Q2 2024 Cabot Corporation Earnings Call

Operator: Good day, everyone, and thank you for standing by. Welcome to the second quarter 2024 Cabot Earnings conference call.

Good day, everyone and thank you for standing by and welcome to the second quarter 2020 for Cabo 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 the <unk>.

Operator: 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 the session, you will need to press star 11 on your telephone. You will then hear a message advising that your hand is raised. To withdraw the question, simply press star 11 again. We ask that you limit your questions to one and one follow-up. Please be advised that your conference call is being recorded. I would now like to hand the conference over to the Vice President, Treasurer, and Investor Relations, Steve Delahunt. Please go ahead.

You wouldn't need to press star one one on your telephone you will turn here a message a dicey your hand this waste to withdraw the question simply press Star One again, we ask that you. Please keep your questions to one and one follow up please be advised that your today's conference is being recorded.

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

Steven J. Delahunt: Thanks, Carmen. Good morning.

Steven J. Delahunt: Thanks, Carmen and good morning, I would like to welcome you to the Cabot Corporation earnings teleconference.

Steven J. Delahunt: I would like to welcome you to the Cabot Corporation Earnings Teleconference. With me today are Sean Keohane, CEO and President, and Erica McLaughlin, Executive Vice President and CFO. Last night, we released results for our second quarter of fiscal year 2024, copies of which are posted in the investor relations section of our website. The slide deck that accompanies this call is also available in the investor relations portion of our website and will be available in conjunction with the replay of the call.

Steven J. Delahunt: With me today are Sean Keohane, CEO, and President and Erica Mclaughlin Executive Vice President and CFO.

Steven J. Delahunt: Last night, we released results for our second quarter fiscal year 2024 copies of which are posted in the Investor Relations section of our website.

Steven J. Delahunt: The 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.

Steven J. Delahunt: During this conference call, we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the press release we issued last night and in our 10-K for the fiscal year ended September 30, 2023, and in subsequent filings we make with the SEC.

Steven J. Delahunt: During this conference call, we will make forward looking statements about our expected future operational and financial performance.

Steven J. Delahunt: Each forward looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Steven J. Delahunt: Information regarding these factors appears in the press release, we issued last night and in our 10-K for the fiscal year ended September 32023, and in subsequent filings, we make with the SEC.

Steven J. Delahunt: In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the investor section of our website. I will now turn the call over to Sean, who will discuss the second quarter highlights, followed by an update on our capital allocation framework, and then discuss the company's efforts in sustainable product innovation. Erica will review the second quarter financial highlights and the business segment results. Following this, Sean will provide an update on our 2024 Outlook and then open the floor to questions.

Steven J. Delahunt: In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.

Steven J. Delahunt: The non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the investors section of our website.

Steven J. Delahunt: I will now turn the call over to Sean who will discuss the second quarter highlights.

Sean D. Keohane: Followed by an update on our capital allocation framework, and then discuss the company's efforts and sustainable product innovation.

Erica will review of the second quarter financial highlights and the business segment results.

Sean D. Keohane: Following this Sean will provide an update on our 2020 for outlook and then open the floor to questions Sean.

Sean D. Keohane: Thank you, Steve. Good morning, ladies and gentlemen, and welcome to our call today. I'm very pleased with results in the second quarter and the tremendous efforts of the Cabot team to execute against what is still a challenging macroeconomic backdrop. In the second quarter, we delivered adjusted earnings per share of $1.78, up 34% year-over-year, driven by growth in both segments. Reinforcement materials delivered very strong results in the quarter, with EBIT up 22% year-over-year to $149 million.

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

Sean D. Keohane: I am very pleased with results in the second quarter and the tremendous efforts of the Cabot team to execute against what is still a challenging macroeconomic backdrop.

Sean D. Keohane: In the second quarter, we delivered adjusted earnings per share of $1 78.

Sean D. Keohane: Up 34% year over year, driven by growth in both segments.

Sean D. Keohane: Reinforcement materials delivered very strong results in the quarter with EBIT up 22% year over year to $149 million.

Sean D. Keohane: The outlook for this business remains strong, driven by our leading global market position, the long-term resilience of the replacement tire market, favorable regional supply and demand dynamics, and outstanding execution across the segment. EBIT and performance chemicals was up 11% compared to the second quarter of fiscal 2023, as demand in the segment appears to have generally stabilized, and the effects of de-stocking have ended. While we did see some early signs of improvement in demand, particularly in our automotive, infrastructure, and semiconductor applications, we remain cautious if these demand trends will further strengthen through the rest of the year.

Sean D. Keohane: The outlook for this business remains strong driven by our leading global market position. The long term resilience of the replacement tire market.

Sean D. Keohane: <unk> regional supply and demand dynamics and outstanding execution across the segment.

EBIT in performance chemicals was up 11% compared to the second quarter of fiscal 2023 as demand in this segment appears to have generally stabilized and the effects of Destocking have ended.

Sean D. Keohane: While we did see some early signs of improvement in demand, particularly in our automotive infrastructure in semiconductor applications. We remain cautious if these demand trends will further strengthen through the rest of the year.

Sean D. Keohane: Operating cash flow was strong in the quarter at $176 million, which supported the return of $47 million to shareholders through a combination of share repurchases and dividends. Given the strength of our underlying business fundamentals and conviction in the long-term cash flow generation of our portfolio, yesterday we announced an 8% increase in our quarterly dividends. Cabot has a long history of growing its dividend, and it would be our expectation to continue increasing the dividend over time as the earnings and cash flow of our business grow.

Sean D. Keohane: Operating cash flow was strong in the quarter at $176 million, which.

Sean D. Keohane: <unk> the return of $47 million to shareholders through a combination of share repurchases and dividends.

Sean D. Keohane: Given the strength of our underlying business fundamentals and conviction in the long term cash flow generation of our portfolio yesterday, we announced an 8% increase in our quarterly dividend.

Sean D. Keohane: Cabot has a long history of growing the dividend and it would be our expectation to continue increasing the dividend over time as the earnings and cash flow of our business grow.

Sean D. Keohane: The Cabot portfolio has strong cash flow characteristics, which enable a balanced capital allocation strategy focused on funding our high confidence, high return growth projects and returning cash to shareholders. This balance of profit growth and cash return can be achieved while maintaining our strong investment grade balance sheet. Despite a weak macroeconomic environment in fiscal year 2023 and a year marked by sharp inventory destocking, we generated a very strong operating cash flow of $595 million. And year to date in fiscal 2024, operating cash flow has totaled $281 million.

Sean D. Keohane: The Cabot portfolio has strong cash flow characteristics, which enable a balanced capital allocation strategy focused on funding our high confidence high return growth projects and returning cash to shareholders.

This balance of profit growth and cash return can be achieved while maintaining our strong investment grade balance sheet.

Sean D. Keohane: Despite a weak macroeconomic environment in fiscal year, 2023, and a year marked by sharp inventory Destocking, we generated very strong operating cash flow of $595 million and year to date in fiscal 2020 for operating cash flow has totaled $281 million.

Sean D. Keohane: Cash generation is expected to remain strong, and we intend to return a robust amount of cash to shareholders through dividends and share repurchases. We've maintained a continuous and growing dividend since 1968, which is the year the company went public, and that commitment remains a core element of our capital allocation strategy. Since Fiscal 2015, our dividend has grown at a compound annual growth rate of 7%, including our announcement last night of an 8% dividend increase.

Sean D. Keohane: Cash generation is expected to remain strong and we intend to return a robust amount of cash to shareholders through dividends and share repurchases.

Sean D. Keohane: We have maintained a continuous and growing dividends since $19 68, which is the year. The company went public and that commitment remains a core element of our capital allocation strategy.

Sean D. Keohane: Since fiscal 2015, our dividend has grown at a compound annual growth rate of 7%, including our announcement last night of an 8% dividend increase we remain.

