Cabot Corp (CBT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Corporation first-quarter 2016 earnings teleconference.

(Operator Instructions)

As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Erica McLaughlin, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon.

I'd like to welcome you to the Cabot Corporation earnings teleconference.

Last night we released results for our first quarter of FY16, copies of which are posted in the Investor Relations section of our website.

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

If you're 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 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 are 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.

As you saw in our press release yesterday, Eddie Cordeiro will lead the call today.

Eddie will discuss the key highlights of the Company's performance and review the business segment and corporate financial details.

Following this, we will open the floor to questions.

Eddie?

Thank you, Erica, and good afternoon, ladies and gentlemen.

As expected, we had a challenging first quarter.

We continued to face global and macroeconomic headwinds, including a slowing demand environment in China, and lower energy prices.

This environment negatively affected volumes and margins in the reinforcement materials segment.

Volumes were also negatively impacted in the purification solutions and specialty fluid segments.

On the positive side, the performance chemical segment continues to deliver strong results, with solid margins and volumes, achieving its third consecutive quarter of record earnings.

We also implemented restructuring plans that are expected to reduce costs by $55 million in FY16, as compared to 2015.

In addition, we generated $83 million in cash from operating activities, and used this strong cash flow generation to return cash to shareholders during the quarter through $14 million of dividends, and repurchasing 260,000 shares for $11 million.

I will now turn to the segment results, beginning with reinforcement materials.

During the first quarter of 2016, EBIT for reinforcement materials declined by $27 million, as compared to the first quarter of 2015.

The decline in EBIT was principally driven from lower unit margins from lower calendar year 2015 contract pricing, negative feedstock effects, lower benefits generated from energy efficiency investments, and the competitive environment in Asia.

The negative feedstock effects and the lower pricing impacted our margins by $30 million.

Volumes also declined by 2% due to lower contractual volumes in North America, and softer demand in China.

Sequentially, EBIT decreased by $5 million from lower volumes.

Volumes declined 4% sequentially due to normal seasonal patterns, and lower demand in China.

Our utilization was in the 75% to 80% range in the first quarter.

These utilization rates, combined with a flat carbon black market in 2015, and a muted global demand outlook for 2016, resulted in a less supportive pricing environment than we had anticipated.

However, the overall outcome of the calendar year 2016 contract negotiations was positive, and we were able to maintain pricing levels, while increasing global contractual volumes with an improved mix.

In terms of a regional view for 2016, the North America carbon black market is expected to increase from growth in like-vehicle tire sales, partially offset by weaker truck and bus tire demand.

For Cabot, we were able to regain lost contractual volume in North America from calendar year 2015, and accordingly we expect our volumes in North America will grow in excess of the market in calendar year 2016.

In Europe, the carbon black market is also expected to grow modestly from strength in light vehicle tire sales, partially offset by weaker truck and bus tire demand.

We expect that our volumes will increase in market rates in Europe.

The most challenging region was South America, where the outlook in Brazil is for GDP contraction in 2016.

The outlook for the carbon black market and for Cabot is for contraction greater than GDP, given the weakness in both light vehicle tire sales and truck and bus tire demand, particularly in the OE segment.

As a reminder, Asia is primarily a spot market.

We expect Asia to experience continued competitive pressures in 2016 as a result of the slowing environment in China.

The truck tire market, which is a significant part of the market in China, experienced a contraction in 2015, which is projected to persist into 2016.

Therefore, we expect our volumes to be lower in China for the next two quarters, in line with the market.

Consistent with customer sentiment and industry forecasts, we anticipate a recovery in our China volumes to begin towards the end of our fiscal year, as the truck tire market begins to improve, along with strong auto sales from government incentives.

Thus, overall for FY16, we project flat to slightly positive volume growth with an acceleration of volumes in the second half of the year.

Looking ahead, we anticipate a step-up in profitability in our second fiscal quarter.

This is driven by the improved mix from our calendar year 2016 contracts, and from the cost saving benefits related to our restructuring actions.

Now turning to performance chemicals.

EBIT increased by $11 million as compared to the first quarter of 2015, due to improved margins from lower raw material costs, 7% higher volumes in specialty carbons and formulations, and lower fixed costs.

This was partially offset by 4% lower volumes in metal oxides, largely due to weaker demand in construction applications.

Sequentially EBIT, increased by $1 million due to improved margins from lower raw material costs and lower fixed costs.

Volumes declined 2% in specialty carbons and formulations, and 8% in metal oxides, primarily from lower seasonal demand.

Looking ahead, we expect to see the strong results continue, due to growth in automotive applications, the penetration of new high value products and the contribution from our cost reduction efforts.

For the first quarter of FY16, EBIT in purification solutions decreased by $4 million, compared to the first quarter of FY15 and $7 million compared to the fourth quarter of FY15.

