Ladies and gentlemen, thank you for standing by, and welcome to the Cabot’s First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Steven Delahunt, Vice President, Treasurer, Investor Relations. Thank you. Please go ahead, sir.

Thank you. Good morning, and welcome to the Cabot Corporation First Quarter Earnings Teleconference. With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our first quarter of fiscal year 2021, 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 additional information regarding these factors appears under that any 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, 2020, and 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. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in the table at the end of our earnings release issued last night and available in the Investors section of our website. I will now turn the call over to Sean Keohane, who will discuss the key highlights of the Company’s performance. Erica McLaughlin will review the business segment and corporate financial details. Following this, Sean will provide closing comments and open the floor to questions. Sean.

Thank you, Steve, and good morning, ladies and gentlemen. Welcome to our first quarter 2021 earnings conference call. I’m very pleased with the exceptional operating results we have reported as we saw a strengthening recoveries across our end markets. For the quarter, we generated record adjusted earnings per share of $1.18 and segment EBIT of $140 million. The results were driven by improving demand trends, robust unit margins, disciplined operational execution and strong performance in our targeted growth initiatives. I would like to recognize the extraordinary employees of Cabot, whose teamwork and commitment made it possible for us to meet the dynamic needs of our customers while maintaining the safety of our people and our communities. The COVID pandemic has challenged our normal ways of working, but I believe our strong culture of connectivity and collaboration enabled us to distinguish - in the marketplace, and we will continue to build on these strengths into 2021. During the quarter, we saw strong volumes in the tire and automotive markets as the recovery momentum continued globally with a sharp rebound of the lows experienced last spring. We are pleased to see that miles driven trends have improved, though still generally lag pre-COVID levels. In terms of automotive builds, a similar trend has taken hold. With both end markets still below prior peaks, we are optimistic about our growth runway as the economic recovery strengthens. As highlighted in previous calls, we experienced real strength throughout 2020 for products sold into the infrastructure, packaging and consumer sectors, and this continued in our first fiscal quarter of 2021. Our strong product portfolio, global reach and technical support have enabled us to capitalize on favorable infrastructure trends in wire and cable, pipe and geomembranes. Additionally, the COVID pandemic has changed certain consumer behaviors, and these trends…

Thanks, Sean. I will start with discussing results in the Reinforcement Materials segment. The Reinforcement Materials segment delivered record operating results with EBITDA of $88 million compared to the same quarter of fiscal 2020, driven by improved pricing and product mix in our calendar year 2020 tire customer agreements and with spot customers in the Asia region. This improvement included our ability to raise prices ahead of rising feedstock costs in Asia that drove strong unit margins. Globally, volumes were up 1% in the first quarter as compared to the same period of the prior year, primarily due to 13% growth in Europe and 9% higher volumes in the Americas, as key end market demand continued to recover along with some level of inventory replenishment from the draw-downs earlier in the calendar year. Asia volumes were down 8% year-over-year, largely due to a scheduled plant turnaround and our decision to balance pricing and volumes in order to improve margin levels. Looking ahead to the second quarter of 2021, we expect stronger year-over-year EBIT in the second quarter as compared to the prior year, driven by higher year-over-year volumes. Looking sequentially, we expect volumes to remain solid, slightly higher than the first fiscal quarter. We anticipate that margins will moderate from the levels seen in the first quarter as feedstock cost increase and we will not experience the same pricing tailwind in Asia ahead of cost. In addition, we anticipate increase in fixed costs sequentially, as volumes increase and we spend a bit more on maintenance activity. Now turning to Performance Chemicals. EBIT increased by 13 million as compared to the first fiscal quarter of 2020, primarily due to higher volumes and improved product mix in the specialty carbons and compounds product lines. Year-over-year volumes increased by 9% in both the…