Sean D. Keohane: We remain committed to the dividend and expect to maintain an industry competitive yield and payout ratio over time. We also believe that share repurchases are an attractive use of cash. Since 2015, with the exception of the COVID impact in fiscal 2021, we have repurchased shares at a minimum to offset dilution from incentive compensation plans and, in most years, have been opportunistic with repurchases in excess of dilution. Year-to-date, we have repurchased $57 million, and since 2015, we have repurchased approximately $700 million of shares and reduced our share count by 9 million shares, or 14% of our outstanding shares.

Sean D. Keohane: Committed to the dividend and expect to maintain an industry competitive yield and payout ratio over time.

Sean D. Keohane: We also believe that share repurchases are an attractive use of cash since.

Sean D. Keohane: Since 2015 with the exception of the Covid impacted fiscal 2021, we have repurchased shares at a minimum to offset dilution from incentive compensation plans and in most years have been opportunistic with repurchases in excess of dilution.

Sean D. Keohane: Year to date, we have repurchased $57 million and since 2015, we have repurchased approximately $700 million of shares and reduced our share count by 9 million shares or 14% of our outstanding shares.

Sean D. Keohane: We expect to continue being opportunistic given our strong cash flow, the structural improvements in our reinforcement materials business, and the long-term growth potential of our portfolio driven by sustainability tailwinds. Cabot has long been recognized as a leader in sustainability, consistently acknowledged by external parties for excellence in this area. While operating responsibly has been deeply embedded in our practices for decades, we also have a rich opportunity pipeline for growth driven by sustainability tailwinds.

Sean D. Keohane: We expect to continue being opportunistic given our strong cash flow the structural improvements in our reinforcement materials business and the long term growth potential of our portfolio driven by sustainability tailwind.

Sean D. Keohane: Cabot has long been recognized as a leader in sustainability consistently acknowledged by external parties for excellence in this area.

Sean D. Keohane: While operating responsibly has been deeply embedded in our practices for decades. We also have a rich opportunity pipeline for growth driven by sustainability tailwind.

Sean D. Keohane: I would like to highlight a few recent developments that showcase the sustainability-driven growth potential of our portfolio. Recently, our E2C product line earned the award for innovation and excellence at the 2024 Tire Technology Expo, the premier tire industry technology showcase. Specifically, we were recognized in the Chemicals and Compounding Innovation of the Year category for our Engineered Elastomer Composites Platform. Our E2C-DX9660 elastomer composite, produced through a proprietary and patented mixing process, enhances tire performance by increasing abrasion resistance by approximately 30% without compromising rolling resistance when compared to conventional rubber compounds. The C2C platform has been validated by global customers, and our products are being sold in the tire market.

Sean D. Keohane: I would like to highlight a few recent developments that showcase the sustainability driven growth potential of our portfolio.

Recently, our <unk> product line earned the award for innovation and excellence at the 'twenty 'twenty four tire technology Expo the premier tire industry technology showcase.

Sean D. Keohane: Specifically, we were recognized in the chemicals and compounding innovation of the year category for our engineered elastomer composites platform.

Sean D. Keohane: Our <unk> Dx 90, 660, elastomer composite produced through our proprietary and patented mixing process enhances tire performance by increasing abrasion resistance by approximately 30% without compromising rolling resistance when compared to conventional rubber compounds.

Sean D. Keohane: The <unk> platform has been validated by global customers and our products are being sold in the tire market <unk>.

Sean D. Keohane: Additionally, our E2C platform offers an array of products tailored to meet the needs of tire manufacturers and industrial rubber applications, combining performance with sustainability benefits. In the quarter, we also launched our new Propel E8 engineered reinforcing carbon black, designed specifically to address the unique challenges of increased weight and torque posed by electric vehicles. The higher weight and torque of EVs drive an increase in tire wear. Propel E8 addresses these issues by delivering low rolling resistance and enhanced tread durability, thereby extending tire life.

Sean D. Keohane: Additionally, our <unk> platform offers an array of products tailored to meet the needs of tire manufacturers and industrial rubber applications, combining performance with sustainability benefits.

Sean D. Keohane: In the quarter, we also launched our new propel and.

Sean D. Keohane: Engineered reinforcing carbon black designed specifically to address the unique challenges of increased weight and torque posed by electric vehicles.

Sean D. Keohane: The higher weight and torque of Bvs drive an increase in tire wear.

Sean D. Keohane: Propel EAA addresses these issues by delivering low rolling resistance and enhanced tread durability, thereby extending entire life.

Sean D. Keohane: Finally, Cabot and our commercial partners were recently awarded a $5 million grant by the U.S. Department of Energy under the bipartisan infrastructure law. This research grant is intended to support the development of fuel cells. Fuel cells are particularly critical in the electrification of long-distance transportation due to their ability to manage extended driving ranges and heavier loads, challenges that are difficult to overcome with battery technology. This project will focus on developing an innovative and scalable manufacturing process for producing specialized carbons, which will serve as catalyst supports for fuel cells.

Sean D. Keohane: Finally, Cabot in our commercial partners were recently awarded a $5 million grant by the U S Department of energy under the bipartisan infrastructure law.

Sean D. Keohane: This research grant is intended to support the development of fuel cells.

Sean D. Keohane: Fuel cells are particularly critical in the electrification of long distance transportation due to their ability to manage extended driving ranges and heavier loads challenges that are difficult to overcome with battery technology.

Sean D. Keohane: This project will focus on developing an innovative and scalable manufacturing process for producing specialized carbons, which will serve as catalyst supports for fuel cells.

Sean D. Keohane: Although this initiative is in its early stages, we believe that our collaboration with partners and our collective expertise position us to make substantial contributions to the hydrogen economy, further driving forward the United States' leadership in clean energy technology. These long-term initiatives reflect our deep commitment to innovation and sustainability, demonstrating our proactive role in shaping a more sustainable future across various aspects of the mobility and energy sectors. I'll now turn the call over to Erica to discuss the segment and financial performance in the quarter.

Sean D. Keohane: Although this initiative is in its early stages, we believe that our collaboration with partners and our collective expertise.

Sean D. Keohane: Position us to make substantial contributions to the hydrogen economy further driving forward the United States leadership in clean energy technologies.

Sean D. Keohane: These long term initiatives reflect our deep commitment to innovation and sustainability, demonstrating our proactive role in shaping a more sustainable future across various aspects of the mobility and energy sectors.

Sean D. Keohane: I'll now turn the call over to Erica to discuss this segment and financial performance in the quarter Erica.

Erica J. McLaughlin: Thanks, Sean. I will start by discussing the results for the company and then review the segment results. Adjusted EPS for the second quarter of fiscal 2024 was $1.78 compared to $1.33 in the second quarter of fiscal 2023, with growth coming from both the reinforcement materials and performance chemical segments. Cash flow from operations was strong at $176 million in the quarter, which included a working capital decrease of $21 million. Discretionary free cash flow was $128 million in the quarter.

Erica J. McLaughlin: Thanks, Sean I'll start with discussing results for the company and then review the segment results.

Adjusted EPS for the second quarter of fiscal 2024 was $1 78 compared to $1 33 in the second quarter of fiscal 2023 with growth coming from both the reinforcement materials and performance chemicals segments cash.

Erica J. McLaughlin: Cash flow from operations was strong at $176 million in the quarter, which included a working capital decrease of $21 million discretionary free cash flow was $128 million in the quarter.

Erica J. McLaughlin: We ended the quarter with a cash balance of $206 million, and our liquidity position remained strong at approximately $1.3 billion. Capital expenditures for the second quarter of fiscal 2024 were $43 million, and we continue to expect $250 to $275 million of capital spending for the fiscal year. Additional uses of cash during the second quarter were $23 million for dividends and $24 million for share repurchases. Our debt balance was $1.2 billion at the end of March, and our net debt to EBITDA was 1.3 times. The operating tax rate for the second quarter of fiscal 2024 was 28%, and we anticipate our operating tax rate for fiscal 2024 to be in the range of 27 to 29.

Erica J. McLaughlin: We ended the quarter with a cash balance of $206 million and our liquidity position remained strong at approximately $1 3 billion.

