Cabot Corporation

participants on 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 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Steve Della Hunt, Vice President, Treasurer, and Investor Relations. Please go ahead.

Thank you, Olivia. 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 first quarter of fiscal year 2025, 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 in the press release we issued last night and in our 10-K for the fiscal year ended September 30, 2024, and in 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. 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 first quarter highlights follow the company's recent cash flow performance, and then discuss the key takeaways from our recent investor day we held in December. Erica will review the first quarter financial highlights and the business segment results. 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. Welcome to our call today. In the first fiscal quarter, we continued to execute at a high level in a mixed economic environment. generating results in line with our expectations and leading to EBIT growth in both of our segments. We delivered adjusted earnings per share of $1.76, which is up 13% as compared to the same period in the prior year, positioning us well with a strong start to fiscal year 2025. I would like to thank our entire Global Cabot team for their agility and continued commitment to execution as we navigate these dynamic times. EBIT in reinforcement materials was $130 million, up 1% year-over-year in what remains a challenging global environment. Results in this business continue to demonstrate the value of the structural improvements we have made over the years to the business and our continued commitment to commercial and operational excellence. EBIT in performance chemicals was up 32% compared to the first quarter of fiscal 2024, largely due to higher volumes as demand in the segment has generally stabilized and volumes have reconnected to underlying demand drivers in key end markets. Cash flow was strong in the quarter, which supported investments in maintenance, compliance, and growth capital projects, as well as the return of cash to shareholders through a combination of share repurchases and dividends. The Cabot portfolio has strong cash flow characteristics which enables a balanced capital allocation strategy focused on funding our high confidence, high return growth projects, and returning cash to shareholders. This balance of profit growth and cash return can be achieved while maintaining our strong investment grade balance sheet. In the quarter, we generated operating cash flow of 124 million. We also invested 77 million in capital expenditures which included growth investments to construct our new Indonesia capacity for reinforcement materials and capacity for growth and battery materials. We also returned 66 million to shareholders through 24 million of dividends and 42 million of share repurchases. Since fiscal 2015, our dividend per share has grown at a compound annual growth rate of 8%. We remain committed to a continuous and growing dividend and expect to maintain an industry competitive dividend yield and payout ratio over time. We also believe that share repurchases are an attractive use of cash. In this quarter, we purchased 42 million of shares. Looking over a longer horizon, we've reduced our outstanding share count by 13% since fiscal 2015, as we have maintained a steady commitment to share repurchases. During the quarter, we also held an investor day in December. We appreciate the support from our investors as we had a great turnout. I'd like to now provide a brief recap of this event. During the day, we reviewed the successful achievement of our 2021 investor day goals, discussed our company vision and strategy, provided an outlook for our segments, and communicated an updated set of three-year financial targets. As I shared at Investor Day, I believe that Cabot offers a compelling investment thesis. Our Creating for Tomorrow strategy is the right one to drive continued growth and shareholder value creation. This strategy is built on the pillars of grow, innovate, and optimize, and we drive execution with a disciplined operating platform of commercial and operational excellence. Our excitement and confidence in our outlook for growth is underpinned by our global footprint and the strong product portfolio that is aligned with three key macro trends. The first macro trend is the changing mobility landscape towards electric vehicles, which is expected to drive growth across the Cabot portfolio. Second, the build out of global infrastructure is expected to drive demand for important applications in our portfolio, from specialty carbons for power distribution cables to fume silica for wind turbine blades. And third, the sustainability transition, where our customers are increasingly seeking more circular and sustainable offerings to meet the needs of their downstream customers. We have set clear growth goals targeting an adjusted earnings per share CAGR of 7 to 10% over the next three years, with growth expected in both business segments. This management team has a proven track record of execution over a long period of time, and we are committed to continuing that high level of execution going forward. And finally, cash flow and capital allocation. The Cabot portfolio has strong cash flow characteristics, and this is the source of our value creation strategy. We expect to continue growing the discretionary free cash flow of the company And we'll deploy that cash in a balanced and disciplined fashion with a focus on funding advantage growth investments and returning significant levels of capital to shareholders. The execution of our strategy has driven exceptional shareholder value creation over the last three years. We are very proud of that track record and are confident we'll continue to do the same in the coming years. I'll now turn the call over to Erica to discuss the segment and financial performance in the quarter. Erica?

