Q3 2024 Cabot Corp Earnings Call
Good day. Thank you for standing by.
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 1-1 on your telephone. You will then hear an automatic message advising that your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Steve Delahunt, Vice President, Treasurer, and Investor Relations. Please go ahead.
Speaker Change: Welcome to Cabot's third quarter 2024 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 session, you will need to press star-1-1 on your telephone. You will then hear an automatic message advising your hand is raised.
Sean Keohane: This accomplishment exemplifies our commitment to circularity by utilizing waste energy in our manufacturing process to produce cogeneration power, which is CO2 free. The strength of our cash flow generation and disciplined capital allocation are fundamental to the strong Cabot investment thesis and a priority for this management team.
Speaker Change: Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Steve Delahunt, Vice President, Treasurer, and Investor Relations. Please go ahead.
Steve Delahunt: Thanks, Livia, and good morning. I'd like to welcome you to the Cabot Corporation Earnings Teleconference.
Speaker Change: With me today are Sean Keohane, CEO and President, and Erica McLaughlin, Executive Vice President and CFO .
Speaker Change: Last night we released results for our third quarter of fiscal year 2024, copies of which are posted in the investor relations section of our website.
Speaker Change: 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.
Speaker Change: During this conference call, we will make forward-looking statements about our expected future operational and financial performance.
Speaker Change: Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Speaker Change: 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 FCC, all of which are available on the company's website.
Speaker Change: In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.
Speaker Change: 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.
Speaker Change: I will now turn the call over to Sean who will discuss the third quarter highlights followed by our progress in the area of sustainability and the company's recent cash flow performance.
Speaker Change: Erica will review the third quarter financial highlights and the business segment results.
Speaker Change: Following this, Sean will provide a strategic summary and closing comments and open the floor to questions.
Speaker Change: Shawn.
Sean Keohane: Thank you, Steve. And good morning, ladies and gentlemen, and welcome to our call today.
Speaker Change: I'm very pleased with our performance in the third quarter, as adjusted earnings per share was up 35% to $1.92 compared to the same period in fiscal 2023.
Speaker Change: This level of performance reflects the continued strength of the reinforcement materials segment and a recovery to more normalized volume levels in the performance chemical segment after the destocking that took place last year.
Speaker Change: EBIT and reinforcement materials grew 3% year-over-year to $136 million, marking the second-best quarter in history.
Speaker Change: This result was achieved despite some weather-related events in Mexico and Brazil that impacted volumes in the quarter and a less favorable regional mix.
Speaker Change: In the performance chemical segment, EBIT increased 72% year-over-year, driven by strong volume growth and a return to a more normalized product mix.
Speaker Change: It is encouraging to see that demand in strategic high-value applications such as automotive and semiconductors rebounded to more normalized levels and reconnected to underlying demand after a very prolonged destocking cycle.
Speaker Change: Furthermore, our products targeted to strategic infrastructure applications continue to build momentum.
Speaker Change: Cash flow generation remains strong in Q3, with operating cash flow of $207 million.
Speaker Change: We returned $73 million of cash to shareholders in the third quarter of 2024 through a combination of share repurchases and dividends consistent with our balanced approach to capital allocation.
Speaker Change: And finally, we are proud to have earned the top rating of platinum from EcoVetas for the fourth consecutive year, reflecting our continued leadership in sustainability.
Speaker Change: At Cabot, sustainability is embedded in all that we do, beginning with our purpose of creating materials that improve daily life and enable a more sustainable future.
Speaker Change: Our customers continue to seek more sustainable and circular solutions, and they want to align with suppliers that report goals and progress in a transparent way.
Speaker Change: To this end, in June , we published our 2024 Sustainability Report, highlighting our recent performance and advancements toward our 2025 sustainability goals, as well as our vision for enabling a more sustainable world.
Speaker Change: We continue to make significant progress in advancing our sustainability agenda and have achieved nine of our 2025 sustainability goals ahead of schedule.
Speaker Change: Among these achievements is our target to export 200% of the energy that we import. This accomplishment exemplifies our commitment to circularity by utilizing waste energy in our manufacturing process to produce cogeneration power, which is CO2 free.
Speaker Change: Cabot has long been a leader in sustainability and has been recognized by numerous external parties for our performance.
Speaker Change: Fiscal year 2024 marks another significant year of progress in our sustainability journey as evidenced by our platinum rating from EcoVetas.
Speaker Change: Equivatus is one of the world's leading sustainability ratings platforms and one that many of our customers rely upon to evaluate their supply chains.
Speaker Change: Their Platinum rating acknowledges Cabot's environmental, social, and governance efforts and places us among the top 1% of companies assessed by EcoVetis.
Speaker Change: In the third quarter, we also announced that we attained Operation Clean Sweep certification in Europe at our two master batch and compounding facilities in Belgium.
Speaker Change: We are one of the first black master batch manufacturers in Europe to earn this third-party certification.
Speaker Change: Since 2019, Cabot has pledged its support for Operation Queen Sweep, having launched comprehensive plans to implement these protocols at our operations.
Speaker Change: Achieving certification at these facilities is a continuation of these efforts and further testament to our commitment to responsible management practices that reduced plastic waste in the environment.
Speaker Change: Finally, we also continue to progress our Evolve Sustainable Solutions portfolio with the launch of our new RePlaz Black Universal Circular Black Master Batches powered by Evolve Sustainable Solutions.
Speaker Change: This launch introduced two new products, which are the industry's first-ever universal circular black master batches with International Sustainability and Carbon Certification, or ISCC-plus, certified content.
Speaker Change: These solutions offer customers an ISCC Plus Certified Single Master Badge for use in a wide range of automotive applications for coloring polyolefins and many engineering plastics.
Speaker Change: Generating strong levels of discretionary free cash flow has been a strategic objective for this management team dating back to 2016.
Speaker Change: The Cabot portfolio exhibits strong cash flow characteristics, and we bring a disciplined approach to execution to ensure robust cash flow levels.
Speaker Change: Over time, through disciplined execution of our strategy, we have increased our level of discretionary free cash flow from an average of $244 million per year from 2016 through 2019.
Speaker Change: to a level of approximately $370 million per year from 2021 through 2023.
Speaker Change: In fiscal year 2024, we are on track to deliver a new, higher level of discretionary free cash flow.
Speaker Change: and to achieve our 2021 Investor Day target to generate cumulative discretionary free cash flow of greater than $1 billion between fiscal year 2022 and 2024.
Speaker Change: This level of cash generation supports our balanced capital allocation framework, which has remained consistent.
Speaker Change: We will prioritize high-confidence, high-return growth investments, where we feel we have a right to win, and that we believe will grow the long-term earnings of the company.
Speaker Change: These investments would include organic growth projects, as well as potential bolt-on acquisitions that support our strategy.
Speaker Change: We expect to maintain an industry competitive and growing dividend and we continue to expect to opportunistically repurchase shares.
Speaker Change: We believe we can do all of this while maintaining our investment-grade credit rating.