Erica J. McLaughlin: Capital expenditures for the second quarter of fiscal 2024 before $18 million and we continue to expect $250 million to $275 million of capital spending for the fiscal year.

Erica J. McLaughlin: Additional uses of cash during the second quarter were $23 million for dividends and $24 million for share repurchases. Our debt balance was $1 2 billion at the end of March and our net debt to EBITDA was one three times.

Erica J. McLaughlin: The operating tax rate for the second quarter of fiscal 2024 was 28% and we anticipate our operating tax rate for fiscal 2020 for it to be in the range of 27% to 29%.

Erica J. McLaughlin: One additional item to note is the benefits seen in the general unallocated income line item. As we discussed last quarter, this line item of general unallocated income and expense includes currency exposures related to our net asset positions and investment income we earn, mainly in the South America region, as well as interest income on our global cash balance. During the quarter, we reported a $15 million benefit in general unallocated income, which was higher than our prior quarter guidance of $7 to $9 million.

Erica J. McLaughlin: One additional item to note is the benefits seen in the general unallocated income line item as we discussed last quarter. This line item of general unallocated income and expense includes currency exposures related to our net asset positions and investment income we earned mainly in the South America region as well as interest income.

Erica J. McLaughlin: On our global cash balances during the quarter, we reported a $15 million benefit in general unallocated income, which was higher than our prior quarter guidance of $7 million to $9 million.

Erica J. McLaughlin: The net benefit was largely due to a slower rate of depreciation in the Argentina peso than expected, while we continue to earn interest on the cash and investments during most of the quarter in that country. At the time of the Argentinian government evaluation in December, there were mandated regulations put into place on how companies could pay offshore supplier balances outstanding as of that date. In March, we followed the regulated path for this and applied for and purchased an allocation of government bonds that could be sold at a discount and used to pay offshore suppliers. Cabot purchased $30 million of bonds, which were immediately sold, resulting in an $8 million loss.

Erica J. McLaughlin: That benefit was largely due to a slower rate of depreciation in the Argentina peso than expected, while we continue to earn interest on the cash and investments during most of the quarter in that country.

Erica J. McLaughlin: At the time of the Argentinian government devaluation in December.

Erica J. McLaughlin: Mandated regulations put into place on how companies could pay offshore supplier balances outstanding as of that date.

Erica J. McLaughlin: In March we followed the regulated paths and applied for and purchased an allocation of government bonds that can be sold at a discount and used to pay offshore suppliers.

Abbott purchased $30 million of bonds, which were immediately filled resulting in an $8 million loss.

Erica J. McLaughlin: We treated this loss as a certain item, as it was still part of the government controls around the access to and use of U.S. dollars related to the government evaluation in December. The purchase and sale of bonds and the recent evaluations have resulted in a much lower U.S. dollar cash balance, so going forward, we expect earnings volatility from Argentina to be minimal. We can now pay offshore suppliers over a mandated timeline, which we would expect to do in the normal course of business going forward.

Erica J. McLaughlin: We treated this losses of certain items as it was still by the government controls around the access to and use of U S dollars related to the government devaluation in December.

Erica J. McLaughlin: Purchase and sale of the bonds and the recent evaluations have resulted in a much lower U S. Dollar cash balance so going forward, we expect the earnings volatility from Argentina.

Erica J. McLaughlin: Minimum.

Erica J. McLaughlin: We can now pay offshore suppliers over a mandated timeline, which you would expect to do in the normal course of business going forward.

Erica J. McLaughlin: Therefore, we would not expect a level of income from the Argentina investments nor the impact of the volatility of the Argentinian peso currency for the remainder of the year in the general unallocated income and expense line item. While global currency movements are difficult to predict, as we look ahead, we would expect general unallocated income to be around $5 to $7 million per quarter, driven by interest income and the net FX impacts on our global cash balance. Now, moving to reinforcement materials.

Erica J. McLaughlin: Therefore, we would not expect the level of income from the Argentina investments, nor the impact from the volatility of the Argentina peso currency for the remainder of the year and the general unallocated income and expense line items.

Erica J. McLaughlin: Global currency movements are difficult to predict as we look ahead, we would expect general unallocated income to be around $5 million to $7 million of income per quarter, driven by the interest income and the net FX impacts on our global cash balances.

Sean D. Keohane: During the second quarter, EBIT for reinforcement materials was $149 million, which was an increase of $27 million as compared to the same period in the prior year. The increase is driven by higher pricing and product mix in our 2024 calendar year customer agreements and higher volume. Globally, volumes were up 6% in the second quarter as compared to the same period of the prior year, due to 21% growth in Asia and 4% in Europe.

Erica J. McLaughlin: Now moving to reinforcement materials during the second quarter EBIT for reinforcement materials was $149 million, which was an increase of 27 million as compared to the same period in the prior year.

Erica J. McLaughlin: The increase was driven by higher pricing and product mix in our 2020 for a calendar year customer agreement and higher volumes.

Erica J. McLaughlin: Globally volumes are up 6% in the second quarter as compared to the same period of the prior year due to 21% growth in Asia and 4% in Europe.

Sean D. Keohane: Looking to the third quarter of fiscal 2024, we expect the reinforcement materials EBIT to be roughly in line with the second quarter of fiscal 2024, with modest sequential volume improvement expected from demand recovery in South America, offset by higher plant maintenance costs and lower energy pricing. Now turning to performance chemicals, EBIT increased by $3 million in the second fiscal quarter as compared to the same period in fiscal 2023. The increase was driven by 6% higher volumes driven by our specialty carbons and specialty compounds product line.

Erica J. McLaughlin: Looking to the third quarter of fiscal 2024, we expect our reinforcement materials EBIT to be roughly in line with the second quarter of fiscal 2024 with modest sequential volume improvement expected from demand recovery in South America, offset by higher plant maintenance costs and lower energy pricing.

Erica J. McLaughlin: Now turning to performance chemicals, EBIT increased by $3 million in the second fiscal quarter as compared to the same period in fiscal 2023, the increase was driven by 6% higher volumes driven by our specialty carbons and specialty compounds product lines.

Sean D. Keohane: Looking ahead to the third quarter of fiscal 2024, we expect modest volume improvement sequentially, as we are seeing some early signs of strengthening demand in specialty carbons and compounds, and we expect margins to hold sequentially as pricing moves in line with raw material costs. I will now turn the call back over to Sean to discuss the fiscal year outlook.

Erica J. McLaughlin: Looking ahead to the third quarter of fiscal 2024, we expect modest volume improvement sequentially. As we are seeing some early signs of strengthening demand in specialty carbons and compounds and we expect margins to go up sequentially as pricing moves in line with raw material costs.

Erica J. McLaughlin: I'll now turn the call back over to Sean to discuss the fiscal year outlook Shawn Thanks, Erika moving.

Sean D. Keohane: Moving to our 2024 outlook, we are very pleased with the momentum coming out of the second quarter, and we feel good about the back half of the year. Based on our year-to-date results and the outlook across our businesses, we are raising our guidance for adjusted earnings per share to be in the range of $6.65 to $6.85 for the fiscal year. The upward revision represents a 20 percent increase at the midpoint compared to our prior guide.

Sean D. Keohane: Moving to our 2024 outlook, we are very pleased with the momentum coming out of the second quarter and we feel good about the back half of the year based.

Sean D. Keohane: Based on our year to date results and the outlook across our businesses. We are raising our guidance for adjusted earnings per share to be in the range of $6 65 to $6 85 for the fiscal year.

Sean D. Keohane: The upward revision represents a 20 <unk> increase at the midpoint compared to our prior guidance.

Sean D. Keohane: At a strategic level, the key drivers for earnings growth remain unchanged. The impact of our calendar year 2024 Reinforcement Materials Customer Agreements and the resilience of the replacement tire market are driving strength in this segment. As discussed in prior quarters, we expect year-over-year volume growth in the second half of the year as the customer destocking we experienced in fiscal 23 is not expected to repeat. These factors are driving our expectation for another year of strong double-digit EBIT growth in the reinforcement materials segment. In performance chemicals, we are beginning to see some early signs of end market improvement, most notably in our automotive, infrastructure, and semiconductor applications, with volumes expected to be modestly higher sequentially.