Thanks, Sean. I will start with discussing results for the company and then review the segment results. Adjusted earnings per share for the first quarter of fiscal 2025 grew 13% from $1.56 in the first quarter of fiscal 2024 to $1.76, with growth coming from both the reinforcement materials and performance chemical segments. As Sean noted, cash flow from operations was strong at $124 million in the quarter, which included a working capital increase of $38 million. Discretionary free cash flow was $114 million in the quarter. We ended the quarter with a cash balance of $183 million and our liquidity position remained strong at approximately $1.3 billion. Capital expenditures for the first quarter of fiscal 2025 were $77 million And we continue to expect $250 to $300 million of capital spending for the fiscal year. Additional uses of cash during the first quarter were $24 million for dividends and $42 million for share repurchases. Our debt balance was $1.2 billion and our net debt to EBITDA was 1.3 times. The operating tax rate for the first quarter of fiscal 2025 was 28%. and we continue to anticipate our operating tax rate for fiscal 2025 to be in the range of 27 to 29%. Now moving to reinforcement materials. During the first quarter, EBIT for reinforcement materials was $130 million, which was an increase of $1 million as compared to the same period of the prior year. The increase was driven by higher volumes and favorable pricing and product mix from the calendar year 2024 customer agreements, partially offset by a less favorable geographic mix and lower energy center revenue. Globally, volumes were up 1% in the first quarter as compared to the same period of the prior year due to 2% growth in Asia Pacific and 1% in Europe as demand in those regions improved. Looking to the second quarter of fiscal 2025, we expect reinforcement materials EBIT to improve modestly as compared to the first quarter. Volumes are expected to remain relatively consistent with the first quarter. We anticipate a more favorable geographic mix with seasonal volume improvement and the impact on contract gains in Europe offset by lower volumes in Asia due to the Lunar New Year holiday. Now turning to performance chemicals. EBIT increased by $11 million in the first fiscal quarter as compared to the same period in fiscal 2024. The increase in the first quarter was due to higher volumes across the segment, partially offset by higher costs. Volumes were higher by 8% in the quarter compared to the same period in the prior year as we saw volumes reconnect to underlying demand drivers as compared to the destocking behavior in the prior year. Costs were higher due to this timing of plant maintenance and the impact of new assets in the segment. Looking ahead to the second quarter of fiscal 2025, We expect modest sequential EBIT improvement from seasonally higher volumes in North America and Europe. I will now turn the call back over to Sean to discuss the fiscal year outlook.