Thanks, Erica. We are very pleased with the record results in the first quarter of 2021, with volumes recovering from the COVID related lows we experienced in fiscal 2020 and the great execution across the organization. We achieved record-setting results and reinforcement materials and much improved performance in the Performance Chemicals segment. This is a great start to our fiscal year. As I look to the second quarter, there are some tailwinds that benefited our results in the first quarter that we don’t expect to repeat. Based on the underlying business performance, we expect adjusted earnings per share in the second quarter to be in the range of $0.90 to one dollar. While I expect our second quarter adjusted EPS to moderate from the first quarter, I believe this level of expected earnings in the second quarter reflects how well our businesses are performing in the current environment. January volumes were strong, and we anticipate the underlying demand in our key end markets will remain robust during the quarter driving year-over-year EBIT growth across all segments. On the cash side, we anticipate our cash and liquidity will remain robust. Net working capital increases should moderate from what we saw in the first quarter with more consistent volume levels going forward. As the fiscal year unfolds, we expect the environment will remain uncertain, and there are several factors that we will be managing closely. The first is the level and timing of COVID-19 vaccine distribution across the world and its impact on the economic recovery. Infection rates remain very high in many parts of the world, and the stability of economic growth will depend on favorable trends in reducing the level of infection. Next is global logistics, where we have begun to see some negative impact in terms of availability and cost of transportation in our supply chain. This influence is being felt across global value chains and may take some time to fully stabilize. And finally, the movement of pricing and input costs, particularly in the spot markets in Asia. We have demonstrated our ability to execute well over the past year no matter what the challenge, and I have confidence that this will continue in the year to come. In closing, I want to thank and recognize our global Cabot team. Our Company’s true character has been showcased during these times of adversity. I’m proud of how the team has responded with great resilience and a focus on our customers, our communities and one another. Our exceptional first quarter results are a true testament to our Company’s capabilities and that position us well for a successful 2021. Thank you very much for joining us today. And I will now turn the call back over for a question-and-answer session.

Thank you. [Operator Instructions] Our first question comes from Mike Leithead with Barclays. Your line is open.

Great, thanks. Good morning guys. I guess first question, the outlook commentary and sequential guidance was very helpful. Just curious, as we think about beyond the second quarter here, would you anticipate further cost inflation that needs to kind of be worked through and absorbed or is your fiscal 2Q kind of a normalized level of margin and customer buying and inventory levels that we can kind of model going forward?

Yes. So Mike, I think we feel good about the Q2 guide that we have given. I think visibility, right now, remains challenging because of the factors that I highlighted that we will be watching carefully and managing through the balance of the year. But I think the Q2 level underscores how well our businesses are performing in the current environment and gives you a view of some of the things that we don’t expect to repeat from Q1. But again, we will be managing these factors in the balance of the year carefully because there is certainly some challenges out there. I talked about one of the factors being transportation. I think globally, supply chains are tight, in particular, ocean freight. Just getting bookings and the impact of that tightness is something that I think every industry is experiencing right now. So we will have to manage those things. And if we experience impacts from that, we will have to work on getting recovery of those things. But I think those are the key factors that we will be watching as we go through the balance of the year.

Got it. That is helpful. And then just maybe two related questions on Asia and China, in particular. First, your Asia reinforcement volumes, I think, were down 8% in the quarter, what I would have assumed China demand is strong, so why was that? And second, with some of the recent kind of Chinese lockdowns and everything going on there, how would you characterize the buying activity for your products in the region heading into Chinese Lunar New Year maybe this year versus a typical year?

Yes. So I mean, China, in terms of the economy is performing very well. Obviously, the only major economy to avoid recession in 2020. And I think if you look at the Q4 GDP in China, I think it was up 6% or 6.5% year-over-year. And if you look at some of the other indicators that we find have a good relationship to our business, things like PMI or composite leading indicators, these types of metrics. Those were quite robust in China, and we are seeing our business respond in a similar way. I think specifically to your question in the quarter around volumes in China, as I think we commented on our last call, our focus and emphasis has been on price and margin over volume in the near-term here. And so we executed on that in the quarter. And so that is why you saw a bit weaker volume there because of our emphasis on price and margin. But as we go forward, the economy in China, right now, remains pretty strong. The uncertainty around lockdowns and COVID impacts, of course, is a global uncertainty. And we will have to watch and manage that as we go through the year.

