Earnings Call Transcript - CBT Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Cabot Corporation Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Delahunt, Vice President, Investor Relations and Treasurer. Please go ahead.

Steven J. Delahunt, Vice President, Investor Relations and Treasurer

Thank you, Jill, and 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, Executive Vice President and CFO. Last night, we released results for our third quarter of fiscal 2025, 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 in the press release we issued last night and in our 10-K for the fiscal year ended September 30, 2024, and in 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. The 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. I will now turn the call over to Sean, who will discuss the third quarter highlights and some strategic highlights. Erica will review the third quarter financial results, along with the business segment results and provide an update on our M&A and capital allocation priorities. Following this, Sean will discuss our outlook for fiscal 2025 and then open the floor to questions. Sean?

Sean D. Keohane, CEO and President

Thank you, Steve, and good morning, ladies and gentlemen, and welcome to our call today. I am pleased with our strong third quarter results, which were a bit better than our expectations. We delivered Q3 adjusted earnings per share of $1.90, which was in line with our second quarter results and down 1% as compared to the same period in the prior year. Overall, we continue to execute at a high level and operate with agility in this dynamic and challenging macroeconomic environment. While both segments were impacted by 8% lower volumes year-over-year given the challenging macroeconomic backdrop, we largely offset these impacts through strong network optimization, cost management efforts and continued execution of commercial excellence actions. Looking at the segments, we delivered solid EBIT results from Reinforcement Materials, which was down 6% year-over-year in the third quarter and strong EBIT results in Performance Chemicals, which was up 4% as compared to the third quarter of the prior year. The Cabot portfolio has strong cash flow characteristics, and this continued strength was exhibited in the quarter. We generated $249 million of operating cash flow in the third quarter, which funded our capital expenditures and enabled $64 million of cash returned to shareholders through a combination of share repurchases and dividends. During the quarter, we also made important progress on key elements of our Creating for Tomorrow strategy. I'll spend a few minutes now highlighting four accomplishments that are important elements of our strategy for long-term shareholder value creation. Last night, we announced that Cabot has entered into a definitive agreement to acquire Bridgestone's reinforcing carbons plant in Mexico for $70 million. This manufacturing facility is located in close proximity to Cabot's current reinforcing carbons facility in Altamira, Mexico and strengthens our long-standing partnership with Bridgestone through the long-term supply of reinforcing carbon products from this plant. The facility also has the capacity to manufacture additional reinforcing carbons, providing flexibility to support broader customer needs and future growth opportunities for Cabot. Furthermore, it underscores Bridgestone's confidence in Cabot as a trusted partner with a proven track record of delivering high-quality, reliable supplies of reinforcing carbon products. The transaction is expected to close within three to six months and to be accretive in the first year. This is an example of how we are deploying our strong cash flow to fund an attractive acquisition that strengthens our portfolio, drives incremental growth and is accretive to earnings. Sustainability is at the heart of our purpose and integral to our strategy of creating value for our customers. Given that, we are especially proud of the various forms of external recognition that we have received over the years for our sustainability leadership. At the top of that list is the platinum rating we received from EcoVadis for the fifth consecutive year. EcoVadis