Sean? Thanks, Erica. Moving to our 2025 outlook, we feel good about the first quarter results, and we are reaffirming our fiscal year 2025 outlook for adjusted earnings per share in the range of $7.40 to $7.80. In terms of assumptions that underpin our outlook, The reinforcement materials segment is expected to remain at a similarly strong level of EBIT for the fiscal year as compared to fiscal 2024. This is based on our current view that global production levels for the tire and auto markets are expected to be relatively flat year over year. We expect to see an increase in volumes as our new capacity comes online in Indonesia in the back half of the year and ramps up into 2026. Also included in our outlook is the impact from the reinforcement materials customer negotiations. Overall, base prices on a global basis concluded similar to the prior year, with volumes higher in Europe but lower in South America. The outlook includes pricing and mix outcomes as it relates to the expected regional and customer volumes, as well as cost changes and continued operational improvements. On balance, given the weaker market environment, we concluded the customer negotiations with reasonable outcomes. We believe commercial excellence is an important competency, and we will continue to pursue a disciplined approach so that we are paid a fair value for the investments we have made to ensure supply reliability, quality, innovation, and sustainability leadership. In terms of performance chemicals, given that volumes have reconnected with underlying demand fundamentals, The segment is expected to continue to perform in the current EBIT range of 45 million to 55 million per quarter for the year, with volume growth expected year-over-year. This range would result in strong year-over-year EBIT growth for the fiscal year, as higher volumes contribute meaningfully to EBIT performance. We expect volume growth across our application set, specifically benefiting from the build-out of global infrastructure where our products play an important role in the manufacture of wind turbine blades as well as the performance of power distribution cables. As the aging grid is renewed and new distribution lines are laid to connect alternative energy sources to the grid, we expect our products geared to wind energy and the wire and cable application to grow strongly. Our outlook includes foreign currency rates and market interest rate projections as of the end of January. Our current guidance does not include any adverse impacts from the tariffs announced over the weekend between the US and Mexico, Canada, and China. Given the timing of the tariff announcements and related delays, we are still assessing the potential impact. The impact could be a bit different by country. For China, we import a very limited amount of volume from China into the US, so we expect the direct impact of these tariffs to be minimal. If production in China is reduced for tires or other exported products, then our demand in China could be impacted. However, we would then expect to see production levels outside of China potentially increase. For Mexico, where we operate one reinforcement materials plant, we expect a minimal direct impact on our production in Mexico, as it is primarily sold into the Mexican market. For Canada, we operate two plants that manufacture products for our reinforcing carbons, specialty carbons, and specialty compounds product lines. A large portion of the production at these plants is sold in Canada, but also there is production sold to customers in the U.S. Carbon Black products that we produce in Canada and sell into the U.S. represents approximately 10% of the Carbon Black we sell in North America. Almost all of these customers are under agreements that allow Cabot to pass through taxes and similar charges, such as tariffs. We are also working with our customers on potential alternative supply sources within our large plant network. In all cases, if the tariffs are implemented, there could be a downstream impact on our customers' businesses, and this could impact underlying demand levels. We are working to better assess the broader impacts of these tariffs on things such as GDP, foreign currency rates, inflation, and overall demand. The situation remains very dynamic and developing a full understanding of this will take time as we observe how negotiations evolve. Cash generation is expected to remain strong and we expect to return a robust amount of cash to shareholders through dividends and share repurchases. Our board's recent 10 million share repurchase authorization supports our expectation of continued share repurchases. We continue to execute our growth agenda and remain on track for additional capacity to come online in Indonesia for reinforcement materials in the back half of the fiscal year with our continued capacity investments in battery materials in China. Overall, I'm very pleased with how the company is positioned today. I believe we have the right strategy and capital allocation priorities, and I'm confident in our team's agility and execution capabilities. Thank you very much for joining us today, and I'll now turn the call over for our question and answer session.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question coming from the line of Joshua Spector with UPS. Your line is now open.

Hi. Good morning, everyone. It's Chris Perrella. I'm for Josh. Could you just dig a little more on the contract terms for reinforced materials that you realized in 2025 and how they compare to the last couple of years? And then is there any benefit still left over from the big – increases that you got in 2023? I know some of those contract terms were extended out a couple years.

Hi, Chris. How are you? Yeah, let me provide an update on the contract outcomes here. So as I think you'll recall, pricing in our customer agreements is comprised of a base price as well as adjusters that change each month for changing input costs and other costs. In terms of the base prices, we remain relatively flat year over year for our calendar year 25 agreements as compared to the 2024 agreements. And then in terms of volumes, as expected, we increased volumes in Europe as many customers were looking for additional supply given the sanctions on Russian and Belarusian supply that came into full effect in the 2024 calendar year. However, volumes in the Americas were challenging given the continued imported Asian tires into the region. And so in North America, our contract volumes concluded pretty consistent with last year, but we did see a reduction in volumes in South America. I think overall, if you look at the reinforcing material segment, we're expecting that based on those outcomes and a number of other factors that go into running the business, that we'll remain at a similarly strong level of EBIT for fiscal 25 as compared to 2024, despite a challenging macro environment. As we look at the end markets here, certainly production levels for tires and auto OE are expected to remain relatively flat year over year. The underlying sort of market backdrop is not so strong. It's pretty flattish. We do expect, as I mentioned in my prepared remarks, that we'll see an increase in volumes as we exit the back part of the year as our new capacity in Indonesia comes back online. So I think overall, you know, when you look at the outcomes here and the expectation for this segment, it includes the pricing and mixed outcomes as it relates to the expected regional and customer volumes, as well as cost changes and, of course, continued operational excellence improvements in the business. We talked about that quite a bit at the investor day.

No, I appreciate that. Thank you. And then just with the Indonesia startup, how should we expect EBIT to improve off of that? Or are there some startup headwind costs you have to overcome as you load volume into the plant?

