Earnings Call Transcript - CBT Q2 2024

Operator, Operator

Good day, everyone, and thank you for standing by. Welcome to the Second Quarter 2024 Cabot's Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President, Treasurer and Investor Relations, Steve Delahunt. Please go ahead.

Steven Delahunt, Vice President, Treasurer and Investor Relations

Thanks, Carmen, 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 second quarter of fiscal year 2024, 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, 2023, and in subsequent filings we make with the SEC. 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 second quarter highlights, followed by an update on our capital allocation framework and then discuss the company's efforts in sustainable product innovation. Erica will review the second quarter financial highlights and the business segment results. Following this, Sean will provide an update on our 2024 outlook and then open the floor to questions. Sean?

Sean Keohane, CEO and President

Thank you, Steve. Good morning, ladies and gentlemen, and welcome to our call today. I'm very pleased with the results in the second quarter and the tremendous efforts of the Cabot team to execute against what is still a challenging macroeconomic backdrop. In the second quarter, we delivered adjusted earnings per share of $1.78, up 34% year-over-year, driven by growth in both segments. Reinforcement Materials delivered very strong results in the quarter with EBIT up 22% year-over-year to $149 million. The outlook for this business remains strong, driven by our leading global market position, the long-term resilience of the replacement tire market, favorable regional supply and demand dynamics, and outstanding execution across the segment. EBIT in Performance Chemicals was up 11% compared to the second quarter of fiscal 2023 and as demand in the segment appears to have generally stabilized and the effects of destocking have ended. While we did see some early signs of improvement in demand, particularly in our automotive, infrastructure, and semiconductor applications, we remain cautious if these demand trends will further strengthen through the rest of the year. Operating cash flow was strong in the quarter at $176 million, which supported the return of $47 million to shareholders through a combination of share repurchases and dividends. Given the strength of our underlying business fundamentals and conviction in the long-term cash flow generation of our portfolio, yesterday, we announced an 8% increase in our quarterly dividend. Cabot has a long history of growing the dividend, and it would be our expectation to continue increasing the dividend over time as the earnings and cash flow of our business grow. The Cabot portfolio has strong cash flow characteristics, which enable a balanced capital allocation strategy focused on funding our high-confidence, high-return growth projects and returning cash to shareholders. This balance of profit growth and cash return can be achieved while maintaining our strong investment-grade balance sheet. Despite a weak macroeconomic environment in fiscal year 2023 and the year marked by sharp inventory destocking, we generated very strong operating cash flow of $595 million. And year-to-date in fiscal 2024, operating cash flow has totaled $281 million. Cash generation is expected to remain strong, and we intend to return a robust amount of cash to shareholders through dividends and share repurchases. We've maintained a continuous and growing dividend since 1968, which is the year the company went public, and that commitment remains a core element of our capital allocation strategy. Since fiscal 2015, our dividend has grown at a compound annual growth rate of 7%, including our announcement last night of an 8% dividend increase. We remain committed to the dividend and expect to maintain an industry competitive yield and payout ratio over time. We also believe that share repurchases are an attractive use of cash. Since 2015, with the exception of the COVID impact in fiscal 2021, we have repurchased shares at a minimum to offset dilution from incentive compensation plans and in most years, have been opportunistic with repurchases in excess of dilution. Year-to-date, we have repurchased $57 million. And since 2015, we have repurchased approximately $700 million of shares and reduced our share count by 9 million shares or 14% of our outstanding shares. We expect to continue being opportunistic given our strong cash flow, the structural improvements in our Reinforcement Materials business, and the long-term growth potential of our portfolio driven by sustainability tailwinds. Cabot has long been recognized as a leader in sustainability, consistently acknowledged by external parties for excellence in this area. While operating responsibly has been deeply embedded in our practices for decades, we also have a rich opportunity pipeline for growth driven by sustainability tailwinds. I would like to highlight a few recent developments that showcase the sustainability-driven growth potential of our portfolio. Recently, our E2C product line earned the award for innovation and excellence at the 2024 Tire Technology Expo, the premier tire industry technology showcase. Specifically, we were recognized in the chemicals and compounding Innovation of the Year category for our Engineered Elastomer Composites platform. Our E2C-DX-9660 elastomer composite produced through a proprietary and patented mixing process enhances tire performance by increasing abrasion resistance by approximately 30% without compromising rolling resistance when compared to conventional rubber compounds. The E2C platform has been validated by global customers and our products are being sold in the tire market. Additionally, our E2C platform offers an array of products tailored to meet the needs of tire manufacturers and industrial rubber applications, combining performance with sustainability benefits. In the quarter, we also launched our new PROPEL E8 engineered reinforcing carbon black designed specifically to address the unique challenges of increased weight and torque posed by electric vehicles. The higher weight and torque of EVs drive an increase in tire wear. PROPEL E8 addresses these issues by delivering low rolling resistance and enhanced tread durability, thereby extending tire life. Finally, Cabot and our commercial partners were recently awarded a $5 million grant by the U.S. Department of Energy under the bipartisan infrastructure law. This research grant is intended to support the development of fuel cells. Fuel cells are particularly critical in the electrification of long-distance transportation due to their ability to manage extended driving ranges and heavier loads, challenges that are difficult to overcome with battery technology. This project will focus on developing an innovative and scalable manufacturing process for producing specialized carbons, which will serve as catalyst supports for fuel cells. Although this initiative is in its early stages, we believe that our collaboration with partners and our collective expertise position us to make substantial contributions to the hydrogen economy, further driving forward the United States leadership in clean energy technologies. These long-term initiatives reflect our deep commitment to innovation and sustainability demonstrating our proactive role in shaping a more sustainable future across various aspects of the mobility and energy sectors. I'll now turn the call over to Erica to discuss the segment and financial performance in the quarter. Erica?

