Cabot Corporation (CBT) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cabot Q2 2017 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. As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call, Mr. Steve Delahunt. You may begin, sir.

Thank you. Good afternoon and welcome to the Cabot Corporation earnings teleconference. Last night, we released results for our second 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 email. 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 appears under the heading forward-looking statements in the press release we issued last night and these factors are discussed more fully in the reports we filed with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. 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 on 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 very pleased to report another strong quarter of operating results on a year-over-year basis, as higher volumes across all segments drove a 24% increase in adjusted earnings per share. The Reinforcement Materials segment delivered a 59% increase in EBIT, driven by the benefits from 2017 contracts in the Americas and EMEA, and another quarter of strong results in China. In the Performance Chemicals segment, higher volumes across all product lines were as expected, offset by the impact of higher feedstock cost, lower sales of fumed silica in the CMP application and higher fixed costs. The Purification Solutions segment saw strong MATS volumes, resulting in a $4 million year-over-year EBIT increase, but results were below expectations due to the negative effects of an unseasonably warm winter. EBIT in Specialty Fluids increased by $2 million, primarily due to higher volumes in fine cesium chemicals. In addition, cash flow in the quarter was a use of $51 million, as working capital increased due to growth in the business, higher feedstock costs and higher working capital days. Consistent with our capital allocation strategy, we continue to reinvest in our businesses and return cash to shareholders. We invested $23 million in capital expenditures in the quarter, while returning cash to shareholders through $19 million of dividends and repurchasing 255,000 shares for $15 million. Almost a year ago, we introduced a new strategy called Advancing the Core, which lays out the roadmap for extending our leadership in performance materials by driving three key themes. One, investing for growth in our core; two, driving application innovation with our customers; and three, generating strong cash flows through efficiency and optimization. Overall, I am very pleased with the progress we have made in advancing the new strategy over the last 12 months, and I'm confident in our ability to deliver attractive and sustained total shareholder return based on the combination of EPS growth and cash return to shareholders. 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 second quarter of 2017, EBIT for Reinforcement Materials increased by $20 million as compared to the second quarter of 2016, as we saw improving business fundamentals across the segment. The increase in EBIT was principally due to higher unit margins and volumes, driven by favorable 2017 contracts in the Americas and EMEA, along with an improved China spot market. Sequentially, Reinforcement Materials EBIT increased by $14 million compared to the first quarter of fiscal 2017, driven by higher volumes and unit margins. Sequentially, volumes increased by 6% due to contract gains in the Americas and EMEA, and some pre-buying in the tire value chain ahead of announced April price increases by the tire manufacturers. The segment also benefited from timely raw material purchases and lower maintenance costs in the quarter. Looking ahead, while Reinforcement Materials will continue to benefit from overall improving fundamentals, the typical seasonal volume increases maybe more muted in the third quarter, due to the strength of the second quarter. Additionally, the third quarter is expected to be a period of higher planned maintenance activity. Now, turning to Performance Chemicals, EBIT decreased by $7 million compared to the second quarter of fiscal 2016 due to lower margins from higher feedstock costs and the decline in the use of fumed silica in the CMP application, along with higher fixed costs. This was partially offset by higher volumes across all product lines. Volumes increased by 15% in the Specialty Carbons and Formulations and 2% in fumed Metal Oxides. Sequentially, Performance Chemicals' EBIT increased by $2 million compared to the first quarter of fiscal 2017, primarily due to seasonally strong volumes, partially offset by lower unit margins, due to higher feedstock costs, higher fixed costs and an unfavorable inventory change. Sequentially, volumes increased by 19% in Specialty Carbons and Formulations and by 2% in Metal Oxides primarily in North America and Europe. Looking ahead to the third quarter, we expect volumes to be relatively flat, while margins are expected to be modestly higher due to a favorable price and product mix. Second quarter fiscal 2017 EBIT in Purification Solutions increased by $4 million compared to the second quarter of fiscal 2016 due to a significantly higher MATS volumes and a favorable impact from an increasing inventory levels versus last year's inventory drawdown. MATS volumes were up 46% year-over-year, as we saw the impact of full MATS implementation and a benefit from higher natural gas prices, but volumes were still below expectations due to the negative impact from the unusually warm winter. Sequentially, Purification Solutions' EBIT decreased by $2 million compared to the first quarter of fiscal 2017, driven primarily by lower than expected MATS volumes. Looking ahead to the third quarter, we expect higher volumes offset by the unfavorable impact of product mix, cost associated with the turnaround activities, and decreasing inventory levels. Second quarter fiscal 2017 EBIT in Specialty Fluids increased by $2 million, as compared to the second quarter of fiscal 2016 as we benefited from higher volumes and stronger demand in fine cesium chemicals. Sequentially, Specialty Fluids' EBIT decreased $2 million compared to the first quarter of 2017, as we saw lower rental activity in Asia, Middle East and Africa. Looking ahead, we expect a pickup in rental activity in the second half of the year, as oil and gas projects begin to ramp up. I will now turn to corporate items. We ended the quarter with a cash balance of $133 million and our liquidity position remained strong at $1.1 billion. During the second quarter of fiscal 2017, cash flows from operating activities were a use of cash of $51 million, including an increase in net working capital of $134 million. The increase in working capital is largely due to the growth in the business, higher working capital days and an increase in feedstock costs. Capital expenditures for the second quarter of fiscal 2017 were $23 million. Discretionary free cash flow was $65 million, of which we returned $19 million in dividends and $15 million in share repurchases. As we look at the full year, we expect capital expenditures to be approximately $150 million. We recorded a net tax benefit of $1 million for the second quarter for an effective rate of 1%. This included a benefit of $20 million from tax related certain items, principally reflecting a benefit on the repatriation of previously taxed foreign earnings. Excluding the impact of certain items on both operating income and the tax provision, the operating tax rate on continuing operations for the second quarter of fiscal 2017 was 24%, which also represents our current forecast for the year. I will now turn the call back over to Sean.

