Q4 2022 Cabot Corp Earnings Call

November 8, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Ladies and gentlemen, thank you for standing by and welcome to the tablet fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

A question. During this session you will need to press star one one please be advised that today's conference maybe recorded I would now like to turn the conference over to your Speaker host, Steve Delahunt, Vice President Treasurer and Investor Relations. Please go ahead.

Good morning, I would like to walk cause you to the Cabot Corporation earnings teleconference.

Today are Sean Cohen, CEO , and President and Erica Mclaughlin Senior Vice President and CFO .

Last night, we released results for our fourth quarter of fiscal year 2022 copies of which are posted in the Investor Relations section of our website.

Slide deck that accompanies this call is also available on 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 32021, 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 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 the vesting of restricted stock awards issued under our long term incentive equity program.

Officers of the company will be selling shares to pay tax.

<unk> and other obligations related to their rewards.

I will now turn the call over to Sean who will discuss our full year highlights.

Eric overview.

Fourth quarter results business segment, and corporate financial details.

Following this Sean will provide some closing comments and open the floor to questions.

Yes.

Thank you, Steve and good morning, ladies and gentlemen, and welcome to our call today.

Fiscal year 2022, with an exceptional year for Cabot.

We delivered record financial performance achieved breakout growth in battery materials advanced a range of strategic initiatives, including the divestiture purification solutions and further our leadership in ESG performance.

All of this was accomplished despite a turbulent macroeconomic and geopolitical environment.

Immensely proud of the Cabot team for the resilience and adaptability they demonstrated throughout the year and for their focus on execution and support of our customers.

By successfully navigating this dynamic environment, we are entering fiscal year 2023 in a strong position.

At the beginning of fiscal year 2022, we introduced are creating for tomorrow strategy, which chart, the new phase of growth and breakout value creation by leveraging our strengths to lead in performance and sustainability.

Our focus is on driving advantage growth.

<unk> innovative chemistry to enable a better future.

And relentlessly pursuing continuous improvement in everything we do.

In fiscal year 2022, we made tremendous progress in executing our strategy and achieving our long term goals.

I would like to spend a little time now recapping the accomplishments of the year.

The cabinet operating model is built on the foundations of commercial and operational excellence and our strengths in these disciplines drove outstanding results in fiscal year 2022.

We delivered records for adjusted earnings per share of $6 28.

Total segment EBIT of $642 million in discretionary free cash flow of $395 million.

In our business segments reinforcement materials, EBIT increased 24% year over year to a record high of $408 million.

This level of performance reflects the resilient nature of the replacement tire end market and the structural improvements to this business over the last several years.

Performance chemicals, EBIT increased 11% year over year, and we continue to generate strong momentum in battery materials, which increased EBITDA by 81% year over year.

Battery materials is becoming a more material part of the portfolio and we continue to expect significant growth in the years ahead.

Overall, we had a very successful 2022 in terms of financial performance adjusted earnings per share growth is running ahead of our 2021 Investor day targets and has grown at a compound annual growth rate of 17% since 2019.

At the same time the quality of our returns remains very strong with adjusted return on invested capital of 20% in fiscal year 2022.

The foundation of our strategy starts with growth, we wanted to accelerate our growth by continuing to win in our core markets and increasing our share in applications with tremendous growth tailwind.

We are strategically focused on battery materials and the opportunity to capitalize on the explosive growth that comes with the transition to electric vehicles.

To support this strategy, we are executing a range of growth investments.

These include commencing operations at our Suzhou, China plant that supports capacity growth in both battery materials and specialty carbons.

In addition, we acquired a new facility in Tianjin, China to support the growth of conductive carbons for battery materials and the first phase of upgrades is scheduled to come online in fiscal year 2024.

We also completed the first phase of a carbon nanotubes dispersion capacity expansion at our Zhuhai, China facility, which added 25% of the capacity in fiscal year 2022.

We expect to complete the next phase by the end of calendar year 2023.

During fiscal year 2022, we also began phase one of a plan to double capacity at our inkjet manufacturing facility, which is set to commission in mid 2023 with the remaining capacity addition expected to be completed by 2025.

This capacity will enable our inkjet product line to meet the growing demand of digital printing in commercial and packaging applications.