Yeah, that's exactly right. I mean, typically what you see is that the plant will start up in the back half of the year, and then you have to work through customer qualifications and then the ramp of So we'd certainly be expecting, you know, a material contribution in 2026 with, I would say, very modest back half benefit in 2025, you know, low single-digit millions kind of as you're really absorbing the cost and starting up and then working through that customer qualification period. So modest in the back half of this year and then, of course, ramping up, you know, SHARP in 2026.

Thank you, Sean.

Thank you. Our next question, coming from the line of John Roberts with Mizuho Group. Your line is now open.

Thank you. Nice quarter. Is it fair to say you're benefiting from the increased tire imports into the U.S., that your Asian customers' volume growth is outpacing any impact you're having to your U.S. customers?

Hey, John, thanks for the comments on the quarter. So as you know, we participate in a very global way. So really, no matter where volumes develop in the world, I would say we're able to secure our share of those volumes. And I think that's, again, a function of uh, our global footprint. Um, but there are differences in, uh, in, in margin levels by, uh, by region. And so in the, in the Western regions, we, uh, we do earn, uh, higher margins there, the, the dynamics, um, in place there in terms of, um, supply and investments that are required around sustainability and, and supply security, uh, and all those factors, uh, you know, drive, uh, a different margin profile. So as Asian imports have increased, I would say that that has been a headwind that we've had to absorb from a margin standpoint, even though, you know, the volumes we do capture because of the very distributed footprint that we have. But we've been able to manage that pretty well, and our expectation going forward is that we would continue to manage that in terms of the underlying financial performance of the business and continuing to consolidate the structural improvements that we've made in this business over a number of years.

And then in specialty blacks, oil prices have been rising. Do you need to go out to get additional price here to kind of hold your margins in specialty blacks?

Yeah, generally that's the case, John. We do have some customers that are under a formula arrangement similar to reinforcement materials, but this business tends to be more oriented towards spot pricing, and so we would be out in the marketplace adjusting prices to deal with that. And I think as you've probably followed in our commentary here over, you know, the last many years, we've done a real good job of managing the margins here in this, and that's certainly what our expectation is as we go forward.

Thank you. Thank you. Our next question coming from the line of David Winkler with Deutsche Bank. Your line is now open.

Thank you. Good morning. Sean, on reinforcement earnings for 2025, I believe your initial guidance was for it to be up year over year. Now it's flat. Is that due to the outcome of the tire contract negotiations? Were they worse than you expected? And was it due to a more competitive market? end of the day. Thank you.

Hey David, thanks. So our outlook for reinforcement materials is to be operating at a similarly strong level as we did in 2024. Obviously a number of factors go into this outlook. At sort of a market level, the underlying demand expectation globally for tire production and for auto OE is pretty flat. So that's sort of the basic, you know, sort of market environment that we're in. As I said in the prepared comments that, you know, our pricing and the contract outcomes concluded, I think, in a reasonable place here. Base pricing maintained relatively flat year over year. We did pick up some volumes in Europe, as expected, as the final impact of sanctions went into place. But in the Americas, the impact of tire imports has challenged the demand outlook from customers. So that's certainly another factor. And then there are other moving parts, as you know well, in this sort of complex global business in terms of, you know, FX rates that are headwind and energy center movements and obviously offsetting cost inflation through operational excellence. You know, all of those factors come together to have us expecting a result in a similar level to 2020-2024. So that's how I would sort of think through it. And again, starting with the underlying demand fundamentals are pretty flattish for our end markets.

Understood. And going back to an earlier question, on those 23 contracts, which are somewhere multi-year, are those benefits still flowing through to you on a base price basis? impact?

We did not have any multi-years that extended from 2023 into 2025, no. Perfect. Thank you.

Thank you. Our next question coming from the lineup. Kevin, is that with Jeffrey? Fuel on is now open.

Hi, this is Kevin, actually. I'm for Lawrence Alexander. Thank you for taking my question. I just wanted to dig a little deeper on some of your end markets. I guess specifically, what's your outlook on sort of a non-auto-related sales in 2025?