Speaker Change: The strength of our cash flow generation and disciplined capital allocation are fundamental to the strong Cabot investment thesis and a priority for this management team.
Speaker Change: I will now turn the call over to Erica to discuss the financial and performance results for the quarter in more detail. Erica?
Erika: Thanks, Sean. I will start with discussing results for the company and then review the segment results.
Erika: We reported adjusted EPS of $1.92 in the third quarter of fiscal 2024, up 35% compared to the third quarter of fiscal 2023, with growth coming from both the reinforcement materials and performance chemicals segments.
Erika: Cash flow from operations was strong at $207 million in the quarter, which included a working capital decrease of $43 million. Discretionary free cash flow was $128 million in the third quarter.
Erika: We ended the quarter with a cash balance of $197 million and our liquidity position remained strong at approximately $1.4 billion.
Erika: Capital expenditures for the third quarter of fiscal 2024 were $52 million, and we expect $220 to $240 million of capital spending for the fiscal year.
Erika: Additional uses of cash during the second quarter were $24 million for dividends and $49 million for share repurchases. Our debt balance was $1.1 billion and our net debt to EBITDA was 1.2 times.
Erika: The year-to-date operating tax rate was 28%, and we expect the fiscal year rate to be in between the range of 27 to 28%.
Speaker Change: Now moving to reinforcement materials. During the third quarter, EBIT for reinforcement materials was $136 million, which was an increase of $4 million as compared to the same period in the prior year.
Speaker Change: The increase was driven by higher pricing and improved product mix in our 2024 calendar year customer agreements and higher volumes, partially offset by a less favorable geographic mix and higher costs.
Speaker Change: Globally volumes were up 4% in the third quarter as compared to the same period of the prior year due to 9% growth in Asia-Pacific and Europe partially offset by a 4% decline in volumes in the Americas.
Speaker Change: Volumes in the Americas were negatively impacted by weather-related events, from a drought in Mexico impacting the area where our plant operates, and flooding in Brazil, which impacted many of our customers.
Speaker Change: While these events are behind us, we expect there will be some lingering impacts into our fourth quarter as customers take a bit of time to return to their normal purchasing patterns.
Speaker Change: Looking to the fourth quarter of fiscal 2024, we expect a modest sequential improvement in reinforcement materials EBIT due to less of an impact from the weather events in the Americas, partially offset by seasonally lower volumes in Europe .
Speaker Change: Now turning to performance chemicals, EBIT increased by $23 million in the third fiscal quarter of 2024 as compared to the same period in fiscal 2023.
Speaker Change: The increase was driven by 9% higher volumes and a more favorable product mix.
Speaker Change: During the quarter, we saw volumes reconnect to underlying demand drivers as compared to the destocking impact we experienced last year, and we had a more favorable product mix due to improved sales in automotive, infrastructure, and semiconductor applications.
Speaker Change: As we look ahead to the fourth quarter, we expect strong year-over-year EBIT growth driven by higher volumes and a more favorable product mix compared to the prior year destocking effect.
Speaker Change: Sequentially, we expect EBIT in the segment will be lower due to normal seasonality impacts. I will now turn the call back over to Sean to discuss the fiscal year outlook. Thanks, Erica. I'm extremely pleased with another quarter of strong operating results in what was a challenging environment.
Sean Keohane: Based on the third quarter performance and our outlook for the fourth quarter, we are raising our expected full year outlook of adjusted earnings per share to be in the range of $7 to $7.10.
Speaker Change: This is an increase from our previous guidance of $6.65 to $6.85 and is up $0.30 at the midpoint.
Speaker Change: This reflects our strong commercial and operational execution and the value of the strategic choices we have made in recent years.
Speaker Change: The strong results in the reinforcement materials segment are expected to continue with EBIT growing year-over-year from higher pricing and better product mix in our 2024 customer agreements and higher anticipated volumes.
Speaker Change: In performance chemicals, we expect the year-over-year growth to continue from higher volumes and a more favorable product mix.
Speaker Change: The outlook for cash flow remains strong, which is sufficient to fund our growth investments and return a robust level of cash to shareholders.
Speaker Change: I believe we are executing well against our Creating for Tomorrow strategy and the long-term targets that we communicated at Investor Day in 2021.
Speaker Change: The increase in our outlook for adjusted earnings per share in fiscal 2024 would place us at or above the high end of the targeted range of 8% to 12% adjusted EPS compound annual growth rate from fiscal year 2021.
Speaker Change: Also, we remain on track to deliver our target of more than $1 billion of cumulative discretionary free cash flow over the last three years.
Speaker Change: I am proud of the Cabot team and the way they have navigated a turbulent period to support our customers and deliver strong results for our shareholders.
Speaker Change: We are excited about the momentum we have built and we plan to share more with you at our Investor Day, which we will host in Boston on December 4th.
Speaker Change: At that Investor Day, we plan to discuss our strategy, key growth initiatives, sustainability leadership, and the next set of long-term financial targets. Hopefully we can see you all there in person.
Speaker Change: Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.
Speaker Change: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Now first question coming from the line of John Roberts with Mizuho Ulanosopin.
John Roberts: Thank you and congrats on a nice quarter. How far along are you on your rubber black contract discussions for next year?
Speaker Change: Well, as you know, John , we don't talk about contract negotiations while they're ongoing, but I would say the timeline would play out.
Speaker Change: pretty consistent with the historical pattern, which is to begin in sort of late summer for most customers and progress through the fall period. So I think the normal timing cycle is what we'd expect this year.
John Roberts: And then there are a lot of cross currents in China that's there. You have a material sized business there. But what's your read on what's going on with the Chinese economy?
Speaker Change: Yeah, so I would say, you know, as you said, lots of cross currents, and lots of global interplay here between China and rest of the world, but
Speaker Change: If I look at China, I would say the economy appears to have stabilized, albeit at a lower level of growth than historical.
Speaker Change: And we are seeing some, you know, pretty robust demand in some of our key end markets, including tires driven by replacement tire exports, but also auto OE and electronics are pretty strong right now.
Speaker Change: But, again, the growth rate, I think, has pulled back a bit, certainly we've seen the recent GDP numbers there down a bit and down from where they're target. So I think it's, you know, sort of...
Speaker Change: a slower economic environment overall, and I think one that
Speaker Change: remains, you know, a little bit choppy, PMI bumps over 50, then it dips below. And, and so there's, there's a bit of this back and forth, I would say. So overall, we remain cautious on the outlook for the China economy, because I, I think the housing market, which is a big part of the GDP there,
Speaker Change: remains sluggish and and FDI is is is is very very low and so I think this
Speaker Change: sort of reflects weak investment confidence. Now, you know, counterbalancing that, I would say the government is trying to stimulate consumer confidence. But other than in
Speaker Change: services and travel and leisure, things like that. There doesn't seem to be much sustained momentum across, you know, durable goods. So
Speaker Change: So that's a bit of what we see. Now, our position there remains...
