Q3 2021 Cabot Corp Earnings Call

August 10, 2021

[music].

Yeah.

Good morning, ladies and gentlemen, and welcome to the third quarter Cabot earnings Conference call.

This time all participants are in a listen on Demount later, we will conduct question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your thoughts on telephone on as a reminder, this conference call is being recorded.

I would now like to turn the conference over to your House, Mr. Steve Delahunt, Vice President Treasurer, and Investor Relations. Please go ahead.

Thank you Jerome and good morning, and I'd like to welcome you to the Cabot Corporation 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 third quarter of fiscal year 2021 copies of which are posted in the Investor Relations section of our website.

A slide deck that accompanies this call.

And so available on the Investor relations portion of our website and.

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 statements 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 and the press release, we issued last night.

And on our annual report on form 10-K for the fiscal year ended September 32020, and.

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.

Any non-GAAP financial measures presented should not be considered to be and 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 and a table at the end of our earnings release issued last night and available and the Investor Relations section of our website.

I will now call I'll turn the call over to Sean Cohen, who will discuss the key highlights of the Companys 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, and welcome to our third quarter 2021 earnings Conference call.

I am very pleased with our results this quarter as we generated adjusted earnings per share of $1.35.

This marks the second strongest quarterly earnings performance in the company's history.

Demand across all businesses were strong and we continue to leverage our global network of plants to serve our customers while managing the persistent challenges related to the COVID-19, pandemic and disruptions and international transportation and logistics market.

And I'm very proud of the entire Cabot team for demonstrating great operating discipline across all aspects of our business and for their resilience and this very dynamic environment.

Our culture of teamwork and our commitment to commercial and operational excellence serves as the foundation for our strong performance.

While raw material markets remained somewhat volatile during the quarter, we were successful and implementing price increases to maintain robust margins.

Im also very excited about our continued progress across our portfolio of targeted growth initiatives, particularly in the battery application.

I believe the battery market presents 1 of the most compelling new growth opportunities from a material sector and our strategic investments over the last several years have positioned cabot very well to capitalize on this unique opportunity.

Our energy materials business continued to build strong momentum and the quarter as we achieved qualification milestones and began commercial sales to an additional 2 of the global electric vehicle battery leaders.

The top 8 EV battery producers represent approximately 90% of the industry and we now have commercial sales to 6 of these top 8 manufacturers.

In addition, we are supplying conductive carbon additives to the top 5 EV battery producers in China.

The Cabot value proposition to the battery market is based on 3 factors.

First the breadth of our product line of conductive carbon additives, including conductive carbon blacks carbon nanotubes carbon nano structures and blends of conductive carbon additives.

Second the depth of our application knowledge and our global research and development centers allow us to tailor products for our customers and respond quickly and this fast changing environment.

And finally, our global footprint of manufacturing plants, and our sales and technical service support.

As battery producers expand their manufacturing footprint outside of Asia to support auto Oems with robust regional supply chains, we see the value of our global footprint and becoming even more important for our customers.

We believe these capabilities represent a compelling differentiator for Cabot and position our company as a key supplier and innovator to the leading battery manufacturers.

Transitioning now to cash operating cash flow and the quarter was $71 million and $157 million year to date.

While EBITDA generation has been very strong conversion to operating cash has been impacted somewhat by higher oil prices, which contributed to over $100 million of the net working capital increase year to date.

While oil price volatility can create short term fluctuations in working capital balances history has shown that over the long term oil driven and working capital fluctuations tend to balance out.

Given the size and strength of our balance sheet, we can easily absorb these changes and working capital without impacting our long term capital allocation priorities.

As oil prices stabilize we expect to see a greater level of conversion of our strong EBITDA and operating cash flow.

The strength of the balance sheet and our cash flow as reflected in our investment grade credit rating. This has long been a priority for us and we remain committed to this posture.

We recently closed on a new $1 billion ESG linked credit facility, which replaces our existing credit facility that was due to mature in October of 2022 debt.

Facility includes 2 ESG metrics centered around our annual sulfur dioxide and nitrogen oxide emission reduction goals.

This agreement represents 1 of the first ESG linked to credit facilities in the chemical industry and further reinforces our commitment to sustainability.

The facility matures in August of 2026 with key terms largely the same as our prior facility.

In addition, during the quarter, we released our 2020 sustainability report, which provides enhanced transparency on our environmental social and governance priorities.

And <unk> leadership is central to our strategy and.

And the interactive digital report summarizes our progress and accomplishments.

Overall, we had a very strong quarter in terms of financial performance and progress against strategic objectives and I will.

Now turn the call over to Erica to discuss the financial results for the quarter and more detail.

Erica.

Thanks, Sean.

And it was discussing results and the reinforcement materials segment.

Reinforcement materials segment delivered strong operating results with EBIT of $85 million.

Which is up $90 million compared to the same quarter and fiscal 2020. The increase is primarily due to significantly higher volumes across all regions and improve unit margin driven by favorable pricing in the Asia region.

Billy volumes were up 71% and the third quarter as compared to the same period of the prior year.

146% growth and the Americas, 100% increase in Europe, and up 30% and Asia.

Higher volumes were driven by key end market demand that continue to recover from COVID-19 related impacts and fiscal 2020.

Looking to the fourth quarter, we expect the volumes to remain strong.

Costs are expected to be sequentially higher due to the timing of planned plant maintenance.

Given the very strong demand and the last few quarters and limited inventory and low supply chain. Our focus has been on supporting our customers' product needs.

And as a result, we have scheduled the higher than normal amount of maintenance and the upcoming quarter.

Another factor that will affect our fourth quarter is the impact on the outage at a plant and the U S. Due to an equipment failure on our recently installed air pollution control system.

Cabot completed this project on schedule. According to the consent decree however, controlling this level of Sox and Nox emissions and new for the card and black industry and the U S.

With the startup of any new technology, there can be unexpected issues and this is the situation. We currently see we anticipate this site will be down for about 1 month to repair the equipment.

In addition, we expect margins to moderate from the third fiscal quarter due to higher feedstock differentials.

We anticipate the differentials impact will be approximately $5 million and the fourth quarter and we expect to recover this impact and the first quarter of fiscal 2022, our DCA mechanisms.

Now turning to performance chemicals, EBIT increased by $33 million as compared to the third fiscal quarter of 2020, primarily due to strong volumes across the segment and improved product mix. This.

The stronger product mix was driven by an increase in sales into automotive applications, and our specialty carbons and specialty compounds product line.

Year over year volumes increased by 17% and performance additives, and 20% and formulated solutions driven by higher volumes across all our product lines underpinned by higher demand levels and our key end markets.

Looking ahead to the fourth quarter of fiscal 2021, we expect overall volumes to remain strong with some impact from lower seasonal demand.

Anticipated higher costs from planned turnarounds and and a net unfavorable impact from plant outages.

The first outage is what I just mentioned at a plant and the U S. This plant supplies, both the reinforcement materials segment and the performance chemicals segment.

Another plant outages related to the specialty compounds plant and Belgium. This plant was severely impacted by the heavy rains and floods and the region in July.

Dosing and this plant remaining offline for the balance of the fourth quarter.

With higher maintenance impacting both our reinforcement materials and performance chemicals segments, we estimate the sequential impact of higher maintenance costs for the company to be and the $8 million to $10 million range. We expect this elevated level to return to a more normal level in Q1 and fiscal 2022.

With regard to the plant outages. This impact is also across both the reinforcement materials and performance chemicals segment, and we expect the impact across the company to be on the range of $7 million to $10 million and the fourth quarter.

We expect to recover insurance proceeds that will help to offset the financial impact from these outages, but we do not anticipate any proceeds to benefit operating results until fiscal 2022.

Moving to purification solutions, EBIT and the third quarter of 2021 increased by $4 million compared to the third quarter of fiscal 2020.