Thanks, Eddie. We were pleased with the underlying business results for the second quarter. Looking across the segments, Reinforcement Materials is well-positioned for another strong quarter, but will not see the one-time benefits from tire customer pre-buying, timely feedstock purchases, and lower maintenance costs that all occurred in the second quarter. The end markets remained strong and we would expect quarterly EBIT in the second half of the year to be in the $45 million to $50 million range. The Performance Chemicals segment end markets continued to grow nicely and we expect full year volume growth to be in the GDP plus range. In the third quarter, the segment will continue to see some impact from higher feedstock costs and the volume decline in the CMP application. In the Purification Solutions segment, we expect to see solid volumes from the MATS-related business, offset by lower margins and an unfavorable inventory effect. While the third quarter will be below the $4 million to $5 million quarterly average we discussed, we do expect to see a seasonal pick up in the fourth quarter. And finally, the Specialty Fluids segment continues to make progress in the expansion into Asia, Middle East and Africa region, but it's 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 expect to be toward the high-end of that range for fiscal year 2017. 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 will now turn the call back over for our question-and-answer session.

Our first question comes from Jim Sheehan with SunTrust.

Thank you. On your 7% to 10% current (12:34) EPS growth range and the high-end of the range outlook that you've given out, can you just discuss what types of things would have to happen or what would have to occur in order to exceed the top of that range?

Sure. Hi, Jim. Well, I guess I will start by saying that we feel good about the fundamentals of our businesses. We have seen very good volume growth so far year-to-date. I would say probably a little bit ahead of what we would typically expect for the full year growth rate, so that's one factor here. We will also see higher turnaround costs in the back half of the year and this would be pretty typical, these are done in more of the spring and summer months rather than winter. So, when you factor all of this in, that gets us to the high-end of that range. In terms of what could change outcomes there, I would say, if we saw a more muted effect in terms of volume pull back, so normally, what we see here in the first part of the year was some pre-buying in the tire value chain, and so most of the tire majors are expecting that the first half will be a bit stronger than the second half. If that profile doesn't develop and in fact it's stronger, then that would be a positive for us. And then, I think also the timing of some projects as it relates to Specialty Fluids could have an impact here. And so, I think those are the types of factors, but we feel pretty good about the fundamentals of where we are right now, and the way the businesses are developing.

