Erica McLaughlin - Investor Relations Contact Eduardo E. Cordeiro - Executive Vice President, Chief Financial Officer & President-Americas Region.

Matthew Stevenson - SunTrust Robinson Humphrey, Inc. Kevin William Hocevar - Northcoast Research Partners LLC Eugene Fedotoff - KeyBanc Capital Markets, Inc. Christopher J. Kapsch - BB&T Capital Markets.

Good day, ladies and gentlemen, and welcome to the Cabot Corporation First Quarter 2016 Earnings Teleconference. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. 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 fiscal year 2016, 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 are not on our mailing list and are interested in receiving this information in the future, please contact Investor Relations. The slide deck that accompanies this call is also available in the Investor Relations 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 filed 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 continue to face global 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 Fluids segments. On the positive side, the Performance Chemicals 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 fiscal 2016 as compared to 2015.

In addition, we generated $83 million in cash from operating activities and used the 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 by 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 impacts 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 light 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 forecast, 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 the fiscal 2016, 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 savings 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.

First quarter fiscal 2016 EBIT in Purification Solutions decreased by $4 million compared to the first quarter of fiscal 2015, and $7 million compared to the fourth quarter of fiscal 2015. 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 have taken to reposition our cost structure. In December, the D.C. Circuit Court ruled to keep the MATS regulation in place while the EPA works to address the cost analysis required by the U.S. Supreme Court's decision.

We are 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 have done to realign our cost structure.

First quarter fiscal 2016 EBIT in Specialty Fluids decreased by $6 million compared to the first quarter of fiscal 2015 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 the slightly higher project activity levels and lower fixed costs.

Going forward, we will see an improving – 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 have returned over $200 million of cash to our shareholders through $84 million in dividends and the repurchase of 2.7 million shares. We recorded a net tax benefit of $5 million for the first quarter, which included $18 million of 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 declining 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 stock 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 fiscal 2016 will be between 26% and 28%. For 2016, we are 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 costs 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 Chemicals segment and following growth in the Purification Solutions segment.

For the full year, we continue to target improvement and adjusted EPS of $0.75 in fiscal 2016 as compared to fiscal 2015. We anticipate strengthening operating results across our segments as the year progresses as we have previously outlined.

In addition, we expect strong cash flow generation from improved business results and disciplined capital and net working 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..

Thank you. Our first question comes from the line of James Sheehan of SunTrust Robinson Humphrey. Your line is open..

Hi. This is Matthew Stevenson on for Jim. Question, you retained the guidance but it seems like pricing on the contracts came in flat, which was perhaps less than we had expected.

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

Hi, Matthew. Thank you. Thanks for the question. So I would characterize it as – the big thing that we are 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 volumes 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 follow-up, of 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 a 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..

Hey. Good afternoon, everybody..

Hi, Kevin..

Wondering if you could help with the feedstock issue that 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 contributed to a $30 million headwind that you mentioned during the quarter for the Reinforcement Materials segment.

So 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. So if you could help us understand that differentials issue..

Okay. Good question, Kevin. Perhaps I could just give you a bit of context around feedstock, at least from our perspective. So for U.S. 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 U.S.

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 U.S.

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 costs will be marginally less favorable in 2015 (sic) [2016] (16:19) unless the markets change from here. And that's kind of the context around how we view feedstock holistically..

Okay. Got you. That's very helpful. And 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? Or if you can help us understand kind of the magnitude of what you've recouped..

Yeah. 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, and 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. All right. Great. And then just final question, you mentioned the Purification Solutions segment ramping up, particularly in the back half of the year or fiscal year as math takes hold.

So wondering if you could help us understand the magnitude of the types of increases there, and how we should expect kind of 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. So at this time, I really can't help too much.

I would expect that 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. Your line is open..

Good afternoon. Thank you for taking my questions..

Hey, Eugene..

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

Sure. So the restructuring was implemented in the first quarter, and so we should start to see an uptick in – or a reduction in the costs starting in the second quarter. This has been essentially split throughout the company and throughout the different regions in 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 in pretty much full run rate..

Got it. Thanks for the color. And for – just a follow-up on Purification Solution.

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

Yeah. 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.

And just a follow-up on Reinforcement Materials, how's pricing in Asia? Is it sort of – 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 the Performance Chemicals, obviously very strong results, and I understand that a small portion – only a small portion of that business sort of pass through raw material prices in contracts.

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

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

Got it. Thank you..

Thank you. Our next question is from Chris Kapsch of BB&T Capital Markets. Your line is open..

Yeah. Good afternoon. I had a couple of follow-ups on the discussion around the Reinforcement Materials contract negotiations. And so I guess you would – in contemplating several quarters back, coming into the season, the idea of getting some pricing, the – I just really want to understand like the inability to capture more value.

Was it – you had mentioned a function of the market sort of becoming more competitive.

Could you just provide more color? Is it just the weakening sort of macro demand environment or was there some specific competitive behavior which sort of undermined those discussions as the contract negotiations evolved?.

Yeah. 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 and – so the regions. So that would be North America, South America and Europe.

And 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 kind of sideways in Europe.

And so 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 the price..

Great. And then just – I don't know if you could provide context about the volume.

Was it – those gains, were they entirely concentrated in North America? And order of magnitude, was it comparable to what 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 had the pass-through provisions, but they didn't really work in 2015, that sort of almost like an imperfect hedge in those contractual obligations.

Maybe not the best way of describing it, but 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 sort of 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. And so there is not a match between the index and the actual material we buy, and you'd 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 really seeing is just the separation between the index and what the actual feedstock purchasing is..

Okay. Then last one. Finally, you mentioned favorable mix associated with the outcome of these contracts, and so is that exclusive of the lower sort of unit costs that would be associated with higher volumes that you were able to achieve? So if you could just be a little bit more explicit on what you mean when you refer to mix.

Is it just the type of grades into specific tires that these contracts sort of yielded, or are you also including the lower fixed cost absorption? Thanks..

No, 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. And so that whole basket, that whole mix was improved compared to where we were a year ago..

Okay. Thank you..

Thank you. And it looks like we have a follow-up question from Kevin Hocevar of Northcoast Research. Your line is open..

Hey, everybody. In the Performance Chemicals segment, it looks like we stepped up to about $50 million of profitability a quarter the last couple of quarters, and it seems like that's about taken another somewhat step up with some of the cost savings you're expecting and starting in the second quarter.

So is that fair to say? And I know you mentioned that the pricing on – particularly on the specialty carbon black side of things is a little bit more negotiated.

Could you give us a sense for how that's holding up, given the raw material declines? Are you expecting that kind of price raw gap to narrow, or how should we think of that going forward?.

Yeah. Thanks, Kevin. So 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, and 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 on to margins, it really gets back to the strength of the market and the stickiness of the products..

Okay. And just – I know you've mentioned a couple of times Asia being soft, and I was just curious on the minority interest line that there was a tick up there in the quarter.

I mean, it's been at about $1 million or $2 million in the last couple of quarters, that ticked up to $4 million, and I think that's primarily Asian joint ventures that you have in there. So, it seems like that to me indicates that profitability ticked up a little bit. Maybe I remapped wrong.

So just of 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..

Okay. All right. Thanks very much..

Thank you. And that concludes our Q&A session for today. I would now like to turn the call back 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..