Erica McLaughlin, Executive Vice President and CFO

Thanks, Sean. I will start with discussing results for the company and then review the segment results. Adjusted EPS for the second quarter of fiscal 2024 was $1.78 compared to $1.33 in the second quarter of fiscal 2023, with growth coming from both the Reinforcement Materials and Performance Chemicals segments. Cash flow from operations was strong at $176 million in the quarter, which included a working capital decrease of $21 million. Discretionary free cash flow was $128 million in the quarter. We ended the quarter with a cash balance of $206 million, and our liquidity position remains strong at approximately $1.3 billion. Capital expenditures for the second quarter of fiscal 2024 were $43 million, and we continue to expect $250 million to $275 million of capital spending for the fiscal year. Additional uses of cash during the second quarter were $23 million for dividends and $24 million for share repurchases. Our debt balance was $1.2 billion at the end of March, and our net debt-to-EBITDA was 1.3x. The operating tax rate for the second quarter of fiscal 2024 was 28% and we anticipate our operating tax rate for fiscal 2024 to be in the range of 27% to 29%. One additional item to note is the benefit seen in the general unallocated income line item. As we discussed last quarter, this line item of general unallocated income and expense includes currency exposures related to our net asset positions and investment income we earned mainly in the South America region as well as interest income on our global cash balances. During the quarter, we reported a $15 million benefit in general unallocated income, which was higher than our prior quarter guidance of $7 million to $9 million. The net benefit was largely due to a slower rate of depreciation in the Argentine peso than expected, while we continue to earn interest on the cash and investments during most of the quarter in that country. At the time of the Argentinian government evaluation in December, there were mandated regulations put into place on how companies could pay offshore supplier balances outstanding as of that date. In March, we followed the regulated path for this and applied for and purchased an allocation of government bonds that could be sold at a discount and used to pay offshore suppliers. Cabot purchased $30 million of bonds, which were immediately sold, resulting in an $8 million loss. We treated this loss as a certain item as it was still part of the government control of around the access to and use of U.S. dollars related to the government evaluation in December. The purchase and sale of the bonds and the recent evaluations have resulted in a much lower U.S. dollar cash balance. So going forward, we expect the earnings volatility from Argentina to be minimal. We can now pay offshore suppliers over a mandated timeline, which we would expect to do in the normal course of business going forward. Therefore, we would not expect the level of income from the Argentina investments nor the impact from the volatility of the Argentine peso currency for the remainder of the year in the general unallocated income and expense line items. While global currency movements are difficult to predict, as we look ahead, we would expect general unallocated income to be around $5 million to $7 million of income per quarter driven by the interest income and the net FX impacts on our global cash balances. Now moving to Reinforcement Materials. During the second quarter, EBIT for Reinforcement Materials was $149 million, which was an increase of $27 million as compared to the same period in the prior year. The increase is driven by higher pricing and product mix in our 2024 calendar year customer agreements and higher volumes. Globally, volumes were up 6% in the second quarter as compared to the same period in the prior year due to 21% growth in Asia and 4% in Europe. Looking to the third quarter of fiscal 2024, we expect the Reinforcement Materials EBIT to be roughly in line with the second quarter of fiscal 2024 and with modest sequential volume improvement expected from demand recovery in South America, offset by higher plant maintenance costs and lower energy pricing. Now turning to Performance Chemicals. EBIT increased by $3 million in the second fiscal quarter as compared to the same period in fiscal 2023. The increase was driven by 6% higher volumes driven by our Specialty Carbons and Specialty Compounds product line. Looking ahead to the third quarter of fiscal 2024, we expect modest volume improvement sequentially as we are seeing some early signs of strengthening demand in specialty carbons and compounds and we expect margins to hold sequentially as pricing moves in line with raw material costs. I will now turn the call back over to Sean to discuss the fiscal year outlook. Sean?