Speaker Change: an operator there in China since the 1980s with great local management teams and strong customer partnerships. So we'll continue to actively manage this really dynamic situation. But that's a bit, John , of what
John Roberts: what we're seeing on the ground there in China right now. Great. Thank you.
John Roberts: Thank you.
John Roberts: Our next question coming from the line-up.
David McLaughlin: David Begleiter with Deutsche Bank. Your line is open. Thank you. Good morning. Sean, what did the Altamira Force Majeure cost you guys in Q3?
Speaker Change: So, the Altamira, we had two weather events, John , I mean David, that impacted us in the quarter. One, Altamira, and then flooding in the southern part of Brazil that impacted.
Speaker Change: Not so much our production, but our customers and therefore our demand. And the impacts of these events were, you know, in the order of about $5 million in the quarter.
Speaker Change: Very good. And July 1st, the ban began on Russian imports of carbon black into Europe . Have you seen any material change in...
Speaker Change: Buying behavior or other activities post-July 1st.
Speaker Change: Yeah, so maybe just a quick recap on the overall sanctions.
Speaker Change: Prior to the Russia invasion of Ukraine, you know, carbon black volumes into the EU 27 were pretty significant, somewhere around 550,000 tons per year.
Speaker Change: And then after the invasion commenced, those volumes started to decline as many customers for reputational reasons moved away, and by the time sanctions were announced, actually,
Speaker Change: that runway was sort of cut in half.
Speaker Change: Now, Russian sanctions, as you just point out, went into full effect on July 1st, and so carbon black can no longer be imported into the EU 27. I would add that additionally, sanctions have been imposed on Belarus to take effect.
Speaker Change: On August 2nd, there is a Russian producer that has a plant in Belarus.
Speaker Change: And so those will now be covered under sanctions, and again, carbon black no longer be imported into the EU27 from there either. So
Speaker Change: This impact has created a shortage of carbon black in the region, and I think it's driving a strong demand from customers to secure local supply and long-term supply, which we'd expect this to continue.
Speaker Change: I don't see any...
Speaker Change: Change in behavior there because this has been a
Speaker Change: you know, a well-telegraphed
Speaker Change: dynamic and and so customers have been preparing.
Speaker Change: for this.
Speaker Change: I think I may have misspoke on the Belarus timing, David, I meant to say October 2nd is the effective date of when that goes in. But anyway, that's sort of the big picture of what's happening, and again, because it's been something that's been underway for quite some time.
Speaker Change: You know, we see a continuation of the desire to secure materials locally. I would say.
Speaker Change: You know, it's probably enhanced even further by continued uncertainties, geopolitical uncertainties, and how those can impact, you know, transportation and, you know, imports and the like. So continuation, I would say.
Speaker Change: Thank you.
Speaker Change: Thank you. Now next question coming from the line up.
Speaker Change: Joss Spector with the UBS. See you on the cell phone.
Joss Spector: Yeah, hi, good morning, and I guess first, congrats on a really solid quarter here.
Joss Spector: I wanted to ask on performance, just, you know, pretty surprising inflection, at least the strength of it.
Speaker Change: So I'm curious if you could give more color on some of the moving pieces there, and just considering how the last year has been relative to, you know, two, three years ago.
Speaker Change: I guess, what's the level of earnings that you're willing to underwrite there at this point? Is it $50 million plus, like the base level past the stocking, or is there anything temporary or anything else you'd call out near term?
Speaker Change: Yeah, thank you. Thanks, Josh.
Speaker Change: Well, we certainly were very pleased to see the strength in performance chemicals, and I would say the drivers are really...
Speaker Change: two main factors. One, of course, you know, volume growth was was strong and and so you know the operating leverage that comes from that is
Speaker Change: is material. But I think most importantly, the what I would say the normalization of our product mix, which has been a significant drag for this business over the last
Speaker Change: four to six quarters. That has now normalized and and we would we would view that as sort of
Speaker Change: volumes having reconnected to underlying demand there.
Speaker Change: And so I'll give a couple of examples, certainly the automotive sector.
Speaker Change: is a very important one for this segment where products typically in this sector are specified in and end up carrying good strong
Speaker Change: margins.
Speaker Change: And while you've seen, you know, some growth and relative strength in auto production, a lot of our products, because the value chains are longer, you know, really suffered from prolonged de-stocking. And even though the autobuild numbers were looking pretty good, we weren't seeing it yet.
Speaker Change: in our demand as the lengthy value chain sort of worked out its inventory. That has now reconnected. And so seeing that
Speaker Change: strong mix. It was certainly a big driver. And again, we think it's reconnected. So that's positive.
Speaker Change: I would say another key factor in the mix was semiconductors, so the CMP.
Speaker Change: application where we sell fume silica.
Speaker Change: Last year was a very, very weak quarter across that whole chain. And again, I think now inventories have
Speaker Change: work their way out. And we're seeing a reconnection there. And so, you know, good strong margins in that.
Speaker Change: in that application. And then finally, we have been underwriting a lot of...
Speaker Change: new product growth in areas around infrastructure. So wire and cable, think about this as
Speaker Change: You know, connecting offshore wind farms, things like this, our products are used in applications like that, and those continue to do well and carry good, strong margins. So it's really a mixed return to normal, I would say, was a really big driver, along with the headline volume numbers.
Speaker Change: Now, in terms of, you know, how do we think about moving forward?
Speaker Change: I think if we remain in or around these volume levels, we would expect the quarterly EBIT would be in the range of $45 million to $55 million per quarter, depending
Speaker Change: on the quarter and you know, specific quarters can be impacted by seasonal demand. Uh, you know, product mix and then the timing of when we do maintenance on our
Speaker Change: on our assets. That can have a significant impact here because the asset base is a little more concentrated than in reinforcement materials where we have a lot more plants.
Speaker Change: one or two plants down for maintenance, you know, it kind of gets diluted in reinforcement a little bit more so, and performance chemicals can be a little more pronounced. So these things can drive some.
Speaker Change: Some quarterly variation, but I think as we sit here now, our best view would be sort of in and around that range of 45 to 55 million per quarter, depending on some of those specific factors.
Speaker Change: Thanks, that's really comprehensive. I guess one quick follow-up there is just, so when you think about the fume silicas and maybe the building construction market, I assume that hasn't improved much. I guess if you can comment there, if anything's changed.
Speaker Change: How much is that still an overhang versus some of the numbers you just gave or the segment?
Speaker Change: Yeah, so certainly the building and construction market is an important end market for silicones and therefore for a sizable portion of our fume silica business.
Speaker Change: And I would say we have not yet seen signs of any bounce there. I would say it is stable, is probably the best way to characterize it. But whether that's in China or outside of China and in the West, not really seen any significant bounce there. I think likely if we're beginning to head into a rate cut cycle, then that could be a catalyst for some improvement in the housing and construction sector.
Speaker Change: But I think it would be...
Speaker Change: Some trickle from that would probably be needed to see it move out of its, what I would call, stable position right now. More runway there, I would say, as that end market gradually recovers.
