Good day, ladies and gentleman, and welcome to the Cabot Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the conference over to Steve Delahunt, Vice President, Treasurer and Investor Relations. Sir, you may begin..

Thank you. Good afternoon. I'd like to welcome you to the Cabot Corporation earnings teleconference. With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and CFO.

Last night, we released results for our second quarter of fiscal year 2019, 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 statements 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 that is filed with the SEC and available on the Company's website.

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

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

I will now turn the call over to Sean Keohane, who will discuss the key highlights of the Company's performance, Erica McLaughlin will review the business segments and corporate financial details, following this Sean will provide closing comments and open the floor to questions.

Sean?.

Thanks, Steve and good afternoon, ladies and gentlemen. In the second quarter of 2019, we have to navigate a number of challenges in the business environment. Despite this, we delivered solid results with adjusted earnings per share of $0.99.

During the quarter, we delivered strong cash flow performance and we advanced our strategic portfolio objectives with the signing of an agreement to divest the Specialty Fluids business. But before we get into more details on the financials, I'd like to take a moment to discuss the themes of the quarter.

Similar to other global chemical companies, we were impacted by soft automotive production, a weak environment in China and higher raw material costs during the quarter. These high level themes impacted both our Reinforcement Materials and Performance Chemical segments.

For Reinforcement Materials, we saw more competitive intensity in Asia relative to the same quarter last year, driven by market softness in more modest levels of environmental curtailment across the chemical space in China.

Looking outside of China, we benefited from strong pricing in our 2019 global customer agreements, but this benefit was offset by feedstock headwinds in the quarter.

While we are pleased with the results of the customer agreements, continued strong attention to pricing actions is necessary to address the cost of environmental compliance, in the trend of widening feedstock differentials.

While the macroeconomic environment was not very supportive, our volumes held up relatively well due to the importance of the replacement tire market. In Performance Chemicals, soft automotive production and the challenges in China, can be seen in the weaker volumes for the segment.

While performance additives experienced a minor 1% decline overall, the product mix was materially weaker in specialty carbons, as demand for higher margin automotive and fiber products declined.

In Formulated Solutions, we experienced a 16% decline year-over-year, due to softer automotive production and destocking across the auto and plastics value chains.

EBIT in our Purification Solutions segment increased $7 million year-on-year, as we saw improvement from volume growth, strong specialty pricing and lower cost as a result of the transformation program we launched in the first quarter.

While we continue to explore strategic options for the business, we are pleased with the performance improvement in the quarter and the outlook for the remainder of the year.

As I look at things in our end markets across the globe, this looks to be more of a slow and steady recovery as opposed to the balance back, we had been anticipating after the Chinese New Year.

Clearly, we are experiencing a demand environment that is not reflective of underlying fundamentals as destocking in a very weak automotive production has impacted volumes and mix in the recent periods. The lack of visibility on US-China trade has also reinforced and more cautious tone among our customers.

As we build our way to a more normal environment across the balance of the calendar year, we expect steady improvement in performance. Looking at the start of our third quarter, we are seeing the shoots of recovery and expect a stronger end market environment by our fiscal fourth quarter.

While the current environment is choppy, we are committed to the long-term growth plans in our core businesses and have conviction around the fundamentals of our markets and our strategy.

We will continue to balance growth investments with the philosophy of tight cost management and a sustained focus on working capital to drive strong operating cash flow. We also remain committed to returning cash to shareholders. And in the quarter, we repurchased shares of $50 million and paid $20 million of dividends.

We have now repurchased $238 million of share over the last 12 months. I will now turn the call over to Erica McLaughlin to discuss the business results in more detail..

Thanks, Sean. I will now discuss the segment results beginning with Reinforcement Materials. EBIT from Reinforcement Materials for the second quarter decreased by $18 million as compared to the same quarter last year.

