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Cabot Corporation (NYSE:CBT)

F2Q12 Earnings Call

May 2, 2012 02:00 pm ET

Executives

Erica McLaughlin - Director, IR

Patrick Prevost - President & CEO

Eddie Cordeiro - EVP & CFO

Dave Miller - Executive Vice President and General Manager, Core Segment and General Manager, Americas Region

Sean Keohane - Senior Vice President and General Manager, Performance Segment

Fred von Gottberg - Senior Vice President and General Manager, New Business Segment

Analysts

Ivan Marcuse - KeyBanc Capital

Saul Ludwig - Northcoast

John Roberts - Buckingham Research

Laurence Alexander - Jefferies

Chris Butler - Sidoti & Company

Jay Harris - Goldsmith & Harris

Operator

Good day ladies and gentlemen and welcome to the second quarter 2012 Cabot earnings conference call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today Ms. Erica McLaughlin, Director of Investor Relations. Please go ahead, ma’am.

Erica McLaughlin

Thanks Keith. Good Afternoon. I would like to welcome you to the Cabot Corporation earnings teleconference. Here this afternoon are Patrick Prevost, Cabot’s President and CEO; Eddie Cordeiro; Cabot’s Chief Financial Officer; Dave Miller, General Manager of the Core Segment; Sean Keohane, General Manager of the Performance Segment, Fred von Gottberg, General Manager of the New Business Segment; Jim Kelly, Corporate Controller; and Brian Berube, General Counsel.

Last night, we released results for our second quarter of fiscal year 2012, copies of which are posted in the Investor Relations section of our website. For those on our mailing list, you received a press release either by e-mail or fax. 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.

I remind you that our conversation today will include forward-looking statements, which are subject to risks and uncertainties, and Cabot’s actual results may differ materially from those expressed in the forward-looking statements. A list of factors that could affect Cabot’s actual results can be found in the press release we issued last night and are discussed more fully in the reports we filed with the Securities and Exchange Commission, particularly in our last Annual Report on Form 10-K. These filings can be found in the Investor Relations portion of our website.

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

Patrick Prevost

Thank you, Erica and good afternoon, ladies and gentlemen. This quarter has been a very strong one for Cabot and we are very pleased with our performance. Over the last few years, we’ve maintained our focus on earnings growth through margin and capacity expansion and from new products and businesses and the results are coming through.

The sole execution of our strategy delivered a 68% quarterly improvement over the last year in adjusted EPS. Our improvement was driven by exceptionally strong business performance that resulted in sequential and year-over-year improvement in total segment EBIT. We achieved another quarter of record performance in two of our business segments, Rubber Blacks and Specialty Fluids.

As we talked about last quarter, we implemented our Rubber Blacks commercial agreements for calendar year 2012 and they contributed strongly to our results this quarter. In addition, our Specialty Fluids segment performed extremely well and we continue to expand into new geographies and with new customers. We successfully completed two jobs in Malaysia during the quarter and are pleased with our geographic expansion as well as customer diversification.

As we indicated earlier in the year, the sequential volume improvement was strong. We saw increases of 4% in Rubber Blacks, 14% in Performance Products and 17% in Fumed Metal Oxides. We believe that these volumes reflect a more normalized demand profile as compared to our volumes at the end of the calendar year which included some destocking activity by our customers.

While macroeconomic environment in Europe remains a challenge, we have seen positive momentum in Asia and North America. In particular, we have seen notable improvements in China and the US in recent months as we are seeing recovery in automotive production as well as some of the other industries we serve.

As a reminder, Cabot's revenues continued to grow preferably in the developing markets around the world. Today we are at close to 50% of our revenues in Asia Pacific and South America. Over the long term, we remain confident in the projected growth of our end markets. We have seen another $3 billion of announced tire capacity expansions since January. This will contribute to a growth rate of about 5% per year in tire unit capacity. The announced expansions are focused in the emerging regions, but we also see significant investment planned for the US. Outside of the tire and automotive industries, we also remain optimistic about the momentum of using inkjet for use in commercial printing and continue to see strength in the infrastructure sector in emerging markets. In addition to the strong operating performance this quarter we made significant progress in our capacity expansions and energy efficiency investments.

We are on track with our previously announced capacity expansion plans through 2014. As a reminder, these plans include an additional 300,000 metric tons or roughly 15% of Rubber Black’s capacity. Approximately 35% to 40% additional fumed silica capacity, an increase of 50% to 55% of Masterbatch capacity and an increase of 20% to 25% of specialty carbon black capacity.

