Hello. And welcome to the Q4 2021 Cabot Earnings Conference Call. All lines have been place on mute to prevent any background noise. After the speaker's remark, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Steve Delahunt. Please go ahead, sir.

Thanks, Lisa. Good morning. I would like to welcome you to the Cabot Corporation earnings teleconference. With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and CFO. Last night, we released results for our fourth quarter of fiscal year 2021. Copies of which are posted in the Investor Relations section of our website. 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. During this conference call, we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Forward-looking Statements in the press release we issued last night and in our annual report on Form 10-K for the fiscal year ended September 30, 2020, and subsequent filings we make with the SEC, all of which are available on the company's website. In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the Investors section of our website. Also, as we do typically 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, who will discuss the fourth quarter and full year highlights. Erica will review the business segment and corporate financial details. Following this, Sean will provide closing comments and open the floor to questions. Sean?

Thank you, Steve. Good morning, ladies and gentlemen. And welcome to our call today. At this time last year, I talked about being prepared to win as the recovery takes hold, and I think 2021 is evidence that we were prepared. Fiscal 2021 was a remarkable year for Cabot as the business recovered from the 2020 COVID lows to deliver record results. We accomplished this through a combination of extraordinary execution and our commitment to driving growth through differentiated investments. I would like to spend a little time now recapping the accomplishments of the year. The Cabot operating model is built on the foundations of commercial and operational excellence, and our strength in these disciplines drove our outstanding results in fiscal year 2021. We delivered record adjusted earnings per share of $5.02 and total segment EBIT of $550 million. And our focus on cash resulted in a record discretionary free cash flow of $353 million. The macro environment in 2021 required resilience and agility, and I'm very proud of the Cabot team and how they work tirelessly to support our customer's evolving needs. Serving our customers and innovating to grow with them is what motivates our team. This was made more challenging in 2021 given the myriad global supply chain disruptions that companies face and the fact that necessary COVID safety protocols continue to evolve and adjust our normal ways of working. Additionally, companies experienced sharply rising input costs, which required dynamic commercial management. Our teams work closely with our customers to manage through this environment, and we were successful in our pricing efforts to ensure our margins remained robust, and we could invest to support our customer's long-term supply needs. Fiscal year 2021 marked the sixth year of our Advancing the Core strategy, and I am very pleased with…

Thanks, Sean. I will start with discussing results in the Reinforcement Materials segment. During the fourth quarter and full year of fiscal 2021, EBIT for Reinforcement Materials increased by $8 million and $167 million, respectively, as compared to the same periods in the prior year. The increases were principally due to higher unit margins and higher volumes. Higher margins were driven by higher spot pricing, particularly in Asia. The higher volumes in the fourth quarter and full year of fiscal 2021 were due to a strong recovery in all regions from the COVID-related impacts of fiscal 2020. The fourth quarter results were also impacted by higher costs associated with plant maintenance. Globally, volumes were up 6% in the fourth quarter as compared to the same period of the prior year due to 6% growth in the Americas, 5% increase in Europe and up 7% in Asia. Higher volumes were driven by strong demand in all regions as the replacement tire market remain robust. Looking at the first quarter of fiscal 2022, we expect a sequential increase in EBIT from a decrease in fixed costs with lower plant maintenance spend and as volumes are expected to increase modestly sequentially as demand for replacement tire remains solid. Now turning to Performance Chemicals. EBIT increased by $20 million in the fourth quarter and $93 million for the full year as compared to the same period in fiscal 2020, primarily due to improved product mix, stronger volumes and higher customer pricing. The stronger product mix was driven by an increase in sales into automotive and conductive carbon applications in our specialty carbons and compounds product lines. Pricing improved year-over-year in our fumed silica product line, particularly in China. Year-over-year volumes in the fourth fiscal quarter increased by 2% in Performance Additives and decreased by…