Driven by volume growth and specialty applications, and and insurance reimbursement from the plant outage and the first quarter of this fiscal year.

Looking ahead to the fourth quarter of fiscal 2021, we expect EBIT to decline due to lower volumes and a mercury removal application and we will not have insurance proceeds and the fourth quarter.

I will now turn to corporate items, we ended the quarter with a cash balance of $173 million and our liquidity position remains strong at $1.3 billion.

During the third quarter of fiscal 2021 cash flows from operating activities were $71 million, which included a working capital increase of $47 million.

And the working capital increase was largely driven by the impact of higher raw material costs and cause higher inventory balances and as we pass these higher costs on and our pricing, which drove accounts receivable higher as well.

Capital expenditures for the third quarter of fiscal 'twenty, 1 with $46 million for the full year, we expect capital expenditures to be approximately $20 million.

This estimate includes continued EPA related compliance spend and the capital related to upgrading our new China carbon black plant and specialty products.

Anticipate the new plant in China will be online and the second half of fiscal 'twenty 2.

Additional uses of cash during the quarter included $20 million per dividend.

Our year to date operating tax rate was 28% and we forecast our operating tax rate will be between 27 and 28% for this fiscal year.

I will now turn the call back over to Sean.

Thanks, Erica I am very pleased with our third consecutive quarter of strong operating results and we are raising our expected full year outlook of adjusted earnings per share to be in the range of $4 and 85.

To $5 <unk>.

This is truly exceptional performance for our company and.

Reflects our strong commercial and operational execution and the value of the strategic choices. We have made in recent years.

Our advancing the core strategy is focused on strengthening our industry, leading positions through great execution and by making smart targeted growth investments.

We've invested aggressively and our operating platform to build excellence and our commercial and manufacturing operations.

On the commercial front, our focus has been on strengthening our capabilities and the disciplines of key account management data analytics strategic pricing and voice of the customer and all of these have been underpinned by a world class CRM platform.

On the manufacturing front, our focus has been on overall equipment effectiveness or OE.

Energy recovery process and yield optimization and capital efficiency.

Through these actions we have demonstrated the earnings power of our 2 high margin segments, and reinforcement materials and performance chemicals and.

And we have enabled this growth and a more capital efficient manner.

On the growth front, we have a philosophy of building from positions of strength and investing and market spaces, where we believe we have a right to win.

This led us to invest for breakout growth and conductive carbon additives for batteries and to complete the central and acquisition and we are growing and the battery space as we expected.

In addition, our capacity investments and Asia over the years have positioned us as a leader in the region across carbon black fumed silica and specialty compounds. These.

These investments are enabling us to drive strong earnings and returns in this high growth area of the world.

Through these foundational capability investments and smart growth choices, we have structurally increase the profitability of the company and have moved to EBITDA based to a new level.

As I look forward the underlying performance of our business is very strong and customer demand remains robust.

Our growth investments are well positioned to take advantage of macro trends and the area of mobility.

Turning to energy generation and storage connectivity and infrastructure reinvestment.

Very good about how Cabot is positioned for fiscal 'twenty, 2 and the coming years.

In closing I want to thank and recognize our global Cabot team.

The strength of our culture and the resilience of our employees has never been more apparent than it has been during these challenging times. Thank.

Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

Ladies and gentlemen, if you have a question at this time. Please press the star and the number 1 key on your Touchtone telephone. If your question has been answered or you. Please turn and move to yourself from the queue. Please press the pound key your first question comes from David Begleiter with Deutsche Bank.

Your line is open.

Thanks, and good morning.

Sean and Erica.

Thanks, Good morning, looking at the Q4 guidance remains a bit wide.

About 20 cents a share can you discuss why and if so why given we're almost halfway through the quarter.

Yes, sure David I think.

As Erica outlined.

3 main drivers there the the.

The higher than normal maintenance spending as we were really focused on supporting customers and the rapid increase in demand earlier in the year. So thats 1 the second is the outages and then the third is the differentials, which will recover and the Ccas and the first quarter I think the primary reason for a slightly wider.

Range then.

And then would be normal at this stage is really related to the outages.

Both.

Specialty compounds plant in Belgium, and carbon black plant and the U S and so we've estimated that but.

Given the dynamic nature of the situation and that's really the reason why the range is slightly wider than what we might normally do.

Understood and I know, it's early look at 2022, but when you think about reinforced materials for next year.

Is this level of earnings you think sustainable at around these this high level.

Yes, I think.

It is early as we've talked about about 2022, but I think the business has really.

Done a great job over the last several years here improving the structural profitability of the business and so you can you can look at this business today and see that volumes are in and around the 2019 levels. If you look at where where tire production is for example, yet the profitability is.

<unk>.

And as substantially up.

In this business and I think the efforts focused on commercial excellence and.

Strategic pricing and and.

And market management has been has been 1 our continued focus around yield energy recovery and overall equipment effectiveness.

<unk> has certainly been and the second and then the third is the Asia Pac market and in particular, China represents somewhere on the order of 35% to 40% of the world's tires and 40% of the world's carbon black and our position there and our ability to manage and that dynamic market. I think has been proven out over a long period of time.

And so so we feel really good about the level of performance in this business and as we look forward into 2022 from the company I think there and there are a few things that are that are on our mind first.

Demand and some of these key end markets like tires, and autos still remain below pre COVID-19 levels.

On the tire side is still a few percent below if you look at <unk> forecast and then.

On the auto build side.

Ihs's outlook is still a little below so I think theres growth runway there number 1 number 2 as we as we look at.

The tire contract season.

And we certainly see demand is strong inventories are low.

Fly side investments and in the West.

Have have not happened at our view on that Hasnt changed so it should lead to.

<unk>.

A favorable environment as we as we move forward and then third our growth investments.

And like in batteries and a number of our other targeted areas are.

We are really beginning to perform quite well here and we think theres. Good momentum. So we feel good about the drivers for for next year and I would say those are the those are the key ones David that are on our mind.

Thank you.

And your next question comes from Mike might head.

Barclays.

Your line is open.

Great. Thanks, and good morning, guys.

On Kmart.

First question I, just wanted to circle back on the <unk> guidance and team.

Seems like sequentially, you're guiding to I don't know $20 million to $30 million lower EBIT sequentially and Erica.

Good job trying to help size some of those buckets. So I was hoping you could just repeat in aggregate how much youre attributing to outages and downtime versus feedstock differentials and other factors that I just want to make sure I got that walk correct and then as we think to fiscal 'twenty 2 I appreciate youre, not giving guidance yet, but it sounded like most of.

And that gets resolved and fiscal <unk> and won't carry into 2020.

Is that a correct interpretation.

Yes, yes, thanks, Thanks, Mike and.

Erica, Yes tried to walk through to provide clarity there as there was some.

And unusual elements and are in our Q4 numbers. So let me just repeat so the first <unk>.

It is.

The elevated level of maintenance activity, and that's estimated and the range of $8 million to $10 million impact on the quarter and.

And that's really driven by the fact that with a very sharp recovery and demand this year and very little inventory.

And most supply chains, our efforts and really been focused on supporting customers customers have needed product and so that just meant and we schedule the higher level of maintenance and this quarter than what would normally occur so and maintenance is and that 8 to 10 range. The second is related to the 2 outages that Erica referenced in.

Belgium, and the U S and the impact there is.

Estimated and the range of $7 million to $10 million on the quarter.

And the plant in Louisiana, we would expect.

To be out for 1 month so.

And let's call that back back running and September and.

And then.

And in Belgium, and the impact.

At this point is through the balance of the fourth fourth quarter.

But our view at this stage is that those would those would not repeat beyond the fourth quarter and then finally differentials.