Speaker Change: Thanks, Sean.
Speaker Change: Thank you. And our next question coming from the lineup, Jeff Zekauskas from JP Morgan. Your line is open.
Jeff Zekauskas: Thanks very much. When you look at Russian and Belarusian carbon black production, has it changed very much? You know, that is, are they making
Jeff Zekauskas: The same amounts that they used to make, they're just not shipping it to Europe ? Or has their production actually fallen?
Speaker Change: Yeah. Hi, Jeff.
Speaker Change: Yeah, so, I mean, difficult to see with, you know, a great level of precision. I don't believe that there have been any material expansions there, so I think what you're dealing with is...
Speaker Change: the structural capacity that existed.
Speaker Change: pre-invasion of Ukraine remaining and it's just moving around.
Speaker Change: differently because of the impact. So that that's our our our best view of that.
Speaker Change: One of the other carbon black companies spoke of
Speaker Change: Consumers trading down to or buying lower quality tires.
Speaker Change: more exports coming in from the offshore areas as something that was leading to
Speaker Change: Lower and different tire production in the United States. Is that something that that you believe or or you don't?
Speaker Change: Well, I do think there is some evidence in the tire industry of trade-down effect, and we have seen historically two dynamics that can emerge when you have economic downturn.
Speaker Change: sort of macroeconomic stress. You know, one is when
Speaker Change: when the economic environment is very weak.
Speaker Change: Then you have seen periods where consumers will stretch the replacement cycle a little bit longer than they probably should.
Speaker Change: I think in the case we're in right now, while, you know, GDP in the U.S., for example, remains, you know, fairly robust,
Speaker Change: The high level of inflation that we're working our way out of and higher interest rates.
Speaker Change: You know, I think probably are. I think there's some evidence of that, that it's stressing the consumer, particularly, you know, in the sort of lower end of the income scales and
Speaker Change: and causing some trade-down effect. So I think that there is definitely some evidence of that and the combination of sort of...
Speaker Change: Stretching this replacement cycle and and seeing some trade-down effect is something that has happened
Speaker Change: before. Historically, it's worked itself out and
Speaker Change: I think we'd expect the same here, especially as inflation is subsiding and we appear to be entering a rate cut cycle, which should begin to ease some of those pressures.
Speaker Change: I guess lastly, are there any possible tariffs that might be put on tires that come from China or other offshore areas that might affect you that you're aware of?
Speaker Change: Well, around the world today, in the West, there are tariffs that are in place. For example, there are fairly significant tariffs today in the U.S. on Chinese tires.
Speaker Change: So the result of that is that most of the imports into the U.S. are coming from the ASEAN countries.
Speaker Change: and then most of the Chinese exports of tires are flowing into Europe, for example. So tariffs do create, you know, movement and sometimes some...
Speaker Change: Some, you know, supply chain distortions, as you'd expect.
Speaker Change: But there are there are tariffs in place today.
Speaker Change: in U.S. and Europe and in South America that impact tire flows.
Speaker Change: Now, you know, the elevated level of imports that we have seen is something that, you know, will likely create some back pressure.
Speaker Change: in the form of, you know, more anti-dumping duties and pursuit of tariffs. We certainly could expect that to happen and to be implemented in some way. So I think the combination of
Speaker Change: The inflation coming down and rates reducing, easing things for the consumer a bit, and I think some tendencies around protectionism, you know, the combination of those, you know, I think it's reasonable to think would would kind of move, move the
Speaker Change: And I am showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Sean Keohane for any closing remarks.
Sean Keohane: Great. Well, thank you. Thank you all for joining today and for your continued support of Cabot. And I would just remind you again that we intend to host an Investor Day on December 4th.
Sean Keohane: of this year and look forward at that point to providing a fulsome wrap-up of our last set of Investor Day goals and targets from 2021 and setting out our path forward in terms of strategy and our next set of long-term goals. So hopefully you can all join us there in person here in Boston. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Thanks for watching!
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Speaker Change: Good day. Thank you for standing by.
Speaker Change: Welcome to Cabot's third quarter 2024 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 session, you will need to press star-1-1 on your telephone. You will then hear an automatic message advising your hand is raised.
Speaker Change: Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Steve Delahunt, Vice President, Treasurer, and Investor Relations. Please go ahead.
Steve Delahunt: Thanks, Livia, and good morning. I'd like to welcome you to the Cabot Corporation Earnings Teleconference.
Speaker Change: With me today are Sean Keohane, CEO and President, and Erica McLaughlin, Executive Vice President and CFO .
Speaker Change: Last night we released results for our third quarter of fiscal year 2024, copies of which are posted in the investor relations section of our website.
Speaker Change: 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.
Speaker Change: During this conference call, we will make forward-looking statements about our expected future operational and financial performance.
Speaker Change: Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Speaker Change: 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 FCC, all of which are available on the company's website.
Speaker Change: In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.
Speaker Change: 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.
Speaker Change: I will now turn the call over to Sean who will discuss the third quarter highlights followed by our progress in the area of sustainability and the company's recent cash flow performance.
Speaker Change: Erica will review the third quarter financial highlights and the business segment results.
Speaker Change: Following this, Sean will provide a strategic summary and closing comments and open the floor to questions.
Speaker Change: Sean?
Sean Keohane: Thank you, Steve, and good morning, ladies and gentlemen, and welcome to our call today.
Speaker Change: I'm very pleased with our performance in the third quarter, as adjusted earnings per share was up 35% to $1.92 compared to the same period in fiscal 2023.
Sean Keohane: This level of performance reflects the continued strength of the reinforcement materials segment and a recovery to more normalized volume levels in the performance chemical segment after the destocking that took place last year.
Sean Keohane: EBIT and reinforcement materials grew 3% year-over-year to $136 million, marking the second best quarter in history.
Sean Keohane: This result was achieved despite some weather-related events in Mexico and Brazil that impacted volumes in the quarter and a less favorable regional mix.
Sean Keohane: In the performance chemical segment, EBIT increased 72% year-over-year, driven by strong volume growth and a return to a more normalized product mix.
Sean Keohane: It is encouraging to see that demand in strategic high-value applications, such as automotive and semiconductors, rebounded to more normalized levels and reconnected to underlying demand after a very prolonged destocking cycle.
Sean Keohane: Furthermore, our products targeted to strategic infrastructure applications continue to build momentum.
Sean Keohane: Cash flow generation remains strong in Q3, with operating cash flow of $207 million.
Sean Keohane: We returned $73 million of cash to shareholders in the third quarter of 2024 through a combination of share repurchases and dividends consistent with our balanced approach to capital allocation.
Sean Keohane: And finally, we are proud to have earned the top rating of platinum from EcoVetas for the fourth consecutive year, reflecting our continued leadership in sustainability.
Sean Keohane: At Cabot, sustainability is embedded in all that we do, beginning with our purpose of creating materials that improve daily life and enable a more sustainable future.