We are excited about the high growth potential look bad in your battery materials and inkjet for packaging and are confident in our strong operating cash flow to fund these expansions.

Now turning to ESG Cabot has long been a leader in sustainability and been recognized by external parties for excellence.

Fiscal year 2022 represented another year of important progress in our sustainability journey.

We were again recognized by Newsweek as one of America's most responsible companies and by Investor's business Daily is one of the 100 best ESG companies, placing in the top three in the chemicals category.

We also are in the top rating of platinum from Echo Vegas for the third consecutive year, which places us in the top 1% of the base and chemical space.

The world needs innovative chemistry to address many of the most challenging climate goals and cabot's materials are playing a critical role in applications ranging from lithium ion batteries for electric vehicles to performance additives that enable light weighting of cars and novel <unk> solutions, which again earned a place on European <unk>.

Robert journals list of top 10 elastomers for sustainability.

While supporting our customer sustainability goals is central to our creating for tomorrow strategy. We also strive to reduce the impact on our own manufacturing footprint.

And in 2022, we announced our ambition to achieve net zero emissions globally by 2050.

SaaS operation requires a long term strategic view of our business and a multifaceted technical approach.

Our 2021 sustainability report further highlights our plans and progress in these areas.

As a company we believe that long term success requires sustainability to be integrated into strategy. Our progress in fiscal year 2022, clearly demonstrates our commitment to sustainability leadership and we intend to build on this success moving forward.

I will now move on to an update on battery materials.

Battery materials results continue to outpace the market in fiscal 2022 volumes grew 58% revenue increased 74% to $132 million and EBITDA grew 81% in the year to $29 million.

We continue to build commercial momentum and are seeing strong demand for our conductive carbon additives from the world's largest battery manufacturers.

We have built a deep technical understanding of this application and are recognized by customers for our broad product offering in the space of conductive carbon additives.

Abbott offers the broadest range of conductive carbon additives, including conductive carbons.

<unk> nanotubes carbon nano structures and blends of these materials to optimize performance.

In addition to our strong product offering cabot's value proposition is supported by our unmatched global network of manufacturing plants.

Regional research and development labs, and commercial and technical experts that can support customers in all major regions with battery production is rapidly growing.

We are currently selling to six of the top eight global manufacturers of batteries, which represents approximately 90% of the market and have active development programs with all of the top eight players.

The growth in battery materials is underpinned by strategic capacity additions, which are critical to meet our customers' volume ramp up requirements.

As discussed earlier, we are on track to meet our goal of tripling tripling battery materials capacity by 2024.

Looking ahead to 2023, we expect commercial momentum to continue as sales to current customers are forecasted to grow and we were recently qualified and two new platforms with top EV lithium ion battery manufacturers with sales ramping in 2023.

We are also in final stages of qualification with several automotive Oems that are building battery capacity.

The automotive Oems will be critical for the long term growth in battery materials and I am pleased to announce that Cabot has signed a multiyear agreement with an American multinational automotive company and has received a first order to supply conductive carbons for EV batteries.

Based on our current outlook, we expect EBITDA for fiscal year 2023 to be in the range of $45 million to $50 million.

The midpoint of this range equates to a 64% EBITDA growth year over year.

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

Okay.

Thank you John I will start with discussing the fourth quarter.

I'm pleased to report strong fourth quarter results with adjusted EPS of $1 55.

Performance is 40% above the same quarter last year.

Given currency and inflationary headwinds.

Pockets of softening retail demand within our performance chemicals segment.

Let's segments delivered earnings growth year over year led by the <unk>.

Enforcement materials segment.

Okay.

We also continue the momentum in battery materials with our record fourth quarter and ended the year with EBITDA of $29 million.

And this starts to become a material contributor to cabot's results.

Cash flow from operations was strong at $105 million in the quarter.

Liquidity remained solid at one 1 billion.

As you look at our full fiscal year results for the company, we delivered adjusted EPS.

<unk> and 'twenty.

He is a 25% growth year over year.

Drivers of growth and segment EBIT included volumes were higher in both reinforcement materials and performance chemicals as well as significant margin expansion driven by our exceptional great Nick management in the face of rising costs and inflation.

Higher volumes and higher margins more than offset headwinds related to the strengthening of the U S. Dollar.