The decrease in both periods was due to the unfavorable impact from reducing inventory levels and lower volumes, primarily in air and gas and water applications.

These unfavorable impacts were partially offset by higher pricing and lower fixed costs, from the actions we've taken to reposition our cost structure.

In December, the DC Circuit Court ruled to keep the MATS regulation in place while the EPA works to address the cost analysis required by the US Supreme Court's decision.

We're pleased with the result of this ruling, and we're well-positioned to supply our customers with activated carbon to comply with MATS.

We are working to finalize supply agreements, and we expect that our share of sales to this sector will be in excess of 40%.

During the quarter, we entered into two mercury emissions contracts.

One is a five-year extension of an existing supply agreement, and the other is a new three-year contract with volumes that started in January.

Looking ahead, we expect a meaningful improvement in profitability in the second half of the year, driven by the increased MATS-related demand, and benefit from new product introductions, and lower costs from the work we've done to realign our cost structure.

First quarter FY16 EBIT in specialty fluids decreased by $6 million compared to the first quarter of FY15, due to lower project activity levels, as a result of the downturn in the oil and gas industry.

Sequentially, EBIT increased by $2 million from slightly higher project activity levels, and lower fixed costs.

Going forward, we see an improving project pipeline, and we anticipate an increase in project activity in the second half of the year.

I'll now turn to corporate items.

We ended the quarter with a cash balance of $84 million, and our liquidity position remains strong at $1.1 billion.

During the first quarter, we generated $100 million of adjusted EBITDA, and reduced net working capital by $54 million.

Uses of cash during the first quarter included $24 million for capital expenditures, $14 million for dividends, and $11 million for share repurchases.

Over the past year and a half, we've returned over $200 million of cash to our shareholders, through $84 million in dividends, and the repurchase of 2.7 million shares.

We have recorded a net tax benefit of $5 million for the first quarter, which included $18 million in benefits from tax-related certain items.

Excluding the impact of certain items, our operating tax rate on continuing operations for the first quarter was 26%.

We also recorded a $2 million benefit related to our LIFO accounting reserve, principally driven by the decline in feedstock costs.

Based on the current outlook for feedstock and our anticipated inventory levels, we expect a $9 million benefit for the year, recorded ratably each quarter.

If feedstock costs move up or down from where they are forecasted to end the fiscal year, this estimate could change.

As we look towards 2016, we expect capital expenditures to be approximately $125 million, and we anticipate our operating tax rate for FY16 will be between 26% and 28%.

For 2016, we're focused on actions that will deliver stronger financial performance, and we expect our results to improve starting in the second quarter.

The improvement will come from cost savings related to restructuring actions that have been implemented, and are on track.

The calendar year 2016 contracts in the reinforcement materials segment, continued strength in our performance chemical segment, and volume growth in the purification solutions segment.

For the full year, we continue to target improvement in adjusted EPS of $0.75 in FY16, as compared to FY15.

We anticipate strengthening operating results across our segments as the year progresses, as we've previously outlined.

In addition, we expect strong cash flow generation from improved business results, and disciplined capital in networking capital management.

We will continue to prioritize returning cash to shareholders through dividends and share repurchases.

Thank you very much for joining us today, and I will now turn the call back over to Christy for our question-and-answer session.

(Operator Instructions)

Our first question comes from the line of James Sheehan from SunTrust Robinson Humphrey.

This is Matthew Stevenson on for Jim.

Question, you retained the guidance but seems like pricing on the contracts came in flat, which was perhaps less than we'd expected.

Is it some raw material benefits that's counteracting the pricing, to enable you to still obtain the $0.75 improvement in EPS?

Matthew, thank you.

Thanks for the question.

I would characterize it as the big things we're doing this year as it relates to the improvement in the EPS is really the restructuring, and the cost reduction program.

So we would expect to gain most of the benefit there.

As it relates to the contracts, yes.

Pricing was definitely weaker than we had expected, and this is something that we had been tracking through the fall, but we were successful in gaining more volume.

So we were able to pivot a bit and recover some of the volumes, and so we've been able to balance that out.

So I would say that's generally the offset to the pricing.

Thanks, and just a followup.

The $55 million in restructuring savings in the year, how much was captured in the quarter?

Good question.

So we did see some cost reductions throughout all the segments in the first quarter.

A lot of that was really year-over-year reductions, based on the 2015 work we had done, really we had called that the belt tightening in 2015, and the totality of that for the company was about $10 million.

Some of the restructuring probably did come through in the month of December, and so some portion of that $10 million probably was part of that $55 million, but I would say it was probably less than $5 million.

Thank you very much.

Thank you.

Our next question is from Kevin Hocevar of Northcoast Research.

Your line is open.

Wondered if you could help with the feedstock issue the carbon black industry has been facing.