Sean Keohane: Our customers continue to seek more sustainable and circular solutions, and they want to align with suppliers that report goals and progress in a transparent way.
Sean Keohane: To this end, in June , we published our 2024 Sustainability Report, highlighting our recent performance and advancements toward our 2025 sustainability goals, as well as our vision for enabling a more sustainable world.
Sean Keohane: We continue to make significant progress in advancing our sustainability agenda and have achieved nine of our 2025 sustainability goals ahead of schedule. Among these achievements is our target to export 200% of the energy that we import. Fiscal year 2024 marks another significant year of progress on our sustainability journey, as evidenced by our platinum rating from Ecoveda. In the third quarter, we also announced that we attained Operation Clean Sweep certification in Europe at our two master batch and compounding facilities in Belgium.
Sean Keohane: We continue to make significant progress in advancing our sustainability agenda and have achieved nine of our 2025 sustainability goals ahead of schedule.
Sean Keohane: Among these achievements is our target to export 200% of the energy that we import. This accomplishment exemplifies our commitment to circularity by utilizing waste energy in our manufacturing process to produce cogeneration power, which is CO2 free.
Sean Keohane: Cabot has long been a leader in sustainability and has been recognized by numerous external parties for our performance.
Sean Keohane: Fiscal year 2024 marks another significant year of progress in our sustainability journey as evidenced by our platinum rating from EcoVetas.
Speaker Change: Equivatus is one of the world's leading sustainability ratings platforms and one that many of our customers rely upon to evaluate their supply chains.
Speaker Change: Their platinum rating acknowledges Cabot's environmental, social, and governance efforts and places us among the top 1% of companies assessed by EcoVetis.
Speaker Change: In the third quarter, we also announced that we attained Operation Clean Sweep certification in Europe at our two master batch and compounding facilities in Belgium.
Sean Keohane: We are one of the first black master batch manufacturers in Europe to earn this third-party certification.
Sean Keohane: Since 2019, Cabot has pledged its support for Operation Queen Sweep, having launched comprehensive plans to implement these protocols at our operations.
Sean Keohane: Achieving certification at these facilities is a continuation of these efforts and further testament to our commitment to responsible management practices that reduce plastic waste in the environment. This level of cash generation supports our balanced capital allocation framework, which has remained consistent. These investments would include organic growth projects, as well as potential bolt-on acquisitions that support our strategy.
Sean Keohane: Achieving certification at these facilities is a continuation of these efforts and further testament to our commitment to responsible management practices that reduced plastic waste in the environment.
Sean Keohane: Finally, we also continue to progress our Evolve Sustainable Solutions portfolio with the launch of our new Replaz-Black universal circular black master batches powered by Evolve Sustainable Solutions.
Sean Keohane: This launch introduced two new products, which are the industry's first-ever universal circular black master batches with International Sustainability and Carbon Certification, or ISCC-plus, certified content.
Sean Keohane: These solutions offer customers an ISCC Plus Certified Single Master Badge for use in a wide range of automotive applications for coloring polyolefins and many engineering plastics.
Speaker Change: Generating strong levels of discretionary free cash flow has been a strategic objective for this management team dating back to 2016.
Sean Keohane: The Cabot portfolio exhibits strong cash flow characteristics, and we bring a disciplined approach to execution to ensure robust cash flow levels.
Sean Keohane: Over time, through disciplined execution of our strategy, we have increased our level of discretionary free cash flow from an average of $244 million per year
Sean Keohane: from 2016 through 2019 to a level of approximately $370 million per year from 2021 through 2023.
Sean Keohane: In fiscal year 2024, we are on track to deliver a new, higher level of discretionary free cash flow.
Sean Keohane: and to achieve our 2021 Investor Day target to generate cumulative discretionary free cash flow of greater than $1 billion between fiscal year 2022 and 2024.
Sean Keohane: This level of cash generation supports our balanced capital allocation framework, which has remained consistent.
Sean Keohane: We will prioritize high-confidence, high-return growth investments, where we feel we have a right to win, and that we believe will grow the long-term earnings of the company.
Sean Keohane: These investments would include organic growth projects, as well as potential bolt-on acquisitions that support our strategy.
Sean Keohane: We expect to maintain an industry competitive and growing dividend, and we continue to expect to opportunistically repurchase shares.
Sean Keohane: We believe we can do all of this while maintaining our investment grade credit rating.
Sean Keohane: The strength of our cash flow generation and disciplined capital allocation are fundamental to the strong Cabot investment thesis and a priority for this management team.
Sean Keohane: I will now turn the call over to Erica to discuss the financial and performance results for the quarter in more detail.
Sean Keohane: Erica?
Erica Mclaughlin: Thanks, Sean. I will start with discussing results for the company and then review the segment results.
Erica Mclaughlin: We reported adjusted EPS of $1.92 in the third quarter of fiscal 2024, up 35% compared to the third quarter of fiscal 2023, with growth coming from both the reinforcement materials and performance chemicals segments.
Sean Keohane: Cash flow from operations was strong at $207 million in the quarter, which included a working capital decrease of $43 million. Discretionary free cash flow was $128 million in the third quarter. Our debt balance was $1.1 billion, and our net debt to EBITDA was $1.2 times. The year-to-date operating tax rate was 28 percent, and we expect the fiscal year rate to be in between the range of 27 to 28 percent.
Sean Keohane: Cash flow from operations was strong at $207 million in the quarter, which included a working capital decrease of $43 million. Discretionary free cash flow was $128 million in the third quarter.
Sean Keohane: We ended the quarter with a cash balance of $197 million and our liquidity position remained strong at approximately $1.4 billion.
Sean Keohane: Capital expenditures for the third quarter of fiscal 2024 were $52 million, and we expect $220 to $240 million of capital spending for the fiscal year.
Sean Keohane: Additional uses of cash during the second quarter were $24 million for dividends and $49 million for share repurchases. Our debt balance was $1.1 billion and our net debt to EBITDA was 1.2 times.
Sean Keohane: The year-to-date operating tax rate was 28%, and we expect the fiscal year rate to be in between the range of 27 to 28%.
Sean Keohane: Moving to reinforcement materials, during the third quarter, EBIT for reinforcement materials was $136 million, which was an increase of $4 million as compared to the same period in the prior year. Globally, volumes were up 4% in the third quarter as compared to the same period of the prior year due to 9% growth in Asia-Pacific and Europe, partially offset by a 4% decline in volumes in the Americas. The increase was driven by 9% higher volumes and a more favorable product mix.
Speaker Change: Now moving to reinforcement materials. During the third quarter, EBIT for reinforcement materials was $136 million, which was an increase of $4 million as compared to the same period in the prior year.
Sean Keohane: The increase was driven by higher pricing and improved product mix in our 2024 calendar year customer agreements and higher volumes, partially offset by a less favorable geographic mix and higher costs.
Sean Keohane: Globally volumes were up 4% in the third quarter as compared to the same period of the prior year due to 9% growth in Asia-Pacific and Europe partially offset by a 4% decline in volumes in the Americas.