These are for the most part very inefficient investments at existing sites. Progress against these plants include the completion of three important expansions during the quarter, our rubber blacks expansion in Indonesia that increased the capacity in the country by 20%. Our fumed metal oxides expansion in China where we tripled our plant production to 15,000 tons and our Inkjet capacity expansion where we have doubled the size of our two lines over the last six months.

All of these expansions will start contributing in the second half of this fiscal year. In addition, we expect three more projects to be completed by the end of calendar year 2012. These include expansions in Brazil and Argentina that will increase our South American rubber black's capacity by approximately 10% and the bottlenecks in Europe that will increase our European rubber black's capacity by about 10% and then finally additional fumed silica capacity in Barry in Wales that will increase capacity of that site by roughly 20%.

We have also commenced the construction of our new rubber blacks plant in [Jiangxi] China which will add a 130,000 tons of new carbon black capacity in that country by the end of 2013.

Along with capacity expansion projects, we also on track with our investments in the energy efficient projects, our energy efficiencies project. We have put two new projects into production in Asia over the last few months and one of them includes proprietary technology that can be deployed at other carbon black plants around the world.

We're extremely excited about this new process technology as it addresses both our sustainability goals and our superior financial return expectations. In addition to capacity and energy efficiency, we are focused on developing new products to meet the changing needs of our customers.

During the quarter, we launched a number of these new products and I will highlight just a few. In our performance segment, we launched a new fumed silica that will be used in special adhesives for the windmill bonding paste market. Typically a windmill blade consists of two pieces that I integrated together with bonding paste.

A strong bonding paste can enable the manufacturing of longer blades through more sag resistant composites. Cabot’s fumed silica delivers 25% to 30% of higher sag resistance and reduces processing time by up to 50%, a great improvement. Another example from our new business scouting efforts is a conductive performance additive for lithium iron batteries.

Our performance additive enables Cabot to help car battery and lithium iron battery manufactures meet tough industry fuel economy challenges. And significantly improve the performance of their products while lowering costs. We believe this will support the growth of these energy efficient vehicles and also consume electronics in general.

The third example is a specialty high strength pigment through water-borne coding formulations. This product represents a major advancement in reducing production costs, while surpassing industry standards for color performance. Cabot’s unique product will enable customers to provide deep black coating for premium automobiles and motorcycle.

As you can see we continue to successfully pull all the levers of our strategy. Margin and capacity expansion, the introduction of new products, and growth of our new businesses. I am extremely pleased with the how the global Cabot team is delivering results.

I will now turn it over to Eddie to discuss the second quarter financial results in more detail. Eddie?

Eddie Cordeiro

Thank you, Patrick. For the second fiscal quarter, total segment EBIT from continuing operations was $123 million which was 28 million or 29% higher than last year’s second quarter and 42 million or 52% higher than the first fiscal quarter of 2012. The increases as compared to both periods were driven by higher pricing, improved product mix and higher volumes that more than offset higher cost from new capacity and spending to support our growth initiatives. As expected we saw a sequential increase in our volumes and a substantial contribution from Rubber Blacks commercial agreements that commenced at the beginning of the calendar year. These factors contributed to a significant sequential improvement in EBIT for Rubber Black and Performance segment. We also experienced a strong quarter in our Specialty Fluid segment.

Now I will discuss the details at the segment level beginning with Rubber Blacks. During the second quarter of 2012, the Rubber Blacks business experienced its strongest quarter ever increasing EBIT by 21 million as compared to the second quarter of 2011. The increase was driven principally by higher margins, resulting from higher prices and a favorable product mix. This margin expansion more than offset the impact of higher fixed manufacturing cost and 2% lower global volumes.

Sequentially, EBIT increased 17 million from the first fiscal quarter of 2012. This resulted from higher prices and a favorable product mix and 4% higher global volumes. The sequential increase in volume was driven by improvement in the Americas, Europe and South East Asia. The sequential decline in volume in China was due to the Chinese New Year holiday in our second fiscal quarter. We believe the new margin structure of the business is more reflective of the value we bring to our customers and allows us to continue to support them into the future.

In the Performance segment, EBIT decreased by 4 million as compared to the second quarter of 2012. The decrease was driven principally by higher fixed cost from the start up of new capacity and the unfavorable impact of declining inventory levels, which partially offset by higher volumes. Performance products volumes increased 1% and fumed metal oxides volumes increased 4%.