<unk> EBIT from the divestiture of our purification solutions.

Moving to reinforcement materials.

Fourth quarter and full year fiscal 2020, EBIT for reinforcement materials increased by $42 million and $79 million, respectively as compared to the same period in the prior year.

The increase was principally driven by improved unit margins from higher pricing and mix and our 2020 calendar year customer agreements.

Their volumes.

Higher volumes were driven by strong demand in all regions.

Year over year results were also impacted by higher utilities, and the negative impact from a stronger U S. Dollar.

The impact of the stronger U S dollar was unfavorable by $6 million year over year in the fourth quarter.

<unk> million year over year in the fiscal year.

Looking to the first quarter of fiscal 2023.

The sequential decrease in EBIT due to lower energy prices impacting our energy center revenue.

Lower volumes and normal year end seasonality and downtime at our North American plant that will impact both volume and fixed cost.

The impact of these factors is roughly equal for a total of about $15 million to $20 million sequentially.

We expect that year over year EBIT results in the first quarter fiscal 2023 will be higher than the first quarter fiscal 2020.

Now turning to performance chemicals.

EBIT increased by $4 million in the fourth fiscal quarter and $23 million for the full year as compared to the same periods in fiscal 2021.

Increases in both periods were driven by higher unit margins as a result of it.

Pricing and product mix in our specialty carbons and fumed metal oxides product line and higher volumes in battery materials volumes grew 67% and products all with a battery material applications in the fourth quarter as compared to the fourth quarter of 2021, as we continue to see customer wins and demand growth given by AEP.

Dan.

These benefits were partially offset by increased costs associated with higher maintenance and utility costs.

The unfavorable impact of foreign currency.

The translation impact of the stronger U S. Dollar was unfavorable by $3 million year over year in the fourth quarter and $7 million year over year in the fiscal year.

Year over year volumes in the fourth fiscal quarter increased by 3% in performance additives and by 5% importantly.

Looking ahead to the first quarter of fiscal 2023, we expect the sequential volume decline of approximately $10 million to $15 million as the economic slowdown in Europe and customer Destocking is expected to unfavorably impact demand in this segment.

We expect the year over year EBIT results in the first quarter fiscal 2023 will be lower than the first quarter fiscal 2020, Q given demand softness and inventory destocking and our intention to also reduce inventory levels.

I will now turn to corporate items, we ended the quarter with a cash balance of $206 million and our liquidity position remains strong at approximately $1 1 billion.

During the fourth quarter cash flows from operating activities were $105 million, which included a working capital increase of 41.

Capital expenditures for the fourth quarter of fiscal 2021 were $90 million.

Additional uses of cash during the fourth quarter were 21 million for dividends and $5 million for share repurchases.

During fiscal 2022, we generated a record $395 million of discretionary free cash flow, while working capital increased by $431 million.

Working capital increase was largely driven by the impact of higher raw material costs.

Expenditures for fiscal 2022 were $211 million, which included both our targeted growth investments and spend related to U S. EPA compliance project.

We expect capital expenditures in fiscal 2023 to be between 303 hundred $50 million.

This estimate includes U S EPA related compliance spend on our third and final plant and increased spending on growth projects related to high confidence high return areas of the portfolio.

The growth related capital includes projects John discussed earlier in the presentation for additional capacity in battery materials.

Additional uses of cash during the fiscal year included $84 million for dividend and $53 million for share repurchases.

The operating tax rate for fiscal year, 2022 was 26% and we anticipate our operating tax rate for fiscal 2023 to be in the range of 26% to 28%.

I'll now turn the call back to Sean to discuss our outlook.

Thanks Erica.

Moving to our 2023 outlook clearly when you're entering the year with some uncertainty in how the global economy will perform.

The energy crisis in Europe is impacting consumer demand and the competitiveness of regional manufacturers in.

In China growth has slowed as Covid management policies remain a constraint economic recovery.

And in the United States. It remains unclear what the impact will be if the fed's actions.

While these macro factors are affecting all companies, we feel good about the resilience of our portfolio and the strength of our balance sheet and overall financial position.

In terms of the assumptions that underpin our outlook, we expect volumes in battery materials to grow above market again in fiscal year 2023 with momentum building as we progress through the year.