is the world's largest and most trusted provider of business sustainability ratings with more than 150,000 rated companies. A platinum rating is the highest level of achievement and places Cabot among the top 1% of companies in the manufacturing of basic chemicals. This prestigious recognition underscores Cabot's commitment to transparency and provides our customers with visibility into our sustainability performance. In Battery Materials, we continue to execute well against our growth strategy to build a leadership position. Through the first three quarters of fiscal year 2025, we have increased contribution margin by 20% compared to the same period in fiscal year 2024. Our strategy is centered around the view that the battery industry is bifurcating with differences between China and the rest of the world. In China, growth is high with EV penetration now exceeding 50% of annual vehicle sales. The environment across the EV value chain is competitive, and our segment strategy is focused on differentiation based on blends of conductive additives and targeting those customers that serve the higher-value segment of the domestic economy and the export market. Outside of China, we are focused on building incumbent positions with the battery customers that are establishing manufacturing plants in the Western economies. These customers value our breadth of technology as we are the only global player that can produce both conductive carbons and carbon nanotubes as well as blends. Additionally, our global footprint is an important feature to address their desire for a local supply chain and strong regional application and sales support. While the build-out of battery production in North America and Europe is developing more slowly than originally anticipated, it is expected to grow at a compound annual growth rate of approximately 40% through 2030 and represent 25% to 30% of global production by that date. Our strong reputation, breadth of product offering, global footprint and track record with the global battery producers set us up well to build an incumbent position in these geographies. We continue to believe these geographies will become large over time, driven by penetration of EVs, hybrid vehicles, and the growth of energy storage batteries for data center and grid applications. This application remains an important strategic priority for us, and we intend to continue to invest prudently to build long-term value. Moving now to strategic growth activities in other areas of Performance Chemicals. You will recall that we highlighted a number of important applications within this segment during our last Investor Day. Two of these priority areas are focused on the infrastructure and alternative energy sectors. Both of these sectors are growing at multiples of GDP, supported by strong macro tailwinds. In the infrastructure space, the wire and cable application is experiencing strong growth driven by electrical grid renewal, growth of power generation demands due to data centers and the development of alternative energy sources such as wind and solar. Our conductive carbons are a critical material in the performance of power distribution cables, and Cabot has built a strong reputation for quality, performance, and reliability. On a year-to-date basis through Q3, our volumes in this application have grown by 15% compared to the same period last year. In the alternative energy space, Cabot is a leading provider of treated fumed silica for use in adhesive formulations that are critical in the manufacturing of wind turbine blades. Growth in this application is being driven by investments in alternative energy generation. And through the first three quarters of fiscal 2025, our volumes have increased by 8% compared to the same period last year. Our strong product offering, global footprint, and reputation for performance and quality have resulted in Cabot achieving a strong incumbent position with many leading customers. I am very pleased with our strategic developments, and I'm confident that these pursuits will continue to build our long-term potential for sustained value creation. I will now turn it over to Erica to discuss the financial results for the quarter. Erica?

