Executives
Jack O'Brien - Non-Executive Chairman
Patrick Prevost - President & CEO
Analysts
Cabot Corporation (CBT) Annual Meeting of Stockholders Conference Call March 7, 2013 4:00 PM ET
Jack O'Brien
Good afternoon. I am Jack O'Brien, Non-Executive Chairman of the Board of Cabot Corporation. I am pleased to welcome you to the 2013 Annual Meeting of Cabot Corporation Stockholders and I hereby now call the meeting to order.
I would like to begin today's meeting by introducing the other members of the Board of Directors. Would each director please stand briefly as he or she is introduced. John Clarkeson, Juan Enriquez, Gautam Kaji, William Kirby, Roderick MacLeod, Henry McCance, Patrick Prevost, we will be hearing from momentarily, Sue Rataj, Ronaldo Schmitz, Lydia Thomas, and Mark Wrighton. Thank you all for being here.
We are also very pleased to be joined this afternoon by several former directors, John Bradley, Jane Bradley, John G.L. Cabot and Arthur Goldstein. Thank you all for coming today. Also present today are representatives of Deloitte & Touche and the company's independent auditors for the fiscal year 2012. They will be available to respond to appropriate questions regarding the 2012 fiscal year during the question-and-answer period at the end of the program.
I will now turn to the business of the meeting. Jane Bell, Secretary of the Corporation is keeping the minutes of today's meeting. Ms. Bell informs me that the notice of the meeting was duly and properly mailed and that a quorum is present.
We will now open the polls to conduct the business of the meeting. There are three items of business before us this afternoon. They are the election of directors; advisory approval of the compensation of Cabot’s named executive officers, the ratification of the appointment of Deloitte & Touche as Cabot’s independent registered public accounting firm for the fiscal year 2013.
As indicated in the proxy statement, four directors are nominated for three year terms to expire in 2016. They are John Clarkeson, Roderick McLeod, Sue Rataj and Ronaldo Schmitz. Is there a motion to elect the individuals nominated? Is there a second to the motion? Is there any discussion concerning the election of the directors?
There being no further discussion, we will proceed with the second item of business which is the advisory approval of the compensation of Cabot’s named executive officers. Is there a motion to approve the compensation of Cabot’s named executive officers? Is there a second to the motion? Is there any discussion concerning the proposal?
There being no further discussion, we will proceed to the final item of the business which is the ratification of the appointment of Deloitte & Touche as Cabot’s independent registered public accounting firm for the 2013 fiscal year. Is there a motion to ratify the appointment of Deloitte & Touche as Cabot’s independent auditors? Is there a second to the motion? Is there any discussion concerning the ratification? Is there any other business to properly become before this meeting?
There being no further business, we will proceed with the voting on the items of business. Any stockholder wishing to submit a proxy of vote in person is asked to raise his or her hand at this time; [our people] will collect the proxy cards and give the ballots to stockholders voting in person. Has everyone voted who wishes to do so? Then I declare the polls closed and I ask the inspectors to count and certify the votes.
I will now turn the floor over to Patrick Prevost, Cabot’s President and CEO, who will share his remarks about the company’s fiscal 2012 performance and the outlook for the future. Patrick?
Patrick Prevost
Thank you very much Jack and good afternoon and thank you for joining us today especially in view of the weather conditions that we have out here in Boston. So on behalf of the executive management team and Cabot’s 5,000 employees globally, I would like to welcome you to our 2013 shareholders meeting.
Before I begin my remarks about the company’s state of affairs, I will remind you that today’s presentation will include forward-looking statements. These statements are subject to risks and uncertainties including those discussed in our 2012 Form 10-K filing and our 10-Q filing for the first quarter of fiscal 2013, which could cause actual results to differ from those contained in the forward-looking statements. Copies of these filings are available on the company’s website.
As you look at the slides, you will see that we are changing the way we present ourselves. Today, I am proud to announce that we are launching a new brand identity. We last updated our brand, an image almost 15 years ago and we have significantly evolved since then as the world around us. With all of these changes we needed to update how we present ourselves to our stakeholders. The many facets of Cabot and the breadth of our businesses needed to be more accurately portrayed in order to convey the strength of our company.
