Ladies and gentlemen thank you for standing by and welcome to the Cabot Corporation Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in a listen only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Steve Delahunt. Thank you. Please go ahead sir.

Thank you and good afternoon. I'd like to welcome you to the Cabot Corporation Earnings Teleconference. With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and CFO. Last night we released results for our fourth quarter of fiscal year 2019 copies of which are posted in the Investor Relations section of our website. The slide deck that accompanies this call is also available in the Investor Relations portion of our website and will be available in conjunction with the replay of the call. During this conference call we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statement. Additional information regarding these factors appears under the heading forward-looking statements in the press release we issued last night and in our last annual report on Form 10-K that is filed with the SEC and available on the company's website. In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures all adjustments the gap results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. Any non-GAAP financial measures reference on this call or reconcile most directly comfortable GAAP financial manager in a table at the end of our earnings release issued last night can avail in the Investors section of our website. Also as we typically do each year. I would like to remind you that over the next several weeks in connection with the vesting of restricted stock awards issued under our long-term incentive equity program officers of the company will be selling shares to pay tax and other obligations related to their rewards. I will now turn the call over to Sean Keohane, who will discuss the full year highlights. Erica McLaughlin will provide a fourth quarter overview and review the business segment and corporate financial details. Following this Sean will provide closing comments and open the floor to questions. Sean?

Thank you Steve and good afternoon ladies and gentlemen. Despite an environment where we saw a continued deceleration of macroeconomic and key sector indicators our fourth quarter results were strong with adjusted EPS up 5% year-over-year. Reinforcement Materials performance remained very robust in the quarter in the face of a weak China environment. In Performance Chemicals we started our new China fumed silica plant. And our transformation plan in Purification Solutions continues to take hold. And we continued our intense focus on cash generation with strong operating and free cash flow performance in the quarter. Erica will go into more detail on the quarter a bit later in the call but I would like to share my perspective on the full fiscal year 2019 results. There is no doubt that the environment in 2019 was much weaker than our planning assumptions heading into the year. Automotive production continue to weaken throughout 2019 particularly in China and Europe, and the second half recovery expected by IHS never materialized. The trade friction between the US and China is having an impact on global growth in a seen as a key driver of the deceleration. Finally, the chemical sector experienced pronounced destocking across most value chains leading to weaker volumes and product mix impacts. While our planning assumptions changed as we progress through 2019 we remained focused on our long-term strategy and capital allocation framework. Starting with our portfolio, I am pleased that we completed the divestiture of the Specialty Fluids business during the year. Given the historically volatile revenue profile of this business and the growing capital call to mine additional ore we determined it was best to monetize this business. The proceeds from the divestiture were largely used to repurchase shares above our stated capital allocation framework. Our strategic view of…

Thanks Sean. Moving to the highlights of the fourth quarter. For the quarter our total segment EBIT was $115 million and adjusted earnings per share was $1.05 up 5% on a year-over-year basis driven by improved results in all three segments. The Reinforcement Materials segment delivered strong operating results with EBIT of $7 million compared to the same quarter in fiscal 2018. These results were achieved despite the challenging business environment in Asia. The Performance Chemicals segment results improved year-over-year largely due to the benefit from the new China fumed silica plant. And EBIT in the Purification Solutions segment improved for the third consecutive quarter due to improved results in our specialty applications and the impact from the segment's transformation plan. Cash flow was very strong in the quarter with operating cash flow of $195 million. And we returned $49 million to shareholders through dividends and share repurchases. I'll now discuss the segment results in more detail beginning with Reinforcement Materials. EBIT from Reinforcement Materials for the fourth quarter of fiscal 2019 increased by $7 million as compared to the fourth quarter of fiscal 2018. The pricing and mix benefits that we achieved from our 2019 customer agreements and the benefits from lower fixed costs were partially offset by the impact of lower margins in Asia from the continued competitive pricing environment and weak automotive production. Globally volumes grew by 2% in the fourth quarter as compared to the same period of the prior year primarily due to a 3% increase in volumes in the Americas and a 3% increase in Asia. Looking ahead to the first quarter of 2020 we expect a sequential decline in EBIT due to lower volumes and higher fixed costs. The lower volumes are driven by normal seasonality as well as customers delaying orders as…