Thanks, Erica. As we look ahead to 2022, I'm excited about the growth opportunities in front of us. Let me take a couple of minutes to share with you our priorities for the upcoming year. First, we will finalize our 2022 tire customer agreements, and we remain positive about the outcome as security of supply remains the top priority for customers. Demand continues to be strong and is projected to be robust in all regions. Inventories at levels are low across the value chain. And global transportation flows remain challenging, all of which are placing a greater premium on local supply. Second, we'll continue to advance a broad portfolio of strategic growth investments across the company. In Battery Materials, we plan to expand capacity at our carbon nanotube facility in Zhuhai, China. Additionally, the aforementioned specialty carbons conversion of our Suzhou plant will provide 50,000 metric tons of growth capacity across specialty carbons and will free up our network to support growth of Battery Materials. We also expect to complete our new specialty compounds production unit in Indonesia later in the calendar year 2022, which will enable us to build on our strong position in the high growth ASEAN region. And finally, we intend to build on our track record of execution by delivering earnings growth and strong cash flow, while maintaining our investment grade rating and industry-leading dividend. I hope this gives you some color on our priorities for 2022. I'll close out my prepared comments today by talking about our outlook for the year. Clearly, we are pleased with the momentum coming out of fiscal 2021, and we feel very good about how the New Year is shaping up. We expect a step up in Reinforcement Materials starting in the second quarter based on an expected positive outcome…

[Operator Instructions] Your first question comes from the line of Josh Spector with UBS.

Hey, guys. Thanks for taking my question. I guess first, I just wanted to ask on reinforcement. If you could maybe go through some of the puts and takes as you look at 2022. So specifically thinking about you called out higher Western pricing. We had some China price benefit earlier this year. And then also some benefit, if I assume higher volumes and higher oil. How would you kind of bucket those as you think about growth over the next year?

Sure. Hi, Josh. Good morning. Well, I think first and foremost, tire production is expected to grow next year. And so we expect demand will remain robust and in line with long-term trends here, so I think that's important. Inventory levels still seem to be very low across the whole value chain. And again, the replacement market remains very robust. So I would say that's the first point. Second is related to our tire customer agreements and how those settle out. Where we sit right now, our view hasn't changed on this. Supply demand fundamentals remain favorable in both the Americas and Europe, and no capacity additions online. And again, pretty strong demand. So we would expect these markets should remain pretty tight. And so as a result, we would expect a positive outcome from the tire agreement. Now the third point is where oil prices go. Oil prices definitely moved up, of course, as you know, through the year. And generally, when oil prices are higher, we earn more on our technology yield investments and on the benefits from our cogen energy facilities. And so if oil prices sort of stay at elevated levels, then there'd be real no change from the exit rate of where we are. So I think it really comes down to demand and how our tire customer agreements and the year, those would be the two biggest movers and why we're optimistic on this segment.

I guess I assume you won't be willing to quantify any earlier view of where those tire agreements come out at in terms of EBIT contribution to 2022 versus 2021?

No, we're still in the process of those. And so when we complete that, then we'll be sharing more detail on our look as we normally do.

Okay. Thanks. If I could just ask on China specifically, what are you guys seeing? I guess, have you guys any - did you guys have any direct impact from any dual control measures? More broadly, have you seen any material impact on supply or demand in that region?

Yeah. The China environment certainly has been dynamic as the country is pursuing a zero COVID policy and that can have - that can cause some lockdown-related impacts, you've probably read about. And there certainly have been power shortages that impacted many parts of the country. Our volumes in the last quarter were solid, and we navigated through this situation well. We did not have any supply disruptions. So this allowed us to serve our customers well in the quarter, and margins held steady. So I think yeah, certainly some factors to manage, but we seem to be managing those quite well.

Okay. Thank you.

Your next question comes from the line of Mike Leithead with Barclays.

Great, thanks. Good morning, guys. I guess first, Sean, can you maybe just talk a little bit more about how you're thinking about the phasing or the cadence of the '22 EPS guide? I truly appreciate it's still very early in the calendar. But just how are you currently thinking about when some of those near-term disruptions fade? And how fast do you expect earnings to accelerate as we kind of move through the year?

