Cabot Corporation

Hello, and welcome to the Q4 2023 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 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President, Treasurer, and Investor Relations, Steve Delahunt.

Thank you, Andrew, and 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 fourth quarter of 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 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 annual report on Form 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 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. Also, as we typically do each year, I'd like to remind you that over the next several weeks, in connection with investing in restricted stock awards issued under our long-term incentive equity program, officers of the company will be selling shares to pay tax and other obligations related to their rewards. I will now turn the call over to Sean, who will discuss the full year highlights, including an update on the reinforcement materials segment, our capital allocation for fiscal 2023, and our continued leadership and sustainability. Erica will review the corporate financial details, business segment results, and our cash flow outlook and priorities for fiscal 2024. Following this, Sean will provide a strategic summary and closing comments and open the floor to questions.

Sean? Thank you, Steve. Good morning, ladies and gentlemen, and welcome to our call today. Fiscal year 2023 was characterized by a turbulent macroeconomic and geopolitical environment, but it was a year in which the enduring strengths of the Cabot portfolio were exhibited. We executed well and built momentum as we moved through the year, positioning us for a successful 2024. We delivered the second highest adjusted earnings per share in the company's history of $5.38, grew the reinforcement materials segment to a record EBIT of $482 million with EBITDA margins of 22% and generated over $350 million of free cash flow. In the year, we returned $186 million to shareholders through a combination of share repurchases and dividends. And finally, we made significant progress against our sustainability ambition and continue to demonstrate our industry leadership. I am immensely proud of the CABA team for the resilience and agility they demonstrated throughout the year and for their focus on execution in support of our customers. Turning now to our fiscal 2023 results, segment EBIT declined 5% year-over-year, largely due to lower volumes, as we saw prolonged destocking in both segments and weekend market demand, especially in the performance chemical segment. Price and mixed benefits net of costs contributed significantly to year-over-year results, driven by the reinforcement materials segment, as we realized improved pricing and product mixed benefits from the 2023 customer agreements. The stronger U.S. dollar had a negative impact in the year due to the translation of weaker foreign currencies back into dollars. The largest impact came from the euro, Japanese yen, and Chinese renminbi. While total segment EBIT was down only modestly at 5%, adjusted earnings per share declined by 14% due to higher net interest expense from the rising rate environment, a higher operating tax rate, and currency headwinds. I want to take a moment to talk about the reinforcement materials segment. This business not only achieved record EBIT in 2023, but I believe it is a structurally changed business compared to a decade ago. KABIT is a global leader in reinforcing carbons with a unique global footprint, leading technology, and a long-standing commitment to sustainability. The KABIT business model is largely a make and sell in-region business. This is driven by economic fundamentals, but also by the importance that our customers place on regional supply security. While this has long been the case, the importance of supply security has become even more pronounced given how rising geopolitical tensions have stressed many global supply chains. The key end markets in this segment are replacement tires and auto OE production. You will recall that replacement tires account for approximately two-thirds of segment volume, with auto OE production and industrial applications driving the balance. The EBIT performance in this segment has increased dramatically over the past eight years, supported by the long-term resilience of the replacement tire market and an increasingly tight supply-demand balance in the mature regions. We expect that utilizations in Europe will become even tighter this year as Russian Carbon Black, which has historically been a significant supplier to the European region, will be subject to sanctions starting in July of 2024. Furthermore, I believe that we have structurally improved our performance through a commitment to commercial and operational excellence across the company. The industry is also facing stricter environmental regulations that are requiring producers to make significant abatement investments to ensure reliable and sustainable supply to our customers. These investments raise the barriers to entry for additional capacity, roughly doubling the cost of new capacity. and require recovery in the form of price increases. As a result of these factors, I believe