Cabot Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Cabot Corporation fourth quarter 2020 earnings conference call. At this time, all participant lines are in a listening 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. 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, Shannon. Good morning. I'd like to welcome you to the Cabot Corporation Fourth Quarter 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 fourth 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, in our quarterly report on Form 10Q for the fiscal quarter ended March 31, 2020, and in subsequent filings we 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 adjustment 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 the table at the end of our earnings release issued last night and available in the investors section of our website. I will now turn the call over to Sean Fulhane, who will discuss the fourth quarter and full year highlights. 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 morning, ladies and gentlemen. I'd like to welcome everyone to our fourth quarter 2020 earnings call. I want to begin by recognizing our employees around the world for their continued commitment to the company, to our customers, and to their community. Managing through this pandemic has challenged us on every front, and I have never been more proud of our team. As we manage through this pandemic, we established a set of guiding principles here at Cabot to protect the house first, and prepare ourselves to be ready to win as the recovery takes hold. I believe our performance to date reflects that balance. For the quarter, total segment EBIT was 84 million, and adjusted earnings per share was 68 cents, up 75 cents on a sequential basis. This result was driven principally by improved results in reinforcement materials, which recovered nicely as demand in our key end markets increased sharply as compared to the third quarter. Performance chemicals results also improved in the quarter as automotive-related demand began a recovery and our self-help initiatives took hold. In purification solutions, we took another step forward in our transformation plan with the sale of our mine and the structuring of a long-term supply agreement for activated carbon with ADES, which better positions us to serve the mercury removal market. We continued our intense focus on cash generation, delivering $99 million in operating cash flow in the quarter and $248 million for the second half, well ahead of our previously communicated expectation of $200 million of operating cash flow in the back half of the year. Erica will go into more detail on the segment results a bit later in the call. I would first like to share my perspective on the full fiscal year 2020 results. There is no doubt that fiscal 2020 was a year unlike any other we've experienced as we battled the global public health crisis and the associated economic fallout. The global pandemic severely affected demand from our key tire and automotive customers, especially in the third fiscal quarter, and that impact was reflected in our full year results. On the performance front, we delivered adjusted earnings per share, $2.08. While this result was well below prior levels and the earnings potential of the company, I am very pleased with how we managed through the crisis, and I believe the strength of Cabot was revealed. Our strong balance sheet and cash generation power and our experienced management team allowed us to navigate the pandemic while remaining focused on our advancing the core strategy. As you know, our strategy is built on three pillars. First, investing for growth in our core businesses. Second, driving application innovation with our customers. And finally, generating strong cash flows through efficiency and optimization. In the reinforcement materials segment, the team did a great job delivering necessary price increases in our calendar year 2020 customer agreements. implementing new commercial terms to manage feedstock volatility, and delivering cost reductions to partially offset the pandemic-driven demand reduction. In the performance chemical segment, the team was focused on self-help measures and laying the groundwork to restore profitability to historical levels. In the year, we successfully implemented price increases in specialty carbons to offset the impact of higher MARPOL-related feedstock costs. The segment also executed on a number of strategic priorities during the year. We closed on the acquisition of Shenzhen Sanshun Nano, a leading producer of carbon nanotubes and formulations for the high-growth lithium-ion battery market. And customer qualifications in inkjet packaging applications continue to build momentum. In the purification solution segment, we closed on the sale of our lignite mine in Marshall, Texas to ADES, and entered into a long-term supply agreement for lignite-activated carbon. This transaction improves our efficiency while also removing a significant hurdle to divestiture of the business. While the earnings environment was challenging, we remained intensely focused on cash flow generation and balance sheet strength. During the year, we delivered strong operating cash flow of $377 million and free cash flow of $177 million largely through tight working capital management. The strong cash flow generation allowed us to repay debt, maintain our dividends, fund the San Shun acquisition along with our CapEx commitments, and retain our investment-grade credit rating. And finally, ESG leadership has been a focus of ours for a long time, and it is becoming ever more important to our stakeholders. We recently launched our updated 2025 sustainability goals, which build on our existing leadership position. By expanding our goals beyond a strict environmental focus to include areas such as product development, supplier sustainability, diversity and inclusion, and community involvement, we believe all stakeholders will participate in our success. Overall, I am extremely proud of our team, and I believe we are well positioned and ready to win as the recovery takes hold. Now turning to an update on the current business environment, we see underlying trends in both tire and automotive demand strengthening with month-on-month improvement continuing through October and into November. The economic recovery is unquestionably linked to stabilizing the public health crisis, and this remains the key to bringing consumer confidence and the economy back to its full potential. China is a good example of where COVID transmission has remained low and the economy is strengthening, with GDP up 5% year over year in the September quarter. Looking at our key end markets, the trend is positive. 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, batteries, coatings, and plastics. External forecasting firms report light vehicle auto production down 3% year over year globally in the September 2020 quarter, as compared to a decline of 43% in the June quarter. Current industry forecasts call for an 18% drop in global auto builds for the full year, including a small decrease of 3% for the December quarter. Now moving to tire production. Global replacement tire industry sales are now expected to decline 12% for the full calendar year of 2020, based on estimates from LMC. Light vehicle replacement tire sales improved in all regions in the September quarter, down only 6% year over year, compared to a decline of 31% in the June quarter. As with auto production, the December quarter is expected to approach 2019 levels, with total replacement tire sales projected to be down 2% year-over-year, according to LMC. Building on the V-shaped recovery in the September quarter, we continue to see consistent improvement in terms of mobility and miles driven, and this bodes well for the replacement demand of tires, both in terms of passenger vehicles as well as truck and bus. As a reminder, the replacement tire market has historically been more resilient compared to other parts of the broader transportation sector. I'll now turn the call over to Erica to discuss the financial results of the quarter in more detail. Erica?