Sure. So as we commented, we expect that Q1 will be largely in line with the Q4 level and then a step-up beginning in Q2. I think the best way Mike, to think about that step-up is from a few specific actions. Certainly, the tire customer agreements, as you know, are on a calendar year basis. So those will kick in January as they always do. So I think that one important element of the expected step-up. The other is that consistent with views in general, around the semiconductor chip shortage on automotive production, while there are impacts flowing through for tire-related value chains right now, it's expected to improve as we progress through 2022. And so that's our view on that one. So that's a second point. Third is we're continuing to build momentum quarter-over-quarter in our Battery Materials business. And so that naturally build as we go through the year. And then finally, I would say the remaining material point is in Performance Chemicals. Right now, we are in process of implementing price increases and surcharges to deal with not only higher oil prices, but higher natural gas costs and rising CO2 costs in Europe. And so these prices will be implemented across the fiscal first quarter. And we expect to be at sort of full run rate of recovery as we enter Q2 and through the balance of the year. But in Q1, we might be chasing it a little bit as we're out in the market right now. You're familiar with our approach in this business. It tends to be more of a spot business. So we have to go out and get the price increases. But we've demonstrated an ability to do that over a very long period of time, including 2021, and we'd expect to continue that. So those would be the biggest factors, I would say, Mike, that account for the step-up as we transition from Q1 then into the Q2 through Q4.

Great. That's helpful, Sean. And then second, you have your Investor Day next month. Could you maybe just highlight the two or three points that you want to bring out in the Investor Day. I appreciate now is not the time or the place to kind of get into all the details. But just high level, what do you want investors to walk away from this upcoming Investor Day?

Yeah, yeah. We look forward to that on December 2nd, Mike, and what we plan to cover in Investor Day are a couple of things. First of all, our updated strategy and view on longer term financial targets, number one. A deeper dive into our growth investments. Certainly, I've been talking more about Battery Materials, and we intend to dig deeper into that as momentum continues to build. But we want to provide a deeper view at our advantaged growth investments for investors. And then third, we want to make sure that the level of transparency is there so that people can truly see the power of the portfolio. And then finally, sustainability is really at the center of everything that we're doing. And I commented on some of our steps of progress in '21. But we want to provide a more holistic view of our approach to sustainability and how that's integral to our strategy and what we're doing to not only improve our own operations, but helping our customers through innovative chemistry to meet their sustainability goals. So I would say those are the priorities, Mike, for Investor Day, and we very much look forward to it.

Great, thank you.

Your next question comes from the line of David Begleiter with Deutsche Bank.

Good morning. Sean, just on Battery Materials, I think you gave a number of $15 million to $20 million [ph] of earnings in '21. What are your expectations for 2022? And what's the sales base of that business exiting the year?

Yeah. Good morning, Dave. So as we commented earlier in the year, we talked about this business having approximately $80 million of sales and that is, in fact, the right way to think about it. And we landed in the EBITDA range that we previously communicated. So those would be a reasonable basis on which to build from. Now as we look forward, the market is growing, the market for conductive carbon additives into mine batteries is growing at around 30%. And so that - we'll call that the sort of organic growth rate provides a strong foundation here. Our expectation is to outperform that organic growth rate because we believe we've got a leading position here both in terms of technology, a distributed production footprint, technology labs in multiple regions to support our customers and a portfolio between our traditional conductive carbon furnace blacks and conductive carbon nanotubes to win in the market here. So that's kind of a thumbnail of how a sketch of how we think about this business. And as I said, we'll definitely be providing a deeper dive into this at our Investor Day.

Very good. And just on Performance Chemicals, Sean, how - what portion of the pricing here is sticky, if and when raws do moderate or roll over?

Yeah. Well, generally, in this business, like a lot of specialty businesses, what you see when raw materials moderate or decline is that there's a certain ability to hold on now to those prices. Now it really - it depends. The portfolio has a diverse set of applications. So some of them you would be able to hold substantial portions of it. And others, you'd have to give back more - those that are more on the sort of commodity end of the product spectrum. But traditionally, what you've seen in periods of decline is that there's some margin expansion there. And it's generally because the performance in the application is pretty important and the loading in the formulation relatively low. So there's a certain sort of support there. But that's how it's typically happened, and we would expect that dynamic should we see that's what raw materials do.