the outlook for this business remains strong, underpinned by favorable long-term demand drivers and a growing requirement for innovation to meet our customers' sustainability needs. Miles Driven has been remarkably resilient over the long term, and the global car park is forecast to continue to grow. both of which are expected to support our outlook for a consistently growing base of earnings and cash flow to fund our capital allocation priorities. Moving now to capital allocation highlights. The Cabot portfolio has robust cash flow characteristics, and in fiscal 2023, we generated very strong operating cash flow of $595 million, which allowed us to fund our balanced set of capital allocation priorities. Capital expenditures in the year were $244 million, which included approximately $143 million of maintenance and compliance capital, with the balance funding our high-confidence, high-return growth projects. Our growth projects in 2023 were focused on the growth factors of battery materials and inkjet, as well as productivity investments across our businesses. In addition to funding our capital plan, we returned $186 million to shareholders during the year. We've maintained a continuous and growing dividend since 1968, which is the year the company went public, and that commitment remains a core part of our capital allocation priorities. We paid $88 million in dividends in fiscal year 2023, including an 8% increase in May, reflecting our confidence in the long-term cash flow outlook for the company. We would expect to continue to raise the dividend over time as our earnings grow. We also repurchased 98 million of shares in fiscal 2023. We have communicated in the past that we plan to offset dilution each year, which is roughly $20 million annually, and we will be opportunistic with additional repurchases based on our outlook for cash flow and the timing of alternative investment opportunities. This is what transpired in 2023 as our strong cash flow generation enabled repurchases in excess of dilution. Given the strength of the cash flow, we are also able to reduce debt by $179 million. Reducing debt is not a core priority of our capital allocation strategy, but rather is more of a temporary use of cash to reduce interest expense until the cash is needed to fund our growth investments. We remain committed to our long-term investment grade credit rating as it affords us consistent access to the capital markets. Now turning to sustainability. In June of this year, we published our 2023 sustainability report, which highlighted our recent performance and advancements toward our 2025 sustainability goals, as well as our vision for creating a more sustainable world. At that time, we had achieved five of our 2025 sustainability goals ahead of schedule, while the others remain on track. Included in the five goals that we have achieved is our goal to export 200% of the energy that we import. I believe that this goal is an excellent example of our commitment to circularity by using the waste energy in our manufacturing process to produce cogeneration power, which is CO2 free. CAPIT has long been a leader in sustainability and been recognized by external parties for our leadership and excellence. Fiscal year 2023 represented another year of important progress in our sustainability journey, as evidenced by our earning the top rating of platinum from EcoVedas for the third consecutive year. The platinum rating recognizes Cabot's environmental, social, and governance efforts and places Cabot among the top 1% of companies assessed by EcoVedas. EcoVedas is one of the world's leading sustainability ratings platforms, and one that many of our customers rely on to evaluate their supply chains. Sustainability is at the core of our purpose and our Creating for Tomorrow strategy, and during the year we made important progress on several strategic fronts. Of particular note in 2023 was the launch of our Evolve Sustainable Solutions Technology Platform, which is focused on advancing sustainable reinforcing carbons. Our goal through the Evolve technology platform is to develop products for our customers that offer sustainable content with reliable performance, and importantly, at industrial scale. Evolve platform is built on three pillars. The first pillar is recovered, where we are focused on developing solutions made from circular value chains, such as end-of-life tire recycling and the plastics recycling value chain. The second pillar is renewable, where we are advancing solutions made from renewable materials or bio-based feedstocks. And finally, reduced, where we seek to innovate new products made from processes with demonstrably lower greenhouse gas footprint. We believe our evolved sustainable solutions platform will play a critical role in our sustainability journey as we look to collaborate with our customers to deliver solutions that address some of their most pressing sustainability challenges. We have a number of projects in various stages of development with our customers and technology partners, and I'm excited about the future innovations that they're expected to deliver. I'll now turn the call over to Erica to discuss the financial results of the quarter in more detail. Erica.

