Cabot Corp (CBT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Cabot Corporation third quarter 2011 earnings conference call.

My name is Jonathan and I'm your Operator for today.

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

We will be conducting a question-and-answer session after the prepared remarks.

(Operator Instructions).

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

And now I would like to hand the call off to Ms.

Erica McLaughlin, Director of Investor Relations.

You may proceed, ma'am.

Thank you, Jonathan.

Good afternoon.

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 Fluids Segment; Fred von Gottberg, General Manager of the New Business Segment; Jim Kelly, Corporate Controller; and Brian Berube, General Counsel.

Last night we released results for our third quarter of fiscal year 2011.

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 section of our website and will be available 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, and our discussed more fully in the reports we file with the Securities and Exchange Commission.

Particularly in our last annual report on Form 10-K.

These filings can be found in the Investor Relations portion of our website.

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.

Following this, Patrick will provide closing comments and open the floor to questions.

Patrick?

Thank you, Erica.

And good afternoon, ladies and gentlemen.

We are very pleased with our results this quarter as we have a number of records to announce.

First of all, we achieved a record overall segment EBIT of $115 million.

Second, we also reported record performance segment profits.

And finally, we continue to grow our New Business Segment with record sales revenue this quarter.

These results are a reflection of our continued efforts across all businesses to grow volumes in key markets, introduce new products, and expand margins through value pricing and process improvements.

We have been working at this since 2008 and are pleased with the progress we have made.

Our strategic focus on margin improvement continues to be a critical driver of our strong financial performance.

During this quarter, we were once again very successful at increasing our profitability by expanding unit margins across the entire portfolio.

We continue to implement our value pricing concept across these segments.

We focus our efforts on higher margin products and we work closely with our customers to ensure that there is a clear connection between the value provided and the prices they pay.

Our innovation culture and technical capabilities allow us to introduce new products on a regular basis and ensures that we're meeting the changing needs of our customers.

In addition, as we've discussed before, the contract lag effect that burned us in the rubber blacks business in the past has been essentially eliminated.

We are now optimizing our product and customer mix in all of our businesses and have implemented price increases in our core and performance segments.

We are now optimizing our product and customer mix in all of our businesses.

And have implemented price increases in our core and performance segments.

We're all focused on selling the highest value products to our customers, including new products with differentiated performance.

This is our area of focus across all segments.

In addition, our energy recovery and yield technology investments are also contributing to our results in the form of lower costs.

Our plans to invest $50 million in energy recovery and yield technologies over the next 3 years will help to continue to drive margin improvement in the future.

What is important is that these are margin improvements that are essentially independent of final product cycles.

On the volume side, numbers have remained solid across all of our key businesses and our capacity utilizations remain at high levels.

We saw sequential quarterly increases in volume in the rubber blacks business, performance segment, and the inkjet colorants business, and a welcome improvement in the specialty fluids segment.

We continue to see strong demand in our end markets.

Cabot has technology and market leadership positions across our segments and geographies.

And is poised to benefit from the macroeconomic trends we outlined at our recent Investor Day event.

And those were energy efficiency and sustainability, growth of the middle class in the emerging markets, and, finally, globalization and mobility.

We believe the growth projected in our end markets will continue to ensure our assets are operating at high utilization rates.

Although an essential part of our portfolio, Cabot is not just about rubber blacks volumes or about the tire industry.

As our growth in the Performance segment and New Business Segments demonstrate, Cabot is also about various other technology applications, from toners to adhesives, or from LCD screens to batteries.

In these diverse markets we are leveraging our material science capabilities and our chemistry expertise to work closely with leading customers to bring innovative solutions and new products to the table.

To remain a supplier of choice, we're dedicated to providing a reliable supply of high quality value-added performance materials to our customers around the world.

Both in the near term and also in the long term.

Our rubber blacks and performance segment capacity announcements show our commitment to support the growth of our global customer base.

For example, we recently announced a 25% increase of our assumed silica capacity in Barry, Wales, which will allow us to meet the growing global demand for silicone, which is forecast to grow in the 5% to 10% range over the coming years.

And this through our long-term partnership with Dow Corning.

This is the first of several strategic capacity expansion projects which we will begin operating in the coming quarters.

They will provide us with a key capability to meet the growing needs of our customers around the globe.

In addition, we are pleased to announce that we are under ay with an expansion of our inkjet colorants capacity at our existing plant in Massachusetts.