Thanks, Erica. Looking forward to 2020 we don't yet see catalysts to improve the current weak macroeconomic conditions. Current market signals point to a soft first quarter as customers manage inventory levels beyond the normal seasonality. We expect the quarterly shape of fiscal year 2020 to be similar to 2019 with Q1 being weak and momentum building throughout the year as we enter seasonally stronger quarters and our initiatives take hold. As we look at segment performance we anticipate year-over-year EBIT growth in all three segments. For Reinforcement Materials we feel good about how the business is performing despite a difficult environment in Asia. Our management actions over the past few years have structurally improved the profit levels in this business. Utilizations remain generally favorable driven by a balanced supply and-demand environment in the Americas and EMEA. This supports a favorable outlook for the outcome of our customer agreements for calendar year 2020. The rising cost of environmental compliance and MARPOL changes are factors that must be recovered with pricing in order to support our customers long term and our efforts to educate customers and gain their support are going well. In Performance Chemicals we expect positive volume growth from a full year of the new China fumed silica plant targeted customer share gains and the expectation that destocking impacts in 2019 will not repeat. We are focused on pricing actions to offset MARPOL-related feedstock volatility and the implementation of cost management initiatives given the current environment. In Purification Solutions we anticipate another year of profit improvement as we realize the full year benefit of transformation actions and as we continue to grow our specialty applications. We expect to experience normal seasonality in the first quarter but results are anticipated to deliver year-over-year improvement. Based on these factors we expect adjusted earnings per share to be in the range of $3.60 to $4.10. The midpoint of this range reflects a growth rate of 7% as compared to fiscal year 2019 results excluding the Specialty Fluids segment. On the cash side we will continue to aggressively drive working capital improvement and expect to generate strong free cash flow in fiscal year 2020. We will use this cash to fund dividends share repurchases and debt management. Our strategy and goals remain unchanged. We will drive our Advancing the Core strategy and the strong cash flows that we generate will be deployed to fund advantaged growth investments and return cash to shareholders. The long-term fundamentals of our businesses are robust. Our market positions and global presence is unmatched and our balance sheet and liquidity provide strength and flexibility. I'm confident in our growth opportunities ahead and our ability to manage the businesses in a challenging environment. Thank you very much for joining us today. And I will now turn the call back over for our question-and-answer session.

[Operator Instructions] Our first question comes from Mike Leithead with Barclays. Your line is now open.

I guess first to start in Reinforcement Materials I was hoping you could maybe parse apart the performance of your China business versus your non-China business both how they performed in the fourth quarter and how you expect them to trend into 2020.

Mike, so I think as you know China accounts for about 40% of the world's tire production and correspondingly something in that range in terms of the world's carbon black business. And the Asia market tends to be more spot and the western more mature markets tend to be more contract-based. So as we progressed through the year in 2019 what you saw was largely an unchanged story where the results of our contract our customer agreements in 2019 were favorable and that was largely offset by a more competitive intensity in Asia Pacific. All in given the environment we're quite pleased with the result and I think it speaks to the robustness of the business. But story in Q4 really didn't change much compared to the way the story unfolded throughout the full fiscal year. It was really those 2 components that were playing out.

And how are you thinking about those two businesses going into next year?

Yes. So our view right now Mike is that we certainly don't see any catalysts that will cause at this stage a change in the macroeconomic factors here. So our thinking right now is that 2020 will set up to be fairly similar to 2019. And that kind of informs the middle of the road in terms of our range. And then there are factors that drive us above that. And depending on how they play out and those same factors could drive us below. But on balance we see an unchanged environment in 2020 kind of lining up with the middle of that range.

If I could just ask one last one on Reinforcement Materials. For 2020 contract pricing have those negotiations been completed yet at this point? And I guess any color you could give on the level of pricing benefit you assume in your guidance would be helpful.

Sure. So while the macro environment may not be exactly what we had hoped for or at the level that it was last year I would say the overall supply demand balance remains favorable especially in the Western regions where most of our business is contracted. And the contract process is taking a little bit longer this year due to changing market environment but also the impact of MARPOL and our efforts to educate customers on the important transition to get protection mechanisms in place here. I've spoken in the past about how we have put DCAs or deliberate cost adjustments in place in most contracts. We had those in place in 2019. And for those where we didn't we actually moved to raise prices to recover any of that. But as we go into 2020 we're certainly looking to get those mechanisms in place going forward and have been investing a lot of time to educate customers on that. And on balance I would say that's going well. So as we sit here today we've concluded negotiations with several customers and we'll see price increases and mix benefits from those that we've closed thus far. So I think we're off to a good start. With several other customers we're still in negotiations. And so it's commercially sensitive to say much more. We'll certainly have more to say about this on our next call.