Great. And could you discuss your price increase in Specialty Fluids? How that is being received by the market and what your expectations are for that to gain traction?

Yeah. So I think Specialty Fluids, this is a unique and high performance niche material that fits certain well applications very well, and so I think most customers buy on the value of that performance, and the performance that they'll – the improved productivity they'll see in the well. So we are optimistic here that that will be received pretty well by the marketplace. So I think that's our view on it at this point.

Great. And in Performance Chemicals, you referred to some improvement in product mix. Can you give a little more color on your mix improvement there?

Yeah. So this segment, Jim, as you know, has a collections of applications that are in it and some of them have certain timing and seasonal aspects to it. So, as we look at our book of business and our opportunity pipeline, that we're working in the second half here, we see that there is a more positive mix, certain applications that go into higher end plastics, adhesives, coatings, these applications are stronger in terms of product mix and the profile that we're seeing from our customers is guiding us in that direction.

Thank you.

Our next question comes from Mike Sison with KeyBanc Capital Markets.

Hey, guys. Nice quarter. Just curious, though, when you think about the guidance for the year, it sounds like Reinforcement Materials should have some growth in EBIT in the second half, right. And then, nor (16:46) Specialty Fluids shouldn't have too much of a year-over-year impact. So, the second half EPS should be down based on your outlook. Are there other things going on below the operating line or is kind of the offset Performance Chemicals with the mix and stuff being down year-over-year?

Yeah, so Mike, let me try to put the second half of the year into perspective a bit by segment. I guess I'll start with Reinforcement Materials where we're really pleased with the way things are developing here. And as we look at the back half of the year, we're expecting that quarterly EBIT levels will put us in the $45 million to $50 million range. And while that represents a little bit of a pullback versus this quarter for the reasons that we already cited, I think it is stronger than when we were in this position last quarter in terms of what we thought. So, I think the fundamentals there continued to be quite good, and we're really pleased if you pullback the lens on this one, over the last couple of years we've been steadily increasing the EBIT performance in this segment and now to have it up to this level. So, I think we're feeling pretty good about that. If you look across the tire producers and what they're talking about, they're certainly guiding towards a little bit more of a front-half calendar year loaded volume picture, because they're out with some fairly significant price increases into the tire chain to deal with higher raw materials. And so, the dealer network seems to have been pre-buying a bit in advance of those. So, that's certainly what they're guiding, and so I think we are reflecting that in our view here at this point. I think, in terms of purification solutions, the range that we have talked about of $4 million to $5 million EBIT quarter on average is the right way to be thinking about this, but there will be some seasonal variations here. So, probably, our view is a bit weaker in Q3, and then Q4 is typically a pretty strong quarter because you've got the summer season and you've got a lot of air conditioning and therefore demand for power. So, you will see a bit of a spread between the two quarters there in all likelihood. And then in Performance Chemicals, we're seeing things develop pretty much as we talked about last quarter. The volumes are developing nicely in this business, but as we look at a few headwinds that we talked about, last quarter being the impact of higher oil, the pullback in the sales into the CMP application, in FX, we summarized all those as saying that would be roughly a $5 million per quarter headwind for the remainder of 2017 versus same quarter last year. And I think this is still the right way to be thinking about this. So, when you roll all those numbers in, that's what really gets us to the high-end of that range.

Got it. And then, we think about the – do you see volumes, I mean, Performance Chemicals volumes kind of mix, but the Specialty Carbons continue to look really good. You see that accelerating as you get into the second half and maybe into 2018?