I think you highlighted it was part of a $30 million -- I don't think it was all the $30 million, but a contributor to the $30 million headwind that you mentioned during the quarter for the reinforcement materials segment.

Could you walk me through the dynamics, there, because I've been hearing that North America might be getting better, but other regions might be getting worse.

If you could help us understand that differentials issue.

Good question, Kevin.

Perhaps I could just give you a bit of context around feedstock, at least from our perspective.

For US Gulf Coast feedstock in 2015, we saw differentials worsen throughout the year, and this was due principally to supply-demand factors at the time.

At this time, we are seeing that US Gulf Coast differentials are more in line with historical norms, which means that they're a bit more favorable than when they were at the peak in 2015.

But they're not as favorable, let's say, as the full-year average of 2015, and certainly not comparable to 2014, for that matter.

We buy a mix of feedstocks including US Gulf Coast decant oil, but also we buy Chinese coal tars, we buy fuel oils from local refineries and crackers, and we try to take advantage of feedstock arbitrages whenever possible, but some of the favorable arbitrages in 2015 are not expected to repeat in 2016.

When I take all those factors into account, we expect that our feedstock cost will be marginally less favorable in 2015, unless the markets change from here, and that's the context around how we view feedstock holistically.

Got you.

That's very helpful.

You mentioned winning back share in North America.

Could you give us a sense of the magnitude there?

Did you recoup all the 15% share that you lost last year?

If you could help us understand the magnitude of what you recouped?

Yes.

So our approach going into the contracts as we had articulated going back to the summer was to try to prioritize value over volume.

As the markets weakened into the fall, we faced a less supportive competitive environment, and therefore we had to balance volume and price.

We were able to maintain our pricing levels, but recovered much of the volumes that we had lost in North America in 2015.

So we're now back to 2014 levels, and I would add that overall globally, we believe that our mix is better, as it relates to the volumes that we've captured.

Okay, great.

Then final question, you mentioned the purification solution segment ramping up, particularly in the back half of your fiscal year, as math takes hold.

Wondering if you could help us understand the magnitude of the types of increases there, and how we should expect that to flow through the rest of the year?

Very good question.

I think we've articulated that we are anticipating a meaningful improvement in EBIT in the back half of the year.

We are still very much in the midst of negotiating with customers, and really the magnitude, the more precise magnitude will really depend on how the pricing shakes out, how much volume we're able to capture, what share of that market we get, and all of that is still being negotiated.

At this time, I really can't help too much.

I would expect the second quarter will be stronger than the first, and that upon implementation in April, the third and fourth quarter, should be stronger than the second quarter.

But much more than that, I really can't help with.

Okay.

Great.

Thanks very much.

Thank you.

Our next question is from Eugene Fedotoff of KeyBanc Capital Markets.

Could you provide an update on the timing of cost savings and distribution of those cost savings by segment in 2016?

Sure.

So the restructuring was implemented in the first quarter.

We should start to see an uptick or a reduction in the costs starting in the second quarter.

This has been essentially split throughout the Company, and throughout the different regions and the segments.

So about $15 million we should see in the reinforcement segment, and $15 million we should see in the performance segment, and I would say that would be ratably through the next three quarters.

We also expect to see $12 million throughout the year in purification solutions, as well as about $5 million in CSF and then probably $2 million to $3 million in unallocated.

And those should pretty much start up in the second quarter, and pretty much full run rate.

Thanks for that color.

Just a followup on purification solutions.

I understand that they all depend on the volume and pricing, as far as profitability, but what is your long-term earnings expectation for that business, given that MATS are in place?

I think the guidance that we've given over the last year is that we are still targeting to earn about $100 million of EBITDA.

Once MATS is fully implemented, and we get through a full year's worth of having those volumes in the business.

And again, a lot of that will depend on our ability to capture the 40% share that we are trying to capture, as well as on what the pricing ultimately shakes out at in the marketplace.

But about $100 million of EBITDA is what we've been targeting.

Got it.

Just a follow-up on reinforcement materials.

How's pricing in Asia?

Are you expecting prices to stabilize throughout the year?

I would describe Asia as a highly competitive environment, right now.

It's pretty much spread all throughout Asia.

So obviously, when we say that pricing is difficult and we're fortunate that we have a very strong asset base and a strong market position.

And so, we are very carefully balancing the volume and price trade-offs in Asia as we see how demand evolves really over the next year.

Got it.

Just a last question if I may.

In performance chemical is obviously very strong results, and I understand only a small portion of the business is pass through the raw material prices in contracts.

What is a typical lag for the remainder of the business, if there is one?

I would say that the pricing is much more market-based, so there really wouldn't be a typical lag, that I could describe.

Got it.

Thank you.

(Operator Instructions)

Our next question comes from Chris Kapsch of BB&T Capital Markets.