Great. Thank you.

Thank you. Our next question comes from Josh Spector with UBS. Your line is open.

Yes, hi thanks for taking my question. And congrats on a solid first quarter here. I guess, maybe to follow-up on Mike’s first question. You gave some explicit kind of items that you bridge sequentially in reinforcement, the feedstock cost tailwind fades and higher fixed costs. And same thing with fixed costs and performance. Are you able to bucket those and give us more of an absolute number of what that actual impact is sequentially?

Yes good morning, Josh. So yes, let me try to help a little bit here on the Q1 to Q2. And so I will try to walk through at least the two different major businesses: Reinforcement and Performance Chemicals. So in Reinforcement first. Q1 was obviously a record EBIT in the quarter, driven by strong demand and pricing and product mix in Asia and from our calendar year 2020 agreement. So you will recall that the December quarter was the last quarter of those agreements from last year. But the quarter also benefited from the timing of price increases in advance of the flow-through of rising feedstock costs as well as we have kept a very intense management of costs here as the outlook in terms of demand has been uncertain. And I think that is been the prudent thing to do. So together, these 2 factors, the pricing ahead of the flow-through of feedstock in Asia and tight management of costs, amounted to about $20 million of EBIT that we would not expect to repeat in Q2. Now in Performance Chemicals, we are obviously very pleased to see the segment recover strongly in Q1, largely due to our work to grow our targeted market segments, along with continued pricing actions, controlling costs and executing on our growth initiatives in areas like energy materials and our new MMO plants. And so we are pleased with all that. But in Q2, we expect sequential EBITDA in Performance Chemicals will moderate a bit from Q1 as higher raw material costs in specialty carbons and compounds flow through. We also expect some increase in costs from a planned drawdown of inventory. And we would estimate the combined impact of that to be roughly 10 million in that segment. So that being said, January volumes were strong in both businesses. And so we anticipate solid volumes for the quarter. So those would be the major movers to bridge you from Q1 to Q2.

Thanks. That is really helpful. I appreciate that. Just on the Performance side, and specifically looking at fumed silicas, Erica mentioned still pricing pressure down year-over-year. But can you comment sequentially on how that business improved or maybe didn’t improve and what your expectations here for that business over the next couple of quarters?

Yes, sure. So that is right on a year-over-year basis, you are still seeing that challenge. But on a sequential basis, we are seeing some improvement here. So let me just try to recap FMO a little bit. So we are seeing volumes recovering as demand in end markets like auto and construction are improving. So that is good. We have also implemented actions to restore pricing. I think I commented on this in the past that this is a focus area for us. And they are starting to take hold, particularly in China, which we are pleased with. So we still have more work to do there, but pleased with what we are seeing so far taking hold. And to pull back the lens a little bit here. I think the fundamentals of the business remain very attractive. The FMO business has historically been a business with very strong profitability and EBITDA margins at the higher end of our portfolio. And this business traditionally grows above GP. If you look at it over a very long-term as silicones have really strong performance characteristics. So the fundamentals of the business, we believe, remains strong here in our position in terms of strategic integration with key silicones partners, be it Dow Silicones, or ChemChina or HYC, we think we are we are really well positioned here. So overall, we remain positive on this business, and we will continue to work through the near-term challenges, but some pricing actions beginning to take hold, particularly in China, which is good.

Okay. Great. Thank you.

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.

Thank you good morning and a very nice quarter, so congrats. Just on this year’s contract tire negotiations, can you just comment on anything unusual in these negotiations. I guess you got a little bit of pricing year-over-year. Any color you can provide on those negotiations?

Yes. So David, we are pleased with the outcome of the annual negotiations with our tire customers. Overall - despite challenges of negotiating during an acute market weakness and with forward-looking uncertainty there as a result of COVID, we ended in a position where we broadly maintained pricing and share as compared to 2020. And so I think that is on balance an outcome that we are pleased with this year, again, given the challenges in volume during 2020.