In reinforcement materials, we expect volumes to remain in line with market as replacement tire demand is expected to remain resilient and auto OE demand is forecasted to improve.

In performance chemicals, excluding battery materials, and inkjet volumes are expected to be impacted by customer destocking and economic softness in Europe , and China predominantly in the first half of the year with volumes returning to a more normalized level in the second half of the fiscal year.

As we look at our margin expectations.

We achieved strong pricing gains in our calendar year 2023 reinforcement materials customer agreements driving expected bottom line improvement in EBIT of approximately $20 million per quarter starting in Q2.

In performance chemicals, we anticipate stable unit margins as we expect to continue to offset higher raw material cost inflation with price increases.

As with many multinational companies, we faced headwinds from a stronger U S dollar.

Based on current foreign exchange rates, we anticipate this to be a headwind of approximately $30 million year over year.

Split roughly equally between the two segments.

In addition to foreign exchange rising interest rates also are expected to be a headwind of roughly $20 million as compared to fiscal year 2022.

The total of the impacts from foreign exchange and higher interest rates is expected to be a headwind to fiscal 2023 results over approximately 65 on.

On an EPS basis.

Based on these assumptions, we expect adjusted EPS in fiscal year 2023 to be in the range of $6 25 to $6 75.

Which is up 4% at the midpoint and up 14%, excluding FX and interest headwinds.

As we think about the quarter, we shape of earnings the first quarter results are expected to be down year over year and accelerate as we move through the year with the expectation that the second half of the fiscal year will deliver higher year over year adjusted EPS.

While the near term macroeconomic uncertainties presented a challenge to be managed our team is focused on long term growth and realizing the breakout value potential of our portfolio.

During Investor Day last December we launched our creating for tomorrow strategy, which seeks to leverage our strengths and exposure to compelling macro tailwind to drive strong growth of earnings and cash flow through 2024.

Delivering on our commitments is Paramount for this management team.

And looking back to Investor day last year, we're very proud of the progress that we've made so far.

Let me first recap the goals and the financial framework that we outlined at Investor Day 2021.

We expect strong business performance to translate into adjusted earnings per share growth of 8% to 12% compounded annually through 2024.

Over the same period, we expect to generate strong discretionary free cash flow in excess of $1 billion.

Which will be deployed to fund growth projects and high value applications, including battery materials in inkjet.

Packaging as well as to return capital to shareholders.

So far through fiscal year 2022, we are executing very well.

<unk> earnings per share grew 25% year over year, and we generated $395 million of discretionary free cash flow in fiscal 2022, putting us in a strong position to achieve our three year target of greater than $1 billion.

These results and the year were achieved while making significant investments to support sustained earnings growth in the future while.

While the macro environment has weakened since Investor day, one year ago, we remain confident in the resilience and strength of our portfolio and in achieving the 2024 investor day targets.

Overall I am very pleased with our performance in 2022 and the track we're on to deliver breakout value creation.

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

Thank you, ladies and gentlemen, slapped asked a question at this time, you will need to press star one one on you touched on telephone please standby, while we compile the Kenny roster.

Okay.

First question coming from the line of.

David Begleiter with Deutsche Bank. Your line is open.

Hey, Good morning. This is Anthony <unk> on for David.

Can you guys touch on how the 'twenty three tier customer.

Customer agreements ended up wrapping up and maybe how much higher pricing will you achieve on your on your 23 customer agreements. Thank you.

Hi, Anthony good morning.

So a few comments about the tire customer agreements.

First of all I'd say overall, we're very pleased with the outcome.

We achieved price and product mix improvements that we anticipate will.

<unk> produced $35 million per quarter and increased prices.

Now this will be netted down a bit by about $15 million to a net of 20 due to the impact of.

Foreign currency translation that Eric talked about.

Higher inflation on our cost base, and then lower energy center revenue ex gas and electricity prices have come off their peaks in 2022, so again the net.

The net benefit expected to be approximately $20 million per quarter and just a reminder, these are calendar year agreements. So they will step up in our fiscal Q2.

And at this point, we have reached agreement with substantially all of our.

Major customers.

And as I've commented on in an earlier calls this is definitely earlier than in a typical year and I think it reflects the desire of our customers.

Secure supply.