Sean Keohane, CEO and President

Thanks, Erica. Moving to our 2024 outlook. We are very pleased with the momentum coming out of the second quarter, and we feel good about the back half of the year. Based on our year-to-date results and the outlook across our businesses, we are raising our guidance for adjusted earnings per share to be in the range of $6.65 to $6.85 for the fiscal year. The upward revision represents a $0.20 increase at the midpoint compared to our prior guidance. At a strategic level, the key drivers for earnings growth remain unchanged. The impact from our calendar year 2024 Reinforcement Materials customer agreements and the resilience of the replacement tire market are driving the strength in this segment. As discussed in prior quarters, we expect year-over-year volume growth in the second half of the year as the customer destocking we experienced in fiscal '23 is not expected to repeat. These factors are driving our expectation for another year of strong double-digit EBIT growth in the Reinforcement Materials segment. In Performance Chemicals, we are beginning to see some early signs of end market improvement, most notably in our automotive, infrastructure, and semiconductor applications with volumes expected to be modestly higher sequentially. We are optimistic that demand trends will continue to improve in this segment as we head into fiscal year 2025. Our balance sheet is strong. Cash generation is expected to remain robust, and we will continue to pursue a balanced capital allocation strategy of growth investments and cash returned to shareholders. In addition to the 8% dividend increase we announced yesterday, we intend to remain opportunistic with our share repurchases going forward. Overall, I'm very pleased with how the company is positioned today. I'm confident in our strategy and the execution capability of our team, and I'm excited about the growth prospects of our portfolio. We are executing well in fiscal year 2024, and we remain on track to meet our 2021 Investor Day consolidated targets. Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

Operator, Operator

Our first question comes from David Begleiter with Deutsche Bank.

David Begleiter, Analyst

Sean, what are you seeing ahead of the July 1st ban on Russian carbon black imports or exports to Europe?

Sean Keohane, CEO and President

Sorry, say it again, David. There was a little noise on the phone there.

David Begleiter, Analyst

So what are you seeing ahead of the July 1st ban on Russian Carbon Black exports to Europe? Any change, any further change in market or buyer behavior?

Sean Keohane, CEO and President

Yes. So the date, as you know, goes into effect on June 30, and we fully expect, and our customers fully expect that will happen. And we've been seeing a continued trend ever since the sanctions were announced of reducing carbon black exports out of Russia into Europe. So we fully expect that this will be in effect on that date. We are through the last year contracting period, regional supply was certainly an important dynamic in the negotiations. And we saw that play out. And certainly, as we are getting closer here, many of our global customers with significant operations in Europe are reaching out for incremental spot purchases for 2024, and they remain keen to secure long-term supply in that region. Now, while our business is largely contracted there and our excess supply in Europe is limited, we are working to support our global customers from our asset base around the world as best we can. But clearly, this is something that is going into effect that has been playing out over some period of time here. And as the date gets even closer, there's continued push for what is remaining to find alternative sources for it. So we'll continue to work closely with our customers to try to help them from our global asset base as best we can.

David Begleiter, Analyst

Very good. Regarding your guidance, the strong Q3 outlook suggests an implied Q4 forecast that seems to indicate a decline. Is this a cautious estimate, or does it reflect the usual seasonal trends you are experiencing?

Sean Keohane, CEO and President

Yes. Maybe I'd ask Erica, and she can walk through that for you, Dave.

Erica McLaughlin, Executive Vice President and CFO

Sure. In terms of the Q3 outlook, David?

David Begleiter, Analyst

What that means for the implied Q4 guidance, it looks to me like it would be down sequentially quarter-over-quarter. Is that just being conservative? Or is that what you expect to see or normally do see in Q4 versus Q3?