Sequentially, EBIT increased by 14 million primarily from higher volumes. Performance products volumes increased 14%, while fumed metal oxides increased 17%. The sequential improvement was seen in both businesses as demand recovered from our first fiscal quarter. We were pleased to see the strong volume recovery this quarter and we continue our diligence in value pricing and our focus on introducing new high value products to the market.

EBIT in our Specialty Fluids business increased by 15 million from the second quarter of fiscal 2011 and by 11 million sequentially. The increases in both periods were due to higher rental revenue from more complex jobs that were larger and longer in duration and a favorable sales mix driven by a significant product sale in the second quarter of fiscal 2012. This sale contributed $7 million of margin during the quarter.

Despite the quarter-to-quarter variability in Specialty Fluids, we continued to see a solid pipeline of projects and a winning business in geographic areas outside of the North Sea including two recent jobs in Asia. EBIT in the New Business segment for the second fiscal quarter was $4 million below the same period last year. The decline was due to the absence of $3 million of business development milestone revenue recorded in the prior year in our Cabot Elastomer Composites business and lower commercial activity in our Aerogel business. While the CEC milestone payments vary in timing, we continue to be excited about the future of this business for both tire and non-tire applications.

Sequentially, we saw a solid improvement in revenue across all of our new businesses. However, EBIT was flat. This is was due to higher fixed costs related to a plant shut down at our [Altona] plant during the quarter.

As Patrick mentioned, we completed the capacity expansion of our inkjet facility this quarter. Inkjet demand for the commercial and office printing industries continues to grow and we expect our new capacity will be fully utilized in the second half of the year.

In January, we completed the transaction to sell our Supermetals business to Global Advanced Metals or GAM for a minimum of $450 million. We received an initial cash payment of a $175 million and we’ll receive additional consideration of at least $275 million over the coming two years. The remaining payments are structured as a loan to GAM and having implied interest component.

As I mentioned last quarter, the imputed interest will be credited through interest income; while we expect the total amount recorded to be consistent with what we estimated last quarter, the timing of when the interest income is recorded has changed somewhat. We had initially anticipated that we would be able to record the interest ratably on a quarterly basis.

However, as we finalized the accounting for this transaction, we now will record approximately $1 million of interest quarterly and we will recognize the remainder as a lump sum based on the actual performance of GAM’s standalone business once per year, most likely in the second fiscal quarter of 2013 and 2014.

As a reminder, these imputed interest payments are recognized for US GAAP accounting purposes only. The majority of the cash payment of $275 million will be received toward the end of the two year period.

The remainder of sale has been recorded as income for discontinued operations. During the quarter, the transaction resulted in a pre-tax gain of $294 million. Income from discontinued operations net of tax was $189 million or $2.92 of EPS for this quarter.

We ended the quarter with a cash balance of $366 million which was an increase of $178 million from December 31st. The increase was driven by the receipt of a $175 million from the sale of the Supermetals business.

Our strong operating results were substantially offset by capital expenditures of $56 million and $31 million increase in working capital, namely due to higher receivables associated with price increases and higher volumes.

We recorded a net tax provision of $23 million for the second quarter. This included a charge for tax related certain items of $2 million. Our operating tax rate on continuing operations for the second quarter was 26% and we anticipate the operating tax rate for fiscal 2012 to be between 25% and 27%.

I will now turn the call back over to Patrick.

Patrick Prevost

Thank you very much Eddie. We are optimistic about the improving conditions in North America and China. We continue to see attractive growth in the emerging economies of Asia and South America both in the short and in the long-term.

Over the last few years, we have worked hard not only to reshape the strategy, but also the culture within the company. I believe a big portion of our success is attributable to the shift to a performance oriented culture, but includes clear target setting, accountability for results and alignment with rewards. We are confident that our strategy is the right one to deliver earnings growth for our shareholders.

We are continuing to increase the efficiency of our operations everyday. Our focus on value pricing and an improved product mix is delivering clear results. Our capacity additions are in the right locations and designed to make the product our customers need today and in the future.

Our portfolio of new businesses and our new product pipeline are strong. We have been successful at launching new products and creating strong partnerships, so our unique products are used in new and exciting applications.

The combination of all these of factors make me confident that we will continue to grow the earnings of this company and achieve our long-term financial targets.

Thank you very much for joining us today. And I will now turn the call back over for a Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from the line of Ivan Marcuse with KeyBanc Capital. Please go ahead.