In a tight market I think supply security.

Especially given the Russian invasion of Ukraine, and the growing desire for more local and regional supply I think was the primary motivation for most of our customers. This year and we found many of them were looking for additional volumes from cabinet due to us being a partner of choice, we built the along record.

The consistency and reliability and I think.

Customers, where we're interested in securing agreements with us. So overall I would say the outcome of the negotiations with customers and it's been a very good one for Cabot and for our customers.

Customers have been able to secure.

Reliable sourcing from us in a very uncertain and supply constrained environment.

And we have improved.

<unk>.

The pricing and.

The product mix in these contracts so I think overall it's.

A very good outcome, so really really pleased with it.

Thank you one moment for our next question.

And our next question coming from the line of.

Joshua Spector with UBS Your line is open.

Hey, guys. This is James Cameron on for Josh.

I was wondering if you could talk a little bit about the volumes you're seeing in specialty blacks in fumed silica is.

What we should be thinking about as we look into the next quarter.

Sure. Good morning, James So, yes, maybe a few comments about performance chemicals, but.

Before before I do that I'll, just for completeness touch on reinforcement as well so we are definitely.

Expecting that reinforcement volumes will.

B moving in line with market and.

Generally this this market is.

Is quite resilient because of that replacement the high replacement tire nature of.

Of this business.

But in in performance chemicals, a few things first and foremost I'll try to break it out into some categories that are relevant for you I think in terms of batteries in inkjet the high growth vectors in the company, we're definitely expecting volume growth.

In 2023.

Now moving outside of those are.

Our high growth vectors I think there is a good amount of uncertainty.

Out there.

In our specialty carbons and and <unk> end markets and I think this is given the longer value chains in.

In this segment and the fact that.

We are seeing some demand softness and some destocking, particularly.

In in this quarter so.

That's impacting carbon van.

Fumed metal oxides.

And so our view is weak.

Sit here today and think about the year is we will see a weakness and some fairly pronounced destocking in our fiscal Q1.

Which is the December quarter, and then some modest improvement as we transitioned into Q2.

Within our return to a more normalized volume level.

In the back half of the year. So that's.

The shape that we expect to see in <unk>.

Again, I think that.

That that shape is fairly consistent with what what other.

Chemical players that participate in these sort of plastics and polymer chains like carbon <unk> does I think that's fairly consistent with what.

What people are expecting but that's our best view at this point to James and how in terms of how the year will will evolve.

Great. Thanks, and if I could just follow up with that.

If you're assuming kind of a return to normal.

In the back half would you say performance EBIT could be up on a year over year basis full year.

So where we're expecting our performance on a full year basis.

We will be flat to down again on a full year basis with us.

A weaker first half and a stronger second half, but I would say the second half.

Results.

Wood.

We expect to be up on a year over year basis. So it's more a question of the shape and again, our fiscal year picks up this December quarter.

Which of course, most chemical companies are expecting to be the weakest but.

To get to your question I think the answer would be yes that would be our expectation.

Okay, great. Thank you very much.

Thank you Glen women for next question.

And our next question coming from the line of Jeff Zekauskas with Jpmorgan. Your line is now open.

Thanks, So much is there any price pressure.

Specialty carbon blacks.

Hi, Jeff.

Prices and.

And margins are holding.

Holding up pretty well here Jeff.

So I think it's more of a.

Near term demand.

The challenge as Destocking occurs and then.

As we take inventories down than we have.

Some of the under utilization.

The issue that we have to work through but overall pricing.

And unit margins unit variable margins are.

<unk> up pretty well in and where were you might normally see some pressure might be on the lower end of specialty carbons and I think.

There is a floor to that given where.

Where rubber blacks unit margins are in and the ability to trade across.

If that opportunity is better so that's sort of how we think about it.

In reinforcement materials why is it that youre not expecting destock buybacks.

By the tire companies and that usually an economically weak periods.

Demand in the reinforcement markets is pretty sharply negative.

And can you talk about current.

Demand trends have reinforcement.

Sure.

<unk> prices in China as well.

Yes, so I guess, a couple of things on reinforcement as.

As you know, Jeff I think over the long term what you typically find.

Is that.

The demand is pretty resilient through economic cycles.

