Cabot Corporation

Good day, and thank you for standing by. Welcome to the Q3 2023 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Steve Delahunt, Vice President of Investor Relations and Treasury. Sir, please go ahead.

Thank you, Chris. Good morning. I would like to welcome you to the Cabot Corporation Earnings Teleconference. With me today are Sean Cohane, CEO and President, and Erica McLaughlin, Executive Vice President and CFO. Last night, we released results for our third quarter fiscal year 2023, 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 that differ materially from those projected in such statements. Additional information regarding these factors appears in the press release we issued last night and in our 10-K for the fiscal year ended September 30, 2022, 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 expected performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The 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 discuss the third quarter highlights and the market environment in our reinforcement materials and performance chemicals segment. Erica will review the company and business segment results along with some corporate financial details. Following this, Sean will provide a strategic summary and closing comments and open the floor to questions. Sean?

Thank you, Steve, and good morning, ladies and gentlemen, and welcome to our call today. In our third fiscal quarter, we continued to navigate a challenging macroeconomic environment. Despite lower volumes in both segments and a tax headwind, we delivered sequential earnings improvement due to the continued strength of the reinforcement materials segment. Consistent with the commentary in our June announcement, we continue to see weakness in China and soft demand on a global basis across many of our key performance chemicals and markets, particularly in the housing and construction sector and across consumer durable applications. In the quarter, we delivered adjusted earnings per share of $1.42, up 7% sequentially. Reinforcement materials delivered a record quarter with EBIT of $132 million, up 17% year-over-year and 8% sequentially, despite the third consecutive quarter of year-over-year volume declines. This level of performance reflects the resilient nature of this business and the structural improvements we have made over the last several years. EBIT in the performance chemical segment improved sequentially, largely due to cost initiatives across the segment. Demand in the segment remained challenged as we saw continued weakness in our key end markets, with the exception of battery materials. In the quarter, we generated strong operating cash flow of $243 million and free cash flow of $163 million, of which we returned $38 million to shareholders through dividends and share repurchases. Our balance sheet remains strong with net debt to EBITDA 1.7 times, and we have 1.3 billion of committed liquidity that has recently been extended to 2027. Our balance sheet and investment grade credit rating gives us the flexibility to continue to advance our long-term strategic priorities supported by our disciplined and balanced capital allocation strategy. Moving to the market environment, Across both segments, we've been dealing with weak end market demand, so I wanted to spend a few minutes to take you through what we are currently seeing. Let's start with reinforcement materials, where the key end markets are replacement tires and auto OE production. You will recall that replacement tires account for approximately two-thirds of segment volume, with OE production and industrial applications driving the balance. For the first three quarters of our fiscal year, we've experienced year-over-year volume declines, with year-to-date volumes down 8% in this segment. The decline is principally driven by a deep inventory destocking cycle, and there is some anecdotal evidence that customers are delaying purchases. When we look at the industry demand fundamentals, we see pretty stable conditions. For the passenger car replacement market, miles driven, and the global car park are generally good indicators for light vehicle replacement tire demand. In the U.S., for example, passenger miles driven is holding steady while the global car park continues to expand. For the truck and bus segment, truck tonnage is a good indicator of underlying health, and we can see in the U.S. that this too is holding steady. The performance of these fundamental demand drivers gives us confidence that volumes will normalize when we exit the current destocking cycle. Auto production is the other key end market for this business and accounts for approximately 27% of reinforcement materials volumes. Global auto production is one area we are seeing signs of recovery across North America, Europe, and China. This end market has experienced growth in recent quarters and is projected to grow in 2023. providing some offset to the lower replacement tire volumes. The impact of a pickup in auto production in this segment is seen fairly quickly given the relatively shallow value chain as compared to the replacement market. In performance chemicals, the external environment remains challenging. Most of our industrial sector end markets are experiencing weak demand, particularly housing and construction. And on the consumer application side, we have seen that demand for durable goods and electronics has also been weak. Manufacturing PMI has historically been a key indicator of demand in this segment. Currently, manufacturing PMI levels in the US and Europe remain below 50, and China has been oscillating around 50 with several recent data points in contraction territory. Recent housing data, both housing starts and building permits, indicates a potential turning point in the U.S., but European permits continue to drop and the China real estate market remains stagnant. Construction and housing demand has a significant impact on our specialty carbons, specialty compounds, and fume metal oxides product lines. As I mentioned earlier, auto production is one area where we are seeing some promising signs in terms of new car builds. Approximately 25% of performance chemicals volume is tied to the transportation OE sector. However, we have not yet seen the impact in our sales due to lingering destocking and the depth of this value chain. Historically, this has taken about two to three quarters to see the impact of a turn in auto production translate into higher demand for our products. As this happens, we would expect a lift in terms of both volumes and product mix as the automotive sector pulls through a high percentage of specialty grades. And finally, the China EV market continues to recover from a sharp sequential slowdown in electric vehicle sales in the March quarter. The June quarter saw a sequential growth, though EV sales volumes still aren't back to the level it heaved in the December quarter. Our battery materials volumes recovered in line with this trend, with Q3 volumes increasing 29% on a sequential basis and 50% year over year. While the volume trend is encouraging, the auto EV market in China is experiencing an increase in competitive intensity, as auto OEMs compete aggressively on price for market share, and this pressure is flowing back upstream to the battery producers and material suppliers. As we transitioned into Q4 and look forward through the balance of the fiscal year, we have experienced pricing pressure that is impacting our margins. The impact is concentrated in our China business and particularly where our products are sold into batteries for lower priced domestic vehicles. Where our products are sold into batteries for export to global OEMs or to customers outside of China, we are seeing stable prices. Given this dynamic in China, and the continued delay and scale up of one of our Western auto OEMs, we now expect the fiscal year EBITDA to be in the low 20 million range. As we manage through this unexpected period of turbulence in China, our focus is on three priorities. First, market segmentation to focus our efforts on higher performing batteries, particularly NCM chemistry, and on those batteries targeted for Western exports. Second, we'll continue to carefully manage the balance between volume and pricing. And third, we're aggressively attacking the cost structure across our base products. Over the long term, we believe that electrification will transform the mobility sector with most growth forecasts for lithium ion batteries in the 25 to 30% CAGR range through the end of the decade. We also expect that the EV and battery market will bifurcate into a China market and a rest of world market. We expect the market outside of China will orient more towards higher performing NCM chemistry, which requires higher performing conductive additives. We also expect that customers outside of China, particularly the global auto OEMs, will continue with strict qualification requirements and management of change protocols required by the IATF quality management system. Additionally, we also expect that the trend towards supply regionalization will accelerate, And this development provides an advantage to a technology leader like Cabot that has a strong global footprint and an ability to scale up capacity and region to meet customer requirements. Over the next decade, the industry will undergo fundamental change as EVs grow in the West, battery supply chains regionalize, and new technologies such as dry process take hold. Over this time, we expect that North America and Europe will grow to comprise approximately 50% of the global battery market. We remain excited by the long-term growth prospects for battery materials and believe it can become a meaningful part of our profitability over time. At Cabot, we have the broadest conductive additive portfolio, a leading global footprint, and the capability to expand in North America and Europe to support our customers' requirements. We believe this value proposition is compelling to customers, and we continue to see momentum with the leading battery producers. I'll now turn the call over to Erica to discuss the segment and financial performance. Erica?