Ivan Marcuse - KeyBanc Capital

The first question I have is the entire shipment data has been I guess, it’s been less than robust, so I would say over the past couple of few months. So how long does that typically take when you see lower shipments going out and it’s just in North America, I know it’s globally. Does that impact your volumes and how should you think about volumes going forward with the addition of the capacity that you have coming on line?

Patrick Prevost

So I am going to ask Dave to take that question, Dave?

Dave Miller

Ivan, let me just kind of maybe first answer that question by giving you a view of what we are hearing from the global tire markets. You are right. In general our customers have indicated to us that tire demand so far this year has been mixed but overall relative to last year down.

Globally, if you look at the passenger car segment, they have seen generally stronger, a weak tire demand and weaker replacement tire demand. In the truck tire segment, they’ve seen a similar trend but in the off-the road segment, this is mining, earth mover, agriculture. They continue to display pretty solid growth globally.

Those that have significant exposure to Europe and generally pointed to economic weakness, there and the uncertainty in that region being a big driver for slower demand with North America being but stronger and the emerging market showing more robust demand overall.

Looking forward, they are signaling that they’re expecting the rest of the year to be about stronger than the first calendar quarter and so we’re planning on that basis. Specifically around inventory management and how long that takes to work through the chain, we generally work on shorter delivery wavelengths through the chain, with maybe a bit of a lag but not a lot.

Ivan Marcuse - KeyBanc Capital

Great. How about lower natural gas cost? How is that impacting your cost structure and does that impact the energy centers or the benefits that you get from those and how should we think about that with gas around $2 right now?

Dave Miller

I think, I mean, in general, it’s a positive factor across the board. We use natural gas as secondary fuel for the production of carbon black and it has benefited us across the board. It does have an impact on some of the energy centers but I would say most of our energy centers are outside of the U.S. Therefore the impact, if any at all, has been minor.

Ivan Marcuse - KeyBanc Capital

Great. Thanks and then my last questions on the Specialty Fluids. You talked about in your release on jobs becoming longer and more complex. So do you think this is just a trend for the quarter or do you believe this will be a continuing trend and should you see, I know it’s very lumpy, but profitability in general, I guess, on an annual basis is probably the best way to look at it, continue to rise with this with more jobs or longer jobs or could you just give a little more detail about that. Thanks for taking my questions.

Dave Miller

As, I guess, you can see when you look at our quarterly results, the Specialty Fluids segment has been and continues to be somewhat lumpy. It’s a very attractive business from a financial point of view but it is very difficult to forecast due to the project nature of the locations where we sell or rent our fluids. I would say, in general we believe that there is a strong trend towards more use of our material for two reasons.

One is the continued increase and the complexity of the wells that are being drilled and the technologies that our customers are utilizing. The second is that our product is the most environmentally friendly drilling fluid out there and we believe that we will continue to see regulations, you know, moving in our favor.

There’s been a lot of work to make this trend happen. We are working very diligently with our customers but you know knowing the performance of our products very closely but we’re also doing a lot of work to educate a lot of the oil companies and the service companies out there to understand how our fluid can actually provide the better performance in the long run in spite, perhaps, of the perceived higher cost that this fluid has.

And what we are seeing is albeit a little slower than we would like, we’re seeing increased understanding of the (inaudible) and we’re seeing actually engagement increased engagement across the board in different geographies and with different customers.

So the recent jobs we’ve done in Asia have been very favorable to us and we’ll continue to spread the word that you know this is a very attractive to material.

Operator

Your next question is from Saul Ludwig with Northcoast. Please go ahead.

Saul Ludwig - Northcoast

First question in that category; number one, corporate expense of $18 million seem to be higher than ever, any other quarter ever and I am just wondering is that a new level to expect for the unallocated corporate expense. And then the line below that where you had the $8 million expense. Was that, how much of that was a LIFO or FX and does that sort of reverse if we see residual oil prices have actually come down in April versus where they were in Jan, Feb, March. So if you could address both the unallocated corporate and the other line?

Patrick Prevost

Thanks Saul. I am going to ask Eddie to take up on this.

Eddie Cordeiro

Saul, on the unallocated corporate expense going year-to-year from 15 to 18, really the main difference there is we made a payment for a technology to XG Sciences during the quarter, which really is substantially the big difference between 2011 and 2012. Otherwise it would have been flat.

Saul Ludwig - Northcoast

We should think of that as being sort of 15 million as you go looking forward.

Eddie Cordeiro

Yeah. It would probably be in the range of, I would say, 12 million to 14 million or 15 million. The other thing that runs through there is any projects that may be going on that we don’t want to burn the businesses is with good flow through that cost center. So that’s really what goes on there. And then on the general unallocated expense, the reduction from 11 to 12 was principally a reduction in LIFO expense. There would still a LIFO expense.