And that's estimated to be around $5 million and as I think you know well we've worked hard over the last few years to put in place mechanisms for recovery on those what we call <unk> or delivered cost adjustments, which are meant to recover when we have.

Sort of temporary dislocations in feedstock pricing from the core underlying index and I think with a certain amount of volatility across the refining complex around the world.

Youre seeing some of those occur and so we will.

We will expect to get recovery on those <unk> and <unk>.

And then in the next quarter. So those are you have them right I think Mike and that's that hopefully clarifies.

It for you and our view on.

On.

On these as we as we look beyond Q4.

Great that's super helpful and then maybe.

Cabot, obviously, hasnt quite a large China presence, especially relative to some of our other U S companies.

And then probably some added consternation from investors of later on China Auto numbers from mixed economic data points, just kind of curious if you could give us.

Your view on the ground kind of what Youre seeing today and.

Expectations moving forward and China.

Yes, yes, well, China, China's and important market for us and 1 that we've demonstrated for a long period of time here and <unk>.

<unk> to manage.

And be strongly profitable and generate strong returns and that business. So we know we know how to operate there our view on China right. Now is that volumes are expected to be to be solid here and.

I don't I don't see any fundamental change.

Changed their underlying demand is strong and expected to continue as as GDP grows and as the China car Park continues to expand and again at the end of the day and our biggest and markets. If we take reinforcement for example, they make almost 40% of the world's tires.

So I think from a structural standpoint, the world is structurally dependent on Chinese tires, even if tariffs sometimes shift around the global flows a bit from from time to time. So I think our long view on China's unchanged here in the short term there is certainly some.

<unk> and global logistics markets right now and so Chinese exporters of tires are are challenged defined container availability, it's pretty scarce and pricing has gone up on on.

On international container shipments so.

This may result in some on the margin shifting of tire production back to importing regions. So we may see a little bit on movement here between Chinese exporters.

And volumes that might be picked up in the and the importing region.

But as you know well, we've got a strong global footprint everywhere and the world. So if that happens we would expect to pick it up on the other side I think there are limits to what can happen there, though because again the world's structurally dependent tiers. So our view on China remains remained remains bullish over the long term here and if there any.

Short term dislocations I.

I think we've proven and ability to manage those over a long time.

Great. Thank you.

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

Yeah, Hi, Thanks for taking my question.

Just a question on the volume side of things.

As you look at the September quarter, and then the December quarter.

Wondering how you think about seasonal volume movements and how much are you talking about your fourth quarter is impacted by your own supply issues versus demand.

And any kind of early read on how youre thinking about December I think it would be helpful. If you can provide context.

Yes, so I mean, we are Josh expecting.

<unk> to remain.

We remained strong here and.

And we continue to see that inventories are low across pretty much every value chain. So if economic activity.

<unk> remains robust and of course, there are questions here around.

Surges and Covid, but let me, let me sort of put that aside for a minute. If you look at underlying economic growth.

And low inventories across the change we would expect demand to remain.

Robust here now and our fourth quarter, we we do normally see a little bit of seasonality and so we're expecting that that same level.

In the coming quarter, but again.

<unk>.

And would expect nothing really out of the normal here.

As we as we transition as we go forward here and you think about turning the band on 2021 and into 'twenty 2.

We really look at it in terms of our key end markets and the tire market is still about 3% below 22019 levels.

And so I think theres more recovery runway there, we've definitely seen very strong recovery in the truck and bus market because I think there has been such a.

Such strength in industrial markets so naturally.

On the truck tire market is very strong what is still lagging a bit 2019, the passenger car market, because mobility and miles driven and are not yet back though they have rebounded pretty sharply here. So we see we see runway as we move into 2022 in terms of further room, just simply to recover back to the pre.

Covid levels.

So hopefully that gives you a little bit of perspective, the normal seasonality in Q4 and.

Still still runway just to simply get back to the pre COVID-19 levels into 'twenty 2.

Thank you I appreciate that I guess, what I was trying to dig into a little day is just as some of the supply issues and September quarter mean that perhaps there's less seasonality for Cabot specifically into the December quarter do you have any thoughts around that.

I wouldn't I wouldn't say.

And that while we have a higher level of.

Of maintenance turnarounds here, we would expect to be.

Fueling most of that demand from inventory, we would typically build inventory ahead of maintenance turnarounds. So.

And so no I don't I don't see any.

Anything that you are describing there any sort of shift of that sort.

Okay. That's helpful and if I could just ask on that.

On the margin side quickly within reinforcement.

Was there anything abnormal within this most recent quarter. So you've had some benefits from the China price cost dynamics was there any benefit embedded there and Kim and coolers that a relatively normal quarter for us to think about bridging into next year also.

Yes.

I would say.

Things developed pretty much as we outlined last quarter with the exception that we we thought debt.

The.

The the cost flow through and China, Youll remember, we were in a rising feedstock environment.

Pricing ahead of the flow through in our P&L and we expected that.

Impact to to hit Us in Q2, Q3, and the impact was.

A little more muted than we originally thought because feedstock prices coal tar prices continued to surge up.

Across the quarter in Q3, so the impact was a little bit less and we would have thought but.

I think when you look at all the different puts and takes I would say it was fairly normal and I think Eric I wanted to comment Josh on your earlier question as well maybe you can provide a little more color, yes, Josh and I just wanted to and I think as you're trying to think about Q4 to Q1 as Sean said the outages that we have and Q4.

And 1 in the U S that plan is expected to be back online within the quarter and so.

There would be and impact in Q4, but not Q1, the Belgium plant, we expect to be offline for the balance of the quarter I would say, it's still unknown and Q4 Q1, and when that would come back online or if it comes back online. So that is 1 as you think Q4 to Q1 may continue.

And you I'd say, it's too early for us to know exactly when.

Just a reminder, that the specialty compounds plant.

Mahler plants as you think about impact.

But but could continue into the first quarter.

Okay got it thank you both.

And your next question comes from Jeff.

On the cost curve with Jpmorgan Your line is open.

Alright, thanks very much.

Your working capital was negative $2.26 through the 9 months, which to be for the year, how much should it improve and the fourth quarter.

Yes, so very Jeff very very oil dependent and.

And as we commented on the year to date basis.

The just the strict oil impact is.

100 ish, a little over $100 million so.

With oil prices moderating.

Here and I, certainly had a pullback and the last week, but let's let's let's call it.

Moderating and we certainly would expect that much more of the strong EBITDA would be.

Would be flowing through there so.

I think it's really just strictly a function of.

And what happens with with oil.

Okay.

Normally you have different turnarounds and the fourth quarter.

So is the difference this year that you have an unusual amount of outage costs.

What's unusual about the fourth quarter as theirs.

And whatever it is $8 million to $10 million.

However, there are $7 million to $10 million of outage costs relative to last year, but everything else is more or less the same as the fourth quarter.

No.

Right and your memory that normally and the fourth quarter, it's a little bit higher seasonal maintenance youre right about that but what we're saying is above that norm. What we would call that normal there is $8 million to $10 million higher and that is just simply because the demand recovery has been so strong this year.

Inventories so thin.

The customers have just needed product and so that has led us to schedule a higher level of maintenance than we would normally have in this quarter and that's in the 8 to 10 range. The outages are a separate issue in the 7% to 10 range. So.

It's just a much much higher level of maintenance activity and I think again, most supply chains have just been running so so hot this year because of the strong demand and limited inventory that.

Things like this have been have been pushed.

But you can only can only push those so long in order to maintain.

Quality of.

Of assets and the like so so we need to we need to get quite a bit done this quarter.

Okay and in China.

Coal prices have really elevated there in general are higher coal tar prices good good for Cabot and China because of whatever raw material differential you have and low coal tar prices tend on the margin to be.

Tougher for your pricing or your margins is that generally true or no.

