Cabot Corporation (CBT) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Cabot's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode to reduce background noise, but later, we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Steve Delahunt, Vice President, Treasurer and Investor Relations. You have the floor, sir.

Good afternoon. I would like to welcome you to the Cabot Corporation earnings teleconference. Last night, we released results for our first quarter of fiscal year 2017, copies of which are posted in the Investor Relations section of our website. For those on our mailing list, you received a press release by e-mail. If you are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations. 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 can be found in the press release we issued last night and in our 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 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 Keohane who will discuss the key highlights of the Company's performance. Eddie Cordeiro will review the business segment and corporate financial details. Following this, Sean will provide closing comments and open the floor to questions. Sean?

Thank you, Steve. Good afternoon, ladies and gentlemen. I'm pleased to see the strong improvement in operating results on a year-over-year basis as higher volumes across all segments drove a 65% increase in adjusted earnings per share. The Reinforcement Materials segment delivered 54% increase in EBIT driven by the benefits from 2016 contracts in North America improved margins and a solid demand picture in China. In the Purification Solutions segment, strong MATS volumes and a seasonal inventory build resulted in a $9 million EBIT increase. In the Performance Chemical segment, higher volumes were largely offset by an unfavorable Metal Oxides mix as the use of fumed silica in the CMP application continues to decline. The overall quarter for the Company also benefited from a $7 million inventory build due to plant turnaround activities in anticipation of growth, as well as a $3 million foreign exchange benefit. Neither of which is expected to repeat in the second quarter of fiscal 2017. In addition, due to our strong business results, we generated over $100 million in cash from operating activities and use this strong cash flow generation to reinvest in our businesses and return cash to shareholders. We invested $22 million in capital expenditures in the quarter, while returning cash to shareholders through $19 million of dividends and repurchasing 305,000 shares for $16 million. On a strategic front, we announced a planned investment in new capacity to enhance production capabilities for plastic formulation, specifically for conductive compounds in engineering thermoplastic applications. Cabot has been formulating and selling conductive compounds and specialty master batches for more than 30 years and we've established a leading position based on the combination of our unique upstream carbon particle technology and downstream application know-how and Channel. We are a leader in the development and manufacturer of products aimed at growth trends, such as automotive lightweighting, and other specialty applications and packaging and medical equipment sectors. This planned investment will support growth and enable our continued development of these high value applications. In the first fiscal quarter of 2017, we completed calendar year negotiations with our major tire customers. The result was generally quite positive and while we saw different outcomes across regions, we realized both volume and price gains on a consolidated basis. The European carbon black market remains strong, which allowed us to strengthen pricing in line with the market along with achieving volume gains. Additionally, we were able to align the formulas in our customer agreements with more appropriate feedstock indices in Europe resetting what had become disconnected with our feedstock markets. In the Americas, we were successful for the second year in a row in regaining volumes in the region while maintaining pricing consistent with the market environment. I also want to take a minute update you on the feedstock environment. I mentioned earlier that we now have alignment in Europe between feedstock indices in the formulas and our customer agreements. So we feel good about Europe. In North America, the feedstock differentials that we saw in 2014 and 2015 have returned to long-term historic norms. In China, the coal tar discounts to fuel oil that we saw over the last few years have largely disappeared. However, the feedstock environment in China remains dynamic. Feedstock is the strategic part of our business and we will continue to manage our various sources and supplier relationships to ensure the right balance of quality and economics. I will now turn it over to Eddie to discuss the financial results of the quarter in more detail. Eddie?