Very good. And just on Performance Chemicals, obviously, very strong Q1, albeit Q2 as well. Can we get back to prior period earnings of upwards of $200 million in this business in the segment going forward, do you think?

Yes. So if you kind of go back in the 2017, 2018 period, this business, just as you said, was around the $200 million EBIT level annually. And so we are definitely pleased to see our hard work and efforts beginning to pay off here, a lot of focus on target market segments, managing pricing and controlling cost and all of this is flowing through and helping us in the results you saw. I think for the business to get back to that sustained level, let’s call it in the sort of 50-ish million a quarter. I think we will need to still see continuing strength in demand. So for example, in automotive, an important end market here. We are still below peak levels of auto builds. And so I think we will need to see continued recovery of the auto sector there as one factor. And then continue progress on my commentary on FMO, as we see stabilization of supply demand economics in FMO flow through and better pricing. That will help. So really you know overall volume recovery related to COVID, automotive continuing to improve, which drives important high-value mix and continued progress in FMO. When all of those take hold, I think we feel that the business will be back at that level, that sort of 50-ish million a quarter, $200 million type of a rate.

Thank you.

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning. Can you give a feel for mix effects for the balance of the year and how you think they will play out over the next couple of years? I’m just thinking about - are you seeing a faster recovery in lower-margin or higher margin products and then is there an offsetting catch up effect? And secondly, can you characterize where we are in terms of the growth of the tire replacement market in China, how much of your business there is currently into the replacement market?

Yes. Thanks, Laurence. So let me talk a little bit first about mix. So the last couple of years, we have had as we have commented, a negative mix impact because auto has been weak. And with that, recovering that is certainly improving the mix, though we are still short of prior levels in terms of auto build. So I think there is more runway there, but definitely, mix improving. We are also very focused on what we call our targeted market growth initiatives here in the Company. And this is really going after key markets where we think we have got a differentiated position and that offer strong margins. And so clearly, applications like energy materials are important. But even inside of what I would call our core product lines in Performance Chemicals, there is a vast array of applications and opportunities here. And we are always working to upgrade the mix. So my sense over the coming period here, the next couple of years is that mix should strengthen as auto continues to improve and our target market efforts pay off. So directionally, that is what we are focused on to create a value. I think this whole mix question is most pronounced in Performance Chemicals. So my comments here are related more to that. On the tire replacement question in China, I think in China, we have got a course passenger car and truck, both of them have a significant replacement component to its 75% to 80% of it being replacement driven. Now in truck, I would say the replacement cycle is pretty mature. But in the passenger car side of things, the replacement cycle is still building as the car park has grown significantly over the last few years, not all of that car park has hit the replacement cycle yet. And so we think that the passenger car side of things has some room to go still before it gets to kind of a mature run rate of replacement. In terms of our business, hard to characterize specifically what percentage is replacement is TC and what is trucked. I mean we are very focused on where the target places for us to participate, whether it is passenger car, truck or off the road in terms of applications as well as customer portfolio. So we are very focused on trying to align ourselves with the right customers and the right applications that really value Cabot and what we offer there.

Great. And just to maybe just follow-up on the mix question. I guess, last time that we had such a strong truck cycle, I think carbon black kind of operating leverage to that cycle as a much bigger part of the story. And has something changed in terms of the content per vehicle or how the business is balanced or the kind of mix of product on the automotive side that service is tempering kind of the operating leverage this time or the relative dynamics between the two markets?

No, I don’t think so. I think perhaps what you are referring to, Laurence, was a couple of years ago, there was I would say, the truck tire market in China got a boost because of regulations that were put in around overloading of trucks. And so that obviously forced more trucks into the fleet in order to carry the same amount of goods. And so there was a bit of a bump to the truck tire market in China. I would say that my view on it is, I think that has largely sort of settled out and stabilized here. And so you will see a robust truck business in China because of the movement of goods as well as continued strength in infrastructure China continues to build and stimulate a lot of infrastructure. And so that requires a lot of movement of steel and cement and industrial goods. And so we think that is a pretty stable outlook.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Chris Kapsch with Luke Capital Markets. Your line is open.