This $10 million expansion plan includes a doubling of capacity for both our color pigment dispersion and polymer product lines.

This expansion will position us well for the growing use of inkjet technology and our materials in office and commercial printing applications.

Eddie?

Thank you, Patrick.

As Patrick mentioned, this was our strongest quarter in history on a segment profit basis.

Total segment EBIT was $115 million, which was $14 million higher than last year's third quarter, driven by higher pricing and improved product mix that more than offset increased raw materials costs.

Sequentially, segment profit increased by $7 million.

The key factors in the increase were higher unit margins and higher volumes.

These strong business results generated adjusted EPS of $0.98, and adjusted ROIC of approximately 16%.

I will now discuss the details at the business level, beginning with the Core segment.

In the rubber blacks business, EBIT increased by $9 million over the third quarter of 2010.

The increase was driven principally by higher margins resulting from higher prices, a favorable product mix, and energy sensor benefits.

These positive factors more than offset the impact of higher raw materials costs, including a $7 million LIFO charge in the quarter and slightly lower global volumes.

As Patrick noted earlier, our manufacturing utilization rates in this business remain high.

We expect the first of our announced capacity additions to come online by the end of this calendar year.

Although EBIT was flat sequentially, this was a fundamentally stronger quarter than the second fiscal quarter of 2011.

This resulted from higher pricing, a favorable product mix, and 3% higher global volumes, driven by growth in emerging markets and Japan.

However, the strong margins and volumes were offset by a $4 million unfavorable LIFO comparison, a $3 million sequential reduction in CEC revenue and a $5 million unfavorable comparison from a one-time benefit recorded in the second quarter.

The super metals business continues to benefit from our strategy to focus on pricing and higher-valued products while de-emphasizing volumes.

As a result, EBIT increased by $5 million, compared to the same period last year, due to higher prices and improved product mix which offset lower volumes and higher ore costs.

Sequentially, profitability decreased slightly by $1 million.

Lower volumes and higher ore costs more than offset the favorable margin impact of higher pricing and improved product mix.

As Patrick mentioned, we saw record EBIT in the Performance segment in the third quarter.

EBIT increased by $7 million in the third quarter when compared to the same quarter last year.

The increase resulted from 9% higher volumes in the performance products business, 2% higher volumes in fumet metal oxide and higher unit margins resulting from our efforts to focus on value pricing.

These efforts more than offset higher raw materials costs, including a $3 million unfavorable LIFO charge in the quarter.

We are looking forward to the start-up of our new master batch capacity in Tianjin, China.

And the first phase of our new fumed silica capacity in Jiangxi, China, both of which are to be completed later this calendar year.

Sequentially, EBIT increased by $5 million, primarily from higher volumes.

Volumes in the performance products business were 1% higher, while volumes in the fumed metal oxides business increased by 8% when compared to the second quarter of fiscal 2011.

EBIT in the Specialty Fluids decreased by $8 million in the third quarter when compared to the third quarter of 2010.

The decrease in profitability this quarter as compared to the same quarter last year was due to lower sales in rental revenues as a result of jobs that were shorter in duration.

Sequentially, EBIT increased by $2 million, principally due to higher rental revenue.

Over the past few months, business results have improved and we continue to progress towards historical activity levels.

We had record revenue of $30 million in the New Business Segment in the third quarter.

Third quarter revenues increased by 20% or $5 million compared to last year, and by 11% or $3 million sequentially.

The growth in both periods was driven by volume in the inkjet colorants business.

This quarter we began a $10 million investment to increase our inkjet colorants capacity to meet the expected future demand growth for office and commercial printing applications.

We ended the quarter with a cash balance of $344 million, notwithstanding a substantial increase in raw materials costs.

We absorbed $68 million increase in working capital during the quarter that was primarily caused by the impact of rising carbon black raw materials costs on our inventory values and accounts receivable balances.

We recorded a net tax provision of $18 million for the third quarter.

This was net of $4 million of discrete tax benefits.

Our tax rate on Continuing Operations was 21%, and excluding the discrete tax benefits and the impact of certain items, a quarterly operating tax rate of 24%.

During the quarter we invested $60 million in capital expenditures.

This is an increase as compared to the last 2 quarters as we ramp up our spending on capacity expansions and energy recovery and yield technologies.

