Cabot Corp (CBT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Cabot earnings conference call.

My name is Chris and I will be your operator for today.

At this time all participants are in a listen-only mode.

We will conduct a question and answer session later in the conference.

(Operator Instructions).

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms.

Susannah Robinson, Director of Investor Relations.

Please proceed.

Thank you, Chris.

Good afternoon, everyone.

I would like to welcome you to the Cabot Corporation earnings teleconference.

Here this afternoon are Patrick Prevost, Cabot's President and CEO, Eddie Cordeiro, Cabot's Chief Financial Officer, Dave Miller, General Manager of the Core Segment, Sean Keohane, General Manager of the Performance Segment, Fred von Gottberg, General Manager of the New Business Segment, Ravi Paintal, General Manager of the Specialty Fluids Segment, Jim Kelly, Corporate Controller, and Brian Berube, General Counsel.

Last night we released results for our second fiscal quarter of 2010, copies of which are posted in the investor relations section of our website.

For those on our mailing list, you received the press release either by e-mail or fax.

If you are not on our mailing list and are interested in receiving this information in the future please contact investor relations.

The slide deck that accompanies this call is also available in the investor relations portion of our website and will be there in conjunction with the replay of the call.

I remind you that our conversation today will include forward-looking statements which are subject to risks and uncertainties and Cabot's actual results may differ materially from those expressed in the forward-looking statements.

A list of factors that could affect Cabot's actual results can be found in the press release we issued last night as well as in our 2009 Form 10-K and subsequent filings with the Securities and Exchange Commission, copies of which are available on our website.

As we typically do during our second quarter teleconference I would also like to remind you that over the next several months in connection with the vesting of restricted stock awards issued under our long-term incentive equity program, officers of the Company may sell shares to pay tax and other obligations related to their prior awards.

I will now turn the call over to Patrick Prevost who will discuss the key highlights of the Company's performance for the quarter.

Eddie Cordeiro will review the business segment and corporate financial details, and following this, Patrick will provide closing comments and open the floor to questions.

Patrick?

Thank you, Susannah.

And good afternoon.

For the second consecutive quarter, we have delivered strong earnings, enabled by solid execution in our key strategic areas, margin improvement, emerging market expansion and new business development.

Our volumes have stabilized slightly ahead of first quarter levels as demand in our end markets continued to improve.

Emerging markets are showing significant strength in the recovery, and our position in these markets give us a distinct competitive advantage.

We are maintaining our robust unit margins in the core and performance segments with effective marketing efforts and ongoing cost management.

Our new business activities are showing steady improvement and the new business segment achieved a positive quarterly profit for the first time.

All in all, we were successful during the quarter at leveraging our actions over the past two years and delivering solid profitability in each of our business segments.

Let me give you some more detail in each of the areas touched upon.

First, volumes.

Volumes have stabilized slightly above first quarter 2010 levels.

In rubber blacks, we are currently about 5% below 2008 levels, which is somewhat ahead of our recovery expectations even just a quarter ago.

In the performance segment, volumes are recovering at a steady pace but still remain approximately 10% below pre-crisis levels.

Let me give you some perspective on our end markets.

The tire and automotive sectors continue to recover globally, certainly led by emerging markets.

The one exception is Europe where markets remain somewhat weaker than in the rest of the world.

The electronics market, which you may recall bottomed out this quarter last year, is also showing steady growth, as are the construction and infrastructure markets.

All of these markets, however, still remain below pre-crisis demand levels.

The investments we have made over the past several years in emerging markets position us well to benefit from the growth in local demand.

Our new rubber black units in China are now fully operational, and have helped us to build upon our already strong position in the rapidly growing market.

We are close to completing our new master batch facility in Dubai to serve the high growth Middle East plastics demand.

As a further demonstration of our commitment to the Asia Pacific region, we are pleased to announce our intention to expand by 20% the capacity of our carbon black facility in Indonesia.

Indonesia is a very large and rapidly growing country with an expanding economy and a stable political environment.