While we delivered significantly higher pricing related to our 2019 customer agreements, this benefit was offset by the impact of lower margins in Asia from a more competitive pricing environment. In addition, we experienced higher raw material costs from both higher feedstock differentials and the timing of the flow through of raw material costs.

Globally, volumes declined 1% in the second quarter as compared to the same period of the prior year, primarily due to 6% decrease in volumes in EMEA from softer automotive demand. Despite the lower margins in Asia, we delivered volume growth of 2% driven by higher volumes in China, as we remained a preferred supplier of carbon black in the country.

Looking ahead to the third quarter, we expect a sequential improvement in margins as the raw materials flow through challenges we experienced in the second quarter are not expected to repeat in the third quarter, the impact of which is roughly $10 million in our second quarter.

During the third quarter, we also have a scheduled downtime for one of our US EPA related investments, which will result in higher fixed costs and the negative impact from inventory drawdown.

While the expected sequential improvement is a positive sign, we anticipate that the third quarter will remain below the prior year, as the pricing environment in Asia will take some time to fully recover.

With expectations for stronger auto demand in the back half of the calendar year, particularly in China and in Europe, we continue to expect a strong fourth quarter for the segment. Now turning to Performance Chemicals. EBIT decreased by $19 million year-over-year, largely due to lower volumes and a less favorable product mix.

Weak automotive production and destocking resulted in volumes declining 1% in performance additive and 16% in formulated solutions. Weaker demand in the more profitable automotive and fiber end markets resulted in a less favorable product mix.

The mix challenges primarily impacted the specialty carbons and specialty compounds product lines in the quarter. Looking ahead to the third quarter, we expect volumes and margins to increase sequentially.

Volumes are expected to improve as automotive and plastics demand recovers and destocking abates, which will result in a margin improvement due to a mix benefit, as well we expect to benefit from lower raw material costs flowing through.

The Performance Chemicals segment will also be impacted by the scheduled downtime for the US EPA related investment, which will result in higher fixed costs and the negative impact of inventory drawdown related to this event in this segment as well.

Similar to Reinforcement Materials, our expectation is for a strong fourth quarter, as automotive production improves and destocking comes to an end. Now moving to Purification Solutions. In the second quarter, EBIT increased by $7 million compared to the same quarter of last year.

This was driven by higher volumes in our specialty applications, including automotive pharma and catalyst, in addition to improved margins, as our price increases in the specialty applications took hold. The business also reduced fixed cost in the quarter, driven by savings from the previously announced transformation plan.

Looking ahead to the third quarter, we also expect to see sequential improvements and seasonally higher volumes and further benefits from actions being taken in our transformation plan. For our Specialty Fluids segment, second quarter EBIT increased by $15 million, as compared to the prior year due to an increase in project activity.

We expect to complete the divestiture of the business in the third quarter and we anticipate minimal EBIT contribution from the segment going forward. I will now turn to corporate items. We ended the quarter with a cash balance of $176 million and our liquidity position remained strong at $630 million.

During the second quarter, cash flows from operations were $90 million, which included a decrease in net working capital of $22 million from a reduction in inventory. We expect to see a further reduction in working capital for the next two quarters, and working capital should be a source of cash for the full fiscal year.

Total capital expenditures for the second quarter were $43 million and we're expecting the full year spend to be in the range of $250 million to $270 million, driven by growth projects including the two new fumed silica plants in the US and China and sustaining in compliance capital which includes EPA related capital investments.

As previously discussed, we returned cash to shareholders to $20 million in dividends and $50 million of share repurchases. Our operating tax rate was 24% for the quarter and we anticipate the fiscal year rate will be between 23% and 25%.

The increase in the tax rate from 21% in 2018 is driven by US tax reform and as we noted last quarter, this additional tax causes a significant headwind the year in the amount of roughly $0.20 of adjusted EPS. I will now turn the call back over to Sean..

Thanks, Erica. Now I'd like to give you an update on our outlook for 2019. Despite, a challenging first half of the year, driven largely by a weak China environment, we are beginning to see signs of improvement in that market.

