this time. I’d like to turn the call – conference back over to our host..

Okay. Well, thank you. Thank you all for joining us, and look forward to speaking with you again next quarter. Have a good day..

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day..