Thanks, Sean. I'll start with discussing the company results. I'm pleased to report the fourth quarter results of adjusted EPS of $1.65, which is the strongest quarter of this fiscal year. This performance was 6% above the same quarter last year, driven by record results in the reinforcement materials segment, partially offset by lower EBIT in our performance chemical segment. Cash flow from operations was strong at $138 million in the quarter, which included a working capital decrease of $1 million. Discretionary free cash flow was $88 million in the quarter. We ended the quarter with a cash balance of $238 million and our liquidity position remained strong at approximately 1.3 billion. Capital expenditures for the fourth quarter of fiscal 2023 were 78 million, and additional uses of cash during the fourth quarter were $23 million for dividends and 50 million for share repurchases. Our debt balance was 1.3 billion, and our net debt to EBITDA was at 1.7 times. The operating tax rate for fiscal 2023 was 28%, and we anticipate our operating tax rate for fiscal 2024 to be in the range of 28 to 30%. One additional item to note is the benefits seen in the general unallocated income. During the quarter, we experienced a foreign currency loss due to a government devaluation in Argentina. In August, the Argentinian government devalued the currency against the U.S. dollar by approximately 20% in one day, resulting in an FX loss of approximately $7 million. We treated this as a certain item consistent with how we have treated similar government-induced evaluations in other countries, most recently being Venezuela. By treating this as a certain item, the interest in investment income earned in the quarter was not offset by as much of a currency headwind as in prior quarters. This line item of general and allocated income and expense includes currency exposures related to our net asset positions, mainly related to the South American currencies, and investment income we earn in those countries, as well as interest income on our global cash balances. While these currency moves are quite difficult to predict, we are expecting that the quarterly amount in fiscal 2024 would be income in the range of $6 to $8 million per quarter, driven by higher interest income from higher interest rates and the net impact from the South America currencies and investment income in those countries. Now moving to reinforcement materials. During the fourth quarter and full year of fiscal 2023, EBIT for the segment increased by 25 million and 74 million, respectively, as compared to the same periods in the prior year. The increase was principally driven by improved unit margins from higher pricing and product mix in our 2023 calendar year customer agreements, partially offset by lower volumes. Volumes were 2% lower in the quarter and 5% lower in the full year as compared to the comparable periods in the prior year. The fourth quarter volumes included lower volumes in the Americas and Europe with higher volumes in Asia, driven by strength in China. The full year volumes were impacted by destocking activities during the year with volumes lower across all regions. Looking to the first quarter of fiscal 2024, we expect a sequential decrease in EBIT due to seasonally lower volumes in the Americas and a negative impact from foreign currency translation. We expect that year-over-year EBIT results in the first quarter of fiscal 2024 will be significantly higher than the first quarter of fiscal 2023 due to the improved price and mix from 2023 customer agreements and higher year-over-year volumes. Now turning to performance chemicals, EBIT decreased by $13 million in the fourth fiscal quarter and $109 million for the full year as compared to the same periods in fiscal 2022. The decrease in the fourth quarter was due to lower margins driven by a less favorable product mix in specialty carbons and few metal oxide product lines. The segment was also impacted by pricing pressures in the few metal oxide and battery materials product lines. Volumes were slightly negative in the quarter as a decrease in volumes year over year in the few metal oxides and inkjet product lines was mostly offset by growth in the specialty carbons specialty compounds, and battery materials product lines. The decrease in the full year was driven by 4% volume and lower unit margins. Volumes were lower across all product lines except battery materials, and most notably, a 17% year-over-year decline in fume metal oxides volumes. Lower volumes in fume metal oxides were driven by weaker demand in silicones applications and the impact from partner-driven downtime. Lower margins were driven by a less favorable product mix in battery materials and specialty carbon. Volumes in battery materials grew by 43% in the fiscal year, and EBITDA was 21 million, as aligned with our communication last quarter. Looking ahead to the first quarter of fiscal 2024, we expect a sequential volume decline due to seasonality in the Americas. We expect margins to remain relatively consistent sequentially, as pricing and product mixed benefits are expected to offset higher costs. We expect that year-over-year EBIT results in the first quarter of fiscal 2024 will be largely flat with last year, as volume improvement is largely offset by higher costs, the absence of insurance proceeds that we had in Q1 of 2023, and an unfavorable impact from foreign currencies. Now moving to cash flow. Sean talked earlier about the strength of our cash flow in fiscal 2023, and the uses of cash that are aligned with our capital allocation framework. As we look to 2024, we expect operating cash flow to remain strong, driven by our outlook for business EBITDA and the forward curve of oil prices. The uses of our cash flow will continue to be aligned with our capital allocation framework, with capital expenditures expected to be in the range of $250 to $275 million. As we invest in maintenance and compliance capital to ensure our plants continue to run reliably, and in attractive growth projects. We also anticipate the continued ability to return a significant amount of cash to shareholders through dividends and share repurchases. To provide a bit more detail on our key capacity investments in 2024, you can see that these projects cut across both segments. In the reinforcement materials segment, we are moving forward with our Indonesia plant expansion. Engineering for this project began a few years ago, but we paused the expansion during the pandemic. Today, we are the only carbon black manufacturer in Indonesia, and this site serves customers throughout the Southeast Asia region, which is growing at the fastest rate in the world for reinforcing carbon. In the performance chemical segment, we expect to complete the capacity additions in China related to battery materials that we have highlighted in the past to add conductive additive capacity. In addition, to meet the expected battery materials demand growth outside of China, We are making investments to expand conductive additive capacity in the US and Europe. These capacity investments are to serve the needs of our customers in those regions with local supply as the demand for EVs grows in those markets. We will begin these projects with the plan to align the timing of when the investments come online with the demand needs of our customers. In inkjet, we are undertaking the bottlenecks at our existing plants in the US to unlock additional capacity in a cost-effective manner to serve the expected increase in demand for packaging applications. I will now turn it back to Sean to discuss our outlook. Sean?