And because of the high replacement tire market in the linked to miles driven and so typically.

You don't see.

Significant.

Impacts.

And I think the other thing Thats playing out right now is that the OE.

Part of the market.

Actually is has some momentum up so I think this is because there is still quite a bit of <unk>.

Pent up demand in the OE.

Channel because of chip shortages and supply chain issues and the like over the last year or two.

And so IHS is forecasting that OE will be up so I think there are some factors that are a little bit different while the macroeconomic environment in the near term is certainly a bit weaker OE is more supportive in the.

The replacement tire market.

Is quite.

Is quite resilient and I think customers too.

We have had.

Have not build as much inventory in this space as maybe it would be typical just because of supply challenges over the last.

Year or so and.

So I think that you know that.

Along with sort of what we're seeing and hearing from customers would say that we expect the demand in this business to remain pretty pretty resilient.

Okay Alright.

You had another question in there as well.

Can you comment on China.

Yes sure.

So China definitely is experiencing a bit of a weaker <unk>.

Macroeconomic environment for sure.

Our volumes in China are are holding up pretty well as well as.

Unit margins here.

I think that's that's principally because coal tar prices are still very very high.

Relative to global fuel oil prices and so I think the.

An upward bias on pricing because of that it's holding unit margins.

In a pretty good spot, but China overall is definitely.

A bit a bit weaker right now and we would expect that that would.

That would improve as as we move through the fiscal year and estimates.

Take some policy actions to try to rebalance a bit there.

Covid management versus.

Economic growth, but overall, China is pretty steady for us.

Maybe lastly for Erika.

I think the working capital use this year was about.

About 430 million, maybe last year, it was $220 million.

Whats the working capital change look like for.

Fiscal 2023.

Is there anything you can do to generate more cash.

So I think the main driver over the last two years, Jeff has been the rising cost of input so that as you know translate.

The higher inventory values.

Well as in the pricing as we pass through the cost of course is that additional price increases.

<unk> moved to expand markets. So those have been the major drivers as we look at 2023.

Do you is that these input costs are moderating and the forward curve with telling you they would be going down as we knew the ear.

In which case, then you would see working capital change direction potentially depending on the level of increases and a source of cash amount of that as it declines.

If it remained flat again aneel need working capital you would need would be growth.

Related working capital. So our expectation is we would not be such a large use of cash from working capital.

And that the operating cash flow then.

Would be quite a bit stronger than what we've seen over the last year or 2020.

Great. Thank you so much.

Okay.

Jeff and the only other thing that I might.

I'd add to that an important part of our overall.

Negotiations this year.

With our tire customers must also to address payment terms.

And terms around.

Around inventory and I think we've made really good progress there so to your point about what additional levers do we have.

We are.

We are making good progress on those so as Eric said if feedstock.

Based on the forward curve moderates then that would be.

An inflow of cash from working capital and then our efforts on.

On payment terms will help as well but.

Much depends at that forward curve.

Plays out.

Thank you and as a reminder, ladies and gentlemen to ask a question. Please press star one one.

And our next question coming from the line of Laurence Alexander with Jefferies. Your line is open.

Good morning, given the price increases in reinforcement blacks can you characterize where you are.

Relative to reinvestment levels.

Sure.

Hi, Lauren so.

We are in a really really strong position here.

Where despite the rising.

Investments to support sustainability for our customers.

The pricing levels.

<unk>.

The team has been able to realize put put our business in a strong place in terms of.

Return, so where we are in a very strong position with respect to returns on invested capital.

In this business and.

Clearly add up.

Yeah.

Reinvestment level and in.

In the business now.

Speaking of Decarbonization can you give an update on your thoughts around how methane paralysis.

The carbon black industry supply demand balance.

Any thoughts on how you could use.

Co product from that.

As feedstock for your.

Sure.

Yeah sure so.

Looking at.

At new technologies, and and always being aware of.

Threats around substitutes or something that.

We look at it both from an offensive and.

And defensive play here.

And.

We've been studying.

This one actively for quite some time and I think there are clearly some.

Product performance.

Challenges as we understand it in terms of.

Getting the product to perform.

In an application in the tire industry in particular.

That I think.

If it if it develops we'll certainly take some time and there is a massive scale mismatch here.

That means that.