Well, I think the best way to look at, and this is, first, to pull the lens back a bit. We've had nice growth in this segment, volume growth over the last couple of years, and we're certainly seeing that right now. So, I think the market fundamentals for the business are very attractive, and we continue to see long-term growth rates in the GDP plus range. The growth we saw in Q2 was running a bit ahead of that, and ahead of those sort of longer term growth rates. I think a few factors that are driving this. One is, demand in China was quite strong as they continue to add stimulus into the economy, and also there had been certain automotive purchase incentives in place in China, and we certainly saw some impacts from that and the expectation is probably that those might taper off and so the second half might be not quite as bullish as we saw in the first half. We also saw some pre-buying in certain Specialty Carbons and Formulations applications, a lot of these applications are in the plastics value chain and polymer prices ticked up a bit over Q2 here and we're at pretty high levels. There were some expectations that those will come down as new polyethylene capacity comes on stream in the Gulf Coast and in the Middle East and so what often happens here is you've got some pre-buying if they're expecting that prices are moving up and you see the opposite occur, if prices are moving down. And so, it's possible that if that capacity comes on stream, as expected, that people in the plastics chain would expect to see prices in polymer drop a bit and you would sometimes see a bit of a pipeline emptying effect. So I think there were some things that were tailwinds a bit for us here in the quarter and our view is those may moderate a bit in the second half. So I think that's another important factor.

Right. And then, given the good strength in volumes for Performance Chemicals, and I know it's a little bit early, but does 2018 look like a year where you get some pretty good growth in EBIT for that business?

I would say, if you look at the long-term growth rates, we still see them being in this GDP plus range, so I think the basket of applications would put you in that 4% to 5% growth range in terms of volume and we would expect, at this stage, that to continue and for us to get our share of that, and therefore have positive impact on earnings growth in this segment.

Great. Thank you.

Our next question comes from Kevin Hocevar with Northcoast Research.

Hey, good afternoon, everybody. I'm wondering, so in Purification Solutions, you called out MATS-related volumes were up 47% – 46% during the quarter and then – but if I look at the sales for Purification Solutions, they were flat year-over-year. So, I realize that that's only part of this segment, but wondering if you could parse out what caused sales to be flat given that that was a nice tailwind to the quarter was – I think you've called out pricing being – unit margins in that business being under pressure, I don't know if pricing was an issue in mercury-related business or some of the other end markets were softer. Just wondering if you could help parse some of that out?

Yeah. So, couple of factors there. Kevin, you're right first of all in terms of the uptick that we saw in MATS and that was a favorable year-over-year comp as we saw full implementation here of the regulation. I think a couple of other factors are in play here, product mix is one. Also we saw some negative impacts from FX. And as we look at pricing in this market for mercury removal, it has become more competitive. And so, I would say those are the three factors there.

Got you. Okay. I don't know if I missed it, but when you are going through the back half of the year expectations for the segment, I might have missed it, but what was your the back half for Specialty Fluids, your expectation for that segment?

Yeah. So, Specialty Fluids, Kevin, our view is that 2017 will probably be the kind of in the range of where we were last year, but much more second half loaded, and we've certainly seen that play out here in the first half. Activity in the oil and gas sector, project activity has been pretty weak in the first part of this year, the first half of this year, but we are seeing the pipeline and the start of projects that we expect to continue into the second half. So, I think what you will see is second half that's much stronger than the first half, probably a bit more weighted towards Q4, than Q3 as the project pipeline ticks up.

Got you. Okay. And then, I wondered if you could walk us around the world in the rubber black business. America saw a very strong volume. I think last quarter, you had indicated you gained some share there in contracts. And then, Europe, I thought some other – some competitors had closed capacities, so I thought maybe you might outperformed that industry a little more than what we saw in the quarter. So, I wondered if you could comment on kind of what you're seeing in each of the regions and then Asia to volumes up 3%, how that's progressed and kind of what you're seeing out of there as we exited the quarter?