It has a rapidly growing tire industry, and we have the leading carbon black manufacturing position in this country.

This expansion will allow us to build upon our strength and meet our customers' growing demand.

Let me now talk about margins.

We were successful during the quarter at maintaining our robust unit margins as a result of effective marketing efforts and disciplined cost management.

This strong and stable margin profile is allowing us to perform at pre-crisis earnings levels despite lower volumes.

In the rubber black business, we have minimized the effect of the contract lag on our financial results, adding stability to the earnings performance of this business.

In the performance segment we have focused our efforts on optimizing our product and customer mix, developing new offerings, and ensuring that we are pricing appropriately for the value we bring.

We believe we are well positioned with the leading customers and with high value product offerings to extend the strong profitability of this segment.

We have leveraged the work done over the past year to reduce our fixed costs, focus on our most efficient assets, drive global operating efficiency and capture the full value of our investments in energy recovery and yield technologies.

Each of these is contributing positively to our performance.

Last week, we announced our intention to close our rubber blacks manufacturing operations in Thane, India.

Although this decision was difficult, it was necessary given our inability to expand this facility and the disadvantaged cost position of the plant.

This does not indicate that we are exiting the India market.

In fact, we will continue to participate broadly in the India market through our very strong positions in performance products and fumed silica.

With regard to rubber blacks, we can be more successful at serving demand from other more efficient operations within our network while we evaluate new manufacturing opportunities within the country.

Lastly, our business development efforts continue to show steady improvement.

The new business segment achieved its first positive quarterly EBIT performance with improved revenue generation and strong focus.

This has been a remarkable $35 million improvement in only the last 18 months.

Although quarter on quarter results will remain somewhat variable, we are optimistic about our ability to achieve strong levels of performance in the future.

In the specialty fluids business we are focused on expanding our reach outside of the core North Sea area.

During the second quarter, 38% of revenue came from these other geographies.

This was a substantial improvement from 9% a year ago and 22% in the first quarter of this year.

And finally, still in the new business development sector, during the quarter we again showed progress in our Cabot elastomer composite efforts.

In 2008 we talked to you about signing an agreement with Michelin to develop and commercialize Cabot's patented CEC technology for tire applications.

Today, I'm pleased to say that as a result of the accomplishments of the last six months we have entered the next phase of the joint development and commercialization program.

Separate from our work with Michelin, we have also made initial progress in developing high value nontire applications for CEC materials and are finding significant interest from customers in the defense and mining industries.

We continue to be convinced that this breakthrough technology will provide material benefit to Cabot in the future.

I will now ask Eddie Cordeiro to review the business segment and financial details for the quarter.

Eddie?

Thank you, Patrick.

Before I get to the discussion of the individual segments, let me give you a bit of perspective on results as a whole.

We have improved our business profitability by $102 million relative to the second quarter of last year.

Volumes are 30% to 40% ahead of the extreme lows of the 2009 crisis, and the high cost inventory that unfavorably affected us by $42 million in the second quarter of '09 is no longer an issue.

Additionally, we are benefiting fully from the cost reduction efforts we put in place during fiscal 2009.

Sequentially although business PBT was relatively flat our underlying operating performance in the second quarter was actually stronger than the first.

You may recall that in the first quarter, we had $9 million of one-time revenue recognition benefits.

Our strong second quarter volumes were slightly ahead of expectations and our robust unit margins in rubber blacks and performance products led to a stronger underlying business performance.

I will now discuss the details at the business level beginning with the rubber blacks business.

In rubber blacks, profitability increased by $56 million when compared to the second quarter of 2009.

Volumes increased by 28% globally with Asia Pacific and China increasing by 50%, South America by 31%, North America by 14%, and Europe, Middle East and Africa by 8%.

Unfavorable high cost inventories that affected results by $31 million in the second quarter of 2009 did not reoccur in 2010.

Looking sequentially, profitability decreased by $3 million due to $7 million of favorable one-time items in the first quarter, which were partially offset by expanded unit margins and 1% higher volumes in the second quarter.