Saul Ludwig - Northcoast

I am looking at the absolute number, not the change as to the nature of the 8 million expense.

Eddie Cordeiro

Right, so in the 8 million expense, roughly half of that was a LIFO expense and the reminder would be either things like FX or it would really be miscellaneous others. So it should be relatively small.

Saul Ludwig - Northcoast

Should that go or become less negative, if the current prices for oil based product stays the same?

Eddie Cordeiro

Yeah, if we were to actually see a LIFO benefit, then it would be less negative or if it were to stay the same you wouldn’t see a LIFO impact. It would be obviously half of that number, you know, all of equals all.

Saul Ludwig - Northcoast

Got you. And then the second question, Patrick, relates to the performance black sector. There I saw that you had a 12% price increase effective I think April 20th and you also alluded to having new capacity and new products and also the segment was impacted you mentioned due to, I guess, may be unabsorbed overhead as you reduce inventories.

When you look at back to second half of the year, are you finished with (inaudible) inventories or are you going to get the benefit of the 12% price increase, benefit of the new products and new capacities which would imply that directionally those earnings should be much, much better in the back end of the year than they were in the front end of the year.

Patrick Prevost

Okay, so I am pleased to see that you picked up on all the messages that we had included in our release and the feat and I must say that all of those are messages that you picked-up correctly where we’ll continue to drive the expansion of the Special Blacks business and the fumed silica business as well as Masterbatch across the performance segment.

With regard to the price increase in Special Blacks, it is actually the announcement was that we had and our intending to increase prices up to 12% and this is because they will be different increases for different types of products in different geographies. So this is kind of an indication of range.

And some of that is actually attributable to the fact that we are seeing feedstock price pressures as well as some transportation costs that we need to recover and one of the drivers for the price increases. So all-in-all I would say that we are on good track with the business. We are back to normalized volumes after significant destocking last quarter and I would say that that would be I think the takeaways with regard to looking at the next two quarters.

Saul Ludwig - Northcoast

Yes, so my conclusion about going forward directionally you are agreeing with?

Patrick Prevost

Yes.

Saul Ludwig - Northcoast

And just quickly, the aerogel plant shutdown, is that back up and running and how much would that cost you?

Patrick Prevost

Let me ask Fred to address the plant shutdown in Frankfurt.

Fred von Gottberg

Yeah, so in connection with the Frankfurt plant it was a typical regulatory shutdown to just check equipment. The plant is now 10 years old, so you do that on a regular basis to make sure that everything is clear. And the plant is back up and running at this stage and in connection with the actual cost associated with that shutdown is in the region of few million dollars.

Operator

Your next question is from the line of John Roberts with Buckingham Research. Please go ahead.

John Roberts - Buckingham Research

You still call the core segment, the core segment; are you going to rename it, the Rubber Blacks segment or is there another core business we should think that will be added there?

Patrick Prevost

It’s a good question John. We’re having that debate internally, because with the sale of the Supermetals business clearly and the move of CEC into the new business segment, the core segment has been reduced to Rubber Blacks. So this is something that we’re considering right now and we’ll be announcing later this year potentially.

John Roberts - Buckingham Research

Sort of related to that do you have any updated thoughts on the use of proceeds; I know that the same answer is before; is there something new you would like to share with us?

Patrick Prevost

Well, I would say that we’re pleased with the cash we’ve received on some of the divesture and it continues the strength from the balance sheet. There is nothing more that I could add at this stage John, I think we’re continuing to think about how we kind of redeploy this cash for growth and as you could see from my speech we’ve got a very long list of great projects that we’re aggressively pursing and the way we are getting results, we are looking at inorganic opportunities, but nothing to be shared at this stage.

And then, we are continuing to return cash to the shareholders through dividend and share buybacks and we have been returning somewhere between $50 million and $100 million a year. So I believe that has been well spent. And then we need some flexibility for working capital, but all-in-all I would say not a major change in our thinking John.

John Roberts - Buckingham Research

And then lastly, the process improvement you mentioned in carbon black, does that involve using more BTUs and/or carbon from natural gas as opposed to liquid hydrocarbon?

Patrick Prevost

It’s actually a technology that improves the overall use of hydrocarbon in the process and it goes beyond the traditional energy center technology and is a very attractive addition to our plants. We’ve proven the technology now and we are looking at rolling it out to the sites where this technology could add value. So it is actually retrofit-able to some of our sites around the world.