Moving to our 2024 outlook, clearly we are entering the year with some uncertainty in terms of how the global economy will perform. The ongoing conflict in Ukraine continues to weigh heavily on Europe, and the military escalation in the Middle East has the potential to impact commodity prices. In China, the timing and pace of recovery is still uncertain. And in the United States, it remains unclear what the impact will be of the Fed's tight monetary policy. While these macro factors are affecting all companies, we feel good about the resilience of our portfolio and our earnings growth prospects for fiscal 2024. Overall, we expect fiscal year 2024 adjusted earnings per share to be in the range of $6.30 to $6.80. which is up 22% at the midpoint over fiscal 2023. Let me take you through the key assumptions that underpin our outlook. As it relates to volumes, we believe that destocking is largely over in our key end markets, both for reinforcement materials and performance chemicals. We believe that the Q4 run rate is a good basis for reinforcement materials. If volumes improve from there, we could move higher into the range. For performance chemicals, we are not yet seeing external indicators point to improvement, so we expect that near-term volumes will likely stay around Q4 levels. Again, if we see recovery, I would say potentially in the back half of fiscal 24, then we could move higher in the range. Regarding margins, we do expect improved pricing and mix from our reinforcement materials calendar 2024 agreements. the magnitude of the increases would impact where we are in the range. For performance chemicals, we expect relatively consistent margins overall to the Q4 exit rate with some differences between product lines. As for costs, we expect higher costs will partially offset the reinforcement materials pricing and product mix benefits driven by inflationary pressures, our new air pollution control project starting up in the U.S., and a return to normal incentive compensation expense. Foreign exchange rates, interest rates, and energy prices can all impact positioning in the range. The midpoint of our range assumes relatively consistent FX rates and interest rates with today's levels, and we are assuming the forward curve for oil. We also have assumed the tax rate to be in the range of 28 to 30%, so at the midpoint, it is one point higher than fiscal year 2023. As we think about the quarterly shape of earnings, the first quarter results are expected to be down sequentially from the fourth quarter of fiscal 2023 due to normal seasonality in the Americas and a higher tax rate. But step up in Q2 as normalized volumes return and new calendar year contract pricing is implemented in reinforcement materials. While we expect the near-term macroeconomic uncertainties to persist through fiscal 2024, our team is focused on long-term value creation and realizing the growth opportunities we have within the portfolio. During Investor Day in 2021, we launched our Creating for Tomorrow strategy, which seeks to leverage our strengths and exposure to compelling macro tailwinds to drive strong growth of earnings and cash flows through 2024. Delivering in our commitments is paramount for this management team, and we are very proud of the progress we've made so far. When we set the targets, we made certain demand and market assumptions based on the environment at the time. While many of those key assumptions have weakened since 2021, it hasn't impacted our focus on achieving our corporate objectives. Let me first remind you of the corporate financial goals that we outlined at that time. We set out a corporate adjusted earnings per share targeted growth rate in the range of 8 to 12% compounded annually from 2021 through 2024. Over this same time, we expected to generate strong discretionary free cash flow in excess of $1 billion. We also outlined our capital allocation framework, which included 200 to 300 million per year of capital expenditures. This amount included maintenance and compliance capital to maintain and run our assets and also to fund growth projects in high value areas such as battery materials and inkjet for packaging. As we look at our 2024 guidance range, we are on track to meet the adjusted earnings per share target despite softer than expected macroeconomic activity and weaker demand in our key end markets. The midpoint of our 2024 guidance would put us at a 9% CAGR over the three-year period. While the expected growth in 2024 is within the range, our path to get there was not what was expected when we launched the goals. We projected higher growth and underlying demand drivers, such as tire production, auto bills, and polymer demand. We also expected foreign currency exchange rates and interest rates to remain consistent with 2021 levels. We have been able to overcome these headwinds mainly due to the very strong performance in our reinforcing material segment and remain on track to achieve our adjusted EPS objective. Discretionary free cash flow continues to be quite strong at over $700 million through 2023, putting us in a good position to achieve our three-year target of greater than $1 billion. Strong cash flow has allowed us to make the necessary sustaining and compliance investments while also committing to projects that will drive sustained earnings growth in the future. Capital expenditures have been between 200 and 300 million for fiscal years 22 and 23 and are expected to be in that range for fiscal year 2024. So, while the macro environment has weakened since Investor Day two years ago, we remain confident in the resilience and the strength of our portfolio and in achieving the Investor Day targets. I would like to close with a reminder of our corporate strategy and our priorities for fiscal year 2024. Our Creating for Tomorrow strategy charts a new phase of growth and breakout value creation by leveraging our strengths to lead in performance and sustainability. Our focus is on driving advantage growth, delivering innovative chemistry to enable a better future, and relentlessly pursuing continuous improvement in everything that we do. Two years into the strategy, we've made tremendous progress in executing the strategy and achieving our long-term goals. And the expectation is that we will build on that in fiscal 2024. As we look ahead to 2024, we're excited about the growth opportunities in front of us and have outlined some key priorities for the coming year. First, we intend to deliver on our financial objectives, which include year over year growth and adjusted earnings per share and robust discretionary free cash flow generation to support growth investments and return cash to shareholders. Second, we'll continue to invest for advantage growth. This means investments where we believe we have a right to win. Those areas include strategic investments in battery materials in the US and Europe to leverage the growing EV market and our customers' demand for regional sourcing. Our priorities also include adding new reinforcing carbon capacity in Indonesia, where we are the only local supplier, to meet the expected growing tire production demand in that region. and it includes adding capital-efficient capacity at our inkjet plant through a series of debottleneck projects. Third, we will continue to execute in the areas of commercial excellence by maintaining pricing and margin discipline and operational excellence with a focus on overall equipment effectiveness, yield, and energy recovery. And finally, we seek to extend our leadership and sustainability by executing against our 2025 goals and building on a revolve platform launch. I hope that provides some color on our priorities for 2024. While the macroeconomic and geopolitical environments will likely remain turbulent, we believe we have the right strategy, a talented team that is committed to execution, and the balance sheet strength to deliver breakout value creation for our shareholders. Thank you very much for joining us today, and I will now turn the call back over for our question and answer session.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. And our first question comes from the line of John Roberts with Mizzouho.