Thanks Sean. I will discuss the segment results beginning with Reinforcement Materials. During the first quarter of 2017, EBIT for Reinforcement Materials increased by $14 million as compared to the first quarter of 2016. The increase in EBIT was principally due to higher unit margins along with favorable FX and a benefit from increasing inventory, partially offset by higher maintenance costs. The higher unit margins were driven by favorable 2016 contracts in North America and in improving China spot market. Sequentially, Reinforcement Materials EBIT decreased by $2 million compared to the fourth quarter of fiscal 2016, driven by higher maintenance costs and lower volumes in the Americas, partially offset by improving margins. Sequentially, volumes decreased by 1% due to lower seasonal volumes in the Americas, partially offset by strong volume growth in China. Looking ahead, we expect to benefit from the 2017 customer agreements in the second quarter, partially offset by seasonal volume weakness due to the Chinese New Year and unfavorable inventory impacts. Now turning to Performance Chemicals, EBIT decreased by $1 million compared to the first quarter of fiscal 2016, due to higher fixed costs and lower margins largely from the decline in the use of fumed silica in the CMP application, partially offset by higher volumes. Volumes increased by 1% in Specialty Carbons and Formulations business and 9% in the Metal Oxide business largely driven by stronger China sales into the automotive and infrastructure sectors. Sequentially, Performance Chemicals EBIT decreased by $9 million compared to the fourth quarter of fiscal 2016, primarily due to seasonally lower volumes, lower unit margin, and higher maintenance costs, partially offset by favorable inventory change. Sequentially, volumes decreased by 4% in Specialty Carbons and Formulations, and by 6% in Metal Oxides, primarily from seasonal demand. Looking ahead to the second quarter, we expect to see a pick up in volumes that will be offset by higher fixed costs and unfavorable inventory impacts. The business may also experience the margin pressure later in the year if oil remains at current levels, first quarter of fiscal 2017 EBIT and Purification Solutions increased by $9 million, compared to the first quarter of fiscal 2016 due to significantly higher MATS volumes and a favorable impact from increasing inventory levels versus last year's inventory drawdown. Sequentially Purification Solutions EBIT increased by $2 million compared to the fourth quarter of fiscal 2016 driven primarily by a favorable product mix and a favorable impact from increasing inventory levels as compared to the prior quarter. These favorable impacts were partially offset by lower seasonal MATS in North America water purification volumes. Looking ahead to the second quarter, we expect seasonally higher MATS volumes that will be offset by higher fixed cost from our competitive MATS pricing environment and unfavorable sequential inventory impacts. First quarter fiscal 2017 EBIT in Specialty Fluids increased by $2 million as compared to the first quarter of fiscal 2016, as we benefited from an increased level of product activity in Asia and a stronger fine cesium chemicals demand. Sequentially, Specialty Fluids EBIT decreased $3 million compared to the fourth quarter of 2016 as we saw reduced project activity in the North Sea. We expect a similar level of project activity for the next quarter with an uptick in activity in the second half of the year. I will now turn to corporate items. We ended the quarter with a cash balance of $189 million and our liquidity position remained strong at $1.2 billion. During the first quarter of fiscal 2017, cash flow from operating activities were $102 million, including a decrease in net working capital of $16 million. Capital expenditures for the first quarter of fiscal 2017 were $22 million. Additional uses of cash during the first quarter included $19 million for dividends and $16 million for share repurchases. We recorded a net tax provision of $70 million for the first quarter and our year-to-date operating tax rate was 24%, which also represents our current forecast for the year. As we look at the full-year we expect capital expenditures to be approximately $150 million. And I'll now turn the call back over to Sean.

Thanks, Eddie. We are pleased with the underlying business results for the first quarter. Looking across the segments Reinforcement Materials is well-positioned for growth after a successful negotiation season and continued to see the environment in China firm up. In the Performance Chemicals segment end markets remain attractive and we are investing for the future for 2017 profit levels will be impacted by some near-term headwinds. The Purification Solutions segment continues to see strong volumes from MATS related business and we remain on track to deliver the seasonally adjusted $4 million to $5 million of EBIT per quarter we’ve discussed in previous calls. Finally the Specialty Fluids segment continues to make good progress in the expansion into the Asia-Pacific region, but is always the timing of projects in this business is uncertain. We continue to drive our Advancing the Core strategy focused on 7% to 10% EPS growth over time and on going strong cash generation. We are maintaining discipline around our capital allocation framework, which balances reinvesting for growth in our core businesses and returning cash to shareholders. Thank you very much for joining us today. And I'll now turn the call back over for our question-and-answer session.

Ladies and gentlemen, the question-and-answer session is now open. [Operator Instructions] Our first question comes from the line of James Sheehan from SunTrust. Your line is open.

Thank you. Good afternoon. Could you give us some more color on the 2017 contracts? So what sort of price increases did you get in each region?

Hi, Jim, how are you?

Great.