During the quarter global volumes remained quite solid despite the Chinese New Year holiday in Asia Pacific with a strong rebound in March in that region.

As a result of our efforts to eliminate the effect of the contract lag on our financial results, we experienced only a $2 million unfavorable impact during the second quarter of 2010.

This is relative to a $9 million benefit in the second quarter of last year.

In the supermetals business, profitability increased by $11 million compared to the second quarter of 2009 from higher volumes, lower raw material costs, and reduced fixed costs.

When compared to the first quarter, profitability decreased by $1 million due to lower volumes from the timing of shipments.

Over the past two years, we have focused the supermetals business on cash generation as we restructured our operations to compete more effectively; and during the quarter the business generated an additional $20 million of cash.

Today we are seeing strengthening tantalum markets with growth principally driven by high end consumer electronics.

Coupled with the work that has been done to restructure our operations, this business is approaching the levels of return that we would expect from a core business.

In the performance segment profitability increased by $32 million year-over-year from higher volumes and increased unit margins.

Volumes increased by 33% in performance products and 47% in fumed metal oxides.

The unfavorable high-cost inventory effects in the second quarter of 2009 did not reoccur in 2010, benefiting results by $11 million.

Sequentially, profitability decreased by $3 million despite volume increases of 9% in performance product and 3% in fumed metal oxides.

The decrease was driven by $2 million of favorable one-time items in the first quarter that did not reoccur in the second and the $3 million unfavorable LIFO impact.

In the specialty fluids segment, profitability increased by $1 million when compared to the second quarter of 2009 due to increased rental activity and a favorable service mix.

Sequentially, profitability was flat, as a favorable service mix was offset by a decrease in rental activity.

As Patrick mentioned earlier, the new business segment achieved a second quarter profit of $1 million, a $2 million improvement over the second quarter of '09 and a $4 million increase sequentially.

Revenues in the segment increased by $6 million compared to 2009, with improvement in inkjet colorants and aerogel.

Sequentially, revenues increased by $5 million, driven by the aerogel business.

From a balance sheet perspective, the Company ended the quarter with $248 million in cash despite a $38 million increase in working capital from higher accounts receivable balances.

Capital expenditures for the quarter were $18 million.

We are still expecting to spend up to $150 million for the full fiscal year.

We reported a net tax benefit of $1 million during the second quarter including $14 million or $0.21 per share of discrete benefits primarily from favorable audit settlements during the quarter.

Excluding these discrete items, the operating tax rate was approximately 25%.

Our full year estimate for the operating tax rate remains between 25% and 27% excluding discrete items and restructuring effects.

And now, turning back to Patrick.

Thank you, Eddie.

Our second quarter performance showed the robustness of our business across all segments.

Our leadership positions in global markets combined with swift actions over the past year have been instrumental in our recent improvement.

The stabilization of our end markets and our ability to deliver in key areas of our strategy gives us growing optimism about the future.

The work we have done over the past year has allowed us to differentiate ourselves and will serve us well through the continued economic recovery.

While we are best known as the leading carbon black supplier to the tire industry it is important to remember that we are a much broader materials company with strong participation across a wide range of segments that are underpinned by very attractive fundamentals.

As I look ahead, Cabot is well positioned to leverage several key trends.

The first trend is infrastructure buildout in emerging markets.

It is providing opportunity for further growth of our specialty carbon black business in the wire and cable and pipe industries.

We also enjoy broad participation in the high growth electronics materials sector from CMP and inkjet to high capacitance tantalum, electrophotography and emerging display applications.

Trends in alternative energy are providing terrific opportunities for our specialty carbons and metal oxides in applications such as advanced battery technologies and wind power.

Engineered polymer substitutions for traditional materials such as glass, metal and wood is continuing unabated.

We are providing the functional additives to enhance the performance of these polymers.

Finally, the trends for advanced adhesives replacing traditional metal fasteners, and composites replacing metals are only accelerating.