John Roberts - Buckingham Research

Is there a way to just talk about it as a percent of the carbon employed or is it percent of BTU employed into the plant; of efficiency?

Dave Miller

I would say John, this is Dave, the way I would put this is, it’s significantly more energy efficient in terms of recovery relative to standard what I’ll call energy centers, co-gen type arrangement. And it decreases our carbon dioxide emissions as well. So you think about better use of the carbons that are in the system.

Operator

Your next question is from the line of Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander - Jefferies

I guess first question on performance; can you give us a sense for the kind of order trends in March and April and how they are comparing to normal seasonal improvement?

Sean Keohane

Hi, Laurence; as Patrick commented, in the quarter we saw a nice rebound across the segment including in performance products following what was quite significant destocking in the Q1 period. as you look into the quarter in more detail we saw momentum build throughout the quarter, so that’s positive and I would say our outlook is fairly optimistic here US seems to be gaining some strength, China now after coming through a couple of quarters of a slowdown is moving back in a more positive direction. So I would say at a macro level we are feeling pretty good of course, Europe remains a question. But we did see momentum build throughout the quarter and I think that’s a good signal

Laurence Alexander - Jefferies

Then on the core business, if you look at the dynamics that are driving your mix shift, should we expect average unit margins to be improving or declining sequentially just from mix for the balance of the year?

Patrick Prevost

Let me think about that. I would say in general we are driving product mix across the segment where we are focused on margin and pricing over volume, so I would say a lot of what we've been doing in the last few quarters is coming through in that, in our second fiscal quarter. I think we will continue to drive some of that but I do not see much further or at least some, perhaps some slight improvement in that average margin through the rest of this fiscal year.

Laurence Alexander - Jefferies

And then lastly when you think about the process yield gains that your new technologies are enabling in the carbon black plants, if you think about five, six years out, how much of an incremental sort of reduction in your feedstock requirement should we be looking for?

Patrick Prevost

I'm trying to think about how to answer that question. Laurence one of the issues I have is that I am uncomfortable with providing that amount of information due to the confidential nature of the technology, but we will be looking at implementing this technology across a certain number of our facilities. It is a major capital project, so it takes about 18 to 24 months to implement. So now that we've proven the technology we are going to roll it out to other sites, but I think the delivery of a further value should be going beyond the current plan environment.

Operator

Your next question is from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Unidentified Analyst

This is [Yoyo Yen] filling for Jeff. So the Core Segment delivered 13.5% of EBIT margin which is relatively high, so is that widely anticipated by the management, is there a surprise or how sustainable is it?

Eddie Cordeiro

Okay, so first of all we don't really look at EBIT or EBITDA margin because of the feedstock impacts on revenue that actually creates some fluctuation with regard to that percent. So a lot of what we are focusing on is actually dollars per ton of either contribution margin or gross margin and there I would say that we are on track in terms of the growth of that margin.

We believe that the business is progressing well in that respect. We think that there still is potential in the future, but it's going to require us to manage both the operating efficiency side of the business as well as the pricing and product mix side, but clearly we are working at both of those areas very hard.

Unidentified Analyst

So I guess to put it other way, this quarter in the Core Segment is relatively good, but your still remaining, your 2012 EPS target of $4.50 so is that, why isn't that lifted or how do you see this business going forward?

Eddie Cordeiro

We've set ourselves some earnings growth goals for 2014 and as you look at where we are to the second quarter of fiscal 2012 I think we’re continuing to show that we are on track with regard to the fiscal year 2014 goals and if you followed one of our presentations or some of our presentations over the last few quarters you’ll know that we have in terms of improvement of the business 40% due to volume and new capacity and then 30% you know that’s coming from margin enhancement and 30% from new products and businesses and clearly we are on track with regard to all three of these levers.

Unidentified Analyst

Okay, and secondly what's your CapEx target for 2012, is it still the same of I think I remember it's $250 million.

Eddie Cordeiro

Yes, we’re currently looking at CapEx number for fiscal 2012 of approximately $250 million.

Unidentified Analyst

How about 13?

Eddie Cordeiro

We believe that beyond 2012, we should be looking at similar numbers at least for one or two years hence.

Operator

Your next question is from the line of Chris Butler with Sidoti & Company. Please go ahead.

Chris Butler - Sidoti & Company

You’d mentioned from your performance segments that added fixed cost were bit of a headwind there, could you give us an idea of what you are looking at in that segment or may be for the company overall for the fixed costs that got added?