Good morning. Sort of a follow-up to that prior discussion just now, but a bit more on a global look versus China specifically. And just to the extent you have visibility, is there any way you can characterize or distinguish what your RM volumes look like in - truck tires versus passenger car tires versus OTR during the quarter? To the extent you have granularity there in terms of the growth by each of those segments.

Yes. Chris, we don’t break that out in terms of reporting. So I think no specific further commentary there.

Okay. And the comment about the quarter may have benefited from inventory replenishment demand. Looking for some color there. My sense is that there must be some threshold that you have reached, given that you are shipping the Carbon black into your major customers via rail car, I believe. And so there must be limited space for them to increase inventory. So I’m just wondering if you could provide any sort of color as to how much you think that dynamic may have contributed during the quarter?

Yes. So in terms of the restocking question, Chris, I think there was likely some level of inventory replenishment in Q1, although I think visibility here is challenging, as there is very little published data. And we have very good visibility, of course, into the point you just raised, which is when we are selling to our customers and filling up silos, we have got good visibility there. Often in restocking, the question is more of what happens downstream of our customers and that is where, unfortunately, very little sort of consistent published data. But what I can say is that customers really pulled down their inventories in 2020 to manage the pandemic, and they seem to be working hard to catch up on orders, which tells me that they are chasing real demand signals here. I think companies are still pretty cautious about rebuilding stocks until trends in the pandemic improve and the economic recovery stabilizes here. If I look at this question across our segments, I would say there was likely only a modest amount in Reinforcement Materials, given that the value chain here is a bit shallower. I mean, us to the tire maker and then the tire maker, either to the auto OE or into their retail channel. So it is a little bit easier to see through, and we don’t see - but a modest amount likely in reinforcement. In Performance Chemicals, we likely saw a bit more in the quarter as the value chains are deeper here. And visibility gets tougher given the layers in the value chain. So probably a little more in the Performance Chemicals applications because of that. All that being said, if we just sort of piece together, what we see, as we talk to customers, what data we can gather all of the different inputs here, I don’t believe restocking was a material part of the story in Q1. It was definitely some, but I don’t think it was a material part of the story.

Okay. That is helpful. And then finally, I guess, I think it was Department of Commerce implemented some tariffs on imported tires from some Southeast Asian countries, Thailand, Korea, a couple of others. Do you have any sense for if and how that may affect, I guess, higher production in the U.S. and therefore, your volumes domestically or is this just like a zero-sum game, or to the extent that you’re getting benefit in the U.S., there is an absence of benefit over there. Any sense for how that dynamic may play out?

Yes, sure. So in terms of impact around tariffs, you’re right. There has been a preliminary determination against some countries in Southeast Asia. I would say this is pretty similar to what we saw against China sometime back. But in terms of impact for us, given our broad footprint of manufacturing locations, tariffs on tires in one geography may cause a little bit of a shift in demand from one region to another. So while there may be an impact on our regional earnings, we don’t expect our corporate earnings to be significantly impacted. So I think that is a function of our global footprint. But if I just sort of pull the lens back a bit around tariffs in general as it relates to the tire industry, as I’ve shared before, my view on this. I think the supply chains for tires, there pretty structurally set, at least, in the medium term. And so tariffs only likely result in higher prices for consumers. I mean, when you look at the structural reliance of the U.S., for example, on imported tires, that doesn’t change overnight. And while there is some, I would say, on the margin capacity expansion in a place like the U.S., the U.S. still requires imported tires. And so I think it ends up really just being a bit of a zero-sum game. And ultimately, you and I, as consumers, pay higher prices here, but that is how I see it a big picture in terms of the Cabot specific impact. We would not expect any significant impact here because of our geographic balance.