We provide critical components to these applications.

These trends as an example combined with our unparalleled position in emerging markets leave me very bullish about our future.

I continue to believe that Cabot is a stronger company than it was before the downturn.

Our leading market positions, strength and strategy execution and the improved stability of our earnings profile give me confidence that we are well on track to meeting our long-term financial targets.

So 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 the line of Jason Miner of Deutsche Bank.

Please proceed.

Thank you, good morning.

Just for background after a number of closures through '09 and now in India, I wonder if you could remind us what your total capacity is.

And actually, if I could tack on, is it possible that your improved cost base will let you gain some market share as demand returns in your view?

Good afternoon, Jason.

Good afternoon.

Sorry.

It's okay.

I'm sure that it has been a long day.

Indeed.

The -- I think the way I would answer the question is if you remember in a few quarters ago when we talked about the restructuring efforts we were working on, we had mentioned that we were in the process of closing about 150,000 tonnes of capacity and at the same time bringing onstream 150,000 tonnes of capacity in Tianjin, China.

In effect the restructuring effort was somewhat neutral on our total carbon black capacity in the system.

And if you now consider the India closure, there will be approximately a 50,000 tonne decrease in capacity, but we have also announced the debottleneck of our Indonesia operation which will add approximately 25,000 tonnes.

So net-net, the actual capacity for carbon black on a reported basis would be about 25,000 tonnes.

So somewhat de minimis compared to our total capacity worldwide.

So I imagine that still leaves you with roughly a quarter of the market in rubber blacks.

Can you perhaps grow it, given an improved cost position as demand returns?

I think the intent is to operate a much more efficient network of capacity, to manage a network more on a global basis.

Of course, keeping, you know, very close connections to our customers regionally or locally but looking at leveraging our costs, leveraging our capability on a worldwide basis.

And, you know, that is really the intent.

We are also working on improving our operating efficiency and trying to extract, you know, the maximum amount at the lowest cost from our total system.

Fair enough.

Just on the elastomer composites arrangement with Michelin, can you describe, is that exclusive?

How would you describe the market potential and perhaps it is limited to certain niches or applicable to all tires?

Right.

Now, we announced the cooperation and the joint project with Michelin last year -- well, actually, it was in 2008.

So there has been quite a bit of work going on.

And this is a project that is actually an exclusive project that we have engaged with Michelin on.

Unfortunately, in terms of your disclosure, this arrangement with Michelin is under confidentiality agreement.

But what I can say is the technology and the agreement with Michelin covers both the technology itself and manufacturing and it has several stages of development, of joint development.

And it is for the tire applications only but it is global.

And we are looking at the success of this technology to impact basically the technology of tires and the usage of tires in the long run.

We believe it will create significant value for Cabot.

And in addition to that and as I mentioned in my introductory speech, we are also working on CEC, that is the name of the technology, Cabot Elastomer Composite, with other industry sectors and there has been a lot of interest.

We have had companies from the mining and defense industries coming to talk to us about this so we see some further potential beyond the tire industry.

Thank you very much.

I'll get back in queue.

Thank you, Jason.

Our next question comes from the line of Saul Ludwig of KeyBanc.

Please proceed.

Good afternoon, folks.

Very good quarter.

Just a follow-up on that CEC.

As you pointed out the process of development and testing goes through various stages before ultimate decision is made on commercialization.

This next phase that you are in or the phase that you are now entering, do you think it is another six months or a year or year and a half of further testing, if you will, before a decision can be made among whether this will really be a go or not?

What do you think the timeline is for the next decision point?

Saul, unfortunately because of the confidentiality agreement we have with Michelin we are really not at liberty to disclose neither the timing or the nature of the project in more detail than I have just done.

So I'm really sorry, I won't be able to answer that question.

Okay.

Second question, you mentioned your growth in volume in Asia and China was 50%.

Was it 50% in each of those regions?

Typically you have given us the change in volume separately for Asia versus China.

