Yahoo Finance Cabot Corporation (NYSE:CBT) Q2 2024 Earnings Call Transcript
Cabot Corporation (NYSE:CBT) Q2 2024 Earnings Call Transcript May 7, 2024
Cabot Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone, and thank you for standing by. Welcome to the Second Quarter 2024 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that your 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.
Steve Delahunt: Thanks Carmen. 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 in 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 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 for the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the Investor 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: Thank you, Steve. Good morning, ladies and gentlemen, and welcome to our call today. I’m very pleased with 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, 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 a 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 have 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 DX9660 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. This 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: 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 remained 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 1.3 times. 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 benefits 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 earn, 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 Argentina 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 devaluation 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 has 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 controls around the access to and use of U.S. dollars related to the government devaluation in December.
The purchase and sale of the bonds and the recent devaluations 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 a level of income from the Argentina investments nor the impact from the volatility of the Argentina peso currency for the remainder of the year in the general unallocated income and expense line item. 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 of 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 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 lines. 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: Thanks, Erica. Moving to our 2024 outlook, we are very pleased with 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 2023 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 return 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 am very pleased with how the company is positioned today. I am 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.
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