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

So continuing on the pricing discussion but perhaps on the performance or the specialty carbon side of the business. Can you just give an update on where those conversations are? And kind of your mix from what already has some type of feedstock differential pass-through in it versus contracts that you're trying to get something similar to that in place?

Sure Josh. So maybe just a quick overview around the difference between specialty carbons and reinforcement. So reinforcement has a much higher percentage of formula business than specialty carbon. Specialty carbon tends to be more spot market-driven. The other factor here is that the specialty carbons business in general tends to rely more on low-sulfur feedstocks as an important input to performance and so therefore is more impacted by the transition to the new MARPOL regulations. So what does all that mean? It means that we're out raising prices in Performance Chemicals to recover any moves in the low-sulfur feedstock. And earlier this year in August toward the end of our fiscal year we announced a surcharge across all our specialty carbon black products that are manufactured in North America. And we've been working with our customers to educate them on the need for this pricing. And I would say on balance that has been going well to date. But as we transition to the new IMO regulations effective date of January it's possible that we'll see some volatility as we trend toward that date and until things settle out. So continuing to be sharp on price recovery is going to be important here in this segment. So I would say good progress but still some work to do here over the coming quarter or 2 as we transition to the new world of IMO 2020 regulations.

And kind of related I guess do you have -- can you quantify the impact of what higher feedstock costs were for the specialty business within this quarter? And what your expectations would be based on this current quarter?

So in this quarter we haven't quantified that. But in this quarter the segment did pretty well in terms of recovery of those higher feedstock costs so I think that's a positive. And then as we transition forward I think it's a little bit difficult right now because of this transition to the new IMO regulations and how the low-sulfur indices are going to play out. We're expecting because this is the first big spec change that I think this industry has -- the oil industry has experienced in a long long time we're expecting that there could be some volatility as we transition to that. So the outlook is a little bit difficult to project but we're trying to be timely in our price recovery here.

Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

Thank you, Sean. Some other companies have mentioned possible green shoots in China over the last few months or a quarter or so. Can you sound a little more cautious around what's happening in China. Any way you can connect those to those two views?

Yes. So boy I wish I had the crystal ball David. But I think as we sit here right now we certainly see continued weakness in China automotive and so OE auto production. I think now it's been about 15 months of consecutive year-over-year declines. In the full year of 2019 on a calendar year basis we'll be negative in auto production. And so we don't yet see anything turning there although there are some signals that the government is looking at stimulus measures to get that trend arrested because it's such an important part of the overall economy. But I can't say that we can point to those yet. So I think -- and then there's no doubt that the U.S.-China trade friction is still I think weighing on China and you see it in most of their indicators. So I don't yet see any signals of improvement. I would say we're not seeing any real significant worsening at this stage if we look across our portfolio but I don't yet see the signals of improvement at least as it relates to our portfolio.

And lastly just on the customer agreements the ones you have negotiated. Can you say the prices are in line with last year in terms of the increase? Up above or below the increase you achieved last year.

Yes. I would say last year we had a pretty strong result. And while it's difficult to say we'll certainly see prices up perhaps not quite to the level that we saw last year. But that being said there are still negotiations going on here. And again I think the supply demand fundamentals remain largely the same as they have. And it's pretty important that the industry have the right mechanisms to deal with this transition to the IMO regulations. And so our efforts there to get these DCA mechanisms in place in all contracts is really important. And I think we've educated customers on that. So I think it's going pretty well. But given the environment is a little bit weaker than what it was last year I would say that it might be a little bit lower than what we saw last year.

Our next question comes from Jim Sheehan with SunTrust. Your line is now open.

Thank you. On your 2020 tire customer contracts do you expect to be fully compensated for increased spending on pollution controls?

Jim, I think the increases that we are getting I think are recovering us ratably as we're moving through the investment phase. You'll remember that we have investments that will play out over the next few years. And so customers certainly understand that. And they know that getting recovery is going to be critical to ensuring long-term supply. So I think it's going to be more a question of getting recovery ratable with how the capital and the operating costs are coming in. And so against that I would say we're progressing well.