I think you've got it got it right, Jeff I think there's 2 factors here, there's sort of absolute price and then there is direction of price and so let me let me try to talk through both of those I think with respect to absolute price Youre right coal tar prices, because the whole coal coke and coal chemicals train has has moved.

Up and pricing so the absolute prices are higher and in general.

And we would prefer that because what that means is.

And that the Chinese carbon black producers do not have.

Much of an arb relative to global fuel oil prices to then export out of China.

Because it just the economics simply don't don't work and I would say right now.

And that Arb and some years passed has been open and therefore flows of carbon black out of China and been more pronounced.

And that Arb is decidedly closed right now because of that so that so there is sort of absolute price point number 1 absolute price point number 2 would be in general.

And we make a more profitability higher levels of profitability when when when feedstock prices are higher because our yield investments and energy recovery.

Generally linked to debt that fuel price.

And so so I think that flow through now the thing to manage and China is really the the direction of travel on pricing because it is a spot market and so what you'll what you'll see is when prices are rising and.

Then we will price and.

And see benefits a little bit ahead of the flow through on our P&L as we've experienced this year and the same is true then when it when it moves down is that you would see market prices adjust a little faster than the flow through of inventory and you'd see it a little bit on the negative side. So it's really.

The direction of travel would impact us and a short term way.

With those with those factors, but in general stability.

And a marginally higher level is.

And as is best for our business.

Thank you in energy and materials.

Has the rate of growth changed and you talked about different customer wins and the technician.

It's a higher growth area for you.

Do you have enough capacity to serve your customers has the rate of change and the business altered over the past 3 quarters, yes.

Yes.

I would say the rate of change has not altered from our outlook that we shared last quarter Jeff.

Robust growth expectation.

The customer wins, and our customer wins that we were expecting and we embedded that expectation into that estimate of EBITDA range that we gave so we're simply executing really well.

Getting qualified and ramping commercial sales as expected. This is all about execution and I would say, we're executing really really well. So I'm very pleased about that and I do think this is it really.

Unique opportunity and 1 that is.

Somewhat time bound because.

This market is ramping fast now and I think the momentum. They are only continues to build as you look at.

What's happening both in terms of.

Government policy in this direction, but also maybe more importantly, what the automakers are saying because as they as they retool their product lines too.

100% Evs over the next 10 plus years once that happens there isn't really a return.

Back to internal combustion you've effectively got to shut off the.

And the R&D investment and internal combustion engines and pivoted. So I think those are those are pretty significant moves I would say and just under underpinned the growth expectations, even more on the capacity side, we will have to invest over time here to continue to provide.

And with capacity to support our customers, but we've got plans underway there you might recall that we.

We purchased carbon black plant and Xuzhou, China from Nippon Steel, we're converting that the specialty carbons as we speak and that will.

Inject a slug of capacity that allows us to rebalance things to continue to serve energy materials and then on the century acquisition and the carbon nanotubes 1.

We continue to grow into that you might recall when we bought it was about half utilized we've been growing into that capacity over the last year year, and a half and we will have to debottleneck and.

Add some incremental capacity there as things ramp what I would call that largely.

Sort of normal course of business growth and that will be a good that would be a good a good a good thing.

To have high value growth and investment to generate strong returns.

And lastly, you expressed some optimism about carbon black pricing in 2022.

And.

It's just early August.

Normally.

It's hard to make out these issues.

Thanks, Kevin before Thanksgiving.

It makes this year so different that.

You have it seems a little bit more forward condition.

From winter.

Yes, I mean, and certainly it's early and the process, Jeff So no change there, but I think our.

Our optimism is really grounded and the fundamentals here.

And here, where demand is strong inventories right now are particularly low so.

We see.

That being supportive.

Supportive its not like Theres a lot of inventory that's been built in.

So I think and general demand recovering still some room to go just to get back to the pre COVID-19 levels inventories pretty thin and as we've been calling for a long time here no real changes on on the supply side.

The only other thing that might be a slight difference as we sit here today.

In a more favorable direction is simply the global flows of product on.

And just more challenged today, given the logistics and transportation issues, and so I think thats, causing most companies too.

And to emphasize a little bit more supply reliability and local supply chain, we're certainly seeing trends of that sort across a whole host of different value chains and so so that that then means that net local suppliers regional suppliers.

And the value proposition there to support our customer is going to be a little bit stronger I think that was always the case as you know well that the reinforcement business is largely a regional business but.

There are global flows, but I would say those are those are more challenging these days because of the transportation. So so a couple of a couple of points that might be accented a little more now than normal, but the optimism is grounded more than anything and the fundamental.

Okay, great. Thank you so much.

Okay.

And your next question comes from Laurence Alexander with Jefferies. Your line is open.

Hi, This is Dan Rizzo on for Lawrence how are you.

Dan.

Just 1 quick question you mentioned.

Free cash flow conversion.

Obviously being hurt by higher oil question I was just.

And if you think about over the long term whats the goal or how should we think about what fresh free cash flow conversion should be.

Yes, yes, I mean, I think really.

If you if you look at the oil movements those are the single biggest things that.

And factor that will will drive cash flow generation and over a very long period of time.

And that oil price volatility has has largely balanced out over a very long period of time, the net change in and.

In dollar investment and working capital has been remarkably close to zero over and over very long period of time, So and we've got the balance sheet.

And to deal with those.

Net inflation deflation of the flat oil price. So you ought to think about operating cash flow is strong EBITDA minus some increase in working capital that is growth related simply volume and growth related.

But but that should that should drive strong operating cash flows if the earnings should flow through and generate strong operating cash flow and then with respect to free cash flow.

It's a question of where our Capex is and we have got.

We've got a philosophy here of.

Trying to our capital allocation philosophy of roughly reinvesting about half of our disc.

Discretionary free cash flow and growth and about half returned to shareholders and over time that that's been a reasonable way to look at it and.

So I think thats those are the those are the factors, but I think the working capital 1 Dan is the thing that Ken.

And distort and in a short period of time, but over a very long over a longer period of time.

It's been remarkably not not not an issue and and we've got the balance sheet to deal with debt.

And thank you very much.

And your next question comes from Chris Capps with loop capital markets. Your line is open.

And good morning, I appreciate your comments about that.

Burgeoning.

Conductive carbons business.

No.

As debt.

EV battery technology roadmap evolves there is a big emphasis on improving range via energy density and also and emphasis on.

Charges and cycle times and to address these improvements there's evolutions.

Cash and especially the anode technology and there's a lot of scuttlebutt of course about solid state lithium ion batteries, maybe eventually becoming broadly adopted.

<unk> adopted so my question.

On to you in terms of how this business develops as are you agnostic about how the technology Roadmaps evolved in other words do you simply benefit.

From a transition to evs from Ice's or are there certain battery technologies, where you see your products being sort of disproportionately increase and in terms of content per battery.

Yes, yes, I think the.

Primary driver here, Chris is the conversion from internal combustion engines to electrification and.

And the current.

Battery technology.

It has strong needs for conductive carbon additives.

To improve both range as.

Well as cycle life. So the conductive carbon additives are really critical and the chemistry now I think the current technology.

Platforms have.

And quite a bit of runway.

Here and.

So that's that's the basis on which so many.

Plants and capacity increases are being installed today by the big battery manufacturers now there are a number of technology developments sort of Nextgen technology developments like solid state batteries that you talked about there are thought to be.

Safer and higher energy density than conventional with EMI and battery products are today.

But.

Since solid state batteries will use either ceramic or polymer as.

As the electrolyte neither of which is conductive.

Solid state batteries will likely need even more conductive carbon additives.

So in that in that sense, we're somewhat agnostic.

But I think the key for US is we want to be and this for the long haul.

So we want to win today.

And then we want to be with our customers as this technology transition.

Occurs and and be there conductive carbon additives.

Innovator to do that.