Thanks, and nice quarter. Could you peel apart the performance outlook a little? Any significant difference in the outlook between master batch, silicones, inks? And there's been a lot of evidence of decelerating growth in EVs. Have you seen that in the growth of your battery materials business yet?

Hi, John. Sure. Let me try to provide a bit of commentary on the guidance and how we're thinking about it. As I said, I think we see that destocking is largely over in our key end markets, both for reinforcement and performance chemicals. So I think that's positive. But I would say in performance chemicals, where your question went, we're not yet seeing any external indicators that are pointing to improvement. So I think, you know, near-term volumes will likely increase. stay near the Q4 levels. I think to see improvement from that, we'd want to see some signs from key end market indicators, things like manufacturing PMI, improvements in housing and construction, uh and uh i think consumer confidence particularly as it relates to durable goods we're still seeing more of a skew towards services uh rather than durable goods so we need to see those uh indicators to to to break out from kind of that current q4 rate of volume in performance chemicals i would say across the different product lines there in performance chemicals uh you know we're uh the only i think notable difference would be in fume silica. Erica commented on the silicones market and her remarks. And clearly the fume silica market, our volumes were down by the largest amount across the product lines and performance chemicals. And this is because there's overall weakness in silicones, which is a big end market that consumes cream silica. So I think that that's often tied to housing and construction and infrastructure, and we're just simply not seeing movements there yet. So again, the Q4 level of volume, that sort of a rate in performance chemicals is, I think, the right way to think about it until we see some end market improvement. I think the second part of your question around battery materials, you know, we're still seeing volumes growing strongly year over year. So I think that is positive, though, as you point out, there are some signs that there's been some deceleration in the market, certainly some public commentary on this. uh would uh would point uh in that uh in that in that direction for sure um and i think it's um you know the way we look at it is we think about this over the long term uh clearly the the shift to evs we think is a a once-ever transition and and will will change the mobility sector but I don't think it'll be a straight line, and there are a lot of moving parts here. Certainly the level of EV penetration, the timing and startup of new battery plants. There are lots of regionalization pressures, government incentives. These things can be distorting in the short term. And I think the timing of build-out of the regional supply chain to support battery plants in the U.S. and Europe, these are all factors that are at play here. So it's a complicated dynamic. But our view on this over the long term remains, and we're positioning ourselves and investing prudently to win in this trend over the long term.

Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Josh Spector with UBS.

Yeah, hi. Thanks for taking my question. So I wanted to ask on reinforcement, I guess specifically with the contract price assumptions for next year. I guess if I go through your guidance, I kind of get something of maybe to the tune of a $10 million benefit per calendar quarter looking at next year. This year, we were over $30 million a quarter benefit. Is that the right ballpark of what baked into your assumption? And I guess, how does that compare versus how negotiations are actually going so far?