Patrick Prevost

I think, mainly the fixed cost in the performance segment were related to incremental structural costs related to new capacity being brought onstream. So these are costs that we had forecast that we knew about and we had these start-ups occurring last quarter and if you think about it, there is a small amount that is one time and then we are just planning for incremental fixed cost as most of these new capacities are actually on the existing side. So just to give you an idea, we would be talking into the lower single-digit millions of dollars.

Chris Butler - Sidoti & Company

And it sounds like as you continue to attract capacity, you might better utilize past assets, but you will be running into additional costs as well?

Patrick Prevost

Well not really. No, I think the plan is to very quickly absorb these additional fixed costs through additional business.

Chris Butler - Sidoti & Company

And the LIFO that was discussed previously, is that primarily here in this performance segment as well, the declining inventory part of it?

Eddie Cordeiro

The LIFO that we discussed is in the unallocated costs. So you wouldn’t see it in the segment results or Carbon Black, generally both Rubber Blacks and Performance Blacks.

Chris Butler - Sidoti & Company

And so then what would be the declining inventory impact for you for this segment?

Eddie Cordeiro

So I don’t think we quantify the exact amount, but that’s essentially drawing down inventories and the unfavorable impact that is on the P&L.

Chris Butler - Sidoti & Company

And shifting gears to new products, at your Investor Day you had mentioned that you were looking for about $10 million to $15 million of savings here for 2014. Understanding that you have a lot of things changing and some things you would see that didn’t occur in this quarter. Do you feel that you are still on the path to achieve that for 2014?

Patrick Prevost

Yeah, we are still right on-track with this

Operator

Your next question is from the line of David Begleiter with Deutsche Bank. Pleas go ahead.

Unidentified Analyst

This is actually [Ram Sivalingam] sitting in for David. Most of my questions have been answered, could you just opine on your outlook for raw materials going forward for the rest of the year; given limited exposure to natural gas cost in the US?

Patrick Prevost

We typically don’t forecast our raw material cost, mainly because we do not have a lot of success in doing so, I don’t think anybody does. But I think what’s important to understand is that and I would say in the majority of cases the way we have structured our business where recovering the cost of energy and feedstock in our products almost immediately, so that there is actually very little lag, if any at all now a days, and I think that we are somewhat agnostic to the absolute level of energy or feedstock cost.

Operator

And your next question is from the line of Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

I have roughly two questions. The easier one is, in your Elastomer Composites, I presume where revenues are up, I presume that's the business that you didn't get any milestone payments for and with the rising revenues what are the costs that are going up with those revenues?

Patrick Prevost

I’ll take the easy question. But so, on the Elastomer Composites business we are doing well. We are on-track with Michelin and we are also continuing to progress well in non-tire applications and we've just recently had a very positive response to some testing done by some mining companies that we are working very closely with. So we are very pleased with the development there.

With regard to cost developing in that business, if there are any increases in costs they would be minor.

Jay Harris - Goldsmith & Harris

Well, then how on higher revenues are you not showing any benefit in the new business segment earnings?

Fred von Gottberg

Let me try and answer that for you. So in this quarter the revenues was all based on product shipments. So obviously what the products shipments you've also got the costs associated with the product shipment. If you compare it to last year, it was essentially a milestone payment which almost goes directly to the bottom-line. So that was the big impact or the delta impact you see.

Patrick Prevost

It’s a 100% margin on last payment, correct.

Jay Harris - Goldsmith & Harris

Now the challenging question. If I look at changes from the first quarter to the second quarter in terms of profitability, is there a way for you to provide us with some insight as to which changes were or the magnitude of the changes that were fully reflected in the quarter and what changes or the magnitude of what changes were partially reflected in the quarter, wherein subsequent quarters we might get a four quarter of it?

Conversely, I guess you referred to the sale of fluids, drilling fluids, which is not necessarily repetitive item and you had perhaps some other benefits that went in the other direction. And can you give us further insight as to how an application from a core continuing operation basis in the second quarter would effect subsequent quarters before we look to sale of additional volumes?

Patrick Prevost

So Jay as I said I’ll pass on the difficult questions. So Eddie if you could help me with this one.

Eddie Cordeiro

I think understand where you’re going Jay and I won’t sort to speak business-by-business or segment-by-segment. But, things like where we achieve additional margin or additional margin through pricing that substantially achieved in a quarter. So you wouldn’t see additional benefits going forward.