Sean Keohane: Volumes in the Americas were negatively impacted by weather-related events from a drought in Mexico impacting the area where our plant operates and flooding in Brazil which impacted many of our customers.
Sean Keohane: While these events are behind us, we expect there will be some lingering impacts into our fourth quarter as customers take a bit of time to return to their normal purchasing patterns.
Sean Keohane: Looking to the fourth quarter of fiscal 2024, we expect a modest sequential improvement in Reinforcement Materials EBIT due to less of an impact from the weather events in the Americas, partially offset by seasonally lower volumes in Europe .
Sean Keohane: Now turning to performance chemicals, EBIT increased by $23 million in the third fiscal quarter of 2024, as compared to the same period in fiscal 2023.
Sean Keohane: The increase was driven by 9% higher volumes and a more favorable product mix.
Sean Keohane: During the quarter, we saw volumes reconnect to underlying demand drivers as compared to the destocking impact we experienced last year, and we had a more favorable product mix due to improved sales in automotive infrastructure and semiconductor applications.
Sean Keohane: As we look ahead to the fourth quarter, we expect strong year-over-year EBIT growth driven by higher volumes and a more favorable product mix compared to the prior year destocking effect.
Sean Keohane: Sequentially, we expect EBIT in the segment will be lower due to normal seasonality impacts. I will now turn the call back over to Sean to discuss the fiscal year outlook. Thanks, Erica. I'm extremely pleased with another quarter of strong operating results in what was a challenging environment.
Sean Keohane: Based on third-quarter performance and our outlook for the fourth quarter, we are raising our expected full-year outlook of adjusted earnings per share to be in the range of $7 to $7.10. This is an increase from our previous guidance of $6.65 to $6.85, and it's up 30 cents at the midpoint.
Sean Keohane: Based on the third quarter performance and our outlook for the fourth quarter, we are raising our expected full year outlook of adjusted earnings per share to be in the range of $7 to $7.10.
Speaker Change: This is an increase from our previous guidance of $6.65 to $6.85 and is up 30 cents at the midpoint. This reflects our strong commercial and operational execution and the value of the strategic choices we have made in recent years.
Speaker Change: The strong results in the reinforcement materials segment are expected to continue with EBIT growing year-over-year from higher pricing and better product mix in our 2024 customer agreements and higher anticipated volumes.
Speaker Change: In performance chemicals, we expect the year-over-year growth to continue from higher volumes and a more favorable product mix.
Speaker Change: The outlook for cash flow remains strong, which is sufficient to fund our growth investments and return a robust level of cash to shareholders.
Sean Keohane: I believe we are executing well against our Creating for Tomorrow strategy and the long-term targets that we communicated at Investor Day in 2021. Additionally, we remain on track to deliver our target of more than $1 billion of cumulative discretionary free cash flow over the next three years. I am proud of the Cabot team and the way they have navigated a turbulent period to support our customers and deliver strong results for our shareholders. We are excited about the momentum we have built, and we plan to share more with you at our Investor Day, which we will host in Boston on December 4th.
Speaker Change: I believe we are executing well against our Creating for Tomorrow strategy and the long-term targets that we communicated at Investor Day in 2021.
Speaker Change: The increase in our outlook for adjusted earnings per share in fiscal 2024 would place us at or above the high end of the targeted range of 8% to 12% adjusted EPS compound annual growth rate from fiscal year 2021.
Speaker Change: Also, we remain on track to deliver our target of more than $1 billion of cumulative discretionary free cash flow over the last three years.
Speaker Change: I am proud of the Cabot team and the way they have navigated a turbulent period to support our customers and deliver strong results for our shareholders.
Speaker Change: We are excited about the momentum we have built and we plan to share more with you at our Investor Day which we will host in Boston on December 4th.
Speaker Change: At that Investor Day, we plan to discuss our strategy, key growth initiatives, sustainability leadership, and the next set of long-term financial targets. Hopefully, we can see you all there in person.
Speaker Change: Thank you very much for joining us today and I will now turn the call back over for our Q&A session.
Speaker Change: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Now, first question coming from the line of John Roberts with Mizuho Yolanda-Solphin.
Speaker Change: Thank you and congrats on a nice quarter. How far along are you on your rubber black contract discussions for next year?
Speaker Change: Well, as you know, John , we don't talk about contract negotiations while they're ongoing, but I would say the timeline would play out.
Speaker Change: Pretty consistent with the historical pattern, which is to begin in sort of late summer for most customers and progress through the fall period. So I think the normal timing cycle is what we'd expect this year.
Sean Keohane: And then there are a lot of cross-currents in China that are there. You have a material-sized business there. What's your take on what's going on with the Chinese economy? services and travel and leisure, things like that. There doesn't seem to be much sustained momentum across durable goods. So that's a bit of what we see. Now, our position there remains strong. We've been an operator there in China since the 1980s, with great local management teams and strong customer partnerships. So we'll continue to actively manage this really dynamic situation. But that's a bit, John, of what we're seeing on the ground there in China right now. All right, thank you.
Speaker Change: And then there are a lot of cross-currents in China that's there. You have a material-sized business there. What's your read on what's going on with the Chinese economy?
Speaker Change: Yeah, so I would say, you know, as you said, lots of cross currents, and lots of global interplay here between China and rest of the world, but
Speaker Change: If I look at China, I would say the economy appears to have stabilized, albeit at a lower level of growth than historical.
Speaker Change: And we are seeing some, you know, pretty robust demand in some of our key end markets, including tires driven by replacement tire exports.
Speaker Change: but also auto OE and electronics are pretty strong right now.
Speaker Change: But, again, the growth rate, I think, has pulled back a bit, certainly we've seen the recent GDP numbers there down a bit and down from where they're target. So I think it's, you know, sort of.
Speaker Change: a slower economic environment overall, and I think one that...
Speaker Change: remains, you know, a little bit choppy, PMI bumps over 50, then it dips below. And, and so there's, there's a bit of this back and forth, I would say. So overall, we remain cautious on the outlook for the China economy, because I, I think the housing market, which is a big part of the GDP there.
Speaker Change: remains sluggish and and FDI is is is is very very low and so I think this
Speaker Change: sort of reflects weak investment confidence. Now, you know, counterbalancing that, I would say the government is trying to stimulate consumer confidence, but other than in
Speaker Change: services and travel and leisure, things like that. There doesn't seem to be much sustained momentum across, you know, durable goods. So
Speaker Change: So that's that's a bit of what what we see now our position there remains.
Speaker Change: an operator there in China since the 1980s with great local management teams and strong customer partnerships. So we'll continue to actively manage this really dynamic situation. But that's a bit, John , of what
John Roberts: what we're seeing on the ground there in China right now. Great. Thank you.
Operator: No next question coming from the line-up. David Begleiter with Deutsche Bank, your line is open.
John Roberts: Thank you.
John Roberts: Our next question coming from the line-up.