Thank you very much.

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

Thanks very much.

Hey, Jeff.

Hi. Can you talk about carbon black pricing in China today. That is has pricing sequentially weakened or strengthened from the September quarter to the December quarter?

From the September quarter to the December quarter, so the quarter that we're in right now, you mean, Jeff?

Yes. Yes, that's exactly right. In other words, because their energy curtailments, there seems to be a slowing of economic growth. Has that filtered into the carbon black area or no?

No, it really hasn't, Jeff. And in fact, I would say, directionally, prices are moving up in China because coal car prices most recently have been trending up a bit. So no, that's not what the industry is experiencing in China.

Why was Formulated Solutions volume down 8% year-over-year? What are the factors behind that?

Yeah, really a single factor, Jeff. It was related to the planned outage that we commented on last quarter. One of our plants in Belgium experienced a 100 year flood and the plant was impacted by that and it was out for a good part of the quarter. And that's expected to come back online in our fiscal Q2. So that will be out again in Q1 as we're working through the repairs and recovery there. So it's singularly related to that.

Some people think that auto production will grow 10% or 11% next year, like IHS. And other people think that it's going to be flat at least through the - at least through June of next year, flat with the December quarter. Do you have a view? Or what's your tendency? Do you think the IHS guys are right? Are they too aggressive? Or how do you see auto production next year?

Yeah, hard to call, and certainly, variable, Jeff. But our view on it is that the shape will be largely consistent with IHS, which I think is showing growth year-over-year. But I think the pattern as we transition through the quarters in 2021, saw some deceleration as the chip shortage took hold and they continue to revise down full year forecast for '21 as we went through the year. And the expectation is that some of that chip shortage impact will be with us during the early part of '22 and then improve as we progress through the year. So that's the view that informs our base case at this point. And difficult for me to have a dramatically different view than that at this point.

And then lastly, why is share repurchase such a low priority for Cabot in that you really haven't bought back stock over the past couple of years. And now your net debt-to-EBITDA is, I don't know, 1.5 times. Like have you changed your view of what your capital structure should be? Or why isn't repurchase of shares a more important use of cash for you?

Yeah. Well, in terms of our capital allocation, we certainly view share repurchases as an important component of our capital allocation. Our priorities right now are on investing in advantaged growth projects, things supporting Battery Materials, for example, bringing on specialty carbons things where we believe will be creating value for shareholders and investing a dollar there is in the best interest of shareholders, number one. Number two, maintaining an industry-leading dividend. It's always been an important part of our capital allocation. We've had an uninterrupted dividend since 1968 and continuing to maintain a very competitive dividend is priority number two. And then share repurchases would be third on that hierarchy and will remain an important part of our capital allocation. I would expect we would be back in the market to some degree in 2022. But that's the prioritization of the hierarchy, and I wouldn't say it's really changed. Any time we have advantaged growth investments where we're going to do better than $1 for the shareholder, then that's where we want to put the money and then again, the dividend being second and then share repurchase, third. So that's how we think about it, Jeff.

Okay, great. Thank you so much.

Your next question comes from the line of Laurence Alexander with Jefferies.

Good morning. Can you give a sense - I mean, you've given the range of growth opportunities that you have now and how kind of the menu has improved. What kind of conventional growth opportunities that Cabot used to focus on have you now sort of walked away from or has fallen kind of to the bottom of the list? Just want to give a sense for how much of what you're doing is prioritizing versus the kind of all of the above. And secondly, kind of with respect to kind of the flooding and the climate stress. Are your facilities sort of insured for those kinds of events? Or I mean - or as you do a scrub of the portfolio, is there a chance that some of your facilities have to be re-evaluated?