We expect the run rate of CapEx to increase for the remainder of the year and now anticipate spending approximately $200 million to $225 million for the full fiscal year.

Now back to Patrick.

Thank you very much, Eddie.

Our strong performance this quarter continues the trend of improvement we have been on for more than 2 years.

I'm pleased that we're successful at executing our margin improvement strategy through value pricing and product portfolio optimization.

Our volumes remain solid and we're operating at high utilization levels.

We have capacity expansions being commissioned over the coming quarters that will help drive our growth initiatives and meet the needs of our customers.

We're continuing to develop technologies and solutions for a wide variety of markets such as mining, electronics, renewable energy, batteries, highly reinforced rubber, silicones and plastics.

Many of these projects are new product development efforts and will continue to position us as a top tier specialty chemicals company in the future.

We remain focused on achieving the long-term financial targets we announced last quarter.

Which are adjusted earnings per share of $4.50 in 2014.

All of this while sustaining an adjusted return on invested capital in excess of 13%.

With that, thank you very much for joining us today.

And I will be turning the call back for the Q&A session.

(Operator Instructions).

Laurence Alexander with Jefferies.

Good afternoon.

First, could you give a little bit more detail on order trends in the Performance segment, particularly whether you saw any sequential deceleration in June?

And any views on trends in July.

As I mentioned earlier during the call, we've seen our business remain quite robust over the last few months.

We do, however, we have noticed some slowdown.

But slowdown in the month of July that has not created any worry on our side, because it matches the seasonal effects we normally see.

So in general, we feel quite comfortable with the volumes and believe that we will see return to levels we expect over the coming month.

And then if energy prices and feedstock prices were to be stable from here, would you be able to reverse or turn working capital into a source of cash in the back half?

Let me try to think through this question here, Laurence.

You're saying that if raw material prices stay flat.

And if we continue to --

Just given normal seasonality in the business and your productivity, would we reverse some of the working capital build?

So, Laurence, if we were to see flat volumes and no increase in raw materials prices, we would convert some of those receivables to cash.

And we would see some stability in working capital for the next couple of quarters, is the way I would think about it.

And finally, has there been any shift in regulatory acceptance of aerogels that might lead to an acceleration in growth of that business

We're continuing to see aerogel do very well.

In that respect, one of the sectors that we talked about on our Investor Relations day was the building industry in Europe where the regulatory environment is becoming more restraining with regard to what is allowed to be done in renovation, but also in new buildings.

So with that background, we're seeing actually aero el becoming a solution in many situations.

And we're working with 2 strategic partners currently to bring products to the market that would allow the building industry to meet these new codes.

So I would say the answer to that is yes.

Saul Ludwig with Northcoast Research.

Good afternoon, everybody, and congratulations on a very good performance.

Is any of the rubber blacks that you produce in your traditional rubber blacks plant used by your Performance black business?

And I'm wondering if the strength in volume in your specialty blacks consumed some volume that otherwise might have gone to the tire industry, or are the 2 totally separate?

Saul, the 2 are totally separate in the sense that in most cases, the equipment that is required and the technology that's supplied to make special blacks is very different than the one that makes rubber blacks products.

So I would say there is no, let's say, cannibalization of capacity from one business to the next.

Any thoughts on the decline in volume in China?

That was particularly surprising.

The other volume trends were pretty much in line with expectations.

So in the recent weeks we have seen some decline in the volumes in China, which we attribute to some of the credit tightening that's been going on in the country to manage inflation.

We've also seen some volatility due to supply/demand effects in various markets such as the plastics markets.

But what we're seeing ahead is actually a return to the type of growth rates we've been experiencing in the last quarters.

So at this stage, we believe this was a very short-term effect.

Then, finally, thinking about, as we look ahead, you mentioned the seasonality effect in the Performance sector where we would expect to see sequentially maybe lower earnings in your fourth quarter than what was achieved in this most recent quarter, and that would be normal.

What about the other business segments?

Is there anything that we should be looking for sequentially as we move from the third to fourth quarter in terms of normal seasonal influences, Patrick?

The businesses that have a strong North American but especially European presence tend to see some slowdown in the fourth fiscal quarter of Cabot, and we're expecting some of that as usual.

It could be that it's slightly more pronounced this time around because of the sovereign credit issues that are going on in Europe.

But the current order pattern seems to be indicating that things are more in normal ways and we're certainly monitoring this very closely.