Sure. So, maybe I'll start with a view of the market, Kevin. I think, if you just look broadly across the tire market, global growth is expected to be in the 2% to 3% range, generally in line with GDP. And you'll see some spread there, as you look across the more developed geographies, EMEA, the Americas and Japan, we see rates that might be a bit below as tire imports and lower regional GDP growth rates push the number down a bit. And then in the emerging geographies, China, South Asia, we see rates higher, as these are typically tire exporting regions and then also have higher growth rates. But overall, the global number, you can think about it in that range. And I think this is very consistent with the tire makers' view on this, if I look at what they're reporting and talking about, looking at growth rates in this same range. They have called out that there has been some lift, the tire maker is in their Q1 and expected in the first half of calendar year, due to early buying, ahead of the price increases that they are putting into the market that I talked about earlier. So they're certainly talking about this in terms of the profile for the year. If we then just kind of go from there and talk a little bit about how it's playing out regionally for us, I would start with Europe. I would say that remains pretty solid and the tightening supply demand situation is continuing to, I think, put us in a strong position here and we're viewed as the real leader in this business and a reliable supplier for our customers. So I would expect over time that, that will continue to look pretty good for us. North America, I would say remains stable. Recently, there was a negative determination on the TBR tariffs for Chinese imports, you might remember that those were first announced, but ultimately, there was a negative determination there. And so perhaps that might may be softened a bit the long-term outlook, there might have been a view that that might, on the margin, increased tire production in the region a bit. But it looks like that probably will not happen, but that's probably a bit of – more of on the margin effect. I think South America is interesting, it's certainly been a very weak macro environment in the last couple of years, but we are seeing that beginning to turn and we saw that reflected in our numbers for the Americas in this quarter. We increased in the Americas 11% and that was significantly driven by an increase in South America. So we're happy to see that after a couple of years of, frankly, pretty tough numbers there. If we look across Asia, I think the story in China continues to be one of pretty strong demand. The Chinese economy, the Chinese government continues to drive stimulus into the economy and then there are certain regulations that are in place that I think they're providing a bit of bump in terms of overall demand, things like not being able to overload trucks any longer, leading to more trucks on the road to haul the same amount of freight and therefore more tires rolling on the road. So things like that, I think are helping us here. And our view in the long-term here is that there is certainly more stringent environmental enforcement across China. And given the level of environmental controls that we have in our plants, I think this in the long run will position us very well in the eyes of our customers, as not only the reliable supplier but the one that's in compliance with, again, these sort of increasingly more stringent enforcement actions by the Chinese government. So, I think, that's a bit of a walk around the region and how we're seeing it. And it lines up pretty well, I think, with how the tire guys are seeing the year play out.

Got you. Okay. Thank you very much.

Our next question comes from Laurence Alexander with Jefferies.

Good afternoon.

Hey, Laurence.

If you wouldn't mind indulging me with a bit of a flogging the dead horse exercise, below the segment line the other income and the equity income and minority interest lines have historically been somewhat lumpy. If you roll them up together or you strip them out individually how do you think they build into your bridge for 2017, like, what's the net drag?

Yeah. So, I'm going to – Laurence, I'm going to ask Eddie to help me here with a little bit of color and see if we can help a bit with that.

So, Laurence, principally the equity line is the minority interest on the joint ventures that we have, and you're seeing some growth there and essentially that's our Asian joint ventures, in particular the strength in our China business. And so, what you have is consolidation going on above the line and then we're backing out the minority interest below the line. On the other income, I think what you – and the general unallocated costs, I think what you're seeing is a little bit of lumpiness, is a little bit heavy in the second quarter, because we had some corporate programs at $14 million. I think you should expect to see something in the $12 million to $13 per quarter for 2017. So, I don't know if that helps in terms of what you were looking for.

And then just lastly, also the minority interest, which has been – it was breakeven in the first half of last year, you lost about $10 million in the first half of this year, I mean, it's been a $10 million drag. I mean, so how much of a drag will minority interest be? And what's driving, how fast that is stepping up?