Let me sort of characterize things overall and I would say that we were pleased with the outcome of the overall annual negotiations with the major tire customers. I think in the aggregate, we grew our volume market participation in expanded unit margins modestly. And in spite of some pricing pressure in certain markets in particular in Argentina and I think a continued challenging pricing environment in North America. But let me give a little color on the outcome of the negotiations, I think as you all know we agree with our major tire customers on annual sometimes multiyear supply arrangements. And these are typically negotiated in the calendar quarter of the year. Things are a bit different in China and Asia as we agree with many of these tire producers on a quarterly rather than an annual basis. So there's not much to comment on regarding Asia. So let me try to give a little bit of color around each region and I'll start with Europe. On the demand side in Europe, the automotive market has been reasonably robust and we've seen pretty solid growth rates in terms of new car registrations and on the supply side two of our four competitors did announce plant closures in the region. So that certainly tightened up supply a little bit and as for several quarters we had been suffering from some compression in our pricing formulas as the fuel oil index that we have historically used became less liquid and disconnected from our actual costs. So it's been a dynamic environment. Our team has been working hard with our customers to rebuild our profitability there and I'm pleased by the results. In the outcome of the negotiations, we successfully expanded our participation in Europe, helping our customers by absorbing some of the volumes that were displaced by the plants that were closed by our competitors and we were able to improve our base prices as well as reset the feedstock index to one that more appropriately tracks our feedstock costs. So we feel pretty good about the overall situation in Europe. We've talked about that in previous calls in terms of where that was trending. If we move on to the Americas, the situation is a little bit different. I think tire demand across the Americas was more sluggish and in South America, we're seeing continued economic weakness there and that kept downward pressure on tire purchases. And in North America, tire purchases were actually relatively flat last year. So unlike Europe there were no structural supply changes in the Americas either. So as a result, we saw some modest price declines in the Americas that we were successful for the second year in a row in recapturing share that we had lost moving from 2014 into 2015. So a lot of moving parts there, but overall a good outcome consistent with the direction that we had talked about in previous calls and I'm certainly pleased with the effort of our business teams and also from the support from our customers.

Great. Thank you. And then moving onto Purification Solutions, can you talk about any changes you're expecting in the regulatory environment? Would there be any chance that MATS rules would be relaxed in anyway and also with respect to coal prices or your coal based power utilities is there going to be more support for those and do you expect that to favorably impact your demand?

Good question, Jim, and one that is bit difficult to predict exactly how the policies of the current administration will play out here, but I think, our view at this point as we look at things we see it as unlikely that the MATS regulation would be overturned and this is something that build from state regulations in a host of states ultimately to a federal regulation that was then up held by the Supreme Court. And so I think something that is pretty well settled in at this point and the utilities have all made the investments and our using activated carbon to remove the mercury level. So difficult to see that at this point that there would be some change in that. And I think the administration's focus on EPA matters is probably geared more towards greenhouse gases and rolling back Obama's plans for the CPP, the Clean Power Plan that's probably where the focus will be. And while President Trump has signaled some support for coal, I think on balance that would be net favorable for us, but difficult to see at this stage that it would have any specific impact. I think that's more of a statement than action at this point.

Great. And also on activated carbon, could you talk about your plans to enter the automotive application in a bigger way. I noticed that China has approved standards for their vehicles in 2020. Do you plan to participate in the Chinese market and if so from what plants would you be supplying that market from?

Yes, so you touched on an important trend in this business and one is underpinning one of our focused product development efforts as most of the world is shifting to higher vapor, fuel emissions standards and an activated carbon is needed to meet those requirements. And so we definitely expect to see significant growth in Asia, in principally China, as you point out I think in both North America and Europe this trend is more developed. And we participate in this today, the second – number two share player in the market, but clearly the number one player has a significant share of the market here. So our product development efforts have been focused here and we've actually been investing in this and have launched some new products into this market. I think the important thing to understand about it is, there is typically a time period where products get qualified and specified in. So I think we're well down that path, but it generally takes a couple years before you would get fully qualified and see the ramp in business there. So that’s an important market segment, one we are invested in and again have made good progress here getting new products out into the market.

Are you going to supply China from an existing plant?

I would say yes.

Thank you very much.

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

Hey, good afternoon everybody.

Hi, Kevin.

I wondered if you could – you gave great color on how the contract negotiation season went for Reinforcement Materials, but wondering if you could help us quantify, what all that means to sequentially for calendar year 2017? How much does that help your volumes and how much when you know when you net it all out, does the pricing and incremental volume help your EBIT as we go forward?

