Cabot Corporation

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2020 Cabot Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Steve DeLaHunt. Please go ahead, sir.

Steve DeLaHunt Thank you, and good morning, and welcome to the Cabot Corporation Third Quarter Earnings Teleconference. With me today are Sean Culhane, CEO and President, and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our third 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. It 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, and 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 our forward-looking statements. Importantly, as we cannot predict the duration or scope of the 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 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, and our quarterly report on Form 10-Q for our fiscal quarter ended March 31, 2020. And in subsequent filings we will make with the SEC, all of which are 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 measures 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 provide an update on third quarter results, along with an update on our financial position, a market overview, and our progress on sustainability. Erica McLaughlin will then review the business segment results in our corporate financial details. Then Sean will provide some call on the fourth quarter and open the floor to questions.

Sean? Thank you, Steve, and good morning, everyone, and welcome to our third quarter earnings call. As expected, the impact from COVID-19 in the third fiscal quarter was significant, as we faced an unprecedented level of demand disruption. I'd like to begin by recognizing the entire Cabot team for the way they responded to ensure that we remain safe, support our customers and communities, and adjust to a new set of priorities around cash preservation and cost management. I am specifically very proud that our extensive protocols to ensure that our people and suppliers are safe have worked well. and pleased to report that we've had no instances of work-related COVID transmission among our employees. In the third fiscal quarter, volumes in product mix across our businesses declined by over $100 million as compared to the prior year quarter, driven primarily by lower demand in the tire and automotive sectors as manufacturers temporarily halted production in response to the COVID-19 pandemic. As a result, Total segment EBIT was $18 million, and adjusted earnings per share was a loss of 7 cents for the quarter. Despite the challenging environment, we're extremely pleased with our cash flow performance in the quarter, as we generated operating cash flow of $149 million. This puts us on track to deliver the operating cash flow that we communicated last quarter of $200 million in the second half of the fiscal year. In addition, we continued our commitment to return cash to shareholders with $20 million in dividends paid in the quarter. We also made progress on a key strategic initiative by completing our acquisition of Shenzhen Sanshun Nano. The acquisition of this leading carbon nanotube producer to the lithium-ion battery sector will complement our range of conductive carbon blacks and strengthen our position in this fast-growing application. We also continue to strengthen our already solid debt and liquidity position. Cabot has consistently generated strong operating cash flow, and since 2015, we've generated over $2.1 billion cumulatively. We remain confident that our cash flow from operations will be sufficient to fund our current dividend and support the capital expenditure needs of our businesses. The strong cash flow generation in the quarter allowed us to fund the Sanchon acquisition while at the same time increasing our cash and bringing our debt balance down. On the liquidity side, as of the end of June 2020, we had $1.4 billion in cash and committed facilities and a debt to EBITDA ratio of 2.9. Out of an abundance of caution, we increased our leverage covenant from 3.5 times to 4.5 times for the four quarters starting in September 2020. which we believe provides ample cushion in these uncertain times. The COVID-19 pandemic is having a far-reaching impact on the global economy, with global GDP forecasted to decline approximately 5% in 2020. In terms of the impact of the pandemic on Cabot's business, we expect the June quarter will be the low point in terms of financial results. April demand proved to be the low point for us, and we saw month-over-month improvement throughout the quarter, with further strengthening in July. Additionally, we are seeing the broad mobility data continue to strengthen. Looking a bit deeper at our end markets, developments are mixed. Automotive production represents approximately 25% of our sales, ranging from tires on new cars to a host of applications in performance chemicals, such as structural adhesives, coatings, and engineered plastic compounds. This market has suffered in 2020 and is projected to decline about 20 percent in the calendar year, with year-over-year declines in all regions. We expect to see improvement in the September quarter based on external forecasts, which are projecting a year-over-year decline in global light vehicle auto production of only 10 percent in that quarter, as compared to a decline of 45 percent in the June quarter. Now moving to tire production. The global replacement tire industry is also expected to decline for the full calendar year of 2020 by approximately 15% based on estimates from LMC, with contraction occurring across all regions. Similar to auto production, the September quarter is expected to show improvement sequentially, with total replacement tire sales projected to be down 10% year-over-year, compared to a decline of 34% for the June quarter, according to LMC. We have also seen clear and steady upward trends in terms of mobility and miles driven, and this bodes well for the replacement cycle for tires, both in terms of passenger vehicles as well as truck and bus. The replacement tire market has historically been more resilient compared to other parts of the broader transportation sector. Beyond automotive and tires, which are large and important end markets for us, we also serve a diverse range of applications across the infrastructure, packaging, and agriculture sectors, and these end markets have held up well during this time. Additionally, PMI has rebounded sharply as we exited the June quarter, a further sign that economies are recovering from the low point in April. In times like these, it's important to remain committed to long-term strategy. A key tenet of our strategy at Cabot is built on sustainability. We believe our ability to develop innovative technologies to meet our customers' sustainability challenges, conserve resources across our value chain, and grow our position in the circular economy is a key to our shared future and provides us with a competitive advantage. For more than a decade, we've consistently published a sustainability report to highlight our progress in this area, and we recently released our 2019 report. As is typical for us, the report was published in accordance with the Global Reporting Initiative. And in an effort to further our commitment to transparency and to provide important information to our shareholders, we have aligned our disclosures with the Sustainability Accounting Standards Board, or SASB framework, which sets forth standards for the chemical industry. We also remain a proud signatory of the United Nations Global Compact, and are committed to reporting our progress as a key component of our sustainability report. I'm also excited to share our expanded 2025 sustainability goals. We have a long history of focusing intensely on the environmental impacts of our operations and the safety of our employees, partners, and communities. We also recognize that long-term success requires a commitment to sustainability in its broadest form, as well as a balanced approach to stakeholder engagement. Our 2025 sustainability goals demonstrate our steadfast commitment to this broad definition of sustainability. This expanded set of goals reinforces our broadened view of sustainability and extends beyond our strong foundation in safety, health, and environment to include areas such as product development, supplier sustainability, diversity and inclusion, and community engagement. In our reinforcement material segment, we're pleased to report that as of June 2020, all major emission control equipment has been received and placed into final position at our Franklin, Louisiana site. This project has completed 90% of the estimated person hours required and remains on track to finish ahead of the industry's April 2021 EPA deadline. Additionally, we've launched another new product within our Cabot engineered elastomer composites business. The new E2C DX9640 solution is specifically engineered to improve the performance, safety, and lifespan of tires while reducing the cost and environmental impact of production. The E2C product line was recently named European Rubber Journal's inaugural list of top 10 elastomers for sustainability, which ranks projects that contribute most to raising the environmental profile of the elastomers and rubber industry. We were the only carbon black company recognized in this top 10 list. I will now turn it over to Erica to discuss the results of the third quarter. Erica.