Erica McLaughlin, Executive Vice President and CFO

Yes. So I think in terms of the business results, the drivers of the outlook is the first half has been quite strong, and we do expect an increase in the segment EBIT as compared to the prior guidance. And as we talked about, a modest increase in the volumes going forward in both Reinforcement Materials and in Performance Chemicals. I think the other item of it was what I talked about, which was the general unallocated income and expense, where we've seen a large benefit in this previous quarter that we would expect to decrease. So we saw $15 million in Q2, and we would expect that to go down to about $7 million to $9 million in the back half, and that's how we would see the next two quarters developing.

Operator, Operator

One moment for our next question, please. And it comes from the line of John Roberts with Mizuho.

John Roberts, Analyst

Back on capital allocation, could you update us on any M&A under review? And are there any other major capital programs being anticipated at this point?

Sean Keohane, CEO and President

Thanks. Maybe just a quick recap of the priorities from a capital allocation standpoint. Certainly, our first priority is to make sure that we invest in the right level of maintenance and compliance in our plants to ensure that the assets operate well and will continue to generate the strong results that we're seeing now and will continue to support our customers. That's what they've come to expect. So that's first and foremost. Now, we plan to continue to invest for growth and so as the next priority, and so this means investing to make sure we have sufficient capacity as we build out our targeted growth vectors in batteries and in jet for packaging, for example, but as well as some strategic investments in reinforcement, in particular, a new unit in Indonesia that's well underway at this point, supporting the strong growth in the ASEAN market. I would say third is, of course, the dividend and maintaining a strong and growing dividend over time as the earnings and cash flow grow, and then finally being opportunistic with share repurchases. Now with respect to M&A, I can't comment specifically, but M&A remains a piece of the strategy where it supports our chosen strategy. So where we can strengthen our existing position in our markets, whether there are established core businesses or our targeted growth vectors, we will certainly be very active looking at opportunities on the M&A front to support the strength in those areas.

John Roberts, Analyst

And then did the strength in specialty carbons include battery material strength? And it looked like inks and fumed silica were probably stable year-over-year. What's going on in those markets?

Sean Keohane, CEO and President

Yes. So overall, we did see higher volumes across the segment in the quarter heavily driven by our specialty carbons and specialty compounds product lines. In the areas where we're seeing the early signs of improvement, certainly across the automotive applications that was pretty good as well as infrastructure. So this is where we sell carbons and compounds that go into wire and cable applications for the build-out of the grid and connecting alternative energy like offshore wind farms and the like. So that infrastructure sector was pretty good. And then in fuel metal oxides, I would say, silicones remains, I would say, in a still somewhat weak position overall in terms of demand but was positive to see that the semiconductor side of that business, there was a pickup in demand after a fairly long prolonged destocking in semiconductor. So that's positive to see. And with respect to batteries, our volumes were higher year-over-year. So that's positive. Certainly, the EV market is still growing at a pretty good clip, mostly driven by China, but production of batteries are expected to lag EV sales this year because there's still quite a bit of inventory in the chain. But that hopefully gives you a sense for the different product lines that are inside of Performance Chemicals and some of the end market applications where we're starting to see some early signs of pickup, which is good to see.

Operator, Operator

One moment for our next question, please. And it comes from the line of Josh Spector with UBS.

Josh Spector, Analyst

So I wanted to ask on performance and specifically margins. So margins stepped down sequentially, and you're kind of back to levels in the first half of last year. And Erica, when you talked about the forward guidance, you were talking about price offsetting cost. So I guess what needs to happen for margins in that segment to get back to the low to mid-teens? And is there a scenario where that happens this year? Or is that more of a further-out prospect?

Erica McLaughlin, Executive Vice President and CFO

Thank you for the question, Josh. As we mentioned last quarter, this quarter experienced some increased maintenance costs and inventory reductions, which affected our margins. That was indeed the case. Overall, the business performed as we anticipated. Looking ahead, we expect a modest improvement in volume compared to Q2 levels, and we anticipate that inventory impacts will not be as significant. Therefore, we expect margins to return somewhat to Q1 levels. To achieve higher margins, leveraging increased volumes will be essential. Our pricing remains resilient, and as we navigate changes in raw material and energy costs, we can maintain our margins. As volumes rise, we expect to see an enhancement in the overall EBITDA margins of the business.