Stimulus measures appear to be taking hold, automotive production in China is projected to improve in the third calendar quarter. China's PMI from March was above 50 for the first time since October of 2018. And our March and April order books are showing signs of pickup.

We've also seen favorable commentary recently from President Xi about the importance of continued environmental enforcement. Based on these positive indicators, we are projecting a gradual improvement in pricing and volumes for the second half of fiscal 2019.

As discussed, we anticipate improving sequential results in our Reinforcement Materials and Performance Chemicals segments, driven by volume and margin recovery.

The sequential improvement in Reinforcement Materials and Performance Chemicals will largely be offset by the impact of our Specialty Fluids segment, which remains on track for divestiture in the third quarter.

Our outlook for the fourth quarter remained strong based on projected improvement in automotive production and a strengthening environment in China. Based on this, we expect full year adjusted EPS to be in the range of $4.05 to $4.30.

We are confident in the fundamentals of our core businesses, our leadership positions and unparallel geographic footprint and the robustness of the industries we serve. Our advancing the core strategy seeks to balance growth and leadership in our core businesses with robust cash return to shareholders.

We have conviction that this is the right strategy for Cabot and we are committed to delivering another year of earnings growth while investing for the future, divesting non-core businesses and returning cash to our shareholders. Thank you very much for joining us today, and I will now turn the call back over for a question-and-answer session..

Thank you. [Operator Instructions] Our first question comes from Mike Leithead from Barclays. Your line is open..

Hey, guys. Good afternoon..

Hi, Mike..

I guess first, if I look at the first half Reinforcement and Performance businesses combined earning about $100 million a quarter in EBIT.

So can you just talk a little bit more about the magnitude of the step-up you're expecting in 3Q and then what that implies for 4Q? It sounds from the commentary Sean, that the 3Q pickup is slightly above the $10 million of EBIT you're losing this quarter from spec fluids is -- am I reading that correctly?.

Well, we expect that we won't have any further contribution from Specialty Fluids in the quarter, that's right. So that will largely offset the sequential improvement that we're expecting to see across both Reinforcement Materials and Performance Chemicals in the quarter. So that's the right high level picture.

If you think about the progression Mike through Q3 and Q4, we are seeing today what looks to be sort of a slower and steadier improvement rather than a sharper uptick that we had been anticipating coming out of Chinese New Year and with resolution of US China trade.

So, I think what we're going to see is more of a step-by-step improvement here and the results expected in the third quarter, I think are evidence of that. Now as we look to the fourth quarter, we are expecting a further step up based on a couple of key things.

One that we will -- if projections around automotive improvement materialize that will certainly help continued steady improvement in China, which we are beginning into March and April to see some modest price increases and so as those continue throughout the balance of the year that will be a positive.

And then, in the fourth quarter, we won't have a repeat of the EPA project, which is quite substantial in the third quarter and the non-repeat of that means that the impact from unabsorbed cost or inventory changes we call it is, it doesn't occur in the fourth quarter.

And then finally, as you know, we have our Wuhai project coming on stream in China during the fourth quarter and we would expect to have some contribution from that as it begins to ramp up. So these are the key drivers of how we see progression across Q3 and Q4..

Got it. That's a helpful bridge. And then, on capital deployment, there's obviously been a step up in buybacks over the past three quarters.

Can you just talk about the extent you're willing to use your balance here -- balance sheet here at current share price levels for repurchases or I guess how do you think about the appropriate leverage levels in the current macro backdrop?.

Yeah. Well, I think a couple of things here Mike. One is that share -- cash return to shareholders is an important part of our capital allocation framework and so, we believe that's the right long-term way to drive TSR for the Company that along with earnings growth.

Now more recently, we have been more aggressive in share buybacks because of where we view the stock price as well as how we see the current cash flow situation. So, we'll continue to look at that and evaluate as we go forward.