I'm assuming China was more than 50% and Asia less but I wonder if you could be a little more specific.

I think China was somewhat more.

Let me just look at the numbers.

We do and we have provided -- so China was 60%; this is quarter-on-quarter -- year-on-year, correct?

Is that second quarter or six months?

Second quarter to second quarter.

Got you.

That is approximately, yeah.

And Asia was?

Sorry, the rest of Asia was, Dave, would you --

Around 50.

Around 50%.

Okay.

Good.

Next question, from a business standpoint, Patrick, let's assume normal conditions sort of continue.

From a seasonal aspect how would the third and fourth quarters compare with the first two quarters, if you will?

Is there any seasonal pattern where one should get better or should get a little worse?

What has been interesting, Saul, is that as I look back and as I look at how the business has developed on the let's say rubber blacks side, we have been noticing that the seasonality of the business has diminished to almost be invisible and I think it is attributable to two factors.

I think the markets are more global in general and our diversification, geographic diversification has increased which means that the seasonal patterns have diminished.

For example, the European summer or the year-end or the Chinese New Year effects have actually, you know -- are not as strong as they were in the past.

So, seasonality, I don't think is a factor.

Now, this is corrected, of course, for any economic recessionary effects.

I was just thinking that you must have had some impact from the Chinese New Year and you did what you did despite that impact.

Whereas let's say in the current quarter you won't have any impact from that.

So we, you know, we had an impact of course, because there were closures in the factories in China and some of the other Asian countries during the Chinese New Year period.

But overall some of that has been made up for by volume in other parts of the world.

And we think that, for example, this summer we will see some reduced volumes in Europe but I believe that those will be offset by continued operations through, you know, in Asia through that summer period.

So really looking at quite a few years back we are not seeing the effects of seasonality as we saw maybe, you know, ten years ago.

Okay.

And then finally, with aerogel you had a spurt in revenues.

I recall that you did get some additional contracts for blanketing material for drilling applications.

Is this level of revenue, and I assume the profit that was associated with that, is this sort of a one quarter thing or is there some legs to the aerogel story?

So yes, you are right, we have been successful in gaining some oil and gas pipeline business.

The nature of that business is more project-oriented, as it is pipeline by pipeline that we get the opportunity to participate.

Yes, so the growth has been driven by that.

But we have also had success in other areas of the -- where aerogel can add performance to the business and that has been in the construction sector and also in the daylighting sector.

So all in all, I would say the business potential is increasing.

We are seeing a growth in revenue and we are very positive about the continued development because the product really is an incredible insulator.

And with the energy costs continuing to be on the upswing we believe that there is going to be more and more demand for the type of applications that aerogel can add value in.

But not yet ready to build a plant over and above the small plant that you now have?

I would say profitability is, you know, target number one.

We will talk about volume after that.

Great.

Thank you very much, guys.

Thank you, Saul.

(Operator Instructions).

Our next question comes from the line of Laurence Alexander of Jefferies.

Please proceed.

This is Lucy Watson on for Laurence today.

Hi, Lucy.

Would you be able to provide us with a rough timeline and perhaps capital investment required for the Indonesia expansion?

We are in the process of starting that capital expenditure and we do not provide details around capital costs for distinct projects.

But what I can tell you is that we have been selecting investments and capital expansion projects based on their efficiency and speed of delivery to the market.

So, in a certain way the answer to your question is that this is the most effective capital investment we have for new carbon black capacity at this stage.

So a very high performance investment for Cabot.

And that new capacity should come onstream sometime by the end of next year?

Mid calendar year.

So, Dave?

It will be mid calendar year, 2011.

Okay, great, thank you.

And are you seeing any signs of restocking in your rubber blacks end markets or is all of the volume growth mostly just true demand?

The question of restocking is one that is, of course, very high on our minds.

We have been speaking with our customers and have been doing that continuously for the last few months as we are trying to get a sense for the level of restocking that may be occurring.