Josh Spector, Analyst

That's helpful. And I guess in terms of your innovations, the comments on the carbon catalyst, and I guess the grants you got for that, that's maybe an opportunity we haven't talked about much. Is that sizable? I guess, can you talk about that a little bit?

Sean Keohane, CEO and President

Yes, Josh. The general perspective is that many people see fuel cells as part of the energy transition. There is significant investment happening in hydrogen hubs across the U.S. and Europe, though it's still early in that development. I believe hydrogen will play a role in the long-term transition. While lithium-ion batteries are already established as the main technology for electrifying light vehicles, hydrogen is seen as a more suitable option for long-haul trucking due to the weight challenges of batteries. However, several factors need to be addressed, such as building out hydrogen hubs and developing refueling infrastructure. This is definitely a longer-term goal, but it's clear that hydrogen will be a part of the energy mix. As this evolves, we are recognized as an innovation leader in this sector and are collaborating with established players in the fuel cell industry. Our work involves jointly developing a carbon support for the catalyst in our fuel cell applications, which is crucial for the future. Additionally, receiving the research and development grant highlights our position as an innovation leader in this area.

Operator, Operator

One moment for our next question and it comes from Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

I think your American Carbon Black volumes have decreased year-on-year for 6 quarters in a row, I think, and you were down 8% in the March quarter, but you have a positive pricing dynamic in North America. Can you explain what's going on in that region?

Sean Keohane, CEO and President

Yes, sure, Jeff. So the decline in the Americas, which is what you see. So that's both North and South America was largely driven by the impact of economic conditions in South America as well as the replacement tire imports from China, particularly in South America, where that has been impacted more to a lesser extent in North America. So I think the decline in volumes in the Americas region that we reported is definitely skewed towards South America and, again, given the economic conditions there, as well as the tire imports that impact that region. As we look forward, we are expecting that we'll see stronger volumes in the second half of the year such that full year volumes for the Americas, I think, will be more consistent with market expectations for the year. If we look at what forecasters like LNC would say. And then with respect to Europe, we saw volumes up 4% driven by higher contractual volumes as customers in the region continue to value local supply. But hopefully, that gives you a sense for the picture in the Americas region.

Jeffrey Zekauskas, Analyst

For my follow-up, could you share how much you grew in North America last year and during the first half of this year? Also, I noticed that your cost of goods sold decreased by about $50 million this quarter and by roughly $100 million for the half, while your revenues remained flat. Can you clarify what is causing the reduction in cost of goods sold? Additionally, if someone could address the energy penalty related to not receiving co-product credits, what was that penalty last year, and what has it been like so far this year?

Erica McLaughlin, Executive Vice President and CFO

Sure, Jeff. So the cost of goods sold decline is really because of lower raw material costs. And I think as you know, through our pricing mechanisms, we pass that through in the revenue line. So the reason you see cost of goods sold going down is because the raw materials are down. We pass that through in the revenue, but we also have price increases in the revenue and higher volumes in the revenue. So they're offsetting what the pass-through amount. So that's why the revenue looks a bit more flat. And that's the driver of why then the EBIT is higher because you're seeing the pricing come through and drop to that EBIT line. Does that help?

Jeffrey Zekauskas, Analyst

Yes. And what about the energy co-product credits?

Erica McLaughlin, Executive Vice President and CFO

Yes. So the energy was a big headwind, I would say, last year from. If you looked at fiscal '22 to fiscal '23, it was roughly $20 million. And so that was the downward pressure. This year, I'd say we're not seeing any meaningful difference in terms of that. Again, there's very different contracts in different parts of the world. And in some cases, we sell electricity, some cases, steam, et cetera. So it doesn't always mirror exactly the energy markets. But this year, I'd say it's a minimal impact year-over-year to us.

Jeffrey Zekauskas, Analyst

Okay. And did you say what your North American volume growth has been last year and this year so far?

Erica McLaughlin, Executive Vice President and CFO

Well, last year, North America was down. If you remember, we had a good amount of destocking happening in the region. So in 2022, you'll remember there were a good amount of supply chain disruptions happening, and so volumes were quite strong in '22, and we saw the destocking happening there last year. I'd say this year, as Sean noted, our expectation would be more of a flattish year in North America.

Jeffrey Zekauskas, Analyst

Is the North American market growing and your seeding share or the North American market is flat?

Erica McLaughlin, Executive Vice President and CFO

No, I think the outlook for this year is roughly flat, North American market.

Operator, Operator

One moment for our next question. It comes from the line of Laurence with Jefferies.