David McLaughlin: David Begleiter with Deutsche Bank, your line is open. Thank you, good morning. Sean, what did the Altamira Force Majeure cost you guys in Q3?
Sean Keohane: So, Altamira, we had two weather events, John, I mean, David, that impacted us in the quarter. One, Altamira, and then flooding in the southern part of Brazil that impacted not so much our production but our customers, and therefore our demand. And the impacts of these events were, you know, in the order of about $5 million in the quarter.
Speaker Change: So, the Altamira, we had two weather events, John , I mean David, that impacted us in the quarter. One, Altamira, and then flooding in the southern part of Brazil that impacted.
Speaker Change: Not so much our production, but our customers and therefore our demand. And the impacts of these events were, you know, in the order of about $5 million in the quarter.
Speaker Change: Very good. And July 1st, the ban began on Russian imports of carbon black into Europe . Have you seen any material change in...
Speaker Change: buying behavior or other activities post-July 1st?
Speaker Change: Yeah, so maybe just a quick recap on the overall sanctions. So, you know, certainly prior to the Russia invasion of Ukraine, you know, carbon black volumes into the EU 27 were pretty significant, somewhere around 550,000 tons per year.
Speaker Change: and then after the invasion commenced, those volumes started to decline as many customers for reputational reasons moved away and by the time sanctions were announced actually that that run rate was was sort of cut in half.
Speaker Change: Now, Russian sanctions, as you just point out, went into full effect on July 1st, and so carbon black can no longer be imported into the EU-27. I would add that additionally, sanctions have been imposed on Belarus to take effect.
Speaker Change: On August 2nd, there is a Russian producer that has a plant in Belarus.
Speaker Change: And so those will now be covered under sanctions, and again, carbon black no longer be imported into the EU27 from there either. So
Speaker Change: This impact has created a shortage of carbon black in the region, and I think it's driving a strong demand from customers to secure local supply.
Speaker Change: and, you know, long-term supply, which which we would expect this to continue. So I don't see any change in behavior there because this has been a, you know, a well telegraphed.
Speaker Change: dynamic and and so customers have been preparing.
Speaker Change: for this.
David McLaughlin: I think I may have misspoke on the Belarus timing, David, I meant to say October 2nd is the effective date of when that goes in. But anyway, that's sort of the big picture of what's happening, and again, because it's been something that's been underway for quite some time.
David McLaughlin: You know, we see a continuation of the desire to secure materials locally. I would say.
David McLaughlin: You know, it's probably enhanced even further by continued uncertainties, geopolitical uncertainties, and how those can impact, you know, transportation and, you know, imports and the like. So continuation, I would say.
Operator: Thank you. Now, the next question coming from the line of... Joshua Spector with UBS. See you on this often.
Speaker Change: Thank you.
David McLaughlin: Thank you. Now our next question coming from the lineup, Josh Spector with UBS. The line is open.
Joss Spector: Yeah, hi, good morning, and I guess first, congrats on a really solid quarter here.
Joss Spector: I wanted to ask on performance, just, you know, pretty surprising inflection, at least the strength of it. So I'm curious if you give more color on some of the moving pieces there, and just considering how the last year has been relative to, you know, two, three years ago.
Speaker Change: I guess, what's the level of earnings that you're willing to underwrite there at this point? Is it 50 million plus, like the base level past the stocking, or is there anything temporary or anything else you'd call out near term?
David McLaughlin: Yeah, thank you. Thanks, Josh.
Speaker Change: Well, we certainly were very pleased to see the strength in performance chemicals, and I would say the drivers are really...
Speaker Change: two main factors. One, of course,
Speaker Change: you know, volume growth was was strong. And and so, you know, the operating leverage that comes from that is
David McLaughlin: is material. But I think most importantly, the, what I would say, the normalization of our product mix, which has been a significant drag for this business over the last
David McLaughlin: four to six quarters. That has now normalized and and we would we would view that as sort of
David McLaughlin: volumes having reconnected to underlying demand there.
David McLaughlin: And so I'll give a couple of examples, certainly the automotive sector.
David McLaughlin: is a very important one for this segment where products typically in this sector are specified in and end up carrying good strong
Joss Spector: margins.
Joss Spector: And while you've seen, you know, some growth and relative strength in auto production, a lot of our products, because the value chains are longer, you know, really suffered from prolonged de-stocking. And even though the auto builds numbers were looking pretty good, we weren't seeing it yet.
Joss Spector: in our demand as the lengthy value chain sort of worked out its inventory. That has now reconnected. And so seeing that
Joss Spector: strong mix. It was certainly a big driver. And again, we think it's reconnected. So that's positive.
Joss Spector: I would say another key factor in the mix was semiconductors, so the CMP application where we sell fume silica.
Joss Spector: Last year was a very, very weak quarter across that whole chain. And again, I think now inventories have...
Joss Spector: work their way out, and we're seeing a reconnection there. And so, you know, good strong margins in that in that application. And then finally, we have been underwriting a lot of
Joss Spector: New product growth in areas around infrastructure, so wire and cable, think about this as
Speaker Change: You know, connecting offshore wind farms, things like this, our products are used in applications like that, and those continue to do well and carry good strong margins. So it's really a mixed return to normal, I would say.
Speaker Change: was a really big driver along with the headline volume numbers.
Speaker Change: Now, in terms of, you know, how do we think about moving forward?
Speaker Change: I think if we remain in or around these volume levels, we would expect the quarterly EBIT would be in the range of $45 million to $55 million per quarter, depending
Joss Spector: on the quarter and, you know, specific quarters can be impacted by seasonal demand.
Joss Spector: product mix, and then the timing of when we do maintenance on our
Joss Spector: on our assets. That can have a significant impact here because the asset base is a little more concentrated than in reinforcement materials where we have a lot more plants.
Joss Spector: you know, one or two plants down for maintenance, you know, it kind of gets diluted in reinforcement a little bit more so and in performance chemicals can be a little more pronounced. So these things can drive some
Joss Spector: Some quarterly variation, but I think as we sit here now, our best view would be sort of in and around that range of $45 to $55 million per quarter, depending on some of those specific factors.
Sean Keohane: Thanks, that's really comprehensive. I guess one quick follow-up there is just so when you think about the fume silicas and maybe the build and construction market, I assume that hasn't improved much. I guess if you can comment there, if anything's changed, and kind of how much is that still an overhang versus some of the numbers you just gave or the segment. Yeah, yeah, so
Speaker Change: Thanks, that's really comprehensive. I guess one quick follow-up there is just, so when you think about the fumed silicas and maybe the building construction market, I assume that hasn't improved much. I guess if you can comment there if anything's changed and kind of how much is that still an overhang versus some of the numbers you just gave or the segment.
Sean Keohane: Yeah, certainly the building and construction market is an important end market for silicones and, therefore, a sizable portion of our fume silica business. And I would say we've not yet seen signs of any bounce there. I would say it is stable is probably the best way to characterize it. Whether that's in China or outside of China and in the West, I haven't really seen any significant bounce there. I think likely if we're, you know, beginning to head into a rate cut cycle, then that could be a catalyst for some improvement in the housing and construction sectors.
