Hello and welcome to the Q4 2023 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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's earnings teleconference. With me today are Sean Keohane, 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 Investors section of our website. Also as we typically do each year, I would like to remind you that over the next several weeks in connection with investing restricted stock awards issued under our long-term incentive equity program officers of the company will be selling shares to pay tax and obligations related to their rewards. I will now turn the call over to Sean who will discuss the full year highlights, include an update our 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 in our cash flow, outlook, and priorities for fiscal 2024. Sean will provide our 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 Material 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 continued to demonstrate our industry leadership. I am immensely proud of the Cabot 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 mix benefits net of costs contributed significantly to year-over-year results driven by the Reinforcement Materials segment as we realized improved pricing and product mix 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, higher operating tax rate and currency headwinds.…

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 FX loss of approximately $7 million. We treated this as a certain item consistent with how we have treated similar government induced devaluations 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…

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 2024, 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…

Thank you. [Operator Instructions] And our first question comes from the line of John Roberts with Mizuho.

Thanks and nice quarter. Could you peel apart the performance outlook a little? Any significant difference in the outlook between Masterbatch Silicones Inc 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 near-term volumes will likely stay near the 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, and I think consumer confidence, particularly as it relates to durable goods, we're still seeing more of a skew towards services rather than durable goods. So, we'd need to see those indicators 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, 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 fume silica. So I think 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's 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, 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 would point in that direction for sure. And I think it’s the way we look at it is we think about this over the long-term. Clearly the shift to EVs, we think is a once ever transition and 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.

Yes, 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, those markets should remain fairly tight 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 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 those pricing, the pricing on those contracts as a reference point for 2024. And so we sit here today, we're in the zone of approximately two thirds of the way through our contract negotiations with price increases achieved across these volumes. But I think saying anything further at this point wouldn't be appropriate. It's sensitive, competitive information, but hopefully that gives you a feel for the environment and our view on things here over the longer term.

Yes, thanks. I mean, that's helpful. Maybe I could try a bit another way is that if you're talking about volumes kind of flattish, just upload single and reinforcement, you're talking about performance similar to fourth quarter levels. So most of the improvement looking at next year, if you have EBIT up $80 million to $100 million, maybe $20 million of that is annualizing performance, the residual, 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?

Yes, well, I think there are a lot of moving parts. I, certainly we are expecting that volumes would be up low single digits off 2023. And as I commented, 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 in 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 lay out a range that we have confidence in. But one that we think is appropriate given the many uncertainties that are out there right now.

Thank you. One moment, please, for our next question. And our next question comes from the line of Laurence 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 the discussions with customers. Because 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 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 is certainly something that is important 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 with the rubber black applications and when would be the earliest that you think you would see any real demand impact from methanolysis if that technology pans out?

Sure, yes. So we're excited about the progress in our elastomer composite through 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, 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 TBR side of things. I think complementing E2C is also our EVOLVE technology platform launch this year. You could think about both of these as really sustainability plays in the tire space. E2C really very much focusing on improving wear as well as the rolling resistance or fuel economy potential of tires. And then our EVOLVE 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.

Just on the methanolysis.

I'm sorry, Lawrence, what was that?

Sorry on the methane paralysis, the kind of timing. 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 EVOLVE technology platform are a 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. Our approach here, both between E2C and our EVOLVE Technology platform, 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 Kapsch with Loop Capital Markets.

Hi. 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 2023, 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 2023. Just wondering if we should think about low single digit volume per 2024 as somewhat derisked assumption based on the historical context.

Yes. So Morning, Chris. So I think clearly there's been significant destocking this year. I think across the industrial landscape. 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 these sort of micro cycles of destocking and restocking, I think it was definitely much more pronounced as we came out of COVID and saw things accelerate in 2021 and 2022 and lots of supply chain disruptions and people really perhaps over buying just to have product. And now, while that's been unwinding across 2023, so it's a bit of a different environment, I would say, than historical. But normally what you do see is that you see that destocking come back because customers 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 people generally will then carry a little more inventory to protect against that cost of stock out. But I wouldn't say we've seen signs yet of a restock. I think what we see is that the destocking is largely over. And I think there are lots of data points that are out there, public data points from our customers in 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. And 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. Just curious how you talked about sort of an intensifying competitive dynamic as 2023 ensued and the pricing pressure which you called out last quarter. MCA [ph]:

Yes, well, there's definitely, I think, a couple of important differences or points of bifurcation, I would say, Chris, one is that we definitely see that our view is that the market will bifurcate into a China market and the rest of world market. Now, 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, therefore viewed as a higher performing chemistry, but higher cost. And so 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 there's a large chunk of that market that is pretty price competitive in terms of the vehicles and pushing all the way back up through the chemistry inputs. But what you see on the NMC side is something different where the performance requirements are higher and therefore the competitive intensity is lower. So 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 very different than the low end of the auto OE market in China. 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'll 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.

Yes, 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 and 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 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 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 lightweighting will remain very important. In fact, more important, I would say, because EVs are heavier than internal combustion engines. So the trends around lightweighting 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 Corp. 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 for battery materials, do you have an EBITDA forecast for 2024?

Yes. For 2024 David we are not providing a specific guide because I think 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, 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, 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 in this near-term environment. It's tricky and dynamic, but we are expecting EBITDA growth in 2024.

Thank you.

Thank you. I'll now hand the call back over to President and CEO Sean Keohane 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 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.