Sean D. Keohane: At a strategic level the key drivers for earnings growth remains unchanged the.

Sean D. Keohane: The impact from our calendar year 2020 for reinforcement materials customer agreements and the resilience of the replacement tire market are driving the strength in this segment.

Sean D. Keohane: As discussed in prior quarters, we expect year over year volume growth in the second half of the year as the customer Destocking, we experienced in fiscal 'twenty three is not expected to repeat.

Sean D. Keohane: These factors are driving our expectation for another year of strong double digit EBIT growth in the reinforcement materials segment.

Sean D. Keohane: In performance chemicals, we are beginning to see some early signs of end market improvement most notably in our automotive infrastructure in semiconductor applications with volumes expected to be modestly higher sequentially.

Sean D. Keohane: We are optimistic that demand trends will continue to improve in this segment as we head into fiscal year 2025. Our balance sheet is strong, cash generation is expected to remain robust, and we will continue to pursue a balanced capital allocation strategy of growth investments and cash return to shareholders. In addition to the 8% dividend increase we announced yesterday, we intend to remain opportunistic with our share repurchases going forward. Overall, I'm very pleased with how the company is positioned today.

Sean D. Keohane: We are optimistic that demand trends will continue to improve in this segment as we head into fiscal year 2025.

Sean D. Keohane: Our balance sheet is strong cash generation is expected to remain robust and we will continue to pursue a balanced capital allocation strategy of growth investments and cash returned to shareholders in.

Sean D. Keohane: In addition to the 8% dividend increase we announced yesterday, we intend to remain opportunistic with our share repurchases going forward.

Sean D. Keohane: Overall I am very pleased with how the company is positioned today I am confident in our strategy and the execution capability of our team and I'm excited about the growth prospects of our portfolio.

Sean D. Keohane: I'm confident in our strategy and the execution capability of our team, and I'm excited about the growth prospects of our portfolio. We are executing well in fiscal year 2024, and we remain on track to meet our 2021 Investor Day Consolidated Target. Thank you very much for joining us today, and I will now turn the call back over to our Q&A session. Thank you.

Sean D. Keohane: We are executing well in fiscal year 2024, and we remain on track to meet our 2021 Investor day consolidated targets.

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

Operator: Thank you. And as a reminder, that is star 11 to get in the queue. Wait for your name to be announced. And to remove your questions, simply press star 11 again. One moment while we compile the Q&A roster. All right, our first question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Speaker Change: Thank you and as a reminder, that is star one one to get in the queue wait for your name to be announced and.

Speaker Change: And remove your question simply press Star one again.

David L. Begleiter: Thank you.

Speaker Change: While we compile the Q&A roster.

Operator: I'm sorry, say it again David, there was a little noise on the phone there. So what are you seeing ahead of the July 1st ban on Russian carbon black exports to Europe? Any change, any further change in market or buyer behavior? Yeah, so the date, as you know, goes into effect, the sanction date, June 30th.

Speaker Change: All right. Our first question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

David L. Begleiter: Thank you good morning.

David L. Begleiter: Sean.

David L. Begleiter: Good morning, what are you seeing ahead of the July four as bad on a Russian carbon black imports or exports to Europe.

Speaker Change: Sorry say it again, David there was a little noise on the phone there. So what are you seeing ahead of the July one.

Sean D. Keohane: And we fully expect, and our customers fully expect, that that will happen. And we've been seeing a continued trend ever since the sanctions were announced of reducing carbon black exports out of Russia into Europe. So we fully expect that that will be in effect, you know, on that day.

Speaker Change: And on Russia, carbon black exports to Europe any change any further change in market or buyer behavior.

Speaker Change: Yes. So the date as you know goes into effect the sanction date June 30.

Speaker Change: And we fully expect and our customers fully expect that that will happen and we've been can see we've been seeing a continued.

Continued trend ever since the sanctions were announced of reducing.

Speaker Change: Carbon black exports out of Russia into Europe, So we fully expect.

Speaker Change: But that will that will be in effect.

Speaker Change: On that on that day, we are through the last year contracting period.

Sean D. Keohane: We are, you know, through the last year's contracting period; regional supply was certainly an important dynamic in the negotiations, and, you know, we saw that play out. And certainly, as we're getting closer here, many of our global customers with significant operations in Europe are reaching out for incremental spot purchases for 2024. And they remain keen to secure, you know, long-term supply in that region. Now, you know, while our business is largely contracted there and our excess supply in Europe is limited, we are working to support our global customers from our asset base around the world as best we can.

Speaker Change: Regional supply was certainly an important dynamic in the negotiations and we saw that.

Speaker Change: Play out and certainly as we're getting closer here many of our global customers with significant operations in Europe are reaching out for incremental spot purchases for 2024, and they remain keen to secure long term supply in that region now.

Speaker Change: <unk> are our business is largely contracted there and our excess supply.

Speaker Change: In Europe is limited.

Speaker Change: Our working to support our global customers from our asset base around the world as best we can but.

Sean D. Keohane: But, you know, clearly, this is something that is going into effect and has been playing out over some period of time here. And as the date gets even closer, you know, there's continued push for what is remaining to find alternative sources for it. So we'll continue to work closely with our customers to try to help them from our global asset base as best we can.

Speaker Change: Clearly this is something that is going into effect and has been playing out over some period of time here and as the date gets even closer.

Speaker Change: There is there is continued push for what what is remaining to find alternative sources for it. So we will continue to work closely with our customers to try to help them from a global asset base as best we can.

David L. Begleiter: Very good. And just on your guidance, based on your good Q3 guidance... which results in implied Q4 guidance, I believe, which is down sequentially. Is that just being conservative, or is that just normal behavior, normal seasonal trends?

Speaker Change: Very good and just on your guidance based on Q3 guidance, which results in an implied Q4 guidance I believe which is down sequentially.

Speaker Change: Is that just being conservative or is that just.

Speaker Change: Normal behavior normal seasonal trends youre seeing.

Operator: Yeah, maybe I'd, I'd ask Erica, and she can walk you through that for you there.

Speaker Change: Yes, maybe.

I'd ask Erica and she can.

Erica J. McLaughlin: Walk through that for you Dave.

Erica J. McLaughlin: Sure, in terms of the Q3 Outlook, David?

Erica J. McLaughlin: Sure in terms of the Q3 outlook David.

David L. Begleiter: What that means for the implied Q4 guidance, it looks to me like it would be down sequentially quarter for quarter. Is that just being conservative, or is that what you expect to see or normally do see in Q4 versus Q5?

Erica J. McLaughlin: What that means for the implied Q4 guidance it looks to me like it would be.

Erica J. McLaughlin: Down sequentially quarter over quarter is that just being conservative or is or is that what you expect to see or normally do see in Q4 versus Q3.

Erica J. McLaughlin: Yeah, so in terms of the business results, you know, the drivers of the outlook are the first half has been quite strong, and we do expect an increase in the segment EBIT as compared to the prior guidance. And, as we talked about, a modest increase in volumes going forward in both reinforcement materials and performance chemicals. I think the other item of note was what I talked about, which was the general and allocated income and expense, where we've seen a large benefit in this previous quarter that we would expect to decrease. So we saw $15 million in Q2, and we would expect that to go down to about $7 to $9 million in the back half. And that's how we would see the next two quarters developing.

David L. Begleiter: Yes, So I think I think in terms of the business results.

David L. Begleiter: The drivers of the outlook as the first half has been quite strong and we do expect an increase in the segment EBIT as compared to the prior guidance and as we talked about a modest increase in the volumes going forward in both reinforcement materials and performance chemicals.

David L. Begleiter: I think the other item of note was what I talked about which is the general unallocated income and expense, where we've seen a large benefit in that.

David L. Begleiter: In this previous quarter that we would expect to decrease so we saw a $15 million in Q2, and we would expect that to go down to about $7 million to $9 million in the back half and that's how we would see the next two quarters developing.