Today, we have a global market leading positions in a wide range of products beyond carbon black including fumed silica, aerogel, cesium formate, Inkjet Colorants and activated carbon. Our customers, shareholders, suppliers and partners recognize us as experts in the businesses and the technologies we have chosen. We have become a leading global performance materials and speciality chemicals company.
The reason we refreshed our corporate brand was to clearly align our communications with our corporate division and strategy. The intent of the new brand identity is to show the evolution of the company to help us more accurately depict who we are, how we operate and what you can expect from us.
The central idea of our new brand is engage, create, advance. This is not a tagline; but an articulation of the unique value we deliver to the market. We engage with our customers taking the time to understand their business and their needs. We create by innovating, collaborating and applying our expertise to deliver solutions today but also preparing for tomorrow. And we advance not only Cabot’s business, but also our customers businesses. Cabot’s new corporate logo developed to support the brand connects the company's past with its future. The arrow signals our new direction; the company that advances everyday.
We have been in business for more than 130 years and we take great pride in our global market leading positions. We have some of the best technical talent in the world and our manufacturing team consistently and reliably produces quality products that meet the most demanding specifications. In addition, our safety, health and environmental performance is among the best in the chemical industry. For all of these reasons, our customers, employees and other stakeholders recognize Cabot as a partner of choice.
Our new brand portrays Cabot as a leader in the principal industries we serve. As you can see, these are transportation, infrastructure, environment and consumer. In addition, Cabot is introducing Cabot Labs, this is a way to highlight our technical expertise and market knowledge as it is applying to create new products and processes. At Cabot, we have a long standing commitment to safety, health and the environment. This remains an integral part of our new brand.
Our number one priority is the safety and well being of our employees, contractors, visitors and neighbors in the communities where we operate. In 2012, we achieved our best ever performance in terms of recordable incidences and environmental non-conformances.
We experienced 17 recordable injuries in over 15 million man hours worked and we improved by more than 35% year-over-year continuing to operate at truly world class levels. The dramatic improvement we showed concerns the strengths of our values and our deep professionalism.
It has been five years since I joined Cabot and put our current strategy and vision in place, delivering earnings growth through leadership and performance materials. We've been working on achieving this vision through the execution of our strategic levers which include margin improvement to ensure that we maximize the value generated from our superior products and services and that we manage operations in diligent fashion from a cost point of view.
Capacity in emerging market expansion to ensure that we are thinking about the future growth of the company and that we build our positions in the regions with the greatest growth. New products and new business development to ensure that we are leveraging the extraordinary talent, innovation capability and intellectual property that exists within this organization, and then finally, portfolio management to ensure that we are constantly evaluating the strength of the businesses within our portfolio and looking for opportunities that may fit with our strategic direction.
The implementation of our strategy has led us to achieve our third consecutive year of record earnings. In fiscal 2012, we generated $3.32 of adjusted earnings per share which is a 37% improvement from 2011. To put this in historical perspective, it is nearly triple the earnings we achieved in 2008.
We improved total segment EBIT, our 2012 EBIT in reinforcement materials is almost doubled to what it was in 2008 despite a mixed economic environment. Our advanced technologies segment contributed $49 million in 2012 driven by record setting year in our specialty fluids business.
We also maintained our strong results and performance materials while positioning the segment for growth with capacity investments in few metal oxide and specialty carbon and compounds and a further strengthening of our marketing and applications capabilities.
All of this work resulted in a 72% improvement in total segment EBIT over fiscal 2008. In 2012, we also delivered adjusted EBITDA of $503 million. We achieved this result despite difficult market conditions in the US and Europe and slowing growth in China.
Our success was driven by multiple factors. I will highlight specifically our value pricing, improved product mix, energy efficiency investments and the introduction of new products. Let me address our margins first.
We have been pulling many levers in this area. We have improved the mix of products we sell to our customers and a greater percentage of our sales today come from higher margin products. We've changed our approach on pricing to realize the value we bring to our customers.
We have invented and continue to advance new process and yield technologies to reduce our variable costs globally. And our investments in energy efficiency are delivering meaningful impact to our operations.