And finally, the trends in the margin improvement, there's nothing that you see ahead that's going to interrupt that pattern?

We're certainly very driven by our value pricing strategy and at this stage we don't see anything that would get in the way of it.

(Operator Instructions).

John Roberts with the Buckingham Research Group.

Good afternoon.

When I look at the LIFO breakdown in the footnotes, and you split it between the cost of goods effect and the liquidation effect, the liquidation effect is in the tantalum business and that's as you run the inventories down there and the cost of goods effect is in the carbon black business?

Let me ask one of our experts here to take that question.

Jim?

Hi, John.

Yes, the liquidation is in TSM and the cost effect is actually in both, carbon black and super metals business.

And the liquidation effect has been recurring for some time as you've been bringing those inventories down.

Do you have an estimate of how much further or how much is there in terms of earnings benefit from bringing those inventories down to what you think the new equilibrium will be?

John, we have been working, as I'm sure you're aware, for the last few years to generate cash in the business and reduce a substantial amount of inventory.

At this point, I'm a bit hesitant to try to forecast as to when that would turn over, really because it's competitive information.

Christopher Butler with Sidoti & Company.

Good afternoon, everyone.

If we're looking at the super metals business, could you give us an idea of the volumes here for the quarter and how that might compare to, say, last quarter?

You've made substantial improvement with the margins in this business over the last year-plus, but this is the first time, I think, in a while that we've seen a flat top line year-over-year.

So Chris, the business has been repositioned over the last few quarters.

And what we've been doing is focus very much so on margins and less so on volume.

And the effort is continuing in that respect.

And I would say there is nothing here that we consider to be an indication of declining business.

And shifting gears to the inkjet, which seems to have been a pretty good source of strength on the top line.

How much of this is volume oriented versus price increases in this quarter?

So, what we're seeing is continued very positive trend in the use of inkjet in the office and commercial markets.

So if you remember, the consumer markets are fairly mature already but the office and commercial markets are developing very strongly.

And what we're seeing here is really those markets taking off.

Now, in addition to that, we also have new printer platforms that are being launched and there's some inventory filling in the supply chain to help with these launches.

So we may have seen slightly stronger growth this quarter than we would have expected.

But I would say that the underlying growth and the potential for continued growth in inkjet in support of our business here is there, and we're going to be certainly exploiting our very strong technology and our 40% market share in this business.

(Operator Instructions).

Jay Harris with Goldsmith & Harris.

Patrick, what are you doing in the inkjet business that is offsetting the volume growth in terms of operating income?

Hi, Jay.

I'm not sure -- I think Fred has got the question, so I'll let Fred answer.

So, Jay, I presume the question is around the fact that the top line grew very healthily but the bottom line growth was not as strong as the top line growth.

Is that correct?

That's correct, yes.

Jay, the actual inkjet bottom line grew very nicely, as well, in the quarter.

But what actually offset that was our continued investment in new opportunities in superior micro powders, and these are things like batteries and graphenes.

As well as a slight decrease in the EBIT line with aerogel because we had a plant shutdown in the quarter which offset that.

I don't know whether you want to answer this on a gross profit basis or on an operating income basis, but are the prospective profits, profit margins in inkjet higher or lower than in the other 2 components of the businesses?

Jay, I would rather not go into specifics around our margins in the inkjet business or any of the other businesses.

I was only asking on a relative basis, not on an absolutely basis.

In other words, the way you answered my question, you've indicated you stepped up development expenditures in micro super powders.

And I'm just wondering what the relative profit potential is among these 3 businesses.

So Jay, this is Fred again.

Perhaps the best way to look at it is in the inkjet business we've got very, very strong technology.

We deliver solutions to our customers that really help them differentiate in the market and we get paid for that.

Perhaps that can give you a sense of the potential there.

Okay.

The doubling, the $10 million, there was some indication on the formal remarks that that would double a component of your inkjet coloring capacity.

Can you provide a little more color?

So, Jay, the announced capacity increases are around 2 production lines in that inkjet facility.

One of them around color pigment dispersion and the other one around polymer-treated materials.

And to go back to Patrick's comment, this is all reflective of the growing demand of these materials in commercial and office printer platforms.

So they support that new market that we're participating in.

Would you share with us what the revenue capacity will be of inkjets after the expansion is completed?

No, I will not.

That's confidential information.

All right.

Then switching back to tantalum, the process of focusing on higher margin businesses, what are the growth rates that we're seeing there?