The furnace black route to making carbons for carbon black for tires.

As far and away the.

The best way and ultimately I believe the most sustainable way because I think in the future things like carbon capture on.

On a furnace black plant will probably be the most economic way to meet quality and scale requirements for.

Four four.

Customers here, but that's that's something that.

Will will play out over over a very very long period of time, you know the tire industry is pretty pretty sensitive to changes in <unk>.

Inputs in terms of performance and safety and.

And so I think that's that's a quite long term I think the other thing is we are.

As we assess the the hydrogen markets I think in the long run what youre going to see is that most of the hydrogen divestment.

Is going to.

Water route order electrolysis route.

And because of its environmental friendly nature. So.

As hydrogen grows we see most of it going that way, where there isn't actually a carbon carbon byproduct.

But.

If there if there are some some carbon outputs from such a process. Then we would look to evaluate that as a potential input, particularly for markets like our specialty compounds business where.

We look to develop sustainability options for our plastics customers and will use recycled polymer and may look at.

At at other carbon byproducts.

From this route.

The potential source for developing a sustainable product so.

And then I just had to ask Kevin you mentioned that carbon sequestration might be a long ways off.

Do you think you could be.

Doing at least one such project before 2030, given the incentives in the U S.

Yes, so certainly carbon capture is something that I would say is still in demonstration phase with certain industries, but it is one that we.

We think we'll likely feature prominently in our.

In the long wavelength.

Of de Carbonization for the chemical industry I think some of the chemical peers have been.

Fairly public about their style and some others I think about.

The role there.

So it is something that if you think about <unk>.

Delivering a decarbonize product for a tire customer the tire industry needs.

15 million tons of carbon black a year in all parts of the world.

And so to build.

Uh huh.

Scale in.

In an alternative process is.

Really really difficult.

Thing to do and the most probably likely an economic way.

To Decarbonize the furnace route would be through.

Some sort of.

Our carbon capture.

Unit now that would require collaboration with a range of industry players in order to do that.

And it's certainly something that we will be.

Value added.

As we progress towards 2030 to try to.

Think about a demonstration type of a unit and and to try to see if we can take advantage of.

Incentives that would be out there to do such a thing.

Thank you.

Thank you and one for next question.

Non next question coming from the line of Chris.

Chris Capps with loop capital your line is open.

Yes. Good morning, So I have a follow up on the reinforcement materials business and the outcome of the annual supply agreements.

That he talked about in your formal remarks, you mentioned good pricing outcome.

But stable volumes I think the term was and so that's.

That's just opposed against the European market. It seems it seems extremely motivated to secure additional sources of carbon black supply as it pays out their dependence on.

On Russian suppliers. So curious if you are simply sold out in that region.

I'm asking because in a response to another question on specialty you mentioned the ability of carbon black producers.

So trade across each segment.

Thank you were implying that the appointment of reactors that are currently devoted to specialty products could be used for producing reinforcement grades of carbon Black's I'm. Just wondering if you elected not to make this trade or if this is a potential source of upside to the volumes that are spelled out in the annual contracts.

See them today.

Yes, good morning.

Chris So I think a couple of things first.

Our our our outlook our expectation.

Assumes that our reinforcement business.

Moves in line with the market and I think if you look at <unk>.

<unk> C, which is the forecast that.

You know that we are we rely on here for expected tire production. If you look at the fiscal year 'twenty three so if you take your 23 forecast in physical lines that for our fiscal year.

It implies sort of flattish to maybe a little less than 1% production growth. So that's that's what sort of serving as the base for the expectation that we.

We said in their prepared remarks, and why we see it moving in line in line with market now to your question on capacity.

And movements between reinforcement and specialty carbons.

That's definitely something that.

We will be dynamic and we will.

We will look at as we progress through the year, specifically to your question on Europe as you might recall.

The.

The network has been very tight utilizations have been very high for some time now so.

There was it was not any.

Any material additional.

Capacity.

On supporting the base growth expectations for our customers, but if we are.

Seeing weakness in.

The lower end of specialty carbons in the course of the year.

Then there is that opportunity certainly to trade across and we continue to get.

Requests from customers for <unk>.

Additional volumes in reinforcement because supply is tight.

And these uncertainties.