Erica J. McLaughlin, Executive Vice President and CFO

Thanks, John. I will start by discussing results for the company and then review the segment results. Adjusted earnings per share for the third quarter of fiscal 2025 declined 1% from $1.92 in the third quarter of fiscal 2024 to $1.90, driven by EBIT growth from the Performance Chemicals segment, partially offset by a decline in the Reinforcement Materials segment. Foreign currency impacts were minimal for the quarter and the operating tax rate remained at 28% Cash flow from operations was strong at $249 million in the quarter, which included a working capital decrease of $101 million, driven by lower accounts receivable and inventory balances. Discretionary free cash flow was $114 million in the quarter. The cash balance at the end of the quarter was $239 million, and our liquidity position remains strong at approximately $1.4 billion. Capital expenditures for the third quarter of fiscal 2025 were $61 million, and we continue to expect between $250 million to $275 million of capital spending for the fiscal year. Our strong cash flow performance year-to-date enabled us to continue to pay our competitive dividend and repurchase shares. During the quarter, we used $24 million for the payment of dividends and $40 million for share repurchases. Our debt balance was $1.2 billion, and our net debt-to-EBITDA was 1.3x at the end of June. The strength of our cash flow and balance sheet positions us really well as we look ahead to continue to invest for growth, complete strategic acquisitions and return cash to shareholders. The year-to-date operating tax rate for fiscal 2025 was 28%, and we continue to anticipate our operating tax rate for fiscal 2025 to be in the range of 27% to 29%. Now moving to Reinforcement Materials. During the third quarter, EBIT for Reinforcement Materials was $128 million, which was a decrease of $8 million as compared to the same period in the prior year. The decrease was primarily driven by lower global volumes, which were down 8% year-over-year due to lower customer demand driven by uncertainty from tariffs and a weaker global macroeconomic environment. Regionally, volumes were down 11% in Asia Pacific and 9% in the Americas, while volumes in Europe were up 4%. The lower volumes were partially offset by continued optimization and cost reduction efforts in the segment. Looking to the fourth quarter of fiscal 2025, we expect a modest sequential EBIT decline in the segment as higher volumes expected in Asia are offset by higher costs anticipated sequentially. This expected EBIT would be slightly higher than the prior year fourth quarter EBIT, driven by our ongoing optimization and cost reduction efforts. Now turning to Performance Chemicals. EBIT increased by $2 million in the third fiscal quarter as compared to the same period in fiscal 2024. The increase in the third quarter was due to higher gross profit per ton, partially offset by lower volumes. Global volumes were down 8% year-over-year, primarily due to lower customer demand driven by uncertainty from tariffs and the weaker global macroeconomic environment, particularly from lower demand in auto-related applications. The improvement in gross profit per ton was driven by continued optimization and cost management efforts in the quarter. Looking ahead to the fourth quarter of fiscal 2025, we expect Performance Chemicals EBIT to be lower sequentially and relatively consistent with the prior year fourth quarter. The expected sequential decline is driven by seasonally lower volumes and higher anticipated costs in the fourth quarter as compared to the third quarter. In summary, for the company, we expect our total segment EBIT for the fourth quarter to be largely consistent with the prior year fourth quarter. However, we expect a higher tax rate in the fourth quarter of fiscal 2025 as compared to the fourth quarter of fiscal 2024. Sean talked earlier about our agreement to acquire Bridgestone's reinforcing carbon plant in Mexico. This is a good example of the type of acquisition that aligns well with our strategy. I thought I would take a minute to remind you about our M&A priorities that we previously discussed at our 2024 Investor Day. As we think about how M&A fits into the strategy, we look for acquisitions that one, strengthen our business competitive position; two, drive growth and are margin enhancing to the company; and three, provide attractive economic returns in a three- to five-year time frame. These opportunities include capability and capacity investments in high-growth areas of the company, including in the areas of batteries and conducted materials. We will look to increase scale, geographic access, and participation across our carbon black and silica franchises, and we will also target technology investments in high-growth areas. With our strong operating cash flow performance and low net debt-to-EBITDA ratio, we believe we're well positioned to leverage various opportunities for the future, and we expect to continue our balanced approach to capital allocation. With our disciplined approach to M&A opportunities, we will look to execute strategic acquisitions to improve scale, capabilities, and participation across our key end markets. The agreement to acquire the plant in Mexico is a great example of the type of acquisitions that make strategic sense and are attractive financially. We will also prioritize high confidence, high growth projects. We have a number of exciting organic growth opportunities in our pipeline, and we think these projects offer a compelling business case to grow the company. We expect we'd be able to fund these investments with our strong operating cash flow. During fiscal 2025, we have completed our new unit in Indonesia for reinforcing carbons as well as an expansion of CNT capacity in China for battery materials. In addition to these investments, we expect to maintain a competitive dividend yield. We increased the dividend by 5% in May of this year, and that we would expect that we would continue to increase the dividend in line with earnings growth. With the strength of our operating cash flow, we have also continued to repurchase shares. The Board increased the share authorization in the first fiscal quarter to 10 million shares, and we expect to repurchase between $150 million to $200 million of shares in fiscal 2025. I will now turn the call back over to Sean to discuss the fiscal year outlook.