Yes, thanks. Thanks Kevin. Maybe I just draw the lens back a little bit for us to put the progress in this business into perspective. We were certainly pleased with the development in the business and have been working intensely to restore earnings levels from the lows of 2014. And our position in the marketplace is clear that we're viewed by our customers both the tire customers and industrial products customers as the leader and we're certainly focused on translating that that position into improved performance. And our strategy as you know is to leverage what I think is a unique global footprint. So that over time we grow at market rates with our customers and then we continue to focus on the high value products and applications in both tire and industrial products. And then finally drive ongoing productivity and efficiency in our plan. So this is the strategy we're pursuing. And I think the results of this are bearing out in what is a steadily increasing earnings picture and we expect that to continue into 2017 and if you go back to 2015 our EBIT levels in this business were in the sort of mid-to-high $20 million per quarter range, in calendar 2015 and then in calendar 2016 we improve that up into the mid $30 millions range for a quarter. And in 2017, we would expect that quarterly profit levels would continue to improve and we would likely see something in the sort of $40 million to $45 million range per quarter. There will be certainly some variation between quarters due to seasonality in timing of maintenance, but you can see very steady improvement here in the results and as we pursue the strategy. So we're pleased with that progress and that should how I’d frame up the expectations Kevin.

Okay, that's very, very helpful. And you've commented in Performance Chemicals, in your outlook that you expect to continue to benefit from robust demand, but the rising oil prices could negatively impact the margin. So wondering, what that means to dollar EBIT? Does that mean that lower margins from higher feedstock costs would cause EBIT dollars to decline or would the volume help offset that and kind of keep it stable and maybe trends going forward to be similar to what we saw in the first quarter. There's also the inventory build that sounds like might negatively impact the second quarter. So kind of wondering, if you could help frame up, how all that factors into performance in the Performance Chemicals segment, throughout the balance of the year?

Yes, well there's a lot going on here Kevin. So let me try to help you understand the drivers and the impact sort of how they're playing out and again I like in reinforcements sort of pull the lens back a bit for us to start and underscore that this is a great business you know very attractive margins here, markets that are growing at good solid rates, a leadership position in these businesses and I would say an overall structure that's favorable. So it's a terrific business and you've seen that play out over the last several years here. So we see real strong opportunities for growth and innovation and in fact we're investing accordingly for that, but as we do move through 2017 there are some near-term challenges that we are managing namely oil and we’ll most likely experience some margin pressure related to higher oil prices throughout 2017. I think the amount of the impact will depend on the rate in magnitude of the moves of oil as well as competitive dynamics, but that's certainly one that we're managing. Another is foreign exchange. The continued strengthening of the dollar that we have seen recently will impact our international business results upon translation. So a certain amount of this business is produced in the U.S. and sold in other markets. So those profits when they translate back would have some impact. And then finally, we're seeing the market for CMP move steadily away from fumed silica as they go to smaller and smaller node sizes in the semiconductor market. So when you think about the positives in terms of the growth and the new product development we are doing and then combine that against the effects of some of these headwinds in 2017, I'd say that the impact would be maybe roughly $5 million-ish per quarter for the balance of 2017 versus last year. But I think there is certainly uncertainty around where FX rates go and where oil goes and in the recovery of oil movements. So that one is a little bit more difficult to predict, but I'd sort of think about it in that way.

Okay, very, very helpful. And then you called out that MATS related volume was stronger in the quarter, in your outlook you expect higher volumes for MATS related, but also called out that pricing should be competitive in your outlook. So wondering what you are seeing there. Is it still just an oversupplied industry and that just even with MATS fully implemented and that causing the pricing pressure or wondering if you could give us some color on that?

Yes. Again I probably start by pulling the length back a bit and as we’ve talked about last quarter, we feel that the right way to be thinking about this business in 2017 is that we'd be in the $4 million to $5 million EBIT range for quarter with some seasonality around that. And that's still our view here and that improvement in EBIT year-over-year is significant and driven by a few different things. And the first one is certainly volume growth from a full-year of implementation of MATS and that certainly playing out. We're also in the full-year of 2017 we will see reduced inventory headwinds versus last year, so that contributes to some of the improvement and our focused efforts on new product development as well as some efforts in improving our variable costs in particular in our mine here in the U.S. Those are contributing. So we still feel that’s the right way to think about the business. That being said, the environment in the MATS market is still competitive as people try to stakeout position in this rapidly growing or establishing application and so we are seeing some impact from that, but on balance we still think that’s the right way to think about it is as I've just laid out.

Okay, perfect. Thank you very much.

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

Good afternoon. It’s Dan Rizzo for Laurence.

Hi, Dan.

