Cabot Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Cabot Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's 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 today, Steve Delahunt, Vice President, Treasurer, and Investor Relations. Thank you. Please go ahead, sir.

Thank you. Good morning. I'd like to welcome you to the Cabot Corporation Earnings Teleconference. With me today are Sean Cohane, President and CEO, and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our second 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. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control and difficult to predict. If known or unknown risks materialize or should underlying assumptions prove inaccurate, our actual results could differ materially from those expressed or implied by forward-looking statements. Importantly, as we cannot predict the duration or scope of a COVID-19 pandemic, the negative impact to our results cannot be predicted. Factors that will influence the impact on our business and operations include the duration and extent of the pandemic, the extent of imposed or recommended containment or mitigation measures, and the general economic consequences of the pandemic. Other important factors that could cause our results to differ materially from those expressed or implied in the forward-looking statements are discussed under the forward-heading forward-looking statements in the press release we issued last night and in our last annual report on Form 10-K for our fiscal year ended September 30, 2019, our quarterly report on Form 10-Q, for our fiscal quarter ended March 31, 2020, or subsequent filings we make with the SEC, all of which are also 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, who will provide an update on the impact of COVID-19 on our business and operations. Erica will review the key highlights of the company's performance, business segment results, and corporate financial details. Then Sean will provide some context for how we are seeing the second half of the year developing in light of the COVID-19 pandemic. We will then open the floor to questions. Sean?

Thank you, Steve. Good morning, everyone, and welcome to our second quarter earnings call. First, I hope you and your families are all well at this time. To start the call, I want to share an update on the COVID-19 situation. First, I'd like to express my thanks to our first responders, health care professionals, and all those who are working tirelessly on the front lines of the coronavirus response effort. I would also like to thank the entire Cabot team for the way they have adapted to these unusual working conditions and have maintained the focus on protecting our employees, serving our customers, and supporting our communities. We have a long tradition of community engagement, and we are inspired by the many countless acts of kindness and community support from our Cabot team during this time. from donating personal protective equipment and contributing raw materials for the production of hand sanitizer, to helping supply food to children who are without access to school meals. Thank you. The COVID-19 pandemic is having a significant impact on the world, and our first priority is the health and safety of our employees, customers, and all stakeholders. We were quick to take steps to ensure the safety of our employees, including halting travel, requiring work from home where possible, implementing social distancing measures, restricting access to our facilities to critical personnel, providing guidelines for self-monitoring and screening, increasing sanitation procedures, following strict hygiene rules, and providing the appropriate protective equipment and procedures to ensure the safety of our people at our sites all around the world. Additionally, we've implemented leave policies to help support our employees impacted by COVID-19. The chemical and materials industry has been deemed an essential industry by most governments around the world. For Cabot, this means that our production facilities have remained open. Chemical products are essential building blocks for virtually everything, and Cabot's products specifically support such important sectors as the transportation of goods, the production of medical supplies, the manufacture of key infrastructure products such as power distribution cables, consumer packaging, and the agriculture sector broadly. That said, many of our plants are operating at significantly lower rates due to the temporary halting of operations by many of our key customers, notably most tire and automotive manufacturers in the Americas and Europe, Middle East, Africa. Serving our customers during this dynamic time requires that our supporting functions of customer service and supply chain operate flawlessly, despite our remote work environment. I am pleased to report that all of our business processes, IT systems, and technical service teams are performing consistent with the high level of service that customers have come to expect from Cabot. Now, if I move to the impact of COVID-19, here is what we have seen to date in our business. We first experienced the impact of COVID-19 in China with extended Lunar New Year holiday closures at the end of January and into February. Many of our customers' plants in China were closed or running at low rates for most of February. We began to see week-by-week improvement as we moved through March, but China volumes in the second quarter were still down 26% for reinforcement materials compared to the same quarter in 2019. In terms of the other countries where we operate in Asia, namely Japan, Indonesia, and Malaysia, we experienced limited impact in the second quarter. We have seen more of an impact in these locations in April as the virus has spread to other parts of the region. We continue to operate our plants in those countries, however most at significantly reduced rates. Moving to Europe and the Americas, throughout January, February, and early March, we experienced solid demand across our businesses. as the impact of COVID-19 was pretty limited up to that point. By the end of March, many of our tire and automotive customers across these regions began to stop operations and demand was reduced over the last two weeks of the quarter. This led to weaker volumes, mainly in our reinforcement materials segment. At this point, all of our facilities remain open, but they are operating at significantly lower rates to align to lower customer demands. While supply chain and logistics disruptions have been cited by some companies, we have not experienced any material issues at this point. In this uncertain economic environment, ensuring strong cash flow and protecting access to liquidity is our top priority. Our management team is experienced, having worked through several recessionary periods over the last 20 years, and we know in times like this, we must act quickly to generate cash. On this front, we are taking aggressive actions to reduce inventory levels and accounts receivable, which combined with lower oil prices will result in a significant release of working capital in the second half of the fiscal year. This counter-cyclical cash flow profile is a distinguishing feature of Cabot. In the 2009 financial crisis, Cabot generated strong cash flow from operations despite the significant short-term reduction in volumes, which allowed us to respond quickly as demand returned. We have also taken timely and prudent steps to lower costs in the near term while balancing our ability to respond quickly when the demand for our non-discretionary products returns. We eliminated all discretionary spending, stopped travel, curtailed production, tightened plant spending, and I temporarily suspended my salary in the third quarter. In addition, cost reduction actions that were underway prior to the COVID pandemic such as the move of our shared service center in the U.S. to Latvia and the streamlining of our management structure, are now providing significant cost savings in the back half of the year. We anticipate these efforts will yield a reduction of $45 million of cost in fiscal year 2020. These cost reductions will partially offset the negative impact from COVID-19 and the cost associated with growth investments. Finally, we have further reduced our capital expenditure forecast by another $25 million. We've deferred CapEx where possible, including the delay of some of our growth projects, and this will reduce our capital expenditures to approximately $200 million for this fiscal year. In terms of capital allocation, we remain committed to our current dividend level and are confident in our cash flow outlook to support this. During the second quarter, we repurchased $10 million of shares early in the quarter, but we have since halted our repurchase activity as part of our prudent cash flow management actions. We do not anticipate repurchasing shares for the remainder of the fiscal year. These actions will continue to strengthen our already solid debt and liquidity position. Our operating cash flow generation has been consistently strong, and since fiscal 2015, we have generated over $2 billion in cash. We are confident that our operating cash flow will be sufficient to fund the dividend and support the capital expenditure needs of our businesses. In terms of our debt maturity profile, it is staggered with no maturities until fiscal 2022. On the liquidity side, as of the end of March 2020, we have $1.3 billion in cash and committed facilities and we were well below our debt to EBITDA covenant in our revolving credit agreement, which we believe provides ample liquidity cushion for these uncertain times. We anticipate strong operating cash flow in the second half of the year, resulting in a stable debt profile. I will now turn it over to Erica to discuss the results of the second quarter. Erica?