Speaker Change: Thank you.

David L. Begleiter: Thank you.

Speaker Change: Thank you one moment for our next question. Please.

Operator: Thank you. One moment for our next question, please. Any calls from the line of John Roberts with Ms. Huo, please proceed. Thank you. Back on capital allocation, could you update us on any M&A?

Speaker Change: And it comes from the line of John Roberts with Mizuho. Please proceed.

John Roberts: Thank you back on capital allocation could you update us on any M&A under review and are there any other major capital programs being anticipated at this point.

Sean D. Keohane: Yeah, hi, good morning, John. Thanks. Maybe just a quick recap of the priorities from a capital allocation standpoint. You know, certainly our first priority is to make sure that we invest in the right level of maintenance and compliance in our plans to ensure that the assets operate well and will continue to generate the strong results that we're seeing now and will continue to support our customers. That's what they've come to expect.

John Roberts: Yes, hi, good morning, John Thanks, maybe just.

John Roberts: Quick recap of the priorities from a capital allocation.

John Roberts: Standpoint.

John Roberts: Our first priority is to make sure that we invest in the right level of maintenance and compliance in our plans to ensure that the assets operate well and we will continue to generate the strong results that we're seeing now and we will continue to support our customers. That's what they have come to expect so that's that's first and foremost now.

Sean D. Keohane: So that's, that's first and foremost. Now we plan to continue to invest for growth. And so as the next priority, and so this means investing to make sure we have sufficient capacity as we build out our targeted growth vectors and batteries jet for packaging, for example, but as well as some strategic investments in, in reinforcement, in particular, a new unit in Indonesia that's well underway at this point, supporting the strong growth in the ASEAN market, I would say third is, is, is of course, the dividend and maintaining a strong and growing dividend over time as the earnings and cash flow grow, and then finally being opportunistic with share repurchases.

John Roberts: We plan to continue to invest for growth.

John Roberts: And so as the next priority and so this means.

John Roberts: Investing to make sure we have sufficient capacity as we build out our targeted growth vectors in batteries and inkjet for packaging for example, but as well as some strategic investments.

John Roberts: In in reinforcement.

John Roberts: In particular, our new unit in Indonesia.

John Roberts: Well underway at this point.

John Roberts: Porting.

John Roberts: The strong growth in the ASEAN market I would say third is of course the dividend.

John Roberts: Maintaining.

John Roberts: A strong and growing dividend over time as the earnings and cash flow grow and then finally being opportunistic with share repurchases now with respect to M&A I can't comment specifically, but.

Sean D. Keohane: Now, with respect to M&A, I can't comment specifically, but M&A remains a piece of the strategy where it supports our chosen strategy. So where we can strengthen our existing position in our markets, whether there are established core businesses or our targeted growth vectors, you know, we will certainly be very active looking at opportunities on the M&A front to support the strength in those areas. And then did the strength and specialty carbons include battery material strength? And it looked like inks and fume silica were probably stable year over year. What's going on in those markets?

John Roberts: M&A remains a piece of the strategy, where it it supports our chosen.

John Roberts: Chosen strategy, so where we can strengthen our existing position.

John Roberts: In our markets, whether they're our.

John Roberts: Established core businesses or our targeted growth vectors.

John Roberts: We will certainly be very active looking at opportunities on the M&A front to support.

John Roberts: The strength in those in those areas.

John Roberts: And then did the strength in specialty carbons include battery materials strength and it looked like inks in fumed, silica, where probably stable year over year, what's going on in those markets.

Sean D. Keohane: Yeah, so overall, we did see higher volumes across the segment in the quarter, heavily driven by our specialty carbons and specialty compounds product lines. And the areas where we're seeing the early signs of improvement, certainly across the automotive applications, that were pretty good, as well as infrastructure. So this is where we sell carbons and compounds that go into wire and cable applications for the build out of the grid and connecting alternative energy, like offshore wind farms and the like.

John Roberts: Yes. So overall, we did see higher volumes across the segment in the quarter.

Heavily driven by our specialty carbons and specialty compounds product lines in the areas, where we're seeing.

John Roberts: The early signs of improvement certainly across the automotive applications that was pretty good as well as infrastructure. So this is where we sell carbons and compounds that go into wire and cable applications for the build out of the grid and connecting alternative energy.

John Roberts: Like offshore wind farms and the like so that.

Sean D. Keohane: So that the infrastructure sector was pretty good. And then in fuel metal oxides, I would say silicones remain, I would say, you know, in a still somewhat weak position overall, in terms of demand, but it was positive to see that the semiconductor side of that business had a pickup in demand after a fairly long, prolonged destocking. So that's, that's positive to see. And with respect to batteries, you know, our volumes were higher year over year.

John Roberts: That infrastructure sector was was pretty good and then in fumed metal oxides, I would say silicones remains.

Speaker Change: I would say.

Speaker Change: Still somewhat weak position overall in terms of demand.

Speaker Change: <unk> was positive to see that.

Speaker Change: The semiconductor side of that business there was a pickup in demand after a fairly long prolonged destocking.

Speaker Change: Semiconductors, so that's that's positive to see.

Speaker Change: And with respect to batteries are volumes, where we are.

Sean D. Keohane: So that's positive. Certainly, the EV market is still growing at a pretty good clip, mostly driven by China, but production of batteries is expected to lag EV sales this year because there's still quite a bit of inventory in the chain. But that hopefully gives you a sense for the different product lines that are inside performance chemicals and some of the end market applications where, you know, we're starting to see some early signs of pickup, which is good to see. Thank you.

Speaker Change: Our higher year over year.

Speaker Change: So that's positive.

Speaker Change: Certainly the EV market.

Speaker Change: It is still growing at a pretty good clip, mostly driven by China, but production of batteries.

Speaker Change: Our expected to lag EV sales this year, because theres still quite a bit of inventory.

Speaker Change: In the in the chain, but that hopefully gives you a sense for.

Speaker Change: The different product lines that are.

Speaker Change: Inside of performance chemicals.

Speaker Change: And some of the end market applications, where.

Speaker Change: We're starting to see some.

Speaker Change: Early signs of.

Speaker Change: Pick up which is which is good to see.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you one moment for our next question. Please.

Operator: Thank you. One moment for our next question, please. Any calls from the line of Josh Spector with UBS, please proceed.

Speaker Change: And it comes from the line of Josh Spector with UBS. Please proceed.

Speaker Change: Okay.

Joshua David Spector: Yeah, hi, good morning. So I wanted to ask about performance and, specifically, margins. So margins step down sequentially, and you're kind of back to levels in the first half of last year. And Erica, when you talked about the forward guidance, you were talking about price offsetting costs. So, you know, I guess what needs to happen for margins in that segment to get back to the low to mid-teens and is there a scenario where that happens this year, or is that more of an outcrop?

Joshua David Spector: Yes, hi, good morning.

Joshua David Spector: Want to ask on performance and specifically margins so.

Joshua David Spector: Margin step down sequentially, and Youre kind of back to levels in the first half of next last year.

Joshua David Spector: And Eric when you talked about the forward guidance you were talking about price offsetting cost.

Joshua David Spector: So I guess what needs to happen for margins in that segment to get back to the low to mid teens and is there a scenario where that happens this year or is that more of a further out prospects.

Erica J. McLaughlin: Yeah, thanks, Josh, for the question. So I think, if you recall, last quarter, we talked about this quarter having some higher maintenance and reduction of inventory, which impacted the margins. And so that did happen.

Eric: Yes, Thanks, Josh for the question. So I think if you recall last quarter, we talked about this quarter had some higher maintenance and reduction of inventory, which impacted the margins and so that did happen and I would say the business performed as expected I think as we go forward.

Eric: We talked about we expect some improvement in volume of modest improvements in the Q2 levels.

Erica J. McLaughlin: And I'd say the business performed as expected. I think as we go forward, as we talked about, we expect some improvement in volume, a modest improvement from the Q2 level. And then we wouldn't expect the same level of inventory impact. So I think that, you know, you would see the margin, you know, return a bit to maybe what you saw at the Q1 levels. I think to get to higher, it's going to be leverage on volumes.