Sure. Hi, Kevin. So the non-auto-related sales would, of course, be primarily concentrated in our performance chemicals segment, which is made up of end market exposures that include auto OE, but also infrastructure and industrial applications, consumer applications, as well as the building and construction and market sectors. So in our investor day, we outline sort of what those exposures look like. We're certainly seeing strength in our infrastructure-related end markets, And I think that's driven a lot by expansion in alternative energy that continues to grow. Energy demand in general is rising, driven in part by AI and data center needs, but also because of renewal of the aging grid infrastructure. So there's both demand increase as well as renewal that's, I think, driving a good outlook in some of these broader industrial exposures that we participate in. I would say our consumer market exposures we would expect to track pretty closely with GDP outlooks. And then on housing and construction, that remains, I would say, more muted. Certainly, if we go deeper into a rate cut cycle, then we'd expect to see some benefit building in housing and construction, but I don't think there's really any strong evidence of those markets picking up. I would say they're sort of stable and maybe bouncing along at the bottom right now, but it would really come down to how rates If you sort of boil it all up for performance chemicals, we're expecting, you know, good solid growth rates in the sort of mid-single digits, maybe a little higher across the whole basket of applications for the fiscal year, but with some differences depending on applications.

Understood. Thank you. And since you just mentioned rates, and this question is, I guess, regarding a cyclical turn, I guess it seems like some expectations around credit easing and stimulus have maybe eased a bit. And I guess I was just wondering, I mean, you guys gave an outlook for sort of the back half of the year, but I mean, I guess in terms of a turn, I mean, I guess it sounds like you maybe sound, it sounds like you're expecting something more like a gradual improvement rather than a sort of a more significant turn.

Yeah, Kevin, it was difficult to hear the first part of your question. Would you mind just repeating that for me?

Sure, yeah. So basically, since you mentioned rates and this question's about a cyclical turn, right? I guess it sounds like you expect the improvement to be a little bit more gradual rather than like a quick turn. I've heard some other company management basically sort of temper expectations and call for improvement to be a little bit more gradual here.

Yeah, yeah. Okay, great. Yeah, no, I missed the word rates when you were talking about the turn there. So, well, I think what we have in our outlook is sort of the market expectation for rate cuts through the balance of the year. You know, that in more recent months that has been tempered versus, I think, where it was, you know, some months ago where there was I think a higher expectation for number of rate cuts in 2025. So I think it probably will be a little more gradual as the world still and central banks still try to balance this growth versus getting to inflation targets. We're not still quite there yet. So I think that it will be probably a little more gradual and how that ultimately trickles down into housing and construction. There's obviously a delay or an onset, a delayed onset for that to happen. So I think that's right. It will be a little more gradual when those end markets that are very sensitive to rates and that's That's largely what our expectation is. And, of course, when you bake that in with all the other end market exposures that we have in performance chemicals, again, we're expecting overall volume growth rates to be quite good and in sort of mid-single digits to maybe a little bit better. Got it. Thank you very much.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your touchtone phone. Our next question, coming from the lineup, Jeff Sekuska with JP Morgan. Your line is now open.

Hi, this is Lydia Huang, author of Jeff. Can you talk about which product lines within the performance chemical segment drove the 8% volume growth? Was it fume silica, battery materials, master batch, or others? And if all product lines grew, which ones grew more and which ones less? Thank you.

Hi Lydia, this is Erica. So we did see growth across all product lines within the segment year over year. If we comment on the larger businesses, carbons and compounds grew more in a 5 to 6% range, and then our few metal oxide product line grew the most, more around a 20% growth rate.

OK, thank you. And could you quantify the year-over-year energy center revenue lost? Was it more or less than $30 million this quarter, and which region contributed to the decline?

Sure. So, again, the loss on an EBIT type basis or margin basis was about $5 million headwind year-over-year in the reinforcement materials segment, driven both by Europe and China. revenue.

Thank you. And allocated corporate costs were $4 million less negative year over year. So what drove that? And is that going to be the case for the next three quarters?

So that was really just the timing of some corporate expenses, I'd say. So lower spend on some corporate meetings, as well as board related costs. So That would be why year over year we're down 4 million. If you look to the remainder of the quarters, I think you would see a little bit higher, probably more in the 14 to 16 million per quarter range for the rest of the year. Usually Q2, just because of the timing of certain expenses, is a bit higher than the other quarters.

Thank you. Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Sean Cohen for any closing remarks.

Great. Thank you very much for joining us today, and we appreciate your continued support of Cabot. It was great to see you all at our Investor Day a little over a month ago, and we look forward to speaking with you again next quarter. Thank you.

This does conclude today's conference. Thank you for your participation, and you may now disconnect.