Sean D. Keohane, CEO and President

Thanks, Erica. I am pleased with another quarter of strong operating results in what was a very challenging environment. Based on the third quarter performance and our outlook for the fourth quarter, we are reaffirming our expected full year outlook of adjusted earnings per share to be in the range of $7.15 to $7.50. This range reflects year-over-year EPS growth for fiscal 2025 in what is a very weak environment driven by the uncertainty from tariffs and soft global macroeconomic conditions. At current demand levels, we would expect to be in the middle to lower end of the range. If the more recent tariff announcements were to translate into higher demand in the fourth fiscal quarter, we'd expect to be higher in the guidance range. To address the challenging environment, our efforts are intensely focused on execution of our operating platform of commercial and operational excellence. This includes working closely with our customers to understand how their production might shift as a result of tariff policies and offering volume support from our expansive global plant network. We have also implemented a range of countermeasures across our global network. These efforts include commercial actions to drive product and grade mix benefits as well as operational actions to optimize our assets and supply chain costs. We also remain on track with the fixed cost and procurement initiatives we discussed last quarter. Our outlook for cash flow remains strong, and we will continue to deploy capital within our balanced framework. In addition to funding targeted organic growth projects and strategic M&A, we expect to continue to return cash to shareholders through a competitive and growing dividend and remaining active in the share repurchase market. As we have in the past, you can expect us to be excellent stewards of cash, driving a disciplined and balanced approach to capital allocation. Overall, I'm very pleased with how the company is responding in a very challenging environment. I am confident in our strategy and the execution capability of our team and remain excited about the long-term growth prospects of our portfolio. Thank you very much for joining us today. And I will now turn the call over for our Q&A session.

Operator, Operator

Our first call comes from John Roberts with Mizuho Group.

Saurabh Dhir, Analyst

This is Saurabh Dhir from John Roberts line. I just want to understand the relationship between the tariffs and the demand in the North American region. At what tariff rates on the Southeast Asian countries would you expect? And then what do you think will be the tariff rates when the domestic production will become competitive with the imports?

Sean D. Keohane, CEO and President

Thank you for the question about tariffs related to tires. This is a constantly changing situation, so let me outline where we currently stand and our general perspective. For passenger car and light truck tires, there are various tariff levels in different regions. In Southeast Asia, passenger car tires typically face tariffs ranging from 19% to 29%, which applies to countries like Thailand, Vietnam, and Indonesia. Additionally, there may be company-specific antidumping and countervailing duties that can increase these rates. For example, tariffs on passenger car tires from China to the U.S. are around 70%, which explains why we mainly see imports of tires from Southeast Asia rather than China. Moreover, there are also antidumping and countervailing duties on some of those tires, contributing to a significantly high effective rate, leading to very few Chinese tires being imported into the U.S. Regarding Mexico and Canada, tires and carbon black currently fall under the USMCA trade agreement, so they remain at zero tariffs. The focus thus is on tariff levels and antidumping duties for Southeast Asian and Chinese tires. Overall, these tariffs and duties are expected to positively impact the market by enhancing the competitiveness of local production. While we cannot predict the exact outcome, it is likely to be supportive of local manufacturing. Additionally, it is encouraging to see that major global tire manufacturers are responding to the rising exports from Chinese OEMs in the ASEAN region by actively defending their Tier 2 brands. For instance, Bridgestone has recently announced a strategy to revitalize their Tier 2 Firestone brand, indicating a more aggressive approach. Michelin, in their recent call, mentioned an expectation that Tier 3 tire imports will decrease in the latter half of 2025. Overall, the trade actions and the responses from global tire manufacturers to protect Tier 2 brands are likely to positively influence local production. However, the final outcomes are still uncertain.

Operator, Operator

Our next question comes from Jeff Zekauskas with JPMorgan.

Jeffrey John Zekauskas, Analyst

In the Americas, was there a difference in your volumes in North America and South America or however you divide it?

Sean D. Keohane, CEO and President

Yes, sure. Thanks, Jeff. In the Reinforcement Materials segment, volumes in the Americas decreased by 9% year-over-year in the third quarter. This decline is primarily attributed to uncertainties stemming from tariffs and a weaker global macroeconomic environment. Notably, tire imports in North America have remained stable since May of this year, while they have actually decreased in South America during the same period. We believe that our market declines closely reflect these broader industry trends influenced by uncertainty. As for the differences between the U.S. and South America, there are notable variations. Similar to our previous discussion, volumes in South America have shown some weakness, partly due to a sluggish market and some volume losses during last year's contract season, which we covered in the last quarter. This trend has continued.