We've also made great progress in completing capacity expansions to support future growth. We started up new capacity over the past year for a number of our businesses, including rubber blacks to bottlenecks in Indonesia, South America and Europe. We tripled our fumed silica capacity in China and we doubled the capacity for two lines at our Inkjet Colorants facility in the US, actually here close by in Haverhill.
In addition to our capacity expansions, we are focused on developing new products to meet the changing needs of our customers. Through our Cabot Labs innovation platform, we launched a number of these new products in 2012 and I will highlight just a few.
We launched new fumed silica products that will be used in specialty adhesives for the environmental and transportation industry. We launched Transfinity XD and MDF elastomer composite products targeted to meet the critical demands of the automotive industry.
We developed and introduced a conductive performance additive, the lithium ion batteries and we believe this will support the growth of energy efficient vehicles and consumer electronics and the last example is speciality high strength pigment, the water bond and solvent coatings formulations, which will enable customers to provide superior black coatings for premium vehicles.
I must say I am extremely pleased with how the global Cabot team is delivering new and innovative products to the market. In addition to delivering strong results, we have been transforming our company through portfolio management.
Our portfolio management process was reinvigorated when I joined the company five years ago. It is the process that requires long-term strategic thinking, patience and a specific set of capabilities. One of the first things we did was to closely look at the businesses we had in our portfolio. We assist their strength and opportunities as well as their fit.
Second, we compared our existing portfolio to what we wanted to achieve as a company and next we set goals for ourselves to improve our existing businesses and improve on our corporate strategy capabilities.
This work led to substantial operational and financial improvement in our existing businesses and also to two significant portfolio changes last year. Let me address the Supermetals business first, from 2008 through 2011 we focused on improving the performance of the Supermetals business and we are quite successful.
At the same time, we recognize that the business was not the right fit for Cabot. We did not have the leading raw material position and we were susceptible to the electronics and metal industries cyclicality. As such, we decided to divest the business to improve the stability of our earnings and allow us to focus our resources on our core strength as specialty chemicals.
We sold this business for approximately $450 million which created value for our shareholders and provided us with capital to reinvest in other areas of the company. In addition to the divestiture, we have also been considering acquisitions that would compliment our strength.
As a science company, technology is at the core of what we do and will drive our thinking, when we evaluate acquisition opportunities; we look at complimenting our existing businesses and leveraging our core competencies and also looking at opportunities that provide us differentiated solutions to end markets with attractive growth potential.
Our acquisition criterion is to look at market leaders with unique product and technology capabilities, which underpin a strong financial performance. Our acquisition of Norit demonstrates our discipline with regard to these criteria. In July 2012, Cabot acquired Norit, a leading global provider of activated carbon.
Activated carbon is a natural extension of our portfolio based on our expertise in carbon particle modification technology. These portfolio additions diversifies our end markets and give us greater access to high growth opportunities as the world will increasingly need activated carbon solutions to purify air, water, gas, food and beverage, pharmaceuticals and to add value in other end user applications such as catalysis. The integration of Norit is progressing well. We are pleased with the strength of Norit team and we see a strong cultural fit between the two companies.
In summary, we have been working for five years to evolve the company to be a more stable, high margin, high growth, specialty chemicals company. Through the execution of our strategy we are making great progress. We are transitioning our footprint towards lower cost, more energy efficient capacity in the highest growing markets in the world. We have improved our commercial and operational capability to extend our leadership position globally.
Our new product pipeline is robust and we are offering cutting edge products to meet the changing needs of the market. We have upgraded our business portfolio with the addition of activated carbon. Through our portfolio management process we continue to improve, optimize and strengthen the financial and operating potential of our company and we are very pleased with what we have accomplished so far.
Let me now say a few words about our current environment. Coming off a very strong period in 2012 we started to see some weakness at the end of the fiscal year and this has continued into 2013. As we look around the world, we continue to face multiple challenges. The crisis in Europe started over one year ago and yet we don't see the situation improving there in Europe. In the US, the economy was the leading topic of the Presidential election. The debate around taxes, the budget deficit and the overall government debt level created significant uncertainty. This uncertainty has not been lifted as Washington enters the sequestration process. The only positive sign in the US is a clear improvement in the housing market.