What we are getting across the board is a very clear sign from our customers that they are extremely cautious, remain very cautious today even, that they do not want to restock at the levels they were at in the past.

So, we feel that, in general the level of demand we are seeing is very much representative of underlying demand.

Okay.

And then understanding I guess that the profitability for your new business segment will still be a bit lumpy going forward, would it be fair for us to consider a low $20 million revenue number as a new break-even point for that business?

I would say we don't provide that level of guidance so I'm sorry, I won't be able to answer that question.

Okay.

And just one last one.

Would you be able to provide us with an update on how much energy centers should contribute to earnings this year and any progress that you expect to make in the back half of the fiscal year?

Well, we -- what I can tell you is that we have -- we are continuing to invest in energy centers, that we have just brought three energy centers into operation in the last six months so late last year and early this year.

And we are -- we have got a couple of additional centers, energy centers that are being worked on.

So we are continuing to look at that as a key contributor to our variable costs and performance at our carbon black operations worldwide and they are significant investments.

And if you remember we indicated that we spend about $20 million to $30 million on each of those and we are looking at returns in the 15% to 20% on each of those investments.

So, very attractive investments and we brought three up as I mentioned in the last six months.

One in Italy, one in Tianjin in China and one in operation Brazil in Maua.

Thank you.

Thanks.

(Operator Instructions).

Our next question comes from the line of John Roberts of Buckingham Research.

Please proceed.

Good afternoon.

Good afternoon, John.

Can you remind us when the CEC patents expire since that was first developed a while ago?

Or have you had a new set of patents or layered on additional technology here that extends the protection?

I'm not sure.

Let me check.

I'm not sure I know what the timeline on the patent is.

But what I would know is we are continually working at extending the reach of our patent position on CEC, so specifically addressing the main patent may actually not be relevant with regard to the, you know, the duration of the protection.

And what I can say is that we are looking at a significant period of time on the base patent and we are working at the extension of that patent.

So we are very comfortable.

We have had confirmation from other companies in the market that we have a very strong patent position and certainly we are going to continue to defend that position through additional patenting but also through management and development of know-how.

And secondly in the rubber blacks business, are you largely now spot pricing?

No, we may have changed the way we deal with the lag and have changed the nature of the contracts we have.

But if you look at the overall business on a global basis, we are still at about a 50/50 basis in terms of contractual volume that is a year or more versus what we would call spot business which may be quarterly contracts or monthly agreements.

And the average lag now in the remaining 50% that is contracted is a month or less?

So we are -- so the total volume that we would consider to still be at risk of lag effects is in and around 10% or will be in and around 10% towards the end of this year, this fiscal year.

We are going to continue to work at diminishing the effect with the intent that over the -- I would say the coming year or year and a half it will become nil in terms of affecting the volatility of our earnings.

So you will have still roughly 50% contracted but with relatively instantaneous passthrough of costs?

Correct.

We are to a great extent actually pricing on a monthly basis now, even within the contractual agreements.

Okay.

And then lastly, on the inventory question because it is always really hard to gauge inventories downstream if you have to rely on your customers but are there order patterns suggesting their inventories are low?

Usually if inventories are low you see a little bit more frequent ordering relative to historical patterns or you see below economic order quantities because they are ordering shorter amounts, smaller amounts in shorter periods or something like that.

I'm going to ask Dave Miller to take that question.

No, we are not seeing any distortion in order patterns.

Okay.

So they are ordering as if their inventories -- it's a steady state situation?

They are certainly ordering regularly, yes.

Okay.

Thank you.

Thank you, John.

That concludes our question and answer session.

I would now like to hand the call back over to Patrick Prevost.

So, in closing, I would say that we are very pleased with the last two quarters and the performance of Cabot in that time frame.

It feels that the environment has changed for the better and we are much more optimistic about the near future based on the economic fundamentals we see.

Certainly I believe the Company is a stronger company than before and I'm very confident in our ability to meet our long-term financial goals.

So with that I would like to thank you for participating in our second quarter call and wish you a good afternoon.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.