And you have seen some step up in using the balance sheet to do this, but I think in light of the current environment, I think we want to be prudent here and so we'll continue to do that.

We've always had a view to maintaining investment grade credit rating is important for Cabot, and I think that's proven out over the long term and so we'll maintain that posture..

Great. Thank you..

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

Hi. Thank you. Sean, just to get on the pricing in China.

You discussed the dynamics this quarter and exactly why you think it will get better by Q4, and demand will get better, but still some of those competitive intensity as I suspect will be sustained going forward?.

Yeah. Sure, David. So I think we've seen quite a sharp reversal in China and I think it's really a confluence of a number of factors as we were -- as well clearly, China in terms of the macro numbers has been quite weak over the past nine months or so.

And they have been working to sort of regain their footing in terms of overall kind of macroeconomic picture, number one. Number two, the numbers auto numbers --auto OEM has been really weak. I think we had probably about nine months, I think where we had negative year-over-year comps and so they were quite pronounced.

And at the same time, while there was demand softening there was a pretty sharp drop late in the calendar year in Chinese coal tar prices. And so as coal tar prices were coming down people had high cost inventory in a weak demand environment. And so there was a certain flushing of inventory type of behavior.

As we look at that, our view is that is not sustainable and not representative of where the market has been recently. So more of a temporary phenomenon and reflecting this confluence of factors.

Now as we go forward, we're not going to see a real sharp snap back in demand, but more of a steady rise in economic activity there, then we are expecting that the pricing recovery in that market will also be more steady and so that's what's implied in our outlook at this point.

And if you look at where we were in both March and April, we were able to get pricing up in both months although somewhat modest. But I think two months in a row moving prices back up, I think is reflective of where the market needs to go to restore back to the right levels..

That's very helpful.

And just one more thing, just you mentioned the feedstock differentials impacting the raw material issue, could you just -- little more color on that -- in that point?.

Yeah. Sure. So I think this topic has been an important one and we've touched on a little bit over the last year. There are clearly a number of factors in the feedstock environment that are -- there are converging today.

Some of them related to MARPOL and the change in sulfur spec and then some of them actually related to the change in the crude slate as you have less -- heavy crude from places like Venezuela and Mexico, then your -- the quality, let's call it, of the carbon black feedstock is lower and so that leads to differentials or differences between the actual cost we're experiencing and our pricing mechanism to pass these through.

And so our view on this is remains consistent that these costs have to be passed through down the value chain. That's our model. It has been for a long time in terms of these formulas and we've been working through mechanisms, both contractual mechanisms as well as spot market mechanisms, when we find that there is a disconnect.

And while we're making good progress on that there is more work to be done here, David. And so I think that will -- that is setting up further pricing action as well as that will inform -- is informing the conversations we're having with customers around next round of negotiations..

Thank you very much..

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

Thanks very much..

Hi, Jeff..

Hi.

When you divest the Specialty Fluids business, are there stranded costs that remain and if there are how large are they and how much do you have to spend to eliminate them?.

Hi, Jeff. This is Erica. So, there is very minimal stranded costs that will still be with the business. So there is not anything I think to worry about in that case..

Okay. You talked about price decreases in China and Reinforcement Materials. If you looked at the magnitude of those price decreases on profits in the segment.

Can you compare them to the benefits that you got by pricing up in Europe and the United States? How would those two numbers compare?.

Yeah. So the numbers Jeff would be roughly equal. If you look at the pricing gains that we got from both our contract and spot markets outside of China and Asia South, so call it kind of the rest of the world. You could think about it as Americas, EMEA and Japan.

So those are typically more of our contract markets and so the benefits there were around $20 million up in the quarter. So I think this is positive and indicative of the core strength of the business.

Now, the situation in China and Asia South, as I've said before you can kind of think about these markets as sort of behaving as one and so the impact in the quarter there. On the negative side was about roughly the same number.