I had a couple follow-ups on the discussion around the reinforcement materials contract negotiations.

So, in contemplating several quarters back, coming into the season, the idea of getting some pricing, I just really want to understand the inability to capture more value.

You had mentioned the function of the markets becoming more competitive.

Can you provide more color?

Is it just the weakening macro demand environment or was there some specific competitive behavior which undermined those discussions as the contract negotiations evolved?

Yes, I would not describe it as specific competitor behavior.

I would say that when we looked at this initially, and started talking about it and planning for it over the summer, the market was stronger in the countries that we do contracts in.

The regions.

So that would be North America, South America, and Europe.

What we've seen over the last six months is a little bit of weakening in North America, a lot of weakening in South America, as you know, Brazil is quite challenged right now.

And sideways in Europe.

As we started to get into the actual negotiations with customers, it became clear that the ability to raise prices was not going to be there, and so we wanted to ensure that we were able to maintain the overall value for the contracts, and so we pivoted a bit, and we ended up taking a bit more volume, and a little less on price.

Great.

Just, I don't know if you could provide context about the volume, were those gains, were they entirely concentrated in North America, and order of magnitude, was it comparable to the share that you had lost last year?

I would say that the gains were not just focused in North America, but that in North America specifically, we were substantially able to recoup the volumes that were lost in 2015.

Okay.

And then, I think you had, given this feedstock issue, one could sort of describe it as, since you have the pass through provisions but they didn't really work in 2015, almost like an imperfect hedge, and those contractual obligations, maybe not the best way of describing it.

I had thought coming into this contract season, one of the thoughts might be to try to renegotiate those pass through provisions such that this feedstock issue wouldn't really result in a pressure on margins, so is that something that just was abandoned, or not something that you really contemplated?

No, we didn't really contemplate that.

The issue around feedstock is that we have certain indices that we price off of.

Those are well-published, well-known indices.

But we may be buying materials at a different rate, depending on what the supply and demand is in the market, or we might be buying a different material because of the mix that we are supplying, so there's not a match between the index and actual material we buy, and you would probably never want to do that anyway.

So we didn't really have a view that we were going to go in and try to harmonize that.

What we're seeing is the separation between the index and what the actual feedstock purchasing is.

Okay.

And then last one, finally, you mentioned favorable mix associated with the outcome of these contracts, and so is that exclusive of the lower unit costs that would be associated with higher volumes that you were able to achieve?

If you could just be a little more explicit on what you mean when you refer to mix, is it the type of grades into specific tires that these contracts yielded, or were you also including the lower fix cost absorption?

Thanks.

That's exactly right, Chris.

It's the type of grades, as well as the specific regions and the specific customers that we're selling into.

That whole basket, that whole mix was improved, compared to where we were a year ago.

Okay.

Thank you.

Thank you.

It looks like we have a followup question from Kevin Hocevar of Northcoast Research.

In the performance chemicals segment, it looks like we stepped up to about $50 million of profitability a quarter over the last couple quarters.

It seems like that's about to take another somewhat step up with some of the cost savings you're expecting, starting in the second quarter.

Is that fair to say?

And I know you mentioned that the pricing, particularly on the carbon black side of things is a little more negotiated.

Could you give us a sense for how that's holding up, given the raw material declines?

Are you expecting that price raw gap to narrow?

How should we think of that going forward?

Thanks, Kevin.

This segment is a real bright spot for our portfolio.

As it has demonstrated over the last quarters, the segment is resilient, and it's really a true specialty business, with differentiated products in broad end markets in both carbon black and silica, that are quite sticky.

So we are focused on continuing to improve the results.

I think that's right, when you look at the cost savings, those should flow through into the next quarter.

We are continuing to focus on developing and commercializing new high-value products and continuing to grow in attractive segments.

As it relates to margins and our ability to hold onto margins, it really gets back to the strength of the market, and the stickiness of the products.

Okay, and I know you mentioned a couple times Asia being soft.

I was just curious, on the minority interest line, there was a tick up there in the quarter.

It's been at about $1 million or $2 million the last couple quarters, and it ticked up to $4 million.

That's primarily Asian joint ventures that you have in there, so it seems like that to me indicates that profitability picked up a little bit.

Maybe I'm reading that wrong.

So just curious your thoughts there, as to why that ticked up, and how that relates to Asian profitability?

Good question, Kevin.

In addition to Asia, the minority interest of our Czech Republic business is also in there, and I have to admit, I don't know that exact answer.

We will check into it and get back to you, but I have a feeling it may have something to do with that, as well.

Thanks very much.

Thank you.

That concludes our Q&A session for today.

I would now like to turn the call back over to Mr. Eddie Cordeiro for any further remarks.

Okay, Christy.

Thank you very much.

Thank you all for joining us, and we look forward to speaking with you next quarter.

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

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.