Got it. And sorry, one last one that came to mind. Just in your formal comments, you talked about strength in China. But if you look at your RM segment volumes, they are up in Europe and Americas, but down in Asia. So I’m just trying to reconcile that. I know you talked to it a little bit saying that you are focused more on higher-margin products and not chasing volume in China, but it seems like a big delta in the volume variances vis-à-vis the formal commentary about trying to be as strong as it has been?

Yes. So two things there to recap, Chris. One is definitely our focus. So price and margin over volume in the near-term and restoring margins back to the level where we think they need to be. And it is important to remember, this is a spot market in China. So as we get margins restored and things improve and the volume participation can follow, but we think this is the right short-term emphasis. But we also called out a turnaround in the period that took some of our production capacity, a scheduled turnaround of offline. So now with that maintenance work done, the capacity to support higher volumes will be there. So it is really a combination of those two factors.

Thank you. Our next question comes from Kevin Hocevar with Northcoast Research. Your line is open.

Hey good morning and nice quarter. I wanted to ask about on the timing of pricing benefits that you are seeing in Asia, it sounds like it is a pretty big benefit that you got in the first quarter. And if I remember correctly, the last time this happened was in the first half of your fiscal 2018, where you had a nice - again, pricing in China moved up ahead of the raw materials flowing through the P&L. And I think at that time, it was expected that it would only last a quarter and it ended up at lasting two quarters. So I guess I’m curious if - it sounds like you mentioned earlier that to an earlier question, the 20 million benefit between that and another factor that will go away. I’m curious, has that gone away at this point, like in January, is there no timing benefits anymore or could you still potentially see some benefits from that in your second quarter?

Yes. So we would not expect to see the benefits. It is not that the pricing has gone anywhere, it is that the costs are flowing through our P&L in Q2. And so you basically got a matching, so that is really it. But the pricing remains in a good place. The last time that we saw a run-up like this, you are right, was in 2018. I think a combination of some factors there. One is raw material costs moving up sharply. And because it is a spot market, the pricing would have to follow that very quickly. So I think that factor is similar. One that is slightly different, I would say, is that in 2018, there was a very aggressive ratcheting of environmental enforcement in China. And China has moved through different periods or the sort of degrees of level of enforcement. I would say it was very strong in 2018, as the trade friction kicked in with the U.S. It moderated a little bit, as they were trying to deal with the impacts of, again, the trade issues. As we look at it now, clearly, China has come out with some pretty aggressive targets from an environmental standpoint, peak carbon in 2030 and everything that flows from that. So our view is that the environmental enforcement will continue to ratchet overtime here. But in 2018, that enforcement was very pronounced, and that provided some benefit to us because of our sustainability position and our ability to run and serve customers and differentiate on the basis of sustainability, that was a bit of an extra bump, I would say, there in 2018.

Okay. And then on the rubber business and reinforcing materials. Obviously, volumes seem to be getting better. It sounds like you expect some sequential improvement in your second quarter. You know If we kind of forget about 2020, in 2021, how close do you think you can get to 2019 volumes, do you think you can come within an arm’s length of it or I’m curious, just trying to think of how you are thinking about the - what the recovery looks like here in 2021?

Yes. So our best view there, Kevin, would be to take a look at what we see from those forecast the tire industry. And so if I look at what expectations are in terms of tire production in 2020, it would still be probably 4%, 5% below what the prior peak was. So 2018 and 2019 were pretty flat globally in terms of total tires produced. So let’s call that the most recent peak. And if we look at where the forecasters are for 2021, it is, of course, a nice bump of 2020, but still a little bit below to kind of think in that 5% range, something like that. And so that is our best visibility into it right now.

Thank you. I’m currently showing no further questions at this time. I would like to turn the call back over to Sean Keohane for closing remarks.

Great. Thank you very much, Shannon. Thanks, everyone, for joining our Q1 call today and for your continued support of Cabot. We look forward to speaking with you again next quarter. Have a good day. Stay safe. Thanks.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.