So, as we think about going forward here will see a steady improvement in the pricing environment in China as we sort of work off this sort of temporary bottom that we're at. But we think it's going to be more of a steady climb back rather than a snap back..

So, prices in China must have been down a lot, because maybe the non-China businesses. I don't know, twice the size of the China business.

Is that right?.

Well, so prices were down pretty sharply because feedstock you remember dropped very sharply and so the combination of that and weaker demand left people holding high cost inventory and so the behavior was to try to move it fast and clear it out. And so, I think that exacerbated the situation for sure.

Now, if you look at where we are now, we have seen not all, but a substantial portion of that coal tar price decline rebound and rebounded pretty quickly. And that is providing that along with the fact that those sort of dumping or clearing prices aren't sustainable.

So, the combination of those is causing prices to appropriately start moving back up and we saw progress against that in both March and April.

So, I think as the demand environment continues to firm up from the very sort of unusual and confluence of negative factors here to a more normal level, then we expect the restoration of profit margins there in China..

So maybe I didn't ask my question, right.

So was the decrease in China profits equal to the increase in the profits in the other region in the quarter?.

Well, I think there's three -- there are three factors in terms of the Q2 profits, Jeff. So in terms of the decline and so you can think about them as roughly equal, they're with the positive pricing up outside of China and Asia Pacific South, there was the pricing down in China and Asia Pacific South, and then there was the feedstock challenges.

Those -- all three of those were roughly equal and sort of approximately the $20 million range. And then all of that $20 million that was related to feedstock, about half of that was timing flow through which we do not expect to repeat..

Okay. That's pretty color.

And then lastly, you talked about the strength in the fourth quarter and would you see that strength if auto production in Europe and then China were flat year-over-year or do you actually need higher year-over-year auto production to achieve that strength that you see?.

Yeah. So if you think about the range that we have Jeff. So, certainly to hit the top end of that range, we would need to see pretty, pretty solid positive year-over-year comps.

Now that's what IHS is calling for in calendar Q3 and calendar Q4 and of course, in our fiscal will only pick up one quarter of that, but we would need to see what they are calling for. And the impact there is principally a mix improvement. I mean the volume increase is not that big of a driver, but more of the favorable product mix that comes there.

So I think that's one important factor. I think we also would need to see that with polymer prices lifting that destocking in the plastics chain starts to shift to a bit more of a restock position and that would impact both our -- the plastic side of specialty carbons as well as our specialty compounds business.

So, we need to see a couple of those factors starting to kick in to think about the upper end of the range. And so if you think about kind of a balanced view, I would say, yes, we need to see some improvement, but we don't have to have the factors swing as positively to hit the top end as we would hit the top end..

Thank you. Our next question comes from Jim Sheehan with SunTrust. Your line is open..

Thank you.

Could you give us some more detail on the green shoots you're seeing? Is it more on the auto area or the plastics or exactly where?.

So, we are seeing in terms of looking at the order book, we are seeing some positive signals there and in certain applications beginning to see volumes look a little firmer than -- then we had been seeing. So, I think that's probably an indication that destocking is coming to an end and beginning to turn.

If you look across the plastics value chain and you just look at underlying polymers, you saw in April, it's pretty much all of the polymers begin to tick up in terms of pricing. And so I think that also has historically been a signal that starts to firm up demand and depending on how sharp that is can begin the restocking process.

I wouldn't say those moves have been significant enough yet to do that, but positive in that each of them turned up in the month of April. I think, the other things that we are seeing is across China. Well, I think it's still early day the momentum around stimulus measures beginning to take hold is positive.

Over the last two months PMI, it's been over 50, which it hadn't been for a while.

And I think most recently President XI again has been public about returning to a more aggressive posture around environmental enforcement and probably that kind of commentary wouldn't be happening if there wasn't some confidence on his side around stimulus beginning to firm things up in terms of the economy.

So,I think there are a range of things that we look at here, Jim that I would put in this category of green shoots..