You mentioned working with I think you've made.

And maybe even being stacked and then was it 6 of the top 8 producers.

Are you also have any development efforts ongoing with.

Some of the.

The companies that are trying to position themselves for.

Date, and the future or right now is your commercial effort focused on on the existing battery producers. Thanks, a lot appreciate the color.

Yes, so yes, as I said and the in the comments the top 8 producers make up about 90% of the market today.

And so we're now qualified and with commercial sales on 6 out of the top 8.

And have on development programs with.

And qualification efforts underway with all of them. So I think our focus is very much their know how.

And how technology develops here over time is going to be a combination of the existing leaders transitioning technology developments and we're involved with them on those discussions as well as some.

What I would call more up starts that are really trying to play for the next generation technology.

And where we are closely engaged with all of those players as well ultimately how that plays out as is on unclear I mean once that once Mike My guess once the big guys build scale here, they're going to.

We're going to be they're going to be planning for the next generation too so.

Now how that all plays out as it's a bit it's a bit early but where we're engaged across all of the customers right now.

On the next generation work.

Very helpful. Thank you.

Alright, and Im showing no further questions at this time I would now like to turn the conference back to Sean Keohane.

Great. Thank you. Thank you very much for joining us here today, we are excited about the momentum we have built and our growth prospects and we plan to share more of that with you at our Investor day, which we'll be hosting and Boston on on December 2nd and at that Investor Day, we will be taking a deeper dive in.

And to our key businesses and provide more insight into our long term strategy, our key growth initiatives and our sustainability leadership. So hopefully we can see you all there in person.

In the meantime, thank you for joining today for your support of Cabot and I Hope you all remain healthy and safe. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

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Good morning, ladies and gentlemen, and welcome to the first quarter Cabot earnings Conference call. At this time all participants are in a listen on day. Mount later, we will conduct question and answer session and instructions will follow at that time, if anyone should require.

Fifth and turning the conference. Please press Star then zero on your thoughts on the telephone on from reminder, this conference call is being recorded I would now like to turn the conference over to your house.

Steve Delahunt, Vice President Treasurer, and Investor Relations. Please go ahead.

Thank you Jerome and good morning, I'd like to welcome you to the Cabot Corporation 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 third quarter of fiscal year 2021 copies of which are posted in the Investor Relations section of our website.

Slide deck that accompanies this call is also available on 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 statements 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 and the press release, we issued last night and and our annual report on form 10-K for the fiscal year ended September 32020, and.

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.

Any non-GAAP financial measures presented should not be considered to be and alternative to financial measures required by GAAP.

I will now call I'll turn the call over to Sean Cohen, who will discuss the key highlights of the Companys 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, and welcome to our third quarter 2021 earnings Conference call.

I am very pleased with our results this quarter as we generated adjusted earnings per share of $1.35.

This marks the second strongest quarterly earnings performance and the Companys history.

And I'm very proud of the entire Cabot team for demonstrating great operating discipline across all aspects of our business and for their resilience and this very dynamic environment.

Our culture of teamwork and our commitment to commercial and operational excellence serves as the foundation for our strong performance.

While raw material markets remain somewhat volatile during the quarter, we were successful and implementing price increases to maintain robust margins.

I am also very excited about our continued progress across our portfolio of targeted growth initiatives, particularly in the battery application.

I believe the battery market presents 1 of the most compelling new growth opportunities for the material sector and our strategic investments over the last several years and position Cabot very well to capitalize on this unique opportunity.

The top 8 EV battery producers represent approximately 90% of the industry and we now have commercial sales to 6 of these top 8 manufacturers.

In addition, we are supplying conductive carbon additives to the top 5 EV battery producers in China.

The Cabot value proposition to the battery market is based on 3 factors.

First the breadth of our product line of conductive carbon additives, including conductive carbon blacks carbon nanotubes carbon nano structures and blends of conductive carbon additives.

Second the depth of our application knowledge and our global research and development centers allow us to tailor products for our customers and respond quickly and this fast changing environment.

And finally, our global footprint of manufacturing plants, and our sales and technical service support.

As battery producers expand their manufacturing footprint outside of Asia to support auto Oems with robust regional supply chain, we see the value of our global footprint and becoming even more important for our customers.

We believe these capabilities represent a compelling differentiator for Cabot and position our company as a key supplier and innovator to the leading battery manufacturers.

Transitioning now to cash operating cash flow and the quarter was $71 million and $157 million year to date.

While EBITDA generation and has been very strong conversion to operating cash has been impacted somewhat by higher oil prices, which contributed to over $100 million of the net working capital increase year to date.

While oil price volatility can create short term fluctuations in working capital balances history has shown that over the long term oil driven and working capital fluctuations tend to balance out.

Given the size and strength of our balance sheet, we can easily absorb these changes and working capital without impacting our long term capital allocation priorities.

And as oil prices stabilize we expect to see a greater level of conversion of our strong EBITDA to operating cash flow.

The strength of the balance sheet and our cash flow as reflected in our investment grade credit rating. This has long been a priority for us and we remain committed to this posture.

We recently closed on a new $1 billion ESG linked to credit facility, which replaces our existing credit facility debt was due to mature in October of 2022.

The facility includes 2 ESG metrics centered around our annual sulfur dioxide and nitrogen oxide emission reduction goals.

This agreement represents 1 of the first ESG linked credit facilities in the chemical industry and further reinforces our commitment to sustainability.

Facility matures in August of 2026 with key terms largely the same as our prior facility.

In addition, during the quarter, we released our 2020 sustainability report, which provides enhanced transparency on our environmental social and governance priorities.

ESG leadership is central to our strategy.

And the interactive digital report summarizes our progress and accomplishments.

Overall, we had a very strong quarter in terms of financial performance and progress against strategic objectives and I'll.

I'll now turn the call over to Erica to discuss the financial results of the quarter and more detail.

Erica Thanks, Sean.

And with discussing results and the reinforcement materials segment.

Reinforcement materials segment delivered strong operating results with EBIT of $85 million, which is up $90 million compared to the same quarter and fiscal 2020. The increase is primarily due to significantly higher volumes across all regions and improve unit margin driven by favorable pricing and the Asia region.

Globally volumes were up 71% and the third quarter as compared to the same period of the prior year at 146% growth and the Americas, 100% increase in Europe, and up 30% and Asia.

And your volumes are driven by key end market demand and that continued to recover from COVID-19 related impacts and fiscal 2020.

Looking to the fourth quarter, we expect the volumes to remain strong fixed.

Fixed costs are expected to be sequentially higher due to the timing of planned plant maintenance.

Given the very strong demand and the last few quarters and limited inventory and most supply chain. Our focus has been on supporting our customers' product needs. As a result, we have scheduled a higher than normal amount of maintenance and the upcoming quarter.

Another factor that will affect our fourth quarter is the impact on the outage at a plant and the U S. Due to an equipment failure on our recently installed air pollution control system.

Abbott completed this project on schedule. According to the consent decree however, controlling this level of Sox and Nox emissions is new for the carbon black industry and the U S with.

And with the startup of any new technology, there can be unexpected issues and this is the situation. We currently see we anticipate this site will be down from about 1 month to repair the equipment.

In addition, we expect margins to moderate from the third fiscal quarter due to higher feedstock differentials and.

We anticipate this differential impact will be approximately $5 million and the fourth quarter and we expect to recover this impact and the first quarter of fiscal 2022 through our DCA mechanisms.

Now turning to performance chemicals, EBIT increased by $33 million as compared to the third fiscal quarter of 2020, primarily due to strong volumes across the segment and improved product mix. This.

And the stronger product mix was driven by an increase in sales into automotive applications, and our specialty carbons and specialty compounds product lines.

Looking ahead to the fourth quarter of fiscal 2021, we expect overall volumes to remain strong with some impact from lower seasonal demand.