Speaker Change: Yeah, so certainly the building and construction market is an important end market for silicones and therefore for a sizable portion of our fume silica business.
Speaker Change: And I would say we have not yet seen signs of any bounce there. I would say it is stable is probably the best way to characterize it, but whether that's in China or outside of China and in the West, not really seen any significant bounce there. I think likely if we're beginning to head into a rate cut cycle, then that could be a catalyst for some improvement in the housing and construction sector.
Sean Keohane: But I think it would be some trickle from that that would probably be needed to see it move out of its sort of what I would call kind of stable position right now. So more runway there, I would say, as that end market gradually recovers.
Speaker Change: But I think it would be some trickle from that that would probably be needed to see it move out of its sort of what I would call kind of stable position right now. So more runway there, I would say, as that end market gradually recovers.
Operator: Thank you. And our next question comes from the lineup, Jeff Zekauskas from J.P. Morgan. Your line is open.
Speaker Change: All right. Thanks, Sean.
Speaker Change: Thank you. And our next question coming from the lineup, Jeffrey Zekauskas from JP Morgan. Your line is open.
Sean Keohane: Thanks very much. When you look at Russian and Belarusian carbon black production, has it changed very much? You know, that is, are they making the same amounts that they used to make, but they're just not shipping it to Europe? Or has their production actually fallen?
Jep Zekakis: Thanks very much. When you look at Russian and Belarusian carbon black production, has it changed very much? You know, that is, are they making
Jep Zekakis: The same amounts that they used to make, they're just not shipping it to Europe ? Or has their production actually fallen?
Sean Keohane: Yeah, hi, Jeff. Yeah, so, difficult, difficult to see, with, you know, a great level of precision, I don't believe that there have been any material expansions there. So I think what you're dealing with is the structural capacity that existed before the invasion of Ukraine remaining, and it's just moving around differently because of the impact. So that's our, our, our best view of that, Jeff.
Speaker Change: Yeah, hi Jeff.
Speaker Change: Yeah, so, I mean, difficult to see with, you know, a great level of precision. I don't believe that there have been any material expansions there, so I think what you're dealing with is...
Speaker Change: the structural capacity that existed.
Speaker Change: pre-invasion of Ukraine remaining and it's just moving around.
Speaker Change: differently because of the impact. So that that's our our our best view of that. Jeff?
Sean Keohane: Thank you. Thank you. One of the other carbon blocks spoke of consumers trading down to or buying lower quality tires, and more exports coming in from the offshore areas as something that was leading to lower end different tire production in the United States.
Jeff Zekauskas: Thank you.
Speaker Change: One of the other carbon black companies spoke of
Speaker Change: Consumers trading down to or buying lower quality tires.
Speaker Change: more exports coming in from the offshore areas as something that was leading to
Speaker Change: Lower and different tire production in the United States. Is that something that that you believe or you don't?
Sean Keohane: Is that something that you believe, or are you not?
Sean Keohane: Well, I do think there is some evidence in the tire industry of a trade-down effect, and we have seen historically two dynamics that can emerge when you have economic, sort of macroeconomic stress. One is when the economic environment is very weak, then you have seen periods where consumers will stretch the replacement cycle a little bit longer than they probably should. I think in the case we're in right now, while GDP in the U.S., for example, remains fairly robust, the high level of inflation that we're working our way out of and higher interest rates, you know, I think probably are.
Speaker Change: Well, I do think there is some evidence in the tire industry of trade-down effect, and we have seen historically two dynamics that can emerge when you have economic
Sean Keohane: I think there's some evidence of that, that it's stressing the consumer, particularly at the sort of lower end of the income scales and causing some trade-down effect. So I think that there is definitely some evidence of that, and the combination of sort of stretching this replacement cycle and seeing some trade-down effect is something that has happened before. Historically, it's worked itself out, and I think we'd expect the same here, especially as inflation is subsiding and we appear to be entering a rate cut cycle, which should begin to ease some of those pressures.
Speaker Change: to the macroeconomic stress, you know, one is when
Speaker Change: when the economic environment is very weak.
Speaker Change: Then you have seen periods where consumers will stretch the replacement cycle a little bit longer than they probably should.
Speaker Change: I think in the case we're in right now, while, you know, GDP in the U.S., for example, remains, you know, fairly robust.
Speaker Change: The high level of inflation that we're working our way out of and higher interest rates.
Speaker Change: You know, I think probably are. I think there's some evidence of that, that it's stressing the consumer, particularly, you know, in the sort of lower end of the income scales and
Speaker Change: and causing some trade-down effect. So I think that there is definitely some evidence of that and the combination of sort of...
Speaker Change: Stretching this replacement cycle and and seeing some trade-down effect is something that has happened
Speaker Change: before. Historically, it's worked itself out. And I think we'd expect the same here, especially as inflation is subsiding, and we appear to be entering a rate cut cycle, which should begin to ease some of those some of those pressures.
Sean Keohane: I guess lastly, are there any possible tariffs that might be put on tires that come from China or other offshore areas that might affect you that you're aware of?
Speaker Change: I guess lastly, are there any possible tariffs that might be put on tires that come from China or other offshore areas that might affect you that you're aware of?
Sean Keohane: Well, around the world today, in the West, there are tariffs that are in place. For example, there are fairly significant tariffs in the U.S. on Chinese tires. So the result of that is that most of the imports into the U.S. are coming from ASEAN countries, and then most of the Chinese exports of tires are flowing into Europe, for example. So tariffs do create movement and sometimes some supply chain distortions, as you'd expect.
Speaker Change: Well, around the world today, in the West, there are tariffs that are in place. For example, there are fairly significant tariffs today in the U.S. on Chinese tires.
Speaker Change: So, the result of that is that most of the imports into the U.S. are coming from the ASEAN countries, and then most of the Chinese exports of tires are flowing into Europe , for example. Tariffs do create movement, and sometimes some
Sean Keohane: But there are tariffs in place today in the U.S. and Europe and in South America that impact tire flows. Now, the elevated level of imports that we have seen is something that will likely create some back pressure in the form of more anti-dumping duties and the pursuit of tariffs. We certainly could expect that to happen and to be implemented in some way. So I think the combination of inflation coming down and rates reducing, easing things for the consumer a bit, and I think some tendencies around protectionism, the combination of those, I think it's reasonable to think would kind of move tire imports back to kind of a more normalized level.
Speaker Change: in U.S. and Europe and in South America that impact tire flows.
Operator: And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Sean Keohane for any closing remarks.
Sean Keohane: Great. Well, thank you. Thank you all for joining us today and for your continued support of Cabot. And I would just remind you again that we intend to host an Investor Day on December 4 of this year and look forward to that point
Speaker Change: Great. Well, thank you. Thank you all for joining today and for your continued support of Cabot. And I would just remind you again that we intend to host an Investor Day on December 4th.