Okay. And on that subject of environmental inspections. There was an accident, an explosion in Jiangsu and we've heard reports about increased safety inspection activity.

Are you seeing any impact in terms of your facilities being inspected or others in the industry?.

So you're right, there was a terrible accident there that resulted in pretty significant loss of life and has in fact resulted in an increase in the intensity around inspections. And so we definitely see that less so at our sites, but just sort of observing what's happening across the industry, we definitely see that.

So I think the combination of things like that as well as China's long-term commitment to improving air quality mean that the environmental agenda, I think remains important here.

Although over the last six months or six to nine months, it seems that they did take their foot off the accelerator, a little bit as they were trying to work through global trade issues with the US and regain their footing in terms of economic growth. But we definitely are seeing that across the chemical sector. Jim, but no direct impact on us..

And on the subject to differentials, is this only happening in raw materials in China or is it more of a global phenomenon and I think you had actually fixed this problem earlier in Europe, a few years ago.

This is just a matter of applying the same fix you did before or is it more complicated than that?.

Well, it's always more complicated than that, but I think Jim you're directionally right here.

So, at a high level, the differentials are because of what's happening in the US Gulf Coast, since that's the biggest pool for carbon black feedstock and not only supports the US, but also supports parts of Europe and some significant parts of Asia excluding China.

So what you're seeing here is with probably some early movements as people are preparing for MARPOL, that's causing some movements, as well as the crude slate again is not as heavy because of quantities of crude that are not coming out of places like Venezuela and Mexico is sort of degrading the quality somewhat of the carbon black feedstock slate.

So all of that is resulting in differentials that need to be passed on down the chain. Now, you're right, we have been working through a combination of contractual mechanisms.

So things like the delivered cost adjustment in our contracts, as well as mechanisms where when we see cost diverge, we have an opener in our agreements with customers to discuss this and attempt to get recovery forward.

And so I think we need to stay the course on this, because it's an important factor and it's clearly one that has to get managed in our business model is that these need to get -- these need to get passed on.

So we're spending a lot of time educating our customers on this and making sure that they understand this is a critical part of us providing long-term viable supply to them..

Thank you..

Thank you. Our next question comes from Kevin Hocevar with Northcoast Research. Your line is open..

Hey. Good afternoon, everybody..

Hi, Kevin..

Wonder -- I think it was around this time last year that you started negotiations for the 2019 rubber carbon black contracts.

So curious, if you're starting to see that again at this time -- this year for 2020 contracts?.

Yeah. So Kevin, I think we have indeed started some preliminary discussions with customers. I think in response to their request to do so. I'd say, they are at a very early stage and we are definitely being selective here to make sure that we engage in the right way and have the right deals.

I think particularly with respect to providing mitigation of feedstock risk due to any impacts that may emerge over the balance of the year related to MARPOL. I think this is, as you know, a bit of a moving target and this kind of a spec change across the refining industry is a really big deal.

So, I think we want to tread carefully here and make sure that we manage this in the right way.

If there is -- this year I would say and last year, as we started addressing these MARPOL risk in any differentials, this will remain an important part of annual contract negotiations, and so we're spending a lot more time with customers on this in preparation. So, the answer is yes.

It's a little more complex, because of the education required, but I would say we're making very good progress in this regard..

Okay. And then, can you comment, you've talked in the past about potentially strategical alternatives for Norit, I'm curious any updated thoughts there. It seems like the business is stabilize a bit and actually getting better here and something you expected to get sequentially better from here.

So curious, if you could just update us on your thoughts around that?.

Yeah. So my thoughts I haven't changed here, Kevin. In terms of the long-term view on this we don't view it as a strategic part of the portfolio and therefore have been and will continue to aggressively pursue alternatives here.

I can't speak more specifically than that, at this point, but I do want to be clear that the strategic intent and our motivation has not changed at all. Now, in the meantime, we have been aggressively working to improve results.

