EBIT in Reinforcement Materials up 37% year-over-year due to structural improvements and a tight supply-demand balance, with an expected EBIT increase of approximately $15 million per quarter for the remaining three quarters of fiscal 2024.
Performance Chemicals segment EBIT increased by 17% year-over-year as demand stabilized and destocking effects diminished.
In Reinforcement Materials, first-quarter EBIT increased by $35 million year-over-year, driven by higher pricing, product mix, and volumes.
Performance Chemicals EBIT rose by $5 million in the first fiscal quarter compared to the same period last year, driven by higher volumes.
Cabot continues to be recognized for its sustainability efforts, being named to Newsweek’s list of Most Responsible Companies for the fifth consecutive year.
The company remains focused on its Creating for Tomorrow strategy, expecting continued earnings and cash flow growth.
Investments in battery materials and inkjet segments are expected to drive long-term growth, with battery materials market expected to grow between 20% and 30% over time.
Cabot reaffirms its fiscal 2024 adjusted earnings per share outlook in the range of $6.30 to $6.80, up 22% at the midpoint year-over-year.
Cabot’s balanced capital allocation strategy is aimed at funding strategic investments for long-term earnings growth while returning cash to shareholders and maintaining a strong investment-grade balance sheet.
The company has a continuous and growing dividend since 1968, reflecting confidence in the long-term cash flow outlook.
A corporate discretionary free cash flow target was set to generate in excess of $1 billion over three years, with Cabot on track to achieve this target in fiscal 2024.
The Chinese economy has stabilized, showing signs of marginal improvement in recent months, with pockets of stronger demand in replacement tire exports and automotive OE sectors.
The government’s stimulus plans around affordable housing, urban renovation, and dual-use infrastructure are expected to further drive demand for chemicals.
Growth expectations align with the latest macroeconomic indicators, with GDP growth projected in the 4% to 5% range.
Yes, EBITDA is expected to grow in fiscal year 2024 due to continued year-over-year volume growth and a better product mix in China, driven by higher penetration of performance grades.
Growth is anticipated to be more second-half driven as OEMs and battery makers reduce high inventory levels.
Overall profitability in fiscal 2024 is expected to grow roughly in line with battery production growth.
Reinforcement Materials: Multiyear Contracts and Capacity Debottlenecking#
Two levers are used to increase capacity: driving overall equipment effectiveness (OEE) and implementing capital-efficient debottlenecks.
OEE improvements typically yield a 1-2% capacity increase annually, while debottlenecking involves minor capital investments to unlock additional capacity.
These levers, combined with a low single-digit demand growth rate, provide confidence in the company’s growth runway for multiple years.
Carbon Elastomers: Market Adoption and Customer Considerations#
Market adoption of carbon elastomers is primarily driven by customer considerations due to the novel technology requiring changes to customers’ production processes.
Adoption has been evident in the off-the-road tire segment, particularly for wear and cut/chip performance, with many commercial tires already in use.
The next phase of adoption is expected in the truck and bus tire segment, where customers are conducting extended road tests to improve wear characteristics and balance fuel economy.
The adoption cycle is conservative due to the qualification process, but the value proposition of carbon elastomers is becoming increasingly compelling.
Reinforcement Materials Pricing and Mix Gains by Region#
How were the pricing and mix gains in Reinforcement Materials balanced across regions, and was there a more significant impact in Europe due to the sanctions against Russian-sourced Carbon Black?
In Europe, the upcoming ban on Russian supply to the EU drove strong demand as customers sought to secure supply, leading to price increases and reinforcing the value of Cabot’s stability and sustainability leadership.
In the Americas, price increases were realized across the board despite transient destocking in the replacement chain, with customers recognizing the value of regional supply and consistent quality.
In Asia, where most business is negotiated on a spot basis, price increases were achieved for global customers with annual agreements.
Overall, the impact of pricing and mix gains was likely stronger in Europe due to the Russia sanction phenomenon.
Competitive Landscape and Structural Improvement in the Industry#
The company’s performance validates the structural improvement in the industry, yet there is skepticism in the stock valuation. Can you comment on the barriers to entry and the market’s skepticism about the industry’s structural improvement, particularly in light of recent capacity additions by a competitor in Southeast Asia?
The company has demonstrated strong earnings growth over a long period, providing proof points of the industry’s structural dynamics, which are different from historical trends.
The stability of demand in each region, supply-side reductions, environmental capital requirements, and the importance of regional supply all contribute to higher barriers to entry.
The company’s self-help initiatives, such as improving operational excellence, driving yields, and energy recovery, further differentiate its business and contribute to its performance.
The recent capacity additions mentioned have been announced in the past but not fully acted upon, and their firmness is uncertain.
If these additions do materialize in the ASEAN region, it would align with the expected growth in tire production and potentially help backfill the displacement of Russian supply.