<unk> remained so I would characterize it as an upside, but hopefully that gives you a sense for sort of the base case and how we.

How we arrived there.

Okay and is there any way to quantify what that potential.

Just.

I don't know swing capacity might represent.

Jack.

Keith.

Because of the macro because the economy in Europe specifically.

How much that might represent in terms of.

Potential to serve as European customers.

Yes difficult to quantify.

Chris because it first starts with.

What sort of.

Demand do we see in specialty carbons, and then it depends which reactors that's on and which of those would naturally fit better to serve and pivot to reinforcement. So you sort of end up in this kind of very.

Layered assumption.

Analysis, and so it's difficult to give any kind of a rule of thumb, but I think what's important.

To understand is that.

We're very dynamic in our <unk>.

Management here of the business I think we've proven that over the last.

For several years and so.

As those opportunities.

Emerge and then we will we will certainly.

<unk> moved quickly to take advantage of them. So.

To give you a rule of thumb here.

Fair enough.

And then one last one so when we travelled recently Jonathan meetings, you were talking about how some of the.

<unk>.

The carbon black producers in China were shipping exporting to.

Europe .

Reflecting just how I don't know if desperate word, but how motivated.

Customers, there where to get additional sources.

At the time.

With the shipping rates and challenges of chipping like flip the carbon black and given the high crude coal tar feedstock costs in China, which you mentioned in this call.

It just seem highly on economic I'm curious if that how that dynamic has been playing out lately and if if it if that is influencing.

The regional market in China. Thank you.

Yes.

So I think you've used.

Summarized it pretty well there.

There Chris so the dynamic in Europe is is very tight given the Russia.

<unk> situation and customers, placing a real emphasis on supply security.

Now that has led to an.

An increase in Chinese imports into Europe , but those are coming in at a pretty high prices because Chinese coal Tar has has not declined even though global fuel oil has.

And so there is a pretty significant I would call. It in kind of a negative arb right now between Chinese coal Tar and U S Gulf Coast feedstock, which makes it not.

Not an economic to move the product.

Into Europe , but it just means it's coming in at the highest price so basically youre moving in product at the right hand side of the global supply curve not not the left hand side. So.

I think a factor in the.

More supportive pricing environment, So I think you've got it well understood.

And with respect to.

With respect to China.

Again, our our business in China is holding up.

Pretty well certainly as some of this.

<unk> moves out of China.

That provides a little more support in China.

For pricing and that's I think one of the reasons why despite a weak economic environment, there things are holding up.

You know fairly well for our for our business. So it tends to be a modest supportive dynamic in.

In China, because the carbon black it does move out has to be carbon black.

That is all of the quality to support that.

Global tire makers are and so.

Those are typically the people we compete against in China, and so that would be a modest supporter dynamic China.

Thank you.

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

Great well. Thank you very much for joining the call today and for your continued support of Cabot and we look forward to speaking again next quarter. Thank you.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect good day.

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Ladies and gentlemen, thank you for standing by and welcome to tablets.

<unk> 2022 earnings conference call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star. One one please be advised that today's conference maybe recorded I would now like to turn the conference over to your Speaker host Steve Delahunt Vice.

President Treasurer and Investor Relations. Please go ahead.

Good morning, I would 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 fourth quarter of fiscal year 2022 copies of which are posted in the Investor Relations section of our website.

Slide deck that accompanies this call is also available on 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 32021 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 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.

A table at the end of our earnings release issued last night and available in the investors section of our website.

Officers of the company will be selling shares to pay tax and other obligations related to their rewards.

I will now turn the call over to Sean who will discuss our full year highlights.

Overview.

Fourth quarter results business segment, and corporate financial details.

This strong and provide some closing comments and open the floor to questions Chuck Thank.

Thank you, Steve and good morning, ladies and gentlemen, and welcome to our call today.

Full year 2022 was an exceptional year for Cabot we.

We delivered record financial performance achieved breakout growth in battery materials advanced a range of strategic initiatives, including the divestiture of purification solutions and further our leadership in ESG performance.

All of this was accomplished despite a turbulent macroeconomic and geopolitical environment.

I'm immensely proud of the Cabot team for the resilience and adaptability they demonstrated throughout the year and for their focus on execution and support of our customers.