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Cabot Corporation (NYSE:CBT)

Annual Meeting of Stockholders Call

March 8, 2012 16:00 ET

Executives

Jack O'Brien – Non-Executive Chairman of the Board

Patrick Prevost – President and Chief Executive Officer

Jack O'Brien – Non-Executive Chairman of the Board

Well, that's a good way to get your attention. Good afternoon everybody. I am Jack O'Brien, Non-Executive Chairman of the Board of Cabot Corporation and I am pleased to welcome you to the Cabot Corporation 2012 Annual Meeting of Shareholders. 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. Will each director please stand briefly as he or she is introduced. John Clarkeson, Juan Enriquez-Cabot, Gautam Kaji, Roderick MacLeod, Henry McCance, John McGillicuddy, Patrick Prevost, Sue Rataj, Ronaldo Schmitz, Lydia Thomas, and Mark Wrighton. Thank you.

We are also joined this afternoon by several former directors. I hope they are all here. I was told they were here, John Bradley, Ken Burnes, John G.L. Cabot, Sam Coco, and Arthur Goldstein. Thank you all for joining us again today. Also present today are representatives of Deloitte & Touche, the company’s independent auditors for fiscal year 2011. They will be available to respond to appropriate questions for the 2001 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 the keeping the minutes of today's meeting. Ms. Bell informs me that the notice of this 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 four items of business before us this afternoon. They are the election of directors, the approval on an advisory basis of the compensation of Cabot's named executive officers as disclosed in the proxy statement for this meeting, the approval of an amendment to the Cabot Corporation 2009 long-term incentive plan to increase the number of shares available for issuance under that plan, and the ratification of the appointment of Deloitte & Touche as Cabot's independent registered public accounting firm for fiscal year 2012.

As indicated in the proxy statement, four directors are nominated for three-year terms to expire in 2015. They are John McGillicuddy, Lydia Thomas, Mark Wrighton, and myself. 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 the business, which is the non-binding vote to approve 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 this proposal? There being no further discussion, we will proceed with the third item of the business which is the approval of an amendment to the Cabot Corporation 2009 long-term incentive plan to increase by 2,454,000, the number of shares available for issuance. Is there a motion to approve the amendment to the Cabot 2009 long-term incentive plan? Is there a second to the motion? Is there any discussion concerning the proposal? There being no further discussion, we will proceed with the final item of business which is the ratification of the appointment of Deloitte & Touche as Cabot's independent registered public accounting firm for the 2012 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 come before this meeting? There being no further business, we will proceed with the voting of the items on the business. Any stockholder wishing to submit a proxy or vote in person is asked to raise his or her hand.

Ashish will collect proxy cards and give ballots to stockholders voting in person. Has everyone voted who wishes to do so today? Then, I declare the polls closed, and ask the inspector 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 both the company’s fiscal 2011 performance and the outlook for the future. Patrick?

Patrick Prevost – President and Chief Executive Officer

Thank you very much, Jack, and good afternoon to all of you. On behalf of the executive management team and Cabot's 4,200 employees worldwide, I would like to welcome you to our 2012 Shareholder 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 2011 Form 10-K filing and our 10-Q filing for the first quarter of fiscal 2012. Copies of these filings are available on the company’s website.

As I stand here today, it feels like I joined this great company just a few days ago. Time has been flying. And this is now the fifth time I have the privilege to share with you Cabot's annual state of affairs. I am proud to have led Cabot through a period of great change. Our progress to-date can best be described as just the beginning of a truly transformational journey.

Before I talk about some of our accomplishments and our goals, I would like to recognize the Cabot team. I truly believe that one of the reasons, our customers choose to buy from Cabot is because our people perform at an outstanding level everyday. They understand what service means. Our employees give us an important competitive advantage. They come from diverse backgrounds, cultures, and experiences, yet they share a core set of values, and each has a passion to create, innovate, and deliver solutions that will help our customers winning the marketplace.

When we deliver value to our customers, we are in turn able to create value for our shareholders. Here you can see the equity market journey that we have been on since 2008 that it has been a bumpy ride. It's certainly no surprise to everyone. Thankfully things have finally improved in the last few months.

At the financial performance level, we have been on the strong path of growth, and in 2010 and 2011, we posted two consecutive years of record earnings. This has translated to improve value for our shareholders. Our vision is to achieve earnings growth through leadership in performance materials and we have made progress in pursuing this vision over the past four years.