In other words, are these also the more rapidly-growing segments of the industry?

So Jay, I would say that the high-end products that we produce are the ones that have the ability, or give our customers the ability, to create more miniaturized capacitors.

And these miniaturized capacitors go into the very special applications, such as the tablets or these specialized multi-functional phones out there.

And these are growing at a faster rate than the rest of the electronics industry.

So we're seeing a lot of opportunities there and we also believe that tantalum, to a certain degree, is not substitutable in some of these applications.

Are you in a position to comment on what percentage of the quarterly revenues are falling in this category of higher margins?

And what was the year-over-year growth rate, looking backwards in that component?

Unfortunately, Jay, that would be providing more information than we're comfortable doing in view of the competitive environment.

Saul Ludwig with Northcoast Research.

Thank you.

A question on the tantalum business.

You're in the process, as Eddie said, of working down what was at one time a very large inventory, and now you're working that down.

What's the time line between you will use up that inventory and start consuming tantalum that you'll be producing from your own mine?

And is that transition from inventory in-house to new inventory that you'll be generating from the mine, does that have a positive or neutral or negative effect on profitability?

So A, timing, and B, profitability.

First of all, what we've been doing, Saul, is adapting our inventory to our new needs in the sense that the business has been somewhat changed in nature.

And as we focus less on volume than on margin the quantities required have diminished, and that has allowed us to diminish the inventory.

I think, secondly, although it may have looked like we're not buying ore, we have continued to buy ore over time and we're continuing to manage the needs to be able to provide assurance of coverage to our customers.

Thirdly, we have announced that we will be starting tantalum mining again in Canada.

We're in the process of ramping up, up there, and we'll be producing tantalum ore again by the end of the calendar year.

And the combination of these factors put us in a pretty good position.

We believe that, of course, we're going to be dealing with tantalum ore pricing, market pricing, that has been going up and has affected us.

But we've been working our margins very aggressively to make sure that we get full value for the business we have.

So it doesn't really exactly answer your question, Saul, but I think it hopefully gives you enough context.

Finally, is there anything new you could tell us about the CEC?

I would say with regard to CEC, the news is that we're on track, Saul.

John Roberts with the Buckingham Research Group.

The mix effect, especially in the Core segment, it's a little bit hard from the outside to see the strength in the higher margin or higher priced products that is generating the favorable mix.

Do you have anything like volume growth or the pounds that are above the average price, and volume decline for the pounds that are below the average price or something like that?

Is there any internal qualification that you use to characterize mix improvement?

We're certainly on top of the various product categories and the various margins we achieve, so we have full visibility on that.

I would say that because it is sensitive information from a competitive point of view, we wouldn't be comfortable releasing that information.

Secondly, in the Specialty Fluids Segment, is there a booking rate or anything that you can provide that has a go-forward look to it?

John, one of the frustrations of the Specialty Fluids business is actually the difficulty we have forecasting because the complexity of the various drilling and completion projects that our customers are dealing with makes for very volatile timing.

And although we're on top of every opportunity, the timing of these opportunities vary widely and we have to deal with that.

And I think our effort is to be there at the right time with the right product, and that is where our focus is.

And over the last couple of quarters, we've seen a decline that we hadn't predicted.

But our visibility in terms of the projects that are ahead of us give us confidence that we will be moving back to the types of levels of usage and rental that we've seen in the past.

So that's a positive.

The difficulty of forecasting will remain a problem in this business.

So just for example, for the current quarter, just reported, the $12 million in income for Specialty Fluids, back in April when you were reporting the March results did you have anything like that in mind?

Or even a quarter ahead you don't have much visibility?

I would say we have some visibility a month ahead.

And then we have a range of projects that we're working with our customers on.

But the probability and the speed and the timing is quite volatile.

And we can see shifts of several months between what we originally thought would be the timing of the drilling or completion project and the timing where our product gets put into use.

And at this time there are no more questions in queue.

I would like to hand the call back to Mr.

Patrick Prevost, President and CEO, for closing remarks.

All right.

Thank you very much for attending our earnings conference today.

I believe that the results were certainly very strong this quarter and that we're continuing on our path to reach our long-term goals that we shared with you at the recent Investor Day.

And I'm looking forward to speaking with you again in about 3 months.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's call.

This concludes the presentation.

You may now disconnect.

Have a good day.