Daniel Rizzo, Analyst

This is Dan is on for Laurence. You mentioned that infrastructure is a tailwind now. I was wondering if you're seeing any benefit from the Infrastructure Act or the Chips Act, if that's helping drive growth if that will help you in the future? Or is that something any effect at all?

Sean Keohane, CEO and President

Yes, we are observing the effects of improvements in infrastructure, particularly in the wire and cable sector. There are two main factors driving this trend. First, governments and municipalities are renewing their grid infrastructure, which is essential. Second, as alternative energy sources are installed, they need to be connected to the grid. A prime example of this is offshore wind farms, which require subsea cables to transmit power back to the grid. This increases the demand for conductive carbons, and we see this trend reflected in our current results. Regarding the U.S., while there are grants and incentives from the infrastructure bill and CHIPS Act starting to emerge, we haven't yet seen any significant direct impact from these measures. Long-term, as these investments help shift the U.S. energy mix towards more renewables, we expect to see a positive influence on our infrastructure applications like wire and cable. Over time, there should be a consistent renewal of the grid, especially given the well-known challenges of grid stability in various parts of the U.S., which is also true for many mature economies. Thus, we believe this situation presents a solid long-term opportunity, especially as alternative energy begins to roll out more extensively.

Daniel Rizzo, Analyst

That's very helpful. My second question is about the battery business for electric vehicles. Given the growth rate, what is your capacity? Do you foresee a time in the medium term where you might need to expand your capacity to meet the expected growth over the next 10 to 15 years?

Sean Keohane, CEO and President

Yes, thank you, Dan. Currently, in the battery sector, we observe a strong and ongoing growth in electric vehicle demand, which is expected to be around 25% to 30% globally this year, with much of that demand arising from China. The growth of electric vehicles is also starting to increase in Europe, while the U.S. is lagging in the early stages. However, at the production level, battery production is not keeping up with electric vehicle sales due to a significant amount of battery cell inventory in the supply chain. Until this inventory is reduced, battery production will likely continue to lag behind electric vehicle growth for the rest of the year. Looking ahead, the global battery industry, not just our operations, is currently heavily dominated by China, which manufactures about 70% to 75% of the world’s batteries. By the end of this decade, we anticipate a more balanced distribution, with around 50% of battery production occurring in China and the remaining half outside of it, particularly in the U.S. and Europe. We plan to invest to support our customers' growth as this shift occurs between China and the rest of the world. We are carefully timing our investments to align with the construction of battery plants in the U.S. and Europe. We are closely monitoring this situation and collaborating with our customers to ensure that our investments are coordinated with these developments. As this unfolds, we expect to make additional capacity investments in the U.S. and Europe to facilitate this growth.

Operator, Operator

One moment for our next question and it comes from Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

You've had a positive price dynamic in North America in fiscal '23. And I think you're optimistic about fiscal '24, but volumes contracted last year in North America, and it seems like they'll be flat or so this year. What makes you optimistic about your pricing dynamic and what in general was causing prices to lift in such a soft demand environment?

Sean Keohane, CEO and President

Yes, I think a couple of things here. If you look back over a long period of time here probably from 2015-ish time period up through this year. What you have seen in the U.S. is two factors. One, an increasingly tightening supply-demand balance, and that structural change remains in place as well as a significant requirement for environmental investments into the plants, which require pricing and returns on capital in order to get an appropriate return on that and to supply our customers. And of course, the tightening balance over that long period of time has been because there have been tire plant expansions in the U.S. as well as competitor closures over that period of time that have brought the supply-demand balance into a tight position. So that structural dynamic has played out over many years. In the current near term here, there's a certain, I would call it, sort of dynamic nature in the demand, as Erica pointed out, because you saw '22 was very, very strong, '21 and '22. And then in '23, I think people realized that there was a bit of overbuild of inventory in '22 that got trimmed off in '23. So you really have to look through those two years and kind of average those out. And when you do that, you see that the dynamic is actually quite snug from a supply-demand standpoint. So that's the long-term picture that we've been sharing for quite some time now. And I would say there's no change in that, but you've got to certainly look through the inventory build and then the destock across '22 and '23 to see the real supply/demand balance.

Operator, Operator

And as I see no further questions in the queue, I will conclude the Q&A session and hand it back to Sean Keohane for final remarks.

Sean Keohane, CEO and President

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

Operator, Operator

And thank you all for participating, and you may now disconnect.