Cabot Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Steve Delahunt, Vice President of Treasury and Investor Relations. Please go ahead, sir.

Thank you, and good afternoon. I'd like to welcome you to the Cabot Corporation Earnings Teleconference. With me today are Sean Cohane, CEO and President, and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our first quarter of fiscal year 2020, copies of which are posted in the Investor Relations section of our website. The slide deck that accompanies this call is also available in the investor relations portion of our website and will be available in conjunction with the replay of the call. During this conference call, we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading forward-looking statements in the press release we issued last night and in our last annual report on Form 10-K that is filed with the SEC and available on the company's website. In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the investor section of our website. I will now turn the call over to Sean Cohane, who will discuss the key highlights of the company's performance. Erica McLaughlin 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, and good afternoon, ladies and gentlemen. Last evening, we announced results for our fiscal first quarter of 2020. As expected, our first quarter results decreased as compared to the prior year. Our first quarter of fiscal 2019 included $10 million of EBIT from our specialty fluids business, which we divested in the third quarter of fiscal 2019. Also contributing to the decrease was lower EBIT in our reinforcement materials segment as compared to the prior year, as we experienced unusual levels of year-end inventory destocking by many of our large customers that impacted volumes, particularly in Europe and the Americas. During the quarter, we finalized the negotiation of our calendar year 2020 customer agreements for the reinforcement materials segment with a positive outcome. We achieved pricing gains and successfully implemented formula adjustments to protect against marco-related feedstock differentials. In the Americas region, we realized price increases while maintaining volumes. This is particularly important given the environmental capital investments we are making in the region to provide reliable supply for our customers. In Europe, the current demand environment is softer, and new carbon black supply has come online from Russian producers, which impacted the negotiations. Despite this, we achieved price increases in the region while making the decision to let go of some lower margin tire business. As a result, volumes in Europe are expected to be about 5 percent lower year on year starting in the second quarter. We believe this was the right action, and as the environment strengthens, this will enable us to supply the spark market and to support the growth of our specialty carbons and compounds businesses. Results in the performance chemical segment increased 14% compared to the same fiscal quarter of 2019. The segment benefited from strong sales volumes in both the performance additives and formulated solutions businesses compared to first fiscal quarter of 2019. While the business environment remained challenging, our management team continued to focus intensely on working capital efficiency, cash flow generation, and balance sheet strength. Operating cash flow of $105 million included a benefit from working capital, which helped to fund our CapEx needs, along with $54 million of cash returned to shareholders. These results demonstrate the strength and durability of the company's cash flow. In the first fiscal quarter, we also continued to aggressively manage costs, and began to implement several actions to enable us to be more efficient and cost-effective. These actions include the reorganization of Cabot's leadership structure, as well as the creation of a global business services function. Global business services is a new strategic function in Cabot that brings together many of our enabling and support services in an effort to drive standardization of our processes, gain scale, and increase efficiency by leveraging the power of digital tools. We have launched a number of priority initiatives, including moving many of our North American shared service activities from the U.S. to Riga, Latvia, where we currently operate our European Shared Service Center. These actions will allow us to streamline our organizational structure and drive expected savings of approximately $10 million this fiscal year, which we will see largely take hold in the back half of 2020. And finally, in the quarter, we announced an agreement to acquire Shenzhen Sanshun Nano, a leading producer of carbon nanotubes. We're excited about the strategic acquisition to accelerate our growth and positioning in the high-growth lithium-ion battery market. Let me give you some details on the deal. Cabot has entered into an agreement to purchase Sanshun for approximately $115 million. As the second largest producer of carbon nanotubes, or CNTs, globally, Sanshun has the capability to manufacture both dry powder CNTs and dispersions and has a proven track record of commercial success in the lithium-ion battery market. The acquisition includes a newly commissioned CNT plant in China, which has sufficient capacity to support growth over the next several years. Their revenue on a trailing 12-month basis is $28 million, and when combined with Cabot's energy materials business, Total sales in the battery application will be approximately $50 million. We believe this is a great addition to Cabot because the lithium-ion battery industry is moving towards blends of conductive carbon additives in order to achieve the optimal performance cost ratio, and CNTs are the fastest-growing conductive carbon additive in energy storage. With this acquisition, Cabot will be the only carbon additive supplier with commercially proven carbon black, CNT, carbon nanostructure, and dispersion capabilities. We believe this acquisition will not only strengthen our global leadership position in carbon additives, but will allow us to deliver new, innovative, conductive formulations to enhance battery performance. This acquisition will be managed as part of Cabot's global energy materials business within the performance chemical segment. The parties are expected to close the transaction in the second quarter of fiscal 2020. Before I turn the call over to Erica, I also want to provide an update on our progress in the area of sustainability. There is no doubt that sustainability is important in our industry and is becoming increasingly important to investors. At Cabot, we strive to be the most innovative, respected, and responsible leader in our markets, delivering performance that makes a difference. We believe that a modern company must balance the needs of many stakeholders in order to sustainably increase the value of the corporation. At Cabot, we achieved this through our commitment to operating responsibly, conserving resources, and developing innovative performance materials that help our customers achieve their sustainability goals. I am proud of our continued leadership and progress in this area. Over the past year, we've been recognized by numerous organizations for our outstanding environmental, social, and governance transparency and performance. Notably, we were recently named to Newsweek's list of America's most responsible companies for 2020, as well as recognized in Corporate Responsibility Magazine's 100 Best Corporate Citizens list for 2019. I'm also pleased that we received a gold rating from EcoVedas for our sustainability program for the fourth year in a row. These accomplishments demonstrate our deep commitment to transparency and continuous improvement. I'll now turn the call over to Erica to discuss the business results.