Sorry. What's driving that is the increased profitability of China. And so, as we see improved consolidated performance above the line, Laurence, the minority interest – that's driven by China, the minority interest below the line will grow. I think it was about $4 million per quarter, and then it bumped up to about $6 million.

Okay.

So, that's really what you're seeing there.

And secondly, as an invitation to get completely over the skies, if you think about the messages you're laying out, there is a favorable trend in the oil projects for Specialty Fluids. There is the supply-demand balance tightening in reinforcement blacks, positive trends in performance. What needs to go wrong in 2018 to keep you within the 7% to 10% earnings channel rather than over shooting?

Well, I think a couple of things Laurence. First of all, when we look at these businesses, we try to look at what the long-term growth fundamentals are and while there will be movements between quarters and as we see effects of things like pre-buying and the pipe in-building again, we really try to focus on the long-term fundamentals and ensure that we are growing at a rate that's consistent with that and that's our view and I think we are building nicely towards that. If you look over last year and this year across Reinforcement Materials as well as Performance Chemicals for example, we're seeing that happening. Now, there can be periods of time where you will see growth rates drift from those long-term fundamentals and those can often be the biggest driver here. So, for example, when you're in a period of rising polymer prices, a lot of our special blacks and our specialty formulations, specialty compounds businesses will see tailwind there, because customers are buying ahead of the expected further rise in polymers and then by the same token, you can see the opposite happening. And so, this can sometimes create either a tailwind or a headwind. They could last a quarter or two. You could see effects of that and so I think these kinds of things could swing it, but our focus is really around making sure we're growing at the fundamental rate in these markets and doing the things that are going to ensure that.

And then lastly, we're hearing sort of from other companies more sort of spurts – bouts of optimism about oil prices starting to move higher in 2018. Can you refresh given the contract changes you managed to put in place, what the dynamics are there and the degree to which it'll be net negative or positive?

Yeah. So, in terms of our contracts with customers, they have price a recovery mechanism or price movement mechanism that is tied to oil prices, and we did as we commented last quarter address some issues in those formulas as part of the contract negotiation. The most significant one was in Europe where we had a disconnect between the index that we were pricing against and what was actually happening in terms of our feedstock costs. And so we work hard and try to help our customers understand that and ultimately did and have addressed that. So, I think the question of which direction absolute oil prices move is one that – if it moves higher, then probably we'll see more benefits from our yield and energy center investments that we've been making over the years. Typically those are pegged to oil prices. And so we typically see an increase or benefit from that as oil prices move higher and then, of course investments in yield to get an extra point of yield improvement on higher barrel price of oil, that's worth more absolute dollars. So, I guess I would just separate those two things, one is, we feel like the formulas are better representing our feedstock costs now, and then there is a second question of where is absolute oil and that's more a question at higher level, it should have some benefits from our energy and yield efforts.

Okay. Perfect. Thank you.

Our next question comes from Chris Kapsch with Aegis Capital.

Yeah. Hi, it's Chris Kapsch. I had a couple of follow-ups. The commentary about there being some benefit in the second quarter from pre-buying the channel in – and the tire channel – and excuse me, the tire channel, could you just talk about like, is there any way to quantify what that benefit, what it might have been and where are you seeing that by region?

Yes, so a bit difficult for us to see that, Chris, with any great precision here, but I think it's pretty clear if you look at the quarterly reports from some of the big global tire makers that they are certainly citing that as something that occurred in the quarter, again for a good reason, they've seen pretty significant increases in raw materials, and as a result, have to move prices up and the dealers will often try to buy inventory ahead of that. So I think the trend is – or the impact I think is definitely there. If I were to try to position the quarter in terms of these sort of timing effects or one-time effects that we experienced both some pre-buying as well as some timely purchasing of feedstock, I would say that those impacts would have been may be in the $5 million to $7 million range in the quarter benefit.

So a combination of pre-buy plus, benefit from timely purchases of raws.

Right.