And how would you quantify the benefit you're seeing in 2020 from both the silica plant -- fumed silica plant in China as well as your opportunity in conductive carbons?

Yes. So on the new facility in China we commented I think the last call or certainly maybe the last couple of calls on what the expected full year impact is. And so that would be in the range of $8 million to $10 million of EBIT on a full year basis. You'll remember we saw about $2 million of benefit in our fiscal Q4 and -- as that came on. So I think that's the right way to think about its earnings contribution. And of course then that's subject to sort of market conditions and the specific rate at how we ramp up. But that's a reasonable way to think about it. On the conductive carbons for energy materials we're growing our sales at a pretty significant clip and focused pretty heavily on customer qualification. So I would say this segment is still more in investment phase at this point as we invest research and development and application development dollars to work with customers on further approvals. And so I think 2020 will be another investment year where sales will grow but investment will be growing quite fast as well. But the expectation here is then with qualifications continuing to build then that it transitions to be a material profit contributor for Performance Chemicals segment. But 2020 will be another year of some fairly heavy R&D investment in that segment.

Our next question comes from Kevin Hocevar with Northcoast Research. Your line is now open.

In the guidance so 7% EPS growth at the midpoint. It seems like with the lower share count sounds like you're expecting to continue to repurchase shares returning 50% of your discretionary free cash flow to shareholders. So between the lower share count the Wuhai facility benefits and there were some $7 million in EPA costs that you incurred in the third quarter of '19 that I think was not expected to repeat seems like you can get to that 7% growth with just that stuff. And then it sounds like contract negotiations are going quite well Purification Solutions should grow earnings. So what are the offsets there that kind of counteract those -- the positive contract pricing? I know there's a lot of uncertainty with IMO impacts and there's the other EPA costs. So what are the offsets I guess that could keep earnings from being better than that?

Yes. So Kevin let me sort of walk you through how we're thinking about it here. So I guess I'd start by sort of outlining the assumptions that we believe would put us kind of in the middle of that range. And as I said earlier I think there's sort of similar economic environment in 2020 as to what we experienced in 2019. So this would mean that -- there's the global GDP growth that tire production would have modest growth in the kind of 1% to 2% range. And then our auto production assumption is aligned with current IHS forecasts which say roughly flat on a year-over-year basis. So of course coming off a year of negative but flat. So not worsening but not getting better. And that's the current view of IHS. And so if you look at those sort of top-level factors I would say that that kind of -- would have you in a middle-ground territory. Now the factors that move us higher and lower are the same factors. It's really just the question of which direction and the magnitude. But let me just walk you through how we think about those. I mean look first of all if auto production is stronger then we could be in the higher end of the range. Of course if we remain in negative territory and that flat outlook from IHS doesn't materialize then that would push us to the lower end. So that's one factor that we're watching closely. I think the other is tire production. And depending on which way this goes you could have movements up or down in the range. The third is the overall competitive environment in China. Right now we're assuming kind of a similar environment in China. If we see some positive…

And then on the in China last couple of years and particularly two years ago there was winter curtailments that occurred. Are you seeing that at all this year? And how is the pricing environment overall in China? How has that been trending?

Yes. So definitely as we saw 2019 play out we did not see the same level of government regulatory intensity. I would say there was no change in the regulations but the level of enforcement seem to back off a little bit I think because China was trying to find their footing as the global trade friction was picking up. And so that being said they continue to do regular inspections and we have plenty of evidence of that. And I think the requirement for China to grow while becoming a better environmental steward I think remains. And there's lots of evidence of that commitment but the actual enforcement can be a little bit choppy and we did see that in 2019 resulting in less curtailment of nonperforming sites and therefore more competitive intensity. And so if we're sitting here saying that our baseline expectation is no real change in the China environment then my guess is that the curtailment story for 2020 will be similar to 2019. And then we'll just have to see as we get deeper into the winter period here and we see how China's doing in terms of their economy I think there will be a relationship between these two. If China begins to strengthen economically then I think you'll probably see a corresponding ratcheting of enforcement because I think the long-term picture here is unchanged. It's just a question of short term a bit of choppiness.