Hi, Josh. Good morning. Thanks for the question. Let me just sort of pull the lens back a little bit here and talk about the timeline and process. I think this year negotiations are playing out along the timeline of what we've historically seen, where most of the contracts are finalized in the fall. And so we're currently in the midst of discussions with customers now. So it would be premature to comment on contract outcomes today. In terms of the current market environment, as I said, we believe destocking is largely over and volumes are normalizing from the weaker levels that we saw earlier in the year. And our view is that the long-term fundamentals haven't changed here. The supply-demand fundamentals remain favorable in both the Americas and Europe with no major capacity additions expected. And as we see that in combination with positive trends in end market demand, such as miles driven, you know, those markets should remain fairly tight, you know, in 2024 and beyond. So that really hasn't changed at all. I think the other factor at play here is certainly costs of both ours and those of our competitors. which are going up driven by increasing environmental and regulatory factors. And in order to support our customers in a sustainable way, we need to earn a fair return on these investments and higher operating costs. And so in order to do that, additional pricing is necessary. And this is certainly an industry-wide issue. And our customers care about this because they too value our commitment to sustainability. And I think it's important to their own value proposition to their customers in terms of promoting more sustainable products. So again, those factors have not changed. And in addition, in Europe, we're seeing customers continue to migrate away from Russian supply ahead of the EU sanctions, which take effect around mid-2024. So those market factors, you know, remain, and that's sort of how we see the environment. And just as a reminder, approximately 30% of our contract volumes are under multi-year deals from last year with additional price increases taking effect in 2024. And we view the pricing on those contracts as a reference point for 2024. And so we we sit here today where you know in the zone of approximately 2 thirds of the way through our our contract negotiations with price increases achieved across these volumes. But I think saying anything further at this point would be wouldn't be wouldn't be appropriate. It's it's sensitive, competitive information, but hopefully that gives you a feel for the the environment and our our view on things. here over the longer term.

Yeah, thanks. I mean, that's helpful. And maybe I could try a bit another way is that if you're talking about volumes kind of flattish, just up low single and reinforcement, you're talking about performance similar to fourth quarter levels. So, you know, most of the improvement looking at next year, if you have EBIT up, you know, 80 to 100 million, maybe 20 million of that is annualizing performance. The residual is That's kind of how I get to that price cost and reinforcement. Is that a fair way to think about it? Or are there other moving pieces that I should be building into the bridge for next year?

Yeah, well, I think there are a lot of moving parts. Certainly, we are expecting that volumes would be up low single digits off 2023. And as I commented earlier, You know, the negotiations that we've completed so far are coming with price increases. But then I think there are a number of other factors here. Certainly China overall and how the China market behaves is a big factor with them making almost 40% of the world's tires. And then there are other factors here in terms of FX. interest rates and where commodity prices are. And so all of those factors don't move at the same direction at the same time. So you have to think through all of these factors. And we have and believe our range accommodates for those. But there are a lot of moving factors here. And so we want to uh lay out a range that uh you know we have confidence in but one that we think is uh you know appropriate given you know the many uncertainties that are uh that are out there right now thank you one moment please for our next question

And our next question comes from the line of Lawrence Alexander with Jefferies.

Good morning. Just a couple of things. First, what are you factoring in, if anything, in terms of the impact in Europe from shifting away from Russian imports and carbon black this summer or next summer?

Hi, Lawrence. Well, that certainly is a factor as I walk through the overall environment. That certainly is a factor in in the discussions with customers because, you know, Russia had been a significant supplier to the European rubber and tire industry, and with sanctions coming into effect midway through the calendar year 2024, I think customers clearly are looking at, supply security as an important factor here. I think the other thing that's important for customers beyond the supply security is ultimately this notion of sustainability. And I think the European producers operate at a different level of sustainability than the Russian players. And across the whole industrial complex in Europe, there are you know, moves afoot to introduce things like carbon border adjustment taxes and these things because they know that suppliers outside the region aren't performing at the same level. So I think the supply security and the sustainability aspects are important for our customers, and they're certainly factors that are driving customers to value more the regional supply. So I can't comment or isolate a specific

amount to that variable but it's it is certainly something that is important in in the customer negotiations and important to our customers speaking of sustainability can you give an update on how the elastomer composites program is going um with the rubber black applications and when would be the earliest that you think you would see any real demand impact from methanolosis if um if that technology pans out.