China economic growth was also subdued during 2012. Lower domestic consumption as well as reduced export opportunities due to the situations in Europe and the US affected the economy. The Chinese leadership transition at the end of last year also created some uncertainty. We expected improvement coming out of the Chinese New Year holiday a few weeks ago but this has not materialized yet and finally we are also seeing pressure from currency effects in places like Japan and Brazil.
So overall the macroeconomic environment remains difficult. And this is not just looking at the countries we operate in, but also as we look at the industries we serve. We observe the weakening of the transportation industry last year and no strong signs of recovery over the last few months. 2012 automotive OEM sales were at a 17-year low in Europe. The somewhat better performance we saw in the emerging economies and the US last year is unfortunately moderating. We go to tires, consumers in the US and Europe are holding off replacing their tires for as long as possible. And most leading tire companies reported weak unit sales in 2012 as well as a cautious outlook for this year.
On the infrastructure side, we have finally started to see some positive trends in the US. especially on the housing side. But the infrastructure builds around the world, are not as strong as we would have expected. And finally, demand for products sold in to environmental applications and consumer products are showing some growth but perhaps not as much as we would have anticipated. So this all led to a first quarter fiscal 2013 results that were solid. However, they were affected by the continued weakness in the macroeconomic environment.
On the positive side, we experienced 25% higher volumes year-over-year in our fuel metal oxides business. From the introduction of new products and the addition of our new capacity in China. The addition of purification solutions, some restructuring cost savings and advanced technologies and the improved performance in Elastomer Composites were positive contributors to adjusted EPS year-over-year. Unfortunately, offsetting these positive contributions were low activity levels in specialty fluids and unsatisfactory volumes in reinforcement materials, specialty carbons and compounds and purification solutions.
So far in January and February, we have seen a solid rebound in performance materials volumes as our customers are restocking after December’s inventory control. However, our reinforcement materials volumes remain soft as we see volumes in January and February approximately 8% below January and February of last year. We also experienced a temporary plant disruption in Japan, which we estimate will favorably impact our second quarter of fiscal 2013 by $6 million to $8 million.
On the positive side we see progressively high activity levels in our Specialty Fluids business with a robust pipeline of projects starting this summer and reaching into the next few years. However in summary, we see the second quarter of fiscal 2013, shaping up to perform in a similar range as our first quarter of this fiscal year.
Despite the challenging environment we are facing, we continue to focus on the earnings growth for the company and our adjusted EPS target of $4.90 to $5 in 2014. When we first set this target, we expect that the improvement to come from capacity expansions, margin improvement and new products, new businesses. We have been successful in our value pricing initiative over the past few years and can see the results in the margin profile of the company, and we are also making great progress in new product and new business growth.
However, volumes weaken than 2012 as compared to 2011 and put us behind in our volume growth expectations. Therefore, in order to achieve our plan earnings growth, we will need to see volumes increase approximately 10% to 15% in 2014 as compared to 2012 in both reinforcement and performance materials. As we learned in 2009, a demand recovery can happen very quickly in our businesses as many of the end products we serve are non-discretionary.
As the environment improves, we are well-positioned with comparative capacity in the right geographies. In the meantime, we are evaluating many self help opportunities to offset the challenging economic environment. Late last year we announced restructuring in on new business group. We have also slowed down our capacity expansion program, and we will continue to access options to adjust our cost structures to help us achieve our targets.
In closing, I am pleased that we are creating value for our shareholders. We have a robust strategy, we have upgraded our portfolio, we have a solid pipeline of growth opportunities and we are focused on continuing our track record of meeting our commitments. I am proud of the transformation that has occurred with in this company thus far, and I believe that our best days are still ahead. I look forward to the next steps of the journey with confidence and optimist. I thank you for your time today. And now we will now read the results of the voting.
Thank you very much. So these are the results of the voting. The inspectors report that the John Clarkeson, Roderick MacLeod, Sue Rataj and Ronaldo Schmitz have been elected directors of the corporation for terms expiring in 2016. The inspectors further report that on the advisory basis, the compensation paid to Cabot’s named executive officers has been approved.
And finally the inspectors report that the appointment of Deloitte & Touche as Cabot’s independent auditors for fiscal year 2013 has been ratified. Thank you very much.
Question-and-Answer Session
[No Q&A Session for this event]
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