We're pleased to see that, that is beginning to show itself here, which is I think, a really, really positive signal in the efforts by the team on all of the different levers of our transformation plan are certainly beginning to pay off..

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open..

Hi, guys.

This is Dan Rizzo on for Laurence, How are you?.

Good, Dan..

How does IMO 2020 going to affect the raw material cost differential you guys are just kind of describing?.

Well, I think it's difficult to exactly project them and because again this level of a spec change across the refining sector is somewhat unprecedented. And so, I think everyone is really working hard to understand what the impact could be and put the right mechanisms in place to deal with it.

Our view remains unchanged here that our business model is about providing high value, high-performance carbon black to our customers and the movements around feedstock are intended to be pass-through and pass down the value chain. And so that remains unchanged.

The only difference here is that the traditional indices, it may not with the advent of MARPOL reflect exactly the way we're experiencing cost.

And so I think it's going to be very important that we continue to educate our customers here and then we get the right mechanisms in our contracts to reflect this, so that we can really focus our attention on how we create value for our customers, which is around the quality of the product, the performance in the application and the overall supply reliability and environmental stewardship which -- these are the elements of the value proposition that customers pay us for..

Okay. Now, thank you. And then one other, so was all the headlines we're seeing about potentially step up in Chinese tariffs.

I was wondering if you guys have a view on how that would affect you if things were to go or if the talks were to end and higher tariffs are installed as early as this Friday?.

Yeah. So we're certainly being kept on our toes with the regular tweets here back and forth between the two sides. The way I think about it is a bit more at a structural level, Dan, if you look at the tire industry today, you're getting close to 40% of the world's tires are made in China.

And so, this is across both passenger cars, truck and bus tires as well as a whole host of off-the-road tires. And so in effect, the world is structurally dependent on Chinese tires.

And so as tariffs, if they get implemented, that would certainly cause some short-term price impacts that ultimately going to flow right through to consumers, but the ability for the structural supply chain to sort of pivot quickly outside of China is pretty limited because it's just the absolute size and the fact that these are structural value chains, not like textiles or something that can, they can move and chase low labor or other things very quickly.

That's not the case here. So there would certainly be some short-term impact just around consumer sentiment and everything else, if in fact those aggressive tariffs come in, but I sort of look through that and think about the structural aspect of it and I think that structural view is pretty is real..

Okay. And thanks for that. And then one more if I may, so you mentioned improved pricing and purification solutions. I thought, competitive pressures would make it kind of difficult, I was wondering if there has been competitors who have left the market or how things have improved, just in general, I guess..

Yeah. No, fair question, Dan. So we have called out in the past competitive pressure, especially around, what we call the North American powder market and so this is a market, where activated carbon is used in mercury removal and some other applications.

And I would say that situation remains largely unchanged, but we are seeing pricing strength right now is across our specialty portfolio.

And so, one of the key elements of our transformation plan is built around market choices and applications that we want to serve and so a greater emphasis on selected specialty applications is an important part of that transformation plan, and we are seeing pricing support their as we focus..

Thank you. Our next question comes from Chris Kapsch with Loop Capital Markets. Your line is open..

Yeah. Good afternoon. I had a couple of follow-ups. First, on the green shoots, I'm assuming that your commentary is that you are seeing green shoots primarily or most pronounced at least in China.

Are you also seeing any improvement maybe into April, into May, I guess, now in Europe or could you just talk about the trends you're seeing in Europe, and how you see that moving forward?.

Yeah. It's more related to China Chris, I mean there are some selected areas where we are seeing some firming in Europe, I would say in Reinforcement, it's kind of status quo.

I would say no, no significant bounce up, but if you look across our plastics value chain, as polymer prices are starting to move up, then we've been seeing an improving volume picture in our specialty compounds business, where we produce black masterbatches and compounds for the plastics industry.