How you guys doing? You mentioned plastic formulation business, could you just provide a little color on that, I mean how new is it and something that’s being commercialized or just a little more input?

Yes, so again, we’ve had as part of our Specialty Carbons and Formulations business, a business in specialty compounds and master batches for a long time, more than 30 years. And this business is strategic downstream business where we drawdown our, the strength of our Specialty Carbon particle technology to develop compounds that need the performance from Specialty Carbons. And so you could call it a strategic formulation in channel play where we combine our upstream Specialty Carbons and the downstream Formulation into plastic compounds to create value. So this has been part of our Company for a long time and one where we see opportunities for growth, again given our strong backbone upstream in making Specialty Carbons and combining those in Formulations downstream to sell. So that's the business and how it works and this investment is geared to continue to grow our position here and in the markets we’re in we are the leader. We've got real strength in Europe and real strength in China in particular, so not something new here.

Okay. And then you mentioned people taking their stakes in activated carbon and then perhaps the push for vapor emissions and China might be a growth driver, but in the U.S. I mean a portion on the country is moving towards higher emissions as well, so-called California Standard. I was wondering that’s something that could provide some upside or is that something you're not really I guess taking your position at this point?

So you're right about that and in both the European and North American markets are more established in terms of the vapor emissions and it appears that those will continue to ratchet, although, we'll have to see given the apparent about face on all of these topics from the Trump administration, but let's see how that plays out. So we certainly are in this market today and our product development efforts are geared to benefit from this. But I think it's important and our focused efforts are in markets where this regulation is really being established and where there's I think a more legitimate jump ball to win there.

Okay. And then finally, you mentioned that your costs were – did not link with the fuel, oil index that you’re using. I mean has it kind of relinked up or you just not using that index anymore, has anything changed?

Yes, so we in negotiations with our customers, worked hard to help our customers understand that this impact was a structural one and one that really needed to be addressed in order to keep the business healthy and on a good track. And so we spent a lot of time with our customers on that and help them understand that. And as a result, have been able to change the structure of those arrangements in terms of the index and the way that that formula works, so that we feel it has a much better track to our actual purchase cost.

Thank you very much.

Thank you. Our next question comes from the line of Chris Kapsch from Aegis Capital. Your line is open.

Hey, Sean. Just following up on that last point, you're talking about structurally having changed the index link in Europe specifically not across the world, is that correct?

That’s correct. Yes, you might remember Chris that sometime in the past year or so we had commented on the feedstock situation and how in Europe we felt it was a structural disconnect and therefore needed to be addressed in the customer discussion. So that's what I'm referring to having addressed that.

Right. I mean the feedstock differential was an issue in North America for a while too, and there was at one point the notion at the industry we try to structurally change that index link in North America as well, but it sounds like that didn't happen in this round of negotiations of annual supply contracts and maybe perhaps because it normalized, but can you just characterize the normalization. Will you get a year-over-year benefit in the fact that should have normalized now versus the last couple years when there was adverse differentials, is that – could that be perceived as the fact of price increase and then just along those lines, just try to get a little more granular on the outcome of the North American contract negotiations did – it sound like you see that price, setting aside the differential question. It sounds like you see that price. Can you just provide some order magnitude, what the volume gain might have been in the price secession might have been?

So let me first, Chris try to talk about the feedstock differentials in North America, and you might recall that those moves from favorable differentials to unfavorable differential in that move was largely related to the opening of the arbitrage between Chinese coal tar and global fuel oil prices and – when that opened up a lot of the Asian carbon black producers switched from pulling feedstock in the Gulf Coast to taking Chinese coal tar because that that arbitrage was beneficial. Now that has all reversed and our view on that is that it's unlikely to open back up because that that are opened up because of Chinese stimulus and stimulus in steel, which created more coking and more, more coal tar and that certainly not the case today. But what happened is then as that that arbitrage closed and people who traditionally bought in the Gulf Coast moved back and the differential started to swing in the other direction. And then there are always some things that can happen here in terms of specific suppliers and when they have outages or turnaround, you can you can find things can move. But I would say as we look at it, those differentials have returned to the long-term historical norms and so that's kind of how we see that one.

But the year-over-year affect that so that represented the fact our price increase and having without having normalized this year versus say last year?

I don't think so, Chris because we've been talking about this kind of gradually normalizing here for a little while. This is not very recent phenomenon, and so I don't see anything you see anything material there.

Okay, got it.