Just on that note is, is that another way of saying that notwithstanding what you've done to address the feedstock differential issue in Europe, but is that a way of saying that like not only has the feedstock differential situation normalized in another regions, but perhaps it's kind of swung to a benefit for you or is it just that you had very specific opportunities to take advantage of some purchasing?

Yeah. So, let me explain that because the feedstock differential story is really not a story right now Chris and so that's not it. What it is, is as we talked about, I think it was last quarter as we were heading into the new contract season, which begins in January. For our tire contracts, we built inventory in preparation to serve that higher level of activity. And as we were building that inventory, we were buying feedstock to produce that at a period when oil was moving up, so in the end how some of those sales were priced versus the feedstock that was used to produce it as we were building that inventory, there was a bit of a positive spread there, that's really what that is. The feedstock differentials again are really a non-event here. We've seen it in North America. They've really returned to the long-term historical norms in Europe as I have talked about, where we did see some disconnect, we have addressed that through our contracting mechanisms and those would be the markets where there would be the most significant historical differential issues, so not a story in this quarter at all.

Okay. And then, I would have to – given that the stock is under pressure a little bit based, I guess, on the commentary that in terms of the forward outlook that for the balance – or for 2017, you'd be at the high-end of the long-term strategy of growing 7% to 10%. And if you do the math on that, it sort of suggests the full-year EPS of, call it, $3.45, that's 10% better than adjusted EPS last year and The Street was at a couple of dimes better than that. But then when you talk about the quarterly earnings expectation by segment based on what you've said and you do the math even with Specialty Fluids being flat year-over-year with the Specialty Fluid earnings flowing through in the second half, it sort of looks like you're going to – your qualitative outlook had you doing better than 10%? So, it seems like that's creating a little bit of a disconnect, can you address that? When you say the high-end of 7% to10%, are you saying 10% or are you saying that you could actually do better than that? That'll be helpful, I think. Thanks.

Yes. Well, I guess, I would say a couple of things first, Chris, I think the overall full-year consensus you'd mentioned couple of dimes ahead of that, that's not the case. So, I want to be clear about that. But let me come back to the...

Well, it'd be $0.15, I mean, The Street said $3.60 of the $3.65 and if you did 10% better than fiscal 2016 that would be $3.45, so that's all.

Yeah. I think, the average consensus on The Street is $3.56, Chris, but we can deal with that later. But I think what we're talking about in terms of the – being at the high end of the 7% to 10% is that as we look at how the full year is likely to develop, we see that we'll be at the high-end of that range. That's our outlook at this point. And we feel pretty good as we sit here right now in terms of the fundamentals of these businesses and we've seen good volume growth year-to-date, but perhaps a bit ahead of what would typically be the full-year growth rate and so, we're trying to reflect that in our outlook here. We've certainly seen very strong volumes in both specialty carbons and formulations and we've seen certainly some, perhaps a bit stronger than expected volumes in Reinforcement and if those moderate a bit, we're trying to take those things into account here to position the year, where we think it's likely to be. And we feel pretty good about this, especially after coming off pretty strong year last year with EPS up 16%. And our view over time here is that, if we grow the earnings in the 7% to 10% range over time and then combine that with our cash return profile, it's going to put us in a very attractive place in terms of TSR. So that's the strategy and the goal that we're pursuing and we're focused on that.

Okay. Thank you.

Our next question comes from Jim Sheehan with SunTrust.

Thank you. On your Investor Day, you talked about growth plans for Purification Solutions in the transportation market and I was wondering if you could just update us a little bit about your growth plans there, including what geographies you're targeting for penetration?

Sure, Jim. I think you're probably referring to the discussion we had around the application for activated carbon in the automotive application and this is really tied to vapor, fuel emission standards in the car and activated carbon is used here to meet these requirements. And we do expect that over time there will be some significant growth, particularly in Asia as they bring these standards on, these standards are more prevalent in the western part of the world, but a bit less so certainly in Asia and in China. And we're participant in this application today and have been investing in new product development efforts here to strengthen our position over time. We have launched a number of new products and they're in the process of evaluation with customers. So, I think a couple of things are important to note here, one is that that process takes a little bit of time. And number two, I think the most significant growth is going to come in Asia and how those regulations play out, particularly in China, I think is still a bit of a question and exactly the timing of how those play out, but it is something that we see as a good long-term trend and one that we're positioning ourselves for in terms of new products and working with customers.