And so you saw in our numbers that Formulated Solutions volumes were down about 16% in the quarter. I think that's obviously reflecting a pretty significant destocking and that often does happen in the plastics chain. In the last couple of months, we've started to see those volumes trending back to more normal levels.

I would not say, they've tripped the point of kind of restocking, but they have solidified and the movement of polymer price is up a bit, I think, is helping there. So principally China, a few selected markets where we are seeing some positive momentum in Europe, but on the Reinforcement side, I would say kind of status quo in Europe..

Got it. Okay. And then I think it was in your formal comments, you mentioned in Reinforcement Materials that your volumes were up 2%, I think in China, not just greater Asia. And so I'm assuming that's better performance than the carbon black market over there, which would imply market share gain.

So is that an accurate protection of what's happened? And then can you just talk about if that's the case, visibility around sustaining those share gains, as we move forward the balance of the calendar '19?.

Sure, Chris. Erica is going to jump in here and provide a bit of color on that specific point for you..

Yeah. Sure. So the increase of 2% was in Asia. So total Asia includes our South Asian, Japanese business as well. But the driver of the increase is China. So China did improve year-over-year as well. I would say that is better than market performance where we -- the market I think was down overall for the quarter.

I think the reason it is, is really because of our leadership position in the country. And so I do think we're still a preferred supplier and so we saw still pretty good volumes and I think people preferred to have Cabot supply them China for us on the Reinforcement side that pressures came more in the pricing..

Was it -- but the reason for the share gain, I understand your competitive position, but was it anything tactical about your business decisions there that led to the share gain and just -- in terms of the sustainability of the market share gains you just speak to that?.

Yeah, I mean, I think maybe I'll add a couple of things here, Chris. I think, as people navigate their way in China through this sort of period of uncertainty, I think supplier like Cabot and bit of a safe harbor kind of supplier, I think it's important and really valued by our key customers.

And so while, that didn't immunize us from having to deal with some pricing pressures, I think that's pretty clear, as we were heading into the winter period and customers are not knowing exactly how things are going to play out having the strength and reliability of the Cabot in their portfolio. I think it’s really important to them.

And now what we have to do is build from that position and restore the pricing and margins back to levels that we feel are more appropriate for this business and where they have been historically and we are making progress on that and it will be a step-by-step process, but we are making progress on that and I'm optimistic that as we build through the year, we'll demonstrate that pricing in margin recovery and the share will remain pretty firm..

Got it. And then just one additional follow-up if I could on, I think you said in the Performance Chemicals business, you were going to experience a shutdown associated with the installation, the necessary EPA equipment.

I'm just wondering if that is a dedicated specialty black facility or is it also double as a Reinforcement Materials production facility. And is that impact confined to your fiscal third quarter and then where are you in terms of the other plants in terms of retrofitting to achieve or to meet the EPA Consent Decree? Thank you..

Thanks, Chris. Yeah, Erica will pick up on this one here..

Yeah, Chris. So this is the plant that serves both Reinforcement Materials and Specialty Carbons, so you will see the impact in both segments. I say, it's a pretty substantial downtime for us.

So also about half the quarter the plant will be down to do a first phase implementation for this investment and so total magnitude for Cabot is probably around $7 million in Q3 and you can split that kind of half and half through each segments. It's a pretty substantial Carbon -- Specialty Carbon facility as well as Reinforcement.

And your second part of your question, larger about the EPA spend. So you are right, we were the first to settle with the EPA in terms of this pollution control equipment at Consent Decree. And so we implemented one plant and that's been completed.

This is our second plant and this plant will come in two phases, so this is the first phase that we're doing now. We got an extension to the Consent Decree, so then that we will do a second phase at a later date. And then we have our third plant, which will have to come online by 2022..

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

Great. Thank you, Shannon. And thank you all for joining us today and thank you for your continued support of Cabot and look forward to speaking with you next quarter or somewhere out in the road during the next quarter. Thanks very much..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day..