But areas where for example, we built capacity that’s come on-stream where we have recognized the cost for that, the fixed cost, the depreciation, the addition of whatever people you need, but capacity hasn’t either been commission started up, fully loaded or hasn’t been sold. Then we start to see those benefits as we’re able to sell that through to the customers going forward.

And then the last one you called out, I think was a reasonable one the specialty fluids, we did call out, so we did have one rather large sale as opposed to rental, which was contributing about $7 million worth of margin which would go the other way. And so, unless we had similar type sales like that which are very difficult to predict, we wouldn’t see that type of benefit.

Jay Harris - Goldsmith & Harris

Coming back again, I mean, you sort of indicated there were start-up expenses absorbed in the March quarter. You obviously can’t respond to the question on this call, but were you have a big jump in consecutive quarterly performance it would be very harmful if you could provide an aggregate of expected benefits in a subsequent quarter for everything put into place in the particular quarter we’re talking about?

Eddie Cordeiro

I understand. Just at the high level Jay, the jump we saw in the core segment from Q1 to Q2 was a little bit volume, but really margin.

Jay Harris - Goldsmith & Harris

Due to price?

Eddie Cordeiro

Yeah and the jump we saw in the Performance segment was quite a lot of volume because if you remember we said going into that December quarter that we were concerned about the de-stocking and we saw very nice volume rebounds. We were quite happy to see that. In both of those segments, we did see some capacity coming on, lets say in the last three to six months, which will start to take hold later on the year and I think that kind of is a high level but we will consider your question going forward and see if we can do something with that

Operator

And we have follow up from the line of Saul Ludwig of Northcoast. Please go ahead.

Saul Ludwig - Northcoast

You know with a residual fuel oil rising steadily through Jan, Feb and March did you have any lag or impact in the rubber black segment a bit you know $2 million $3 million or $4 million that may not reappear or was there any lag in there

Patrick Prevost

No

Saul Ludwig - Northcoast

You had none. Okay, really good and then you mentioned you are expanding in Europe by 10%. I am trying to reconcile that comment with your other comments about Europe and entire demand in Europe and are you going to find yourself with lot of excess capacity which you don’t need at least in the short-term?

Patrick Prevost

Well I think the situation there, Saul, is that we just don’t know what is going to happen in Europe. I think we are -- and I think our customers are in the same boat with us. I think there is a lot of concern about the recessionary environment developing, I think UK Spain, Holland are in profession. I think I missed a few other countries and with that we believe that disposable income will affect potentially the tire demand but Dave would you like to add anything to that?

Dave Miller

I would just add a couple of points. First of all, there's a long term question which is the investment that we are making versus the short term environment. Our customers are still talking about tire production and tire production marginal growth in Europe longer term.

That's one and two, our investments in capacity in Europe, you know, come after we made rationalization decisions in that market and there also about producing the products that our customers need in that market going forward. So higher performance products to support higher performance tires, which are the bulk of what European tire production is today and will be going forward.

Saul Ludwig - Northcoast

And then the final carry on to that is you've got the 300,000 tons of additional capacity coming on between now and 2014 and I am sure you try to keep score as best as you can in all of the other announcements that have been announced by all of your, anybody else in the carbon black business, what do you think the aggregate amount of additional capacity in addition to your 300,000 that appears to be coming down the pipe.

Dave Miller

I think so there are announcements that are continuing for new carbon black capacity. Most of those remain focused around Asia and so our capacity expansions are 300,000 tons are focused really on meeting incremental demand growth globally.

Saul Ludwig - Northcoast

Do you think the aggregate of all these others is another 300,000 tons or 200,000 or 500,000.

Dave Miller

Yeah I don't…

Saul Ludwig - Northcoast

Approximately.

Dave Miller

Yeah, I think, the takeaway and we've done some work on that is that over the next two to three years we do not see more capacity being built in carbon black including ourselves than we see actually growth in the demand of carbon black increase. So we think that the supply-demand environment should stay fairly stable along the other lines we've seen recently.

Operator

And we have no other questions now. So I would like to turn back over to Mr. Patrick Prevost for closing remarks.

Patrick Prevost

So thank you very much for joining us today. I think the results speak for themselves. We've had a very good quarter and its confirmation of the success of our execution on the strategy and I am pleased with our performance. I believe we are on track with meeting our long-term targets and we are as a team very confident about what will be happening over the coming years. Thanks again for joining us and looking forward to speaking with you next quarter.

Operator

Ladies and gentlemen that will conclude today's conference. Thank you for joining us and you may now disconnect and have a great day.

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