Sure, yeah. So we're excited about the progress in our elastomer composites or our E2C technology platform here. And I think clearly there continues to be penetration and success with this technology in the off-the-road tire segment, which is a very high-value segment for tire producers, and we continue to see good progress there. We're also seeing success with customers as they try to extend this technology into parts of the TBR, the truck and bus segment here. And we think in the long term this technology certainly has potential to penetrate that part of the market. And that would open up the total addressable market in a pretty significant way for E2C. Exactly trying to pin down the rate of commercialization or the timing is difficult here. The tire industry is, you know, I think appropriately cautious around new technology development. They take time, run extended road tests and the like to make sure that performance is there before putting these products, particularly consumer products, out on the marketplace. And so that timeline can certainly take some time here. We did see revenues grow this year in this segment in E2C, which I think is supportive of the trend, as I said, in OTR and some encouraging signs on the TVR side of things. I think complementing E2C is also our evolved technology platform launch this year. You can think about both of these as really sustainability plays in the tire space. E2C really, you know, very much focusing on improving wear and as well as the rolling resistance or fuel economy potential of tires. And then our evolved technology platform really looking at sustainability angles like circularity and trying to enhance that. So you could think about these as very complementary and I think very clearly technologies that our customers care about because they're really pushing hard in this space around sustainability. So we're excited about the long term here and see good signs, but clearly the timing to materiality in this industry, it just takes a bit longer. But we're seeing encouraging signs that are causing us to continue to invest in these spaces, and we think that's the right thing to do for the long term in this business.

And then just on the methamolysis.

I'm sorry, Lawrence, what was that?

Sorry, just on the methane paralysis, the kind of timing, you know, if we are going to see a market impact, what would be the earliest that you would see it?

Well, difficult to tell because while there is a carbon material that comes out of that process, it is not carbon black. It is not an engineered carbon black the way that the tire industry has become accustomed to and formulated around. So I think there remain questions there with respect to the success of that technology. And we feel strongly that working on the elements of our evolved technology platform are very viable approach for our customers to drive up circularity and improve the footprint of the reinforcing carbons that they need in their materials. Because I think critically, one of the things that customers care about is producing materials at industrial scale. And so, you know, our approach here, both between E2C and our evolved technology platform, you know, we think is the right approach.

Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Chris Cash with Loop Capital Markets.

Good morning. So following up on the RM segment and not focus so much on pricing, but more on the characteristically, but perhaps underappreciated resiliency and stability of that business. So in a year like 23, say volumes were down 5%, obviously there was some destocking and just simply weaker demand. But curious if you had any sort of historical data which might inform how the business tends to perform in the year subsequent to one like 23? You know, just wondering if we should think about low single-digit volume per 24 as somewhat de-risked assumption based on the historical context.

Yeah. So, morning, Chris. So, I think clearly there's been, you know, significant de-stocking this year, I think, across the industrial I think many are saying it's probably the most significant destocking cycle that we have seen. So I think while there's always been, you know, these sort of, micro cycles of of destocking and restocking i think it was definitely much more pronounced as we as we came out of covid and saw things accelerate in 21 and 22 and lots of supply chain disruptions and people really uh you know perhaps over buying just to have product and now all that's been unwinding across 23. so it's a you know a bit of a different environment i would say than than historical, but normally what you do see is that you see that destocking come back because customers, you know, have to operate at normalized inventory levels, and if demand is there, then they'll want to make sure that They have the inventory to meet fill rates and the cost of stock out goes higher in the calculus. And so, you know, people generally will then carry a little more inventory to protect against that cost of stock out. But, you know, I wouldn't say we've seen signs yet of a restock. I think what we see is that, you know, the destocking is is largely over. And I think there are lots of data points that are out there, public data points from our customers and their earnings calls and certain industry publications that I think all point to this. So I think what we're seeing now is something much closer to normal demand. But I think probably any significant restock would require more robust economic growth. Again, because I think the calculus is if there's strong growth and people are expecting that to continue, then the cost of stock out goes up, and they therefore would build a little more inventory to protect against that. I wouldn't say we're seeing signs of that yet.

Okay, fair enough. And then I had a follow-up on the battery materials business. And the question sort of is around the evolving dynamic addressing both the EV supply chain and energy storage. So just curious how, you know, you talked about sort of an intensifying competitive dynamic, you know, as 23 ensued and the pricing pressure, which you called out last quarter. So just curious, like when you're selling to the value chain, Is there a more pronounced competitive intensity when focused on LFP cathode or battery makers versus the higher energy density, NMC or MCA batteries? Just wondering if that bifurcation, if it's happening, is becoming any more pronounced or understood in and around the conductive carbon business specifically.