Jeffrey John Zekauskas, Analyst

Okay. And how is doing business at Altamira different than it was before if it is different? What is it like now to produce and ship from that plant? Have business conditions changed in the tariff regime that we're in?

Sean D. Keohane, CEO and President

The tariff situation has not affected tire production or carbon black. Tires remain tariff-free because they comply with USMCA, and we are currently the only manufacturer in Mexico. Our customers for carbon black are primarily tire plants located in Mexico, so we don't typically export carbon back to the U.S.; it's mainly for local use. The tariff situation remains unchanged, with zero tariffs due to the USMCA coverage, and we expect this to continue. Regarding the acquisition transaction mentioned by Erica, it is attractive for several reasons. We have a facility nearby that we have successfully operated for many years, which strengthens our strategic partnership with Bridgestone and reflects their trust in Cabot. We anticipate this business will be financially beneficial, expecting annual EBIT of around $10 million in the first year and approximately $15 million in the second year, with an EBITDA of about $20 million in year two. Thus, we view it as an appealing acquisition both financially and strategically, and we have a high level of confidence in our operations there, having been established for many years.

Jeffrey John Zekauskas, Analyst

Maybe lastly, have negotiations for carbon black prices in North America begun at all yet? Or is this the year where you expect them to begin later in the year?

Sean D. Keohane, CEO and President

Yes. We're in the early stages of contract negotiations, Jeff. So I would say the timing of things is progressing in a typical fashion. Usually starts in the summer and progresses through the fall.

Operator, Operator

The next question comes from the line of Josh Spector with UBS.

Christopher Silvio Perrella, Analyst

It's Chris Perrella on for Josh. Just a follow-up on that. Given the amount of the rise in tire imports ahead of the tariffs this year. How large is the inventory overhang do you think in the market? And at this point, would tariffs have an impact on demand in the last two months of the fiscal year for you at this point? Just trying to gauge potential upside and what the moving parts would be there.

Sean D. Keohane, CEO and President

In terms of inventory levels, we don't see significant issues with tires. When we review the feedback from various tire manufacturers, they indicate that inventory levels are generally balanced among the major Tier 1 tire makers, although some budget brands may have slightly elevated levels. However, they believe these will return to normal levels in the current quarter. There is some volatility due to ongoing trade dynamics, but overall, things appear to be stabilizing. Our best understanding of tire inventories suggests this. Regarding tariffs, as I mentioned earlier, the situation remains dynamic. We anticipate that existing tariffs and any new antidumping duties will support local production by making it more competitive, though it's challenging to predict the exact impact and timing.

Christopher Silvio Perrella, Analyst

I appreciate that, Sean. Is that more of a calendar 2026 benefit then potentially? And then just a quick follow-up on Brazil. If they raise countervailing duties potentially on tires, how much of your customers, not necessarily you, but would be shipping tires out of North America or out of the U.S. down to Brazil?

Sean D. Keohane, CEO and President

Yes. Returning to the first part of the question, predicting the timing and impact of tariffs on demand is quite challenging. However, I believe it should be supportive. I anticipate that we will begin to see the results emerge later this year and into 2026, as the market processes these changes and customers adjust their supply chain planning. Additionally, I believe some of the global major companies are actively working on and investing in revitalizing their Tier 2 brands to compete more effectively and maintain their market share. The precise timing of these developments remains somewhat uncertain. Regarding the situation in Brazil, depending on how duties are determined between the U.S. and Brazil, there are tire manufacturers producing there and exporting to North America. If the final tariff structure makes that less competitive, our global customers may seek to rebalance their tire production. Many of these customers also have production facilities in places like Mexico and other countries, where they could more cost-effectively transport products to the U.S. Therefore, we expect a natural rebalancing. Nonetheless, most major tire manufacturers have an extensive network of production plants.

Operator, Operator

Our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander, Analyst

Can you provide some clarity on what the network optimization initiatives mean for your operating leverage if demand increases? Will you need to give some of that back, or should this result in a higher incremental margin than what you've historically experienced?