Anticipate higher costs from planned turnarounds and and a net unfavorable impact from plant outages and.

The first outage is what I just mentioned at a plant and the U S. This plant supplies, both the reinforcement materials segment and the performance chemicals segment.

Another plant outages related to the specialty compounds plant and Belgium. This plant was severely impacted by the heavy rains and floods and the region and July <unk>.

<unk> and this plant remaining offline for the balance of the fourth quarter.

With iron maintenance impacting both our reinforcement materials and performance chemicals segments, we estimate the sequential impact of higher maintenance costs for the company to be and the $8 million to $10 million range. We expect this elevated level to return to a more normal level in Q1 and fiscal 2022.

With regard to the plant outages. This impact is also across both our reinforcement materials and performance chemicals segment, and we expect the impact across the company to be on the range of $7 million to $10 million and the fourth quarter.

We expect to recover insurance proceeds that will help to offset the financial impact from these outages, but we do not anticipate any proceeds to benefit operating results until fiscal 2022.

Moving to purification solutions, EBIT and the third quarter of 2021 increased by $4 million compared to the third quarter of fiscal 2020 day.

And by volume growth and specialty applications, and and insurance reimbursement from a plant outage and the first quarter of this fiscal year.

Looking ahead to the fourth quarter and fiscal 2021, we expect EBIT to decline due to lower volumes and our mercury removal application and we will not have insurance proceeds and the fourth quarter.

I will now turn to corporate items.

We ended the quarter with a cash balance of $173 million and our liquidity position remains strong at $1.3 billion.

During the third quarter of fiscal 2021 cash flows from operating activities were $71 million, which included a working capital increase of $47 million. The working capital increase was largely driven by the impact of higher raw material costs and cause higher inventory balances and as we pass these higher costs on and our pricing.

Sales accounts receivable higher as well.

Capital expenditures for the third quarter of fiscal 'twenty, 1 were 46 million weighted.

Full year, we expect capital expenditures to be approximately $20 million.

This estimate includes continued EPA related compliance spend and the capital related to upgrading our new China carbon black plant and specialty products.

We anticipate the new plant in China will be online and the second half of fiscal 'twenty 2.

Additional uses of cash during the quarter included $20 million per dividend.

Our year to date operating tax rate was 28% and we forecast our operating tax rate will be between 27 and 28% for this fiscal year.

I will now turn the call back over to Sean.

And to $5 and <unk>.

This is truly exceptional performance for our company and we are.

Flex, our strong commercial and operational execution and the value of the strategic choices. We have made in recent years.

And are advancing the core strategy is focused on strengthening our industry, leading positions through great execution and by making smart targeted growth investments.

We've invested aggressively and our operating platform to build excellence and our commercial and manufacturing operations.

On the manufacturing front, our focus has been on overall equipment effectiveness or OA.

Energy recovery process and yield optimization and capital efficiency.

Through these actions we have demonstrated the earnings power of our 2 high margin segments, and reinforcement materials and performance chemicals and.

And we have enabled this growth and a more capital efficient manner.

On the growth front, we have a philosophy of building from positions of strength and investing and market spaces, where we believe we have a right to win.

This led us to invest for breakout growth and conductive carbon additives for batteries and to complete the sand show and acquisition and we are growing and the battery space as we expected.

In addition, our capacity investments and Asia over the years have positioned us as a leader in the region across carbon black fumed silica and specialty compounds. These.

These investments are enabling us to drive strong earnings and returns in this high growth area of the world.

Through these foundational capability investments and smart growth choices, we have structurally increase the profitability of the company and have moved to EBITDA based to a new level.

As I look forward the underlying performance of our business is very strong and customer demand remains robust.

Our growth investments are well positioned to take advantage of macro trends and the area of mobility.

Turning to energy generation and storage connectivity and infrastructure reinvestment.

Feel very good about how Cabot is positioned for fiscal 'twenty, 2 and the coming years.

In closing I want to thank and recognize our global Cabot team.

The strength of our culture and the resilience of our employees has never been more apparent than it has been during these challenging times.

Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your Touchtone telephone. If your question has been answered or you lease to remove yourself from the queue. Please price.

Your first question comes from David Begleiter with Deutsche Bank. Your line is open.

Thank you good morning, Sean.

Erica.

Good morning, and looking at Q4 guidance remains still wide.

About 20 cents a share can you discuss why.

And if so why given we're almost halfway through the quarter.

Yeah sure David I think as Erica outlined the 3 main drivers there.

Wider range then.

And then would be normal at this stage is really related to the outages.

Both.

And.

Specialty compounds plant in Belgium, and carbon black plant and the U S and so we've estimated that but.

Given the dynamic nature of the situation that's really the reason why the range is slightly wider than what we might normally do.

Understood and I know, it's early look at 2022, but when you think about reinforced materials for next year is.

Is this level of earnings you think sustainable at around these this high level.

Yes, I think.

It is early as we've talked about about 2022, but I think the business has really.

Profitability is.

Is substantially up.

In this business and I think the efforts focused on commercial excellence and.

Strategic pricing and and.

And market management has been has been 1 our continued focus around yield energy recovery and overall equipment effectiveness.

And so so we feel really good about that.

The level of performance in this business and as we look forward into 2022 for the company I think there are few things that are that are on our mind first.

Demand and some of these key end markets like tires, and autos still remain below pre COVID-19 levels.

On the tire side is still a few percent below if you look at <unk> forecast and then.

On the auto build side.

Ihs's outlook is still a little below so I think theres growth runway there number 1 number.

And number 2.

As we as we look at.

The entire contract season.

We certainly see demand is strong inventories are low.

Supply side investments and in the west.

And have not happened.

<unk> on that Hasnt changed.

It should lead to.

And <unk>.

A favorable environment as we as we move forward and then third our growth investments.

And batteries and a number of our other targeted areas are.

We're really beginning to perform quite well here and we think theres. Good momentum. So so we feel good about the drivers for for next year and I would say those are the those are the key ones David that we are on our mind.

Thank you.

And your next question comes from Mike Lakehead.

Barclays.

Your line is open.

Great. Thanks, and good morning, guys.

Hey, Mike.

First question I, just wanted to circle back on the <unk> guidance and team.

And like sequentially, you're guiding to I don't know $20 million to $30 million lower EBIT sequentially and Erica.

Good job trying to help size some of those buckets. So I was hoping you could just repeat in aggregate how much youre attributing to outages and downtime versus feedstock differentials and other factors that I just wanted to make sure I got that walk correct and then as we think to fiscal 'twenty 2 I appreciate youre, not giving guidance, yet, but it sounded like most of that.

Gets resolved and fiscal <unk> and won't carry into 2020 is that a correct interpretation.

Yes, yes, thanks, Thanks, Mike and.

Erica, Yes, I tried to walk through to provide clarity there as there are some.

Unusual elements and are in our Q4 numbers. So let me just repeat so the first bucket is an elevated level of maintenance activity and that's estimated and the range of $8 million to $10 million impact on the quarter and.

And that's really driven by the fact that with a very sharp recovery and demand this year and very little inventory and.

And most supply chains, our efforts have really been focused on supporting customers customers, who have needed product and so that just meant we schedule the higher level of maintenance and this quarter than what would normally occur. So the maintenance is and that 8 to 10 range. The second is related to the 2 outages that Erica referenced in.

Belgium, and the U S and the impact there is.

Estimated and the range of $7 million to $10 million on the quarter and.

And the plant in Louisiana, we would expect.

To be out for 1 month so.

Let's call that back back running and September and then in Belgium the impact.

At this point is.

Through the balance of the fourth fourth quarter.

But our view at this stage is that those would those would not repeat beyond the fourth quarter and then finally differentials.