Eric: Then we wouldn't expect the same level of the inventory impact. So I think that you would see.

Eric: The margin.

Eric: Return a bit to maybe what you saw in the Q1 levels I think to get to higher.

Eric: It's going to be the leverage on the volumes I think our pricing is holding up quite well and so.

Erica J. McLaughlin: I think our pricing is holding up quite well. And so as we, you know, see changing raw material costs, energy inputs, et cetera, we were able to hold those margins. And as volumes improve, I think you will see the overall EBITDA margins of the business improve.

Eric: I see changing.

Eric: Raw material costs energy inputs et cetera, we were able to hold those margins and we just as volumes improve I think you would see the overall EBITDA margins of the business is good.

Joshua David Spector: Thanks, that's helpful. And I guess, in terms of your innovations, you know, the comments on the carbon catalysts, and I guess the grant you got for that, that's maybe an opportunity we haven't talked about much. Is that sizable? I guess, can you talk about that a little bit?

Speaker Change: Thanks, that's helpful and I guess in terms of your innovations.

Speaker Change: The comments on the carbon catalyst and I guess the grants you got for that that's maybe an opportunity. We havent talked about much is that sizable I guess can you talk about that a little bit.

Sean D. Keohane: Yeah, Josh, I think the right way to think about it is certainly, you know, most people view fuel cells as being part of the energy transition. And there's quite a bit of investment across the US and Europe, although it's very early days, building out, quote, you know, hydrogen hubs. And so I think there will be a place for hydrogen in the overall, you know, long-term transition here. Certainly, you know, batteries are lithium ion batteries are much further ahead.

Speaker Change: Yes, Josh I think the right way to think about it is certainly.

Speaker Change: Most people view fuel cells as being part of the.

Speaker Change: The energy transition.

Speaker Change: There's quite a bit of investment across the U S and Europe, although it's very early days building out quote hydrogen hubs and so.

Speaker Change: I think there will be.

Speaker Change: Place for for.

Speaker Change: For hydrogen.

Speaker Change: In the overall long term transition here certainly.

Speaker Change: Batteries are lithium ion batteries are much further ahead and I are the clear and established techs.

Sean D. Keohane: And I am the, you know, clear and established technology for the electrification of mobility in the passenger and, you know, sort of light vehicle space. But as people look forward to alternative fuels and energy to drive long-haul trucking, for example, the view is that hydrogen is probably, you know, a better fit there. I think the weight of batteries certainly would be more challenging in that space.

Speaker Change: <unk> technology for the electrification of mobility in the passenger and.

Speaker Change: Sort of light vehicle space.

Speaker Change: Space, but as people look forward to.

Speaker Change: Alternative.

Speaker Change: Fuels and energy to drive.

Speaker Change: Long haul trucking for example, the view is that.

Speaker Change: Hydrogen is probably.

Speaker Change: A better fit there I think the.

Speaker Change: And the weight of batteries certainly would would be.

Speaker Change: More challenging in that space, so people tend to view hydrogen fitting well in that space. So.

Sean D. Keohane: So people tend to view hydrogen fitting well in that space, but there are a number of factors that have to get built out of these hydrogen hubs. They have to get built out, and infrastructure for refueling has to happen. So it's definitely, you know, a longer-term project but one that I think is pretty clear will be part of the mix. And so as that is developing here, we continue to be recognized as an innovation leader in this space and partnered with some established players in the fuel cell space.

Speaker Change: But there are a number of factors that have to get there.

Speaker Change: Built out of these hydrogen hogs have to get built out an infrastructure for refueling has to happen. So it's definitely a longer term, but one that I think is pretty clear it will be part of the mix and so as that is developing here.

Speaker Change: We continue to be recognized as an innovation leader in this space and partnered with some established players.

Speaker Change: In the fuel cell space.

Sean D. Keohane: And so our work will be with our partners jointly developing a carbon support for the catalyst in this fuel cell application. So something that I think is quite important for the long term. And I think the award of the research and development grant is reflective of our position as an innovation leader in this space.

Speaker Change: And so our work will be with our partners.

Speaker Change: Joining me developing.

Speaker Change: <unk>.

Speaker Change: Carbon support for.

Speaker Change: Further catalyst in this in this fuel cell application. So something that I think is quite important for the long term and I think the.

Speaker Change: Award of the research and development Grant.

Speaker Change: I think is reflective of our position.

Speaker Change: As an innovation leader in this space.

Speaker Change: Got it thank you.

Operator: Thank you. One moment for our next question, and it comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed.

Speaker Change: Thank you for a moment for our next question.

Speaker Change: And it comes from the line of Jeff Zekauskas with JP Morgan. Please proceed.

Jeffrey John Zekauskas: Thanks very much. I think your American Carbon Black volume has decreased year on year for six quarters in a row, and... You were down 8% in the March quarter, but you have a positive pricing dynamic in North America. Can you explain what's going on in that region?

Jeffrey John Zekauskas: Thanks very much.

Speaker Change: Yes.

Jeffrey John Zekauskas: I think your American carbon black volumes have decreased year on year for six quarters in a row I think.

Jeffrey John Zekauskas: You were down 8% in the March quarter, but you have a positive pricing pricing dynamic in North America can you explain what's going on in that.

Speaker Change: Region.

Sean D. Keohane: Yeah, sure, Jeff, good morning. So the decline in the Americas, which is what you see, so that's, you know, both North and South America, was largely driven by the impact of economic conditions in South America, as well as replacement tire imports from China, particularly in South America, where, you know, that has been impacted more to a lesser extent in North America. So I think the decline in volumes in the Americas region that we reported is definitely skewed towards South America.

Speaker Change: Yes, sure Jeff Good morning, so.

Speaker Change: The decline in the Americas, which is what you see so thats, both north and South America.

Speaker Change: It was largely driven by the impact of economic conditions in South America as well as the replacement tire imports from China, particularly in South America, where that has been impacted more to a lesser extent in.

Sean D. Keohane: And again, given the economic conditions there, as well as the tire imports that impact that region, as we look forward, we are expecting that we'll see stronger volumes in the second half of the year, such that full-year volumes for the Americas will be more consistent with market expectations for the year, if we look at what forecasters like LMC would say. And then, you know, with respect to Europe, we saw volumes up 4%, driven by higher contractual volumes, as customers in the region continue to value local supply. But hopefully, that gives you a sense of the picture in the Americas region.

Speaker Change: In North America so.

Speaker Change: I think the.

Speaker Change: The decline in volumes in the Americas region that we reported is is definitely skewed towards South America, and again, given the economic conditions, there as well.

Speaker Change: We as well as the tire imports that impact that region.

Speaker Change: As we look forward.

Speaker Change: We are expecting that we will see stronger volumes in the second half of the year.

Speaker Change: The full year volumes for the Americas, I think will be more consistent with market expectations for the year. If we look at at what forecasters like L. M C.

Speaker Change: Say.

Speaker Change: And then with respect to Europe, we saw volumes up 4% driven by higher contractual volumes as customers in the region continue to value local supply, but hopefully that gives you a sense for.

Speaker Change: The picture in the Americas region.

Jeffrey John Zekauskas: All right, so for my follow-up question, you know, if you could say how much you grew in North America last year and in the first half, that would be good. But in terms of your cost of goods sold, your cost of goods sold is down about $50 million in the quarter. And for the half, it's down about 100, and your revenues are flat. Can you explain why the cost of goods sold? What's the dynamic there?

Speaker Change: Alright, so for my follow up.

Speaker Change: If you can say.

Speaker Change: How much you grew in North America last year and in the first half that would be good.

Speaker Change: But.

Speaker Change: In terms of your cost of goods sold your cost of goods sold.

Speaker Change: Is down about $50 million in the quarter.

Speaker Change: And for the half that's down about 100 and your revenues are flat.

Speaker Change: Can you explain why the cost of goods sold what's the dynamic that's.