Yeah. Yeah. Well, there's definitely a, I think, a couple of important differences or points of bifurcation, I would say, Chris. One is that, you know, we definitely see that our view is that the market will bifurcate into a China market and the rest of world market. Now, you know, even inside of those geographic splits in terms of market, you do see differences depending on battery chemistry. So LFP is generally viewed as lower performing in terms of range, for example, but also lower cost, whereas NMC chemistry is better at range or therefore viewed as a higher performing chemistry, but higher cost. And so, you know, our market view is that there'll be room for both technologies. What you see today is China does skew more towards LFP today. And that makes sense because if you look at the China EV market, you've got, first of all, a significant number of hybrid vehicles on the road, so the battery performance of hybrids is not as demanding. But then you've got a segment of lower priced EVs where, again, the performance of the battery, the expectations is lower. And therefore, you know, there's a large chunk of that market that is pretty price competitive terms of the vehicles and pushing all the way back up through the chemistry inputs but what you see on the NMC side is is something different with the performance requirements are higher and and therefore you know the competitive intensity is is is lower so you know when we're selling into customers or applications for NMC, for high-value cars, or for export of batteries to Western automakers, we're seeing that our pricing is remaining stable. And when we're selling outside of China, again, where the market is quite different, orients more towards NMC and where the quality requirements of the Western auto OEs are are very different than the low end of the auto or we market in China. You know, we're seeing price stability there too. So we do think the market will bifurcate both in terms of geography as well as chemistry. But ultimately, there will be a role for both chemistries, and we participate across both chemistries, but it's going to be about segmentation, where we participate, which customers, which applications, which geographies, and trying to optimize that over time to build a valuable long-term business. That's the trick here.

Yeah, that's helpful. Just as a quick follow-up, and maybe it's an oversimplification, but it sounds like the pricing pressures within conductive carbons is somewhat aligned with the bifurcation where China skewed LFP and Western markets skewed NMC and NCA. But can you just talk about – you had one significant customer in Western markets that had delayed their ramp. I'm just curious if there's any more color on that as you see this market evolving. Thank you.

Yeah, I can't add any more color, obviously, Chris, to that, because we have confidentiality requirements with customers. But certainly, I think the ramp up in the Western markets is a bit tricky to try to project. And as I said earlier, it won't be a straight line. I think there are just lots of moving parts here. I think the long-term trend Uh, you know, and the momentum around that remains, but the exact rate of vehicle penetration, the timing of new battery plants, and how they start up all the pressures around regionalization and governments putting money behind this. Definitely. you know, can have impact, but also can create some distortions. And so there's just a lot of moving parts here that's difficult in the very short term to project with any, you know, high degree of precision. But we're really focused on trying to build out a valuable long-term business, because ultimately the whole mobility sector we view will transition, and mobility is a critical end market for us, not just in this new space of batteries, but also our materials that support light weighting will remain very important. In fact, more important, I would say, because EVs are heavier than internal combustion engines. So the trends around light weighting will remain. And then ultimately, I think the tire market reformulates tires to develop performance to better match EVs. So this whole mobility transition is something that's very important for Cabot Cork, and that's why we're thinking about it over the long term.

Thank you. Thank you. One moment, please, for our next question.

Our next question comes from the line of David Begleiter with Deutsche Bank.

Thank you. Just one question. Sean, do you have a, for battery materials, do you have an EBITDA forecast for 2024?

Yeah. For 2024, David, we are not providing a specific guide because I think there's There's a lot of moving parts as said here, but we would expect that EBITDA in 2024 would grow with continued volume growth and better product mix in China as we optimize our participation and drive higher penetration of these higher performing grades that I was just talking about here. So we do expect that we would have earnings growth over 2024. you know, probably something in line with how the market grows overall. And then you kind of pull the lens back here. Again, we're playing for the long term here. We believe the business has the potential to be a material contributor to Cabot's earnings in the future. And so to give you a sense of that potential, you know, in roughly five years, we might expect this business could generate something around $100 million of EBITDA. But again, it won't be a straight line. And lots of moving parts here. So hopefully that gives you some sense of how we're thinking about the long-term and the business we're trying to build out while, you know, in this near-term environment, it's tricky and dynamic, but we are expecting EBITDA growth in 24. Thank you.

Thank you. Thank you. I'll now hand the call back over to President and CEO, Sean Cohane, for any closing remarks.

Well, thank you all for joining the call today and for our wrap of 2024 and our priorities, 2023, sorry, and our priorities for 2024. And appreciate your support of Cabot and look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating. This concludes today's program and you may now disconnect.