Sort of temporary dislocations in feedstock pricing from the core underlying index and I think with a certain amount of volatility across the refining complex around the world.

Youre seeing some of those occur and so we will.

We will expect to get recovery on those Dcs and.

And in the next quarter. So those are you have them right I think Mike and that's that hopefully clarifies.

It for you and our view on.

On.

On these as we as we look beyond Q4.

Alright, that's super helpful and then maybe that.

Cabot, obviously, hasnt quite a large China presence, especially relative to some of our other U S companies.

And probably some added consternation from investors of late around China auto numbers. Some mixed economic data points, just kind of curious if you could give us.

Your view on the ground kind of what Youre seeing today and Ed.

Expectations moving forward and China.

Yes, yes, well, China, China is an important market for us and 1 that we've demonstrated for a long period of time here and <unk>.

<unk> to manage.

And be strongly profitable and generate strong returns and that business. So we know we know how to operate there our view on China right. Now is that volumes are expected to be to be solid here.

And so I don't I don't see any fundamental change.

Change their underlying demand is.

Strong and expected to continue as as GDP grows and as the China car Park continues to expand and again at the end of the day and our biggest and markets. If we take reinforcement for example, they make almost 40% of the world's tires. So I think from a structural standpoint.

<unk> is structurally dependent on Chinese tires, even if tariffs sometimes shift around the global flows a bit from from time to time. So I think our long view on China is unchanged here in the short term.

There is certainly some challenge and global logistics markets right now and so Chinese exporters of tires are are challenged to find container availability, it's pretty scarce and pricing has gone up on on on.

International container shipments so.

And this may result in some on the margin shifting of tire production back to importing regions. So we may see a little bit on movement here between Chinese exporters and.

Volumes that might be picked up and the in the importing region.

Remains remains bullish over the long term here and if there are any short term dislocations.

I think we've proven and ability to manage those over a long time.

Great. Thank you.

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

Yes, hi, thanks for taking my question.

Just a question on the volume side of things.

As you look at the September quarter, and as a day.

And our quarter just wondering how you think about the seasonal volume movements and how much are you talking about your fourth quarter is impacted by your own supply issues versus demand.

And any kind of early read on how youre thinking about December I think would be helpful. If you can provide context.

Yes. So I mean, we are just expecting volumes to remain.

Remains strong here and.

And we continue to see that inventories are low across pretty much every value chain. So if economic activity.

<unk> remains robust and of course, there are questions here around.

Surges and Covid, but let me, let me sort of put that aside for a minute. If you look at underlying economic growth.

And low inventories across the chain, we would expect demand to remain.

Robust here now and our fourth quarter, we we do normally see a little bit of seasonality and so we're expecting that that same level.

In the coming quarter, but again.

<unk>.

And would expect nothing really out of the normal here.

As we as we transition as we go forward here and you think about turning the band on 2021 and into 'twenty 2.

We really look at it in terms of our key end markets and the tire market is still about 3% below 22019 levels.

And so I think theres more recovery runway there, we've definitely seen very strong recovery in the truck and bus market because I think there has been such a.

Such strength in industrial markets so naturally.

On the truck tire market is very strong what is still lagging a bit 2019 as the passenger car market because mobility and miles driven are not yet back though they have rebounded pretty sharply here. So we see we see runway as we move into 2022 in terms of further room, just simply to recover back to the pre.

Covid levels.

And so hopefully that gives you a little bit of perspective normal seasonality in Q4 and.

And still still runway just to simply get back to the pre COVID-19 levels into 'twenty 2.

Thanks, Bill I appreciate that I guess, what I was trying to dig into a little day is just as some of the supply issues and September quarter mean that perhaps there is less seasonality for Cabot specifically into the December quarter do you have any thoughts around that.

I wouldn't I wouldn't say.

Debt.

While we have a higher level of.

Of maintenance turnarounds here, we'd expect to be.

Fueling most of that demand from inventory, we will typically build inventory ahead of maintenance turnarounds. So.

So no I don't I don't see any.

Anything that you are describing there any sort of shift of that sort.

Okay now that's helpful and if I could just ask on the.

On the margin side quickly within reinforcement.

Was there anything abnormal within this most recent quarter. So <unk> had some benefits from the China price cost dynamics was there any benefit embedded there and Tim and coolers that a relatively normal quarter for us to think about bridging into next year off of.

Yes.

I would say.

Things developed pretty much as we outlined last quarter with the exception that we we thought debt.

The.

And the cost flow through and China, Youll remember, we were in a rising feedstock environment.

Pricing ahead of the flow through in our P&L and we expected that.

<unk> 2 to hit us in Q Q3, and the impact was.

A little more muted than we originally thought because feedstock prices coal tar prices continued to surge up.

Across the quarter in Q3, so the impact was a little bit less and we would've thought but.

I think when you look at all the different puts and takes I would say it was fairly normal.

And I think Eric I wanted to comment Josh on your earlier question as well maybe you can provide a little more color, yes, Josh and I just wanted to and I think as you're trying to think about Q4 to Q1 as Sean said the outages that we have and Q4. So the 1 and the U S that plan is expected to be back online within the quarter and so.

And there would be and impact in Q4, but not Q1, the Belgium plant.

And to be on offline for the balance of the quarter I would say, it's still unknown and Q4 Q1, when that would come back online or if it comes back online. So that is 1 as you think Q4 to Q1 May continue I'd say, it's too early for us to know exactly when and just.

As a reminder, that the specialty compounds plants smaller plants as you think about impact.

But but could continue into the first quarter.

Okay got it thank you both.

And your next question comes from Jeff.

Chris <unk> with Jpmorgan Your line is open.

Alright, thanks very much.

Your working capital was negative $2.26 through the 9 months, which to be for the year, how much should it improve and the fourth quarter.

Yes, so very Jeff very very oil dependent and as we commented on the year to date basis.

The just the strict oil impact is.

100 ish, a little over $100 million so.

And with oil prices moderating.

Here, and certainly had a pullback and the last week, but let's let's let's call it.

Moderating and we certainly would expect that much more of the strong EBITDA would be.

Would be flowing through there so.

It's really just strictly a function of.

Of what happens with with oil.

Okay.

Normally you have different turnarounds and the fourth quarter.

Okay. So is the difference this year that you have an unusual amount of outage costs and so what's unusual about the fourth quarter.

And as theirs, whatever it is $8 million to $10 million.

And how they are $7 million to $10 million of outage costs relative to last year, but everything else is more or less the same as the fourth quarter.

No you are right and your memory that normally and the fourth quarter, it's a little bit higher seasonal maintenance youre right about that but what we're saying is above that norm. What we would call that normal there is $8 million to $10 million higher and that is just simply because the demand.

<unk> has been so strong this year inventories so thin.

And that the customers who've just needed product and so that has led us to schedule a higher level of maintenance than we would normally have in this quarter and that's in the 8 to 10 range. The outages are a separate issue in the 7% to 10 range. So.

It's just a much much higher level of maintenance activity and I think again, most supply chains have just been running so so hot this year because of the strong demand and limited inventory that.

Things like this have been have been pushed.

But you can only can only push those so long in order to maintain.

Quality of.

Of assets and the like so so we need to we need to get quite a bit done this quarter.

Okay and in China.

Pulp prices have really elevated there in general are higher coal tar prices. Good good for Cabot in China, because of whatever raw material differential you have and low coal tar prices tend on the margin to be.

Tougher for your price decks or your margins is that generally true or no.

Coal chemicals train has has moved up and pricing so the absolute prices are higher and in general.

And we would prefer that because what that means is.

And that the Chinese carbon black producers do not have.

Much of and our relative to global fuel oil prices to then export out of China.

Because it just the economics simply don't don't work and I would say right now.

And that Arb and some years passed has been open and therefore flows of carbon black out of China and been more pronounced.