Sean D. Keohane, CEO and President

Yes. So a couple of comments here, Laurence, and then I'll ask Erica if she wants to add anything to it. I think our network optimization efforts are very broad. So when we use that term, we're employing levers that do things to drive a more advantageous product mix. But also we look at our production circuit and try to marry up demand on the most competitive assets with the best delivered cost economics. And so that optimization is something that we're always pursuing. I would say, in addition to that, given the weak macro environment and all the uncertainty from the tariff discussions, we're working hard on the cost and procurement savings front. And all of that is showing through into what I think are quite strong results given the weak demand environment. So the network optimization efforts are really quite broad and part of our overall efforts around both commercial and operational excellence. In terms of the operating leverage question, Erica, maybe I'd ask your comments there.

Erica J. McLaughlin, Executive Vice President and CFO

Sure. Last quarter, we discussed fixed cost and procurement initiatives aimed at saving about $30 million for the year. Currently, we are a bit ahead of that target. Some of these savings come from structural changes, including restructuring actions we've implemented, and those will continue. Others are related to timing, such as travel or third-party expenses, which could increase if the macro situation improves. Overall, it's a mix, but I believe it will positively affect our operating leverage without any negative impact.

Operator, Operator

We have a question from Jeff with JPMorgan.

Jeffrey John Zekauskas, Analyst

I think through the nine months, your unallocated corporate costs were $39 million versus $51 million, so they were $12 million better. How did you achieve that? And sort of how would you describe the $12 million improvement in that line?

Erica J. McLaughlin, Executive Vice President and CFO

So Jeff, it's Erica. I would say these are part of some of the cost reductions we're doing. So these would be a mix of items that would include headcount related actions; it would include things like timing or lower third-party spend. And so those are the actions we've been taking to reduce cost. So you're right, we have been trending about $13 million per quarter so far this year. We would expect September to go to more $16 million to $17 million, so a little bit more similar to last year. Again, this is just timing of certain corporate costs in the quarter. But these cost savings, like I said, are a mix where some are structural; they would continue, and some if the environment improves, you would probably see some of those costs come back in.

Jeffrey John Zekauskas, Analyst

When you examine carbon black volumes over several years, the Americas have seen a decline of 6% in both 2023 and 2024, and it appears they will continue to decline by 6% again. This suggests that this region is performing weaker than either EMEA or Asia. Can you explain why the volume trends have been so consistently weak and why they are underperforming compared to other regions for Cabot?

Sean D. Keohane, CEO and President

Yes. The main reason for this, Jeff, is the elevated level of tire imports we've seen over the past few years. This has negatively affected the region and lowered local production levels. As we look ahead, there are two key factors to consider. First, it will depend on the final levels of tariffs and antidumping duties, which are likely to support making local production more competitive. That’s a positive development. Additionally, we are seeing some global companies losing market share to tire imports, prompting them to make more significant efforts to boost their Tier 2 brands. They realize that focusing solely on the larger rim size and higher-end segment is not enough; they must also address the more fundamental aspects of the business. This combination of factors is directionally favorable. While predicting the timing and scale of these changes is challenging, this summarizes the situation.

Jeffrey John Zekauskas, Analyst

So what we should infer from your commentary is that utilization rates in carbon black in the Americas have moved lower over a multiyear period.

Sean D. Keohane, CEO and President

Well, certainly, utilizations are a function of supply and demand. And so the supply side and the western mature markets, there's been no material adds. So nothing's changed there. And then on the demand front, it's certainly a volume impact from tire imports. But at this stage, we're starting to see that settle out, and the expectation as we go forward and look at commentary from some of the tire majors is they expect that the tire import levels will begin to turn here. And so I think it's really a question of how ultimately the trade situation plays out in the coming months.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Sean Keohane for closing remarks.

Sean D. Keohane, CEO and President

Great. Thank you very much for joining us today, and we look forward to speaking with you again next quarter, and thank you for your support of Cabot. Have a great day.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.