So but we feel that it’s in the right place. Well, I mean a very reasonable place right now and the factors that drove the movements we understand well when and don't see those swinging in any large way, so hopefully that they stay around that that historical norm level. That's our view. I think I guess your second question was around the contracts, the tire negotiations in particular in North America? And I would say that in North American demand environment was pretty much flat in terms of production over this past year. There were still lingering effects from passenger car into dumping duties from China and then also more recently the TBR, the duties against truck tires out of China. All of that led to a certain amount of channel stuffing and therefore depressing a bit, the overall production environment in North America while sales may have been more healthy, production was more flats. So the environment was not as supportive in terms of growth as one might think about in terms of kind of long-term fundamentals. And so as a result, market pricing did move down a little bit and so we acknowledge that that was happening ,but on balance felt that we ended up in a good place here in terms of restoring regaining share back to sort of previous levels and at a good prices.

Okay, and if I could just follow-up, you mentioned the outlook for each segment, some sequential inventory related headwinds. I think for – in RM and Specialty and Purification Solutions. Could you just elaborate on that and Purification Solutions in particular, I thought we were at a point where with the MATS-related inventory that you build to head up the anticipated original MATS implementation date that you’d be burning through that inventory, getting to a point now where you would actually see beneficial inventory trend, so that one is a little bit of a surprise, but if you could just elaborate on why there's some inventory related headwinds, I guess on cost accounting for each of the segment on a sequential basis that would be helpful. Thanks.

Yes. Sure. Well let me start with reinforcement where as we were working through the fall period and customer negotiations and had greater clarity about how those we’re going to shakeout and volume growth associated with those. We did in fact produce more inventory, so that we could ramp up and serve our customers as committed. So that was a certain field in the period that will not reoccur in the next period, so that's a bit of the context there. On Purification Solutions at a high level, I think you’ve captured it well and our view hasn't changed on this one that in terms of the absolute impact from inventory build in 2017, we expect very limited absolute impact and so that is the case. Now there maybe some movements quarter-to-quarter, but over the full-year, we're not expecting significant absolute impact from that, but there will be when comparing certain quarters, there will be some favorability there on a full-year basis. I think we still expect that to be in the sort of $10 million range benefit.

Okay, fair enough. And then if I could just follow-up on one more because you mentioned China strength in a couple different businesses, RM and then in PC, within PC it’s not a maybe more like the metal, few Metal Oxide business there. Do you have any insights into what really is driving the strength in China, for example in RM was their underlying economic strength or could this possibly just be tied to this sort of one-time push by Chinese tire manufacturers to export much tires ahead of those tariffs that are in the process of being implemented. And then any color on the few Metal Oxides strength would be helpful as well.

Yes. So I think in terms of China certainly on the RM, the reinforcement side, we probably did see a little bit of benefit from tire producers trying to aggressively export truck tires ahead of the North American duties, but I think there are a couple of other factors playing out here as well in China. One of them is that China has continued to pull certain stimulus levers to continue to grow the economy at the rate they're trying to grow in there and so that has trickled through. And we've also seen some enforcement actions that I think are providing overall support for our businesses sort of regulatory and enforcement actions and I’d broadly characterize them as under an environmental umbrella, and so one of them is that China has imposed strict regulations and seems to be enforcing the amount of weight that trucks are rated to carry and China had been a chronic sort of abuser of that in a sense that overloading trucks constantly. And with that happening, it means to move the same of freight you've got to have more trucks on the road. So that’s a positive factor for us. And then I think the overall environmental enforcement level in China right now, I think it's something that I see as different and positive from our perspective given the air quality problems in China. I think finally we're seeing what are on the books, pretty strict environmental emission standards, but we're seeing them being enforced much more. And so that happening I think a couple of things are swinging a bit in our favor here. One of that the playing field is a little more level because as a leader in a global player, we certainly comply with all of the standards and regulations, but now that playing field leveling a little bit. And I think some of our customers having a preference for Cabot given our stability and reliability in this area. So how China enforces these things is always a little bit opaque, but I'm definitely seeing a different story today than we have in the past and it's a more favorable one. So I think those are the factors that are underpinning China.

Thanks for the color. Appreciate it. End of Q&A

Thank you. [Operator Instructions] I see no other questioners in the queue at this time. So I would like to turn the call over to Sean Keohane for closing.

Well, thank you all for joining us again and thank you for your support of Cabot and I look forward to speaking with you next quarter.