Jeffrey John Zekauskas: pulling down the cost of goods sold, and maybe someone could comment on what the energy penalty has been in that you're not getting co-product credit. You know, what was that penalty last year? What's been the penalty so far?

Speaker Change: Pulling down the cost of goods sold and.

Speaker Change: And maybe if someone could comment.

Speaker Change: On.

Speaker Change: What the energy.

Speaker Change: <unk> has been and that Youre not getting.

Speaker Change: Co product credits.

Speaker Change: Whats what was that penalty last year.

Speaker Change: What's been the penalty so far this year.

Erica J. McLaughlin: Sure. Hi Jeff.

Speaker Change: Sure Hi, Jeff.

Jeffrey John Zekauskas: So the cost of goods still a decline is really because of the lower raw material costs.

Erica J. McLaughlin: So the cost of goods sold declines is really because of lower raw material costs. And I think, as you know, through our pricing mechanisms, we pass that through in the revenue line. So the reason you see the cost of goods sold going down is because the raw materials are down. We pass that through in the revenue, but we also have price increases in the revenue and higher volumes in the revenue.

Jeffrey John Zekauskas: And I think as you know through our pricing mechanisms, we pass that through.

Jeffrey John Zekauskas: In the revenue line.

Jeffrey John Zekauskas: So the reason you see cost of goods still going down is because the raw materials are down we pass that through in the revenue, but we also have price increases in the revenue and higher volumes in New Avenue, So theyre offsetting.

Erica J. McLaughlin: So they're offsetting the pass-through amount. So that's why the revenue looks a bit flat. And that's the driver of why then the EBIT is higher, because you're seeing the pricing come through and drop to the EBIT.

Jeffrey John Zekauskas: With a path to announce so that's why the revenue looks a bit more flat.

Jeffrey John Zekauskas: And Thats the driver of why then the EBIT is higher because youre seeing.

Jeffrey John Zekauskas: The pricing come through and drop to the EBIT line.

Speaker Change: Does that help.

Jeffrey John Zekauskas: Yes, and what about energy? in different parts of the world. And in some cases, we sell electricity, in some cases, steam, etc. So it doesn't always mirror exactly the energy markets. But this year, I'd say it's had a minimal impact on us. And did you say what your North American volume growth has been last year and this year so far?

Speaker Change: And what about the energy co product credits, yes sort of what are the energy.

Speaker Change: Yeah. So the energy was a big headwind I would say last year. If you looked at fiscal 'twenty two to fiscal 'twenty three it was roughly $20 million.

Speaker Change: And so that was the downward pressure this year I'd say, we're not seeing.

Speaker Change: Any meaningful difference.

Speaker Change: In terms of that.

Speaker Change: Again, there's very different contracts and different parts of the world and in some cases, we sell electricity some cases team et cetera. So it doesn't always.

Speaker Change: Nearer exactly the energy markets that this year I'd say, it's a minimal impact year over year too.

Speaker Change: Okay and could you say, what your north American volume growth to spend last year and this year so far.

Erica J. McLaughlin: Well, last year North America was down. If you remember, we had a good amount of destocking happening in the region. So in 2022, you'll remember there were a good amount of supply chain disruptions happening. And so volumes were quite strong in 2022. And we saw the destocking happening there last year. I'd say this year, as Sean noted, our expectation would be more of a flattish year in North America.

Speaker Change: Well last year North America was down if you remember we had a good amount of destocking happening in the region. So in.

Speaker Change: In 2022, Youll remember there a good amount of supply chain disruptions happening and so volumes are quite strong in 'twenty two when we saw the destocking happening.

Speaker Change: They are last year I'd say this year as Sean noted our expectation would be more of a flattish year in North America.

Jeffrey John Zekauskas: Is the North American market growing and your seeding share growing, or is the North American market flat?

Speaker Change: As the North American market growing and you're ceding share.

Speaker Change: Or the North American market is flat.

Sean D. Keohane: No, I think the outlook for this year is roughly flat for the North America market.

Speaker Change: No I think the outlook for this year is roughly flat North America market.

Speaker Change: Okay, great. Thank you so much.

Operator: Thank you. And as a reminder, that is star 11 if you have additional questions. One moment for our next question. And it comes from the line of Lawrence I with a Jeffrey's. Please proceed.

Speaker Change: Thank you.

Speaker Change: As a reminder that is star one line. If you have additional questions one moment for our next question.

Speaker Change: And he comes from the line of Lawrence <unk> with Jefferies. Please proceed.

Operator: Hi, this is Dan Rizwan from Lawrence. You mentioned that infrastructure is a tailwind now. I was wondering if you're seeing any benefit from the Infrastructure Act or the CHIPS Act, if that's helping drive growth, if that'll help you in the future, or if that's having any effect at all.

Speaker Change: Hi, This is Dan Rizzo on for Laurence.

Dan Rizzo: You mentioned that infrastructure as a tailwind now I was wondering if you're seeing any benefit.

Dan Rizzo: From the.

Dan Rizzo: The infrastructure actually the chips Act, if that's helping drive growth if that will help you in the future.

Speaker Change: That's coming off any effect at all.

Sean D. Keohane: Hi Dan. So I think, yes, we are seeing impact from improvements in infrastructure, again, principally in the wired cable space. If you think about what drives that, there are really two things. One is as governments and municipalities renew their grid infrastructure, which, you know, is in need of renewal. That's one driver.

Speaker Change: Hi, Dan.

Dan: So I think.

Dan Rizzo: Yes, we are seeing impact from improvements in infrastructure again, principally in the wire and cable space, which really if you think about what drives that they are really two things one is as.

Sean D. Keohane: And then as alternative energy gets installed, then that has to be connected to the grid. So the best example of that would be when there's an offshore wind farm; then there have to be subsea cables that bring that power back and connect it to the grid. And so that drives a demand for conductive carbons. And so there is a clear trend there. With respect to, and we're seeing that in the current results, with respect to the, in the U.S., the Infrastructure Bill in parts of the U.S., and this is true in many mature economies that are really in need of renewal. So we think that provides a good long-term tailwind with a bump to that long-term tailwind as alternative energy gets deployed.

Dan Rizzo: Governments and municipalities renew their grid infrastructure, which.

Dan Rizzo: As in is in need of renewal.

Dan Rizzo: That's one driver and then as alternative energy.

Dan Rizzo: Gets installed then that has to get connected to the grid. So the best example of that would be when there is an offshore wind farm. Then there has to be subsea cables that bring that power back and connected to.

Dan: Two to the grid and so that drives demand for conductive carbons.

Dan: And so it is a clear trend there with respect to and we're seeing that in.

Dan: In the current results with respect to the.

Dan: In the U S. The infrastructure Bill.

Dan: And chips act in a range of different stimulus measures there were.

Dan: We're not yet seeing I don't think any direct impact from that in most cases.

Dan: There have been awards.

Dan: Of grant money and incentives that are beginning to trickle.

Dan: The amount of impact from that I don't think is as is meaningful now what what should happen over the longer term here is as those investments take hold to shift the energy mix.

Dan: In the U S to more and more renewables then you should certainly see an impact flowing through our infrastructure applications like wire and cable.

Dan: And then over time I think you should continue to see a sustained.

Dan: Our renewal of the grid I mean, certainly there are very well publicized.

Dan: Examples of where.

Dan: No.

Dan: <unk> has not been stable.

Dan: In parts of the U S and this is true in many of the mature economies and really in need of renewals. So we think that provides a good long term tailwind.

Dan: With.

Dan: Bump to that long term tailwind as alternative energy gets gets deployed.

Sean D. Keohane: That's very helpful, thanks. And then my second question is around the new, kind of battery business for EVs. I was just wondering, given the growth rate, how long, I mean, what's your capacity, and is there a time, at least in the medium term, where you think you might have to build out capacity to meet the anticipated growth over the next, you know, 10 to 15 years or whatever it is? Yeah, yeah.

Speaker Change: That's very helpful. Thanks, and then my second question is around the new the kind of the battery business for Evs I was just wondering.

Speaker Change: Given the growth rate, how long I mean, what's your capacity is there a time in at least in the medium term, where you think you might have to build out capacity to meet the anticipated growth.