Great. And do you expect your product to be spec-ed in for the OEMs in China for that market, and if so, can you meet market demand for a higher-grade material? I'm specifically talking about 15 butane working capacity grade of activated carbon?

I'm sorry – I'm sorry, Jim, the question is what do we expect that we would be specified in or I didn't quite hear you?

Yeah. Do you expect to be spec-ed in for the OEMs in China when they adopt these standards. And secondarily, on the technical grade 15 butane working capacity, can – does your product achieve that requirement?

Our product developments are targeted, Jim, to meet the requirements in this application. And so we would expect that we would have success and win our share of this market as these regulations get implemented. So, certainly our product development efforts here have been geared towards meeting those performance requirements.

Okay. Thank you.

Our next question comes from Kevin Hocevar with Northcoast Research.

Hey, everybody. A quick follow-up. You called out in the Purification Solutions segment that inventory drawdown would negatively impact the results in the third quarter. Given that there was pre-buy in Reinforcement Materials ahead of price increases, and I think you said maybe in polymer end markets too, in your specialty carbon black business, do you expect similar impacts in those two segments or do you think it's only really in the Purification Solutions segment?

Yeah. I think in terms of Purification, maybe I'll just kind of remind you, Kevin, what we see as the effects from inventory here. Certainly, in the year, we're expecting a pretty small absolute impact from inventory in 2017 in Purification, but there will be some inventory swings quarter-to-quarter largely due to seasonality. But over the full year, we're not expecting a significant absolute impact from this. On a full-year basis in 2017, we still expect that this will have about a $10 million benefit compared to the full year of 2016, so not a big absolute impact. But when comparing with prior period, 2016, we still see the full year impact being in that $10 million range. In terms of the other businesses in terms of inventory builds and draws, I don't think it's a big story here as we talk about the back half of the year. There certainly are some movements as we build inventory in advance of turnarounds and then draw it down, while the plant is out of operation for the maintenance activity, you will see that effect. So, for example, in Reinforcement Materials, we will have a heavier third quarter of maintenance activity, and therefore we will have a drawdown, but I wouldn't say it's really very material, but directionally there will be some draw.

Okay. Got you. Thank you very much.

Yes.

Our next question comes from Chris Kapsch with Aegis Capital.

Yeah. Hi, I just had one follow-up on the Reinforcement Materials segment. And you've parsed out the volume comps by region and then you commented about the Americas, specifically being up 11% being, I guess, a little bit skewed towards Latin America. So, I'm just wondering if you could break out, I don't know, just directionally or quantify somehow – just how strong were the volumes in, say, South versus North America? And also, how much of that comp is due to the outcome from the calendar tire contract negotiations in both North America and South America, as opposed to maybe like what you suggested the end markets seemingly picking up, maybe it's a combination of both? But thank you.

Yes. Sure, Chris. Well, we report it on the Americas basis and so I won't break those out in specific detail, but it is correct that it was somewhat skewed towards South America versus North America, although North America was positive. So, there was some real growth there in North America, but it was skewed a bit more towards South America when you look at that composite number. Now, in terms of what's driving it? I think you're seeing both effects here. You're certainly seeing some effects from the calendar negotiations, but you are also seeing that just the overall activity level in South America has picked up a bit and we're seeing that flow through. So, I think you're seeing both effects here, but both sub regions contributed positively to the volume growth in the quarter.

Okay. Thank you.

And I'm not showing any further questions at this time.

Good. Well, thank you again for joining us this quarter, and thank you for your support of Cabot. And we look forward to speaking with you again next quarter. Have a good day.

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