And last one for me. On the contract pricing is that -- the favorable conditions is that specific to any certain region? Or are all regions seeing some type of realization there?

Well, I think in our contract regions Kevin. So as you know that's Americas Europe and then also in North Asia. Where the more mature markets tend to be -- they tend to be on more contract-type structures longer-term agreements. And so I think in those places we find that the supply demand balance remains favorable and we would therefore expect to have favorable outcomes in those. The rest of the world which is principally sort of Asia ex Japan those are much more spot market markets.

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

Hi, everyone. It's actually Dan Rizzo on for Laurence. Given what you just were saying about the kind of lack of a curtailment in China I was just wondering what the regional capacity utilization is. And actually what the capacity utilization is for all the regions for carbon black.

Yes. So utilizations Dan I would say remain -- with the exception of Asia remain largely in line with what we've been communicating over the last year or so here where they're currently running in the kind of mid- to high-80s as you look across the more mature markets. And then in Asia Pacific they would be lower than that because of higher capacity levels and a bit of a softer environment right now in China. So the big picture sort of supply/demand hasn't really changed in the mature markets. And where we're seeing the most competitive intensity is as it relates to China. And as China has softened economically and as auto production has been weak in China that has created some more competitive intensity there. So no real change in the movie here I would say.

Okay. No that's very helpful. And then just given all the fluctuations and the outlook for 2020 do we still have line of sight for 10% EPS growth over the long term? Over the next I don't know five to 10 years or so? Or -- I don't know. How should we think about it.

Yes. So if you look at our strategy Dan and the financial framework that underpins that we believe that we can grow the earnings per share in the 7% to 10% range overtime and we still feel very good about that. I think that's the right long-term way to think about it. And then our plan in terms of capital allocation is to invest about half of our discretionary free cash flow in attractive growth investments to keep that long-term 7% to 10% going and then to return about half to shareholders in the form of dividends and share repurchases. And that is certainly I think the right long-term frame and the way to think about things. In any given year there will be some choppiness. And as we saw this year that was the case on the earnings side. That being said we were more aggressive and stepped outside of our capital allocation framework I think appropriately so in terms of the cash return piece. So in any given year there might be a little movement around that framework but we think that is the right long-term framework for the company.

Our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Yes, thanks. I'm just wondering if you could just touch upon demand trends order trends that you saw sequentially during the September quarter and then thus far into the December quarter. I'm particularly interested in sort of maybe specialty and MRG given that those businesses seem to be tied to end markets where there -- might be more susceptible to inventory stocking or destocking in the supply chain.

Yes, Chris. So it's certainly early in the quarter but I would say the October order book in Performance Additives was pretty good and was up over the same month last year and so that is positive. Now you remember the same month last year we were beginning to experience some destocking across some of these markets. But still I think that's positive. So those -- that gives us some measure of optimism. But that being said we're concerned about customers in the uncertain economic environment trimming inventories more aggressively. We've heard of some customers taking extended shutdowns around Christmas holidays and things like this. And so we're trying to balance off these two things. But I would say the data we have right now the order book in October across those specialty carbons fumed silica those were pretty solid.

And Sean just sequential trends during the September quarter is there just the normal seasonality? Was there anything different about how demand trended sequentially during the -- as the fiscal fourth quarter progressed?

Yes. No Chris not really. I mean we normally see some seasonality as there are often customer turnarounds and a slowdown across the July August month and then September usually ends up being a little stronger. I would say generally that profile was intact as we worked through our fiscal Q4. So nothing really to note there.

Okay. And then I just had a quick follow-up on the fumed metal oxide start-up but just to understand. So the $8 million to $10 million in EBITDA contribution is that in total? Or is that incremental contribution anticipated on top of the $2 million that you saw in the fourth quarter? And then what sort of loading for that plant is baked into that sort of metric?

Yes. So the $8 million to $10 million number Chris is a full year number. Now we -- coming out of the gates we ramped pretty well. So I would say getting to full realization fairly quickly there. But the $8 million to $10 million is a full year number that you should think about. And then that -- how that develops is of course subject to local market conditions. But that's the right way to think about it. And our ramp coming out of the gates in Q4 was pretty consistent with that so that was good.

And at this time I'm showing no further questions. I'd like to turn the call back over to Sean Keohane.

Great. Well thank you very much for joining today and for your questions. And we look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.