Dan: Over the next 10 to 15 years or whatever whatever it is.

Sean D. Keohane: Yeah, yeah, sure. Thanks, Dan.

Sean D. Keohane: So certainly, right now in batteries, what you're seeing is that EV demand continues to grow at a pretty healthy clip. I think globally, it's still somewhere this year expected to be in the 25 to 30% range. Now, most of that coming from China, I think the growth of EVs will pick up in Europe with, you know, kind of lagging in the US in the early stages.

Speaker Change: Yes, yes sure. Thanks, Dan So certainly right now in batteries, what Youre seeing is that the EV demand continues to grow at a pretty healthy clip I think globally, it's still somewhere this year expected to be in the 25% to 30% range now most of that coming in China.

Dan: I think the the growth of Evs.

Speaker Change: Next <unk>.

Dan: Picking up in Europe kind of lagging in the U S. In the early stages.

Sean D. Keohane: But what you're seeing this year is that at the battery production level, you're seeing battery production lag EV sales. And this is because there's, this is quite, you know, well reported; there's quite a bit of battery cell inventory in the chain. And until that's worked off, I think you will see battery production lag EV growth. So probably the balance of this year, you'll probably see that dynamic play out.

Dan: But what youre seeing this year is that at the battery production level.

Dan: That youre seeing battery production lag EV sales and this is because there is.

Dan: This is quite well reported there is quite a bit of inventory battery cell inventory in the chain and until that's worked off I think you will see battery production of lag EV growth. So probably the balance of this year youll probably see that.

Sean D. Keohane: As we look longer term, in this business today, the business is heavily skewed globally, not just our business, but the battery business in general, to China. They make approximately 70 to 75% of the world's batteries. So the overwhelming majority of them now, and over time, by the end of this decade, the expectation is that it will be more 50 50 50% in China and about half, you know, coming outside of China and the US and Europe.

Dan: That dynamic play out as we look longer term in this business today. The business is heavily skewed globally, not just our business, but the battery business in general to China, They make approximately 70% to 75% of the world's batteries. So.

Dan: The overwhelming majority of them now over over time by the end of this decade. The expectation is that that will be more 50 50.

Dan: 50% in China, and about half coming outside of China, and the U S and Europe.

Sean D. Keohane: And so, you know, we'll certainly be making investments to support our customers' growth as that sort of bifurcation happens between China and the rest of the world. But we're really, you know, pacing the investments to make sure that they're synced, they're synced up with the build out of battery plants in the US and Europe. So we're watching that closely and managing closely with our customers to make sure we're, we're, we're pacing those and syncing those up. But that's a bit of the sort of big picture about what's happening, how we see things developing. And then, over time, we would expect, you know, further capacity investments in the US and Europe to support that.

Dan: And so we will certainly be.

Dan: Making investments to support our customers' growth as that.

Dan: Sort of bifurcation happens between China and rest of world, but we're really.

Dan: Pacing the investments to make sure that they.

Dan: They're synced up with.

Dan: The build out of a battery.

Dan: At Erie plants in the U S and Europe.

Dan: Watching that closely and managing closely with our customers to make sure we're where we're pacing those in thinking those up but that's a bit of sort of big picture of what's happening how we see things developing and then overtime.

Dan: We would expect.

Dan: Further capacity investments in the U S and Europe to support that.

Operator: Thank you.

Speaker Change: Thank you very much.

Jeffrey John Zekauskas: Thank you. One moment for our next question. Any calls from Jeff Zekauskas with J.P. Morgan, please proceed.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And it comes from Jeff Zekauskas with JP Morgan. Please proceed.

Jeffrey John Zekauskas: Thanks very much.

Sean D. Keohane: You've had a positive price dynamic in North America, you know, and fiscal 23, and I think you're optimistic about fiscal 24. But volume contracted last year in North America, and it seems like they'll, slot or so this year. What makes you optimistic about your pricing dynamics? And what, in general, is causing prices to lift in such a soft demand?

Jeffrey John Zekauskas: You have had a positive price dynamic.

Jeffrey John Zekauskas: North America.

Speaker Change: And.

Jeffrey John Zekauskas: Fiscal 'twenty three.

Jeffrey John Zekauskas: Thank you are optimistic about fiscal 'twenty four.

Speaker Change: But volumes.

Speaker Change: Contracted last year in North America, and it seems like Dolby.

Speaker Change: Or so this year.

Speaker Change: What makes you optimistic about your pricing dynamic.

Speaker Change: And what is the trend what was causing prices to lift and such a soft demand environment.

Sean D. Keohane: Yifei, I think a couple of things here. If you look back over a long period of time here, probably from the 2015-ish time period up through this year, what you have seen in the U.S. is two factors. One, an increasingly tightening supply-demand balance and that structural change remains in place, as well as a significant requirement for environmental investments in the plants, which require pricing and returns on capital in order to get an appropriate return on that and to supply our customers.

Speaker Change: Jeff I think a couple of things here. If you look back over a long period of time here, probably from 2015 ish time period up through this year.

Speaker Change: You have seen in.

Speaker Change: In the U S is to two factors one a.

Speaker Change: And increasingly tightening supply demand.

Speaker Change: <unk> and <unk>.

Speaker Change: Structural change.

Speaker Change: Remains.

Speaker Change: <unk> in place as well as a.

Speaker Change: A significant requirement for.

Speaker Change: Environmental investments into the plants, which require.

Speaker Change: Pricing and returns on capital in order to.

Speaker Change: In order to in.

Speaker Change: In order to get an appropriate return on that and to supply our customers and of course the <unk>.

Sean D. Keohane: Of course, the tightening balance over that long period of time has been because there have been tire plant expansions in the U.S., as well as competitor closures over that period of time that have brought the supply-demand balance into a tight position. So, that structural dynamic has played out over many years. In the near-term here, there's a certain, I would call it, sort of dynamic nature in the demand, as Erica pointed out, because you saw 22 was very, very strong, 21 and 22.

Speaker Change: Tightening balance over that long period of time has been because there there have been tire plants.

Speaker Change: Expansions in the U S as well as competitor closures over that period of time that have brought the supply demand balance.

Speaker Change: Into.

Speaker Change: Into a tight position so that that structural dynamic has played out over over many years in the current near term here.

Speaker Change: There is there is a certain.

Speaker Change: I would call it sort of dynamic nature in the demand as Eric pointed out because you saw a 22 was very very strong 'twenty, one and 'twenty two.

Speaker Change: And then in 'twenty three I think people realize if there was there was a bit of overt overbuild of inventory in 2002 that got trimmed off in 'twenty. Three so you really have to look through those two years and kind of average those out.

Speaker Change: And when you do that you see that the dynamic is actually.

Speaker Change: White.

Speaker Change: From a supply demand standpoint, so so that's the long term picture that we have.

Sean D. Keohane: So, that's the long-term picture that we've been sharing for quite some time now, and I would say there's no change in that, but you've got to certainly look through the inventory build and then the D-stock across 22 and 23 to see the real supply-demand balance.

Speaker Change: Been sharing for quite some time now and I would say there is no change in that but <unk> got a certainly look through the.

Speaker Change: The inventory build and then the destock across 22 and 23 to see the real.

Speaker Change: The supply demand balance.

Speaker Change: Great. Thank you so much.

Operator: Thank you. And, as I see no further questions in the queue, I will conclude the Q&A session and hand it back to Sean Keohane for final remarks.

Speaker Change: Thank you.

Speaker Change: No further questions in the queue I will conclude the Q&A session and hand, it back to Sharon Cohen for final remarks.

Sean D. Keohane: Great. Thank you very much for joining us today on the call and for your continued support of Cabot, and we look forward to speaking again next quarter. Have a great day.

Sharon Cohen: Great. Thank you very much for joining us today on the call and for your continued support of Cabot and we look forward to speaking again next quarter have a great day.

Operator: And thank you all for participating, and you may now disconnect.

Sharon Cohen: Thank you all for participating and you may now disconnect.

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