Sure. Laurence, let me - I'll take them in the order that you posed on this. So I guess, first, with respect to growth, I think it's always critical that we're prioritizing the growth projects that we work on. And so what guides us is really a framework that we call our right to win framework of these particular areas like Battery Materials, let me use that as an example, why do we think we have a right to win there. Well, if you look at the importance of conductive carbon additives to the battery chemistry, and you look at our technology depth and product portfolio and our sort of global footprint, it's a natural fit for us to innovate in this space. And so that gets priority claim, for example, on growth investments. I think inkjet is a similar example. We have a strong base here in the traditional home and office printing markets. But those markets, the growth rates have softened over time as people are getting more and more of their news and the like from devices, iPhones, iPads, et cetera. So that has really diminished the growth in those traditional markets from what it was thought to be maybe a number of years ago. But as we look forward, we see opportunities in the commercial and packaging space, and these are very large markets that are in the process of converting from analog to digital. And as new digital presses go in, those are all based on inkjet technology. So extending our position in inkjet into those new segments is a natural place and one where we feel we have a strong right to win. So it's really those - that type of a framework that's guiding where we're prioritizing our growth investments. On the second question, we, of course, maintain a healthy coverage of our portfolio in terms of property insurance. And then we have a strong track record of really managing our operations very well. And so there's no change there in terms of our approach. We run our plants well. We manage risks. We take risk mitigation steps. And then we've had long-term insurance partners with us that provide that sort of property coverage.

Thank you.

[Operator Instructions] Your next question comes from the line of Kevin Hocevar with Northcoast Research.

Hey. Good morning, everybody. Last quarter, you guys called out an expectation that this fiscal fourth quarter would be impacted by, I want to say, around $20 million, $25 million of items between planned outages and maintenance, and I think there were some differentials you expected in there. Curious how much of those costs actually ended up hitting the fourth quarter and how that was kind of disseminated between the segments?

Sure. So hi, Kevin. This is Erica. I can talk to that. So last quarter, we called out a few things, like you said. So we said $8 million to $10 million of higher maintenance costs were expected. We did experience that. So you can see it probably one third reinforcement, two third Performance Chemicals. I would say what was unexpected is we did receive insurance proceeds in Performance Chemicals that largely offset the impact of that maintenance. So we didn't see really elevated costs in total as those two offset. And then I'd say we said $8 million to $10 million in plant outages. This is mostly Performance Chemicals related. One plant in Belgium in the compound space and then one carbon black plant in the US. We did experience that as well. I'd say going forward, we have one plant back online, the one in the US. And so we wouldn't expect that to impact us in Q1. But we do have still the Belgian plant out, we think, for the entire Q1. And then the third item we had called out was $5 million in differentials, feedstock differentials that we thought would impact the Reinforcement Materials business. We did not see that happen as expected. And so I'd say there was no material impact in Q4 on that one.

Okay. Okay. Got you. So then the expectation that for the first quarter being similar to the fourth quarter is that - it sounds like some of that maybe the plant continues to stay down. You don't repeat the insurance benefit, I guess, but not that, that matters because that offset the plan outages anyway. And really the - so some of that not repeating sequentially in the first quarter was offset by kind of incremental price cost headwinds in the specialty carbons business, as well as some seasonality and Purification Solutions that come down. Is that kind of the right way to think of the sequential progression from 4Q to 1Q and the different moving pieces there?

Yes, I think you have it captured.

Okay, okay. Thank you.

At this time, there are no further questions. I would like to turn the call back over to Mr. Sean Keohane for closing remarks.

Great. Thank you for joining us again today. We're excited about the momentum that we've built in our growth prospects here at Cabot. And as I said earlier, we plan to share more with you at our Investor Day, which we'll be hosting in Boston on December 2nd. And so we'll be taking a deeper dive into our key businesses and provide more insight into our long-term strategy and targets as well, as the key growth initiatives that we're underwriting here and our position of leadership and sustainability. So I think we've got a great agenda and hopefully, we'll be able to see you all there in person. Thanks very much for joining us today and for your support of Cabot.

This concludes today's conference. You may now disconnect.