And that Arb is decidedly closed right now because of that so that so there is sort of absolute price point number 1 absolute price point number 2 would be in general.

We make more profitability higher levels of profitability when when when feedstock prices are higher because our yield investments and energy recovery or <unk>.

Generally linked to that that fuel price.

And so so I think that that flows through now the thing to manage and China is really the the direction of travel on pricing because it is a spot market and so what you'll what youll see is when prices are rising and.

And then we will price and.

The direction of travel would impact us and a short term way.

With those with those factors, but in general stability.

Had a marginally higher level is.

As is best for our business.

Thank you in energy and materials.

Has the rate of growth changed and you talked about different customer wins and saying this is a higher growth area for you.

Do you have enough capacity to serve your customers has the rate of change and the business altered over the past 3 quarters, yes.

Yes.

I would say the rate of change has not altered from our outlook that we shared last quarter Jeff.

Robust growth expectation.

And the customer wins, and our customer wins that we were expecting and we embedded that expectation into that estimate of EBITDA range that we gave so we're simply executing really well.

Unique opportunity and 1 that is.

Somewhat time bound because.

This market is ramping fast now and I think the momentum. They are only continues to build as you look at what's.

What's happening both in terms of.

Government policy in this direction, but also maybe more importantly, what the automakers are saying because as they as they retool their product lines too.

100% Evs over the next 10 plus years once that happens there isn't really a return.

Back to internal combustion you've effectively got to shut off the R&D investment and internal combustion engines and pivoted. So I think those are those are pretty significant moves I would say and just under underpinned the growth expectations, even more on the capacity side, we will have to.

We invest over time here to continue to provide growth capacity to support our customers, but we've got plans underway there you might recall that.

We purchased carbon black plant and Xuzhou, China from Nippon Steel.

We're converting that the specialty carbons as we speak and that will.

Injective slug of capacity that allows us to rebalance things to continue to serve energy materials and then on the sand shown acquisition and the carbon nanotubes 1.

Add some incremental capacity there as things ramp, but I would call that largely.

And sort of normal course of business growth and that will be a good that would be a good a good a good thing.

To have high value growth and investment to generate strong returns.

And lastly, you expressed some optimism about carbon black pricing in 2022 and.

And.

It's just early August.

Normally.

It's hard to make out these issues.

Thanks, Kevin.

Before Thanksgiving.

It makes this year so different that.

You have it seems a little bit more forward condition and <unk>.

Normally too.

Yes, I mean, certainly it's early and the process, Jeff So no change there, but I think our.

Our optimism is really grounded and the fundamentals here where demand is strong inventories right now are particularly low so.

We see that being.

Supportive its not like Theres a lot of inventory that's been built in.

The only other thing that might be a slight difference as we sit here today.

In a more favorable direction is simply that global flows of product on.

Or just more challenged today, given the logistics and transportation issues, and so I think thats, causing most companies too.

And to emphasize a little bit more supply reliability and local supply chain. So we're certainly seeing trends of that sort across a whole host of different value chains and so so that that then means that that local suppliers regional suppliers.

The value proposition there to support our customer is going to be a little bit stronger I think that was always the case as you know well that the reinforcement business is largely a regional business but.

Okay, great. Thank you so much.

Okay.

And your next question comes from Laurence Alexander with Jefferies. Your line is open.

Hi, This is Dan Rizzo on for Laurence how are you.

Dan just 1 quick question you mentioned.

And free cash flow conversion.

And obviously being hurt by higher oil plus.

And if you think about over the long term whats the goal or how should we think about what free cash flow conversion should be.

Yes, yes, I mean, I think really.

If you if you look at the oil movements those are the single biggest things that.

And factor that will will drive cash flow generation and over a very long period of time.

And that oil price volatility has has largely balanced out over a very long period of time and net change in and.

In dollar investment and working capital has been remarkably close to zero over over a very long period of time, so and we've got the balance sheet.

And to deal with those.

And that inflation deflation of the flat oil price. So you ought to think about operating cash flow is strong EBITDA minus some increase in working capital that is growth related simply volume and growth related.

But but that should that should drive strong operating cash flows if the earnings should flow through and generate strong operating cash flow and then with respect to free cash flow.

It's a question of where our Capex is and we have got.

We've got a philosophy here of.

Trying to capital allocation philosophy of roughly reinvesting about half of our disc.

Discretionary free cash flow and growth and about half returned to shareholders and over time that that's been a reasonable way to look at it and.

So I think thats those are the those are the factors, but I think the working capital 1 Dan is the thing that Ken.

Distort and in a short period of time, but over a very long over a longer period of time.

It's been remarkably not.

Not an issue and and we've got the balance sheet to deal with that.

Alright, Thank you very much.

And your next question comes from Chris Capps with loop capital markets. Your line is open.

Yes, good morning, I appreciate your comments about that.

Burgeoning.

Conductive carbons business so.

As debt.

Battery technology roadmap evolves there is a big emphasis on improving range via energy density and also and emphasis on.

Charging and cycle times and to address these improvements, there's evolutions and cathodes and especially the the anode technology and.

And there's a lot of scuttlebutt and of course about solid state lithium ion batteries, maybe eventually becoming broadly adopt and.

Broadly adopted so my question.

Do you in terms of how this business develops as are you agnostic about how the technology Roadmaps evolved in other words do you simply benefit.

From a transition to evs from Ice's or are there certain battery technologies, where you see your products being sort of disproportionately increase and in terms of content per battery.

Yes, Yes, I think the primary driver here, Chris is the conversion from internal combustion engines to electrification and.

And the current.

Battery technology.

It has strong needs for conductive carbon additives.

To improve both range.

Well as cycle life. So the conductive carbon additives are really critical and the chemistry now I think the current technology.

Platforms.

And quite a bit of runway.

Here and.

So that's that's the basis on which so many.

Safer and higher energy density than conventional with Yamana and battery products are today.

But.

And solid state batteries will use either ceramic or polymer as.

As the electrolyte neither of which is conductive.

Solid state batteries will likely need even more conductive carbon additives.

So so in that in that sense, we're somewhat agnostic.

But I think the key for US is we want to be and this for the long haul and.

So we want to win today.

And then we want to be with our customers as this technology transition.

Occurs and and be there conductive carbon additives.

Innovator to do that.

You mentioned working with I think you may.

And then being stacked and then was it 6 of the choppy producers are you also have any development efforts ongoing with.

Some of the.

And the companies that are trying to position themselves jerks.

All the data and the future or right now is your commercial effort focused on on the existing battery producers. Thanks, a lot appreciate the color.

Yeah, So yeah, as I said and the in the comments the top 8 producers make up about 90% of the market today.

And so we're now qualified and with commercial sales on 6 out of the top 8.

And have on development programs with.

And qualification efforts underway with all of them. So I think our focus is very much there now.

What I would call more up starts.

And really trying to play for the next generation technology.

And where we are closely engaged with all of those players as well ultimately how that plays out as is on unclear I mean once that once my guess once the big guys build scale here, they're going to.

Theyre going to be they're going to be planning for the next generation too so.

How that all plays out as it's a bit it's a bit early but where we're engaged across all of the customers right now.

On the next generation work.

Very helpful. Thank you.

Alright, and Im showing no further question at this time I would now like to turn the conference back to Sean Keohane.

Great. Thank you. Thank you very much for joining us here today.

Excited about the momentum we have built and our growth prospects and we plan to share more of that with you at our Investor day, which we'll be hosting and Boston on on December 2nd and at that Investor Day, we will be taking a deeper dive into our key businesses and provide more insight into our long term strategy, our key growth initiatives and.

And our sustainability leadership, so hopefully we can see you all there in person.

In the meantime, thank you for joining today for your support of Cabot and I Hope you all remain healthy and safe. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

Q3 2021 Cabot Corp Earnings Call

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