Prior to 2008, we had earnings performance, which was relatively stable inside a band of $50 to $2 per share. As a public company, we recognized that our shareholders have investment alternatives and we could not remain satisfied with this level of performance. As a result, we set ourselves a medium term financial target of achieving $3 per share by 2012.

Then came 2009, the economic downturn gave us a significant hurdle to overcome in attaining our goal. Our volumes during the crisis fell by as much as 40%, and our earnings declined dramatically. The environment led to one of the most difficult financial years in Cabot's history. We finished fiscal 2009 with adjusted earnings of only $0.04 per share. The downturn challenged our team and certainly strengthened our results. During 2009, we completed the major restructuring of our operations, while still maintaining strategic growth investments on the capacity and technology front. 2010 then saw dramatic recovery. Our volumes improved by more than 20% year-over-year and our profitability rose to record levels.

And on last year, we finally achieved our $3 earnings target, a full year earlier than we committed to. In addition, we delivered the return on our invested capital of 16%, which is a strong showing and an important measure for business with high capital intensity. After this second straight year of record earnings, we have set our sights on further growth. We have challenged ourselves to move the company to an adjusted earnings level of $4.50 per share in 2014 while maintaining an adjusted ROIC in excess of 13%.

Today, I will discuss with you how Cabot is achieving its results and why I am confident in our ability to continue to meet our commitments. When we said our company strategy, our aim was to build the company that performed well in any market environment and that is seen as a leading player in the performance materials and specialties chemical space.

We also needed to commit ourselves to creating value for the shareholders who haven't trusted us with our capital. This led us to focus our long-term strategy in four areas. First, margin improvement, to ensure that we maximize the value generated from our superior products and services and that we managed our operations cost diligently. Second, capacity in emerging market expansion, to ensure that we are thinking of the future growth of the company and that we extend and build our positions in the regions, where the fastest growth will occur. Third, 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 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. In 2011, we made progress in all of these areas.

We are increasing our margins by pulling many levers. We have aggressively improved the mix of products we sell to our customers and a greater percentage of our sales today come from high margin products. We have changed our approach on pricing to ensure that we are realizing the value we bring to our customers. This has led to deeper market understanding and better segmentation of our total offering. We are managing our raw material purchases more globally to leverage our buying power and reduce our costs. We have invented and continued to develop new process and yield technologies to reduce our variable costs globally, and our investments in energy centers of delivering meaningful efficiency to our operations.

In the area of capacity and emerging markets, we are investing in our future growth through substantial projects across our global footprint. These expansions include a tripling of our fumed silica capacity in Jiangxi, China; a highly efficient and integrated masterbatch facility in Tianjin, China; a 50% expansion of our rubber black capacity in Indonesia; the debottleneck of our fumed silica capacity in Barry, Wales; a 10% rubber black capacity build across three sites in Europe; a 20% expansion of a carbon black capacity in South America; the doubling of our capacity in Haverhill, Massachusetts to produce color inkjet products; and a new world scale carbon black manufacturing site in China together with Risun Chemicals, our new joint venture partner.

As you can see, there is a lot going on at Cabot. All of these projects are well-advanced and will help us meet our 2014 strategic financial goal. Beyond our strategy, we have also focused our activities on the things that are most important to the success of the company. To this end, we believe that safety, innovation, performance, customers, and people are critical elements to our success. And we have clear focus on these areas day-in and day-out.

In safety, we continue to perform at a world class level. Our total recordable incident rate which measures the total number of recordable injuries per 100 full-time employees was 0.35 during 2011. Nonetheless, 26 of our colleagues still sustained the recordable injury, this is 26 to many. And we remain committed to the belief that each and every injury is preventable. This level of commitment to safety requires an intense focus everyday as two very serious accidents have recently reminded us. Since then, we have redoubled our efforts, and as a result, we have had a single recordable incident in the past 80 days. Fundamentally, we believe that every incident is preventable and we will not be satisfied until we achieve our goal of zero injuries.

On the broader sustainability front, we continue to make very solid progress. We are developing new products and new applications that are aimed at conserving power in our customers' products as well as enabling new alternative energies. Our operations are reducing their carbon footprint and we are investing in new processes that will reduce our own energy consumption. In the areas of environmental reporting and conformance, we are focused on ensuring that we meet all of our obligations to the governments and communities in which we operate. Since 2008, we have reduced our rate of environmental non-conformances by nearly 50%.

Finally, we are sharing our efforts and progress more visibly. During 2011, we published our first ever GRI certified sustainability report, GRI standing for Global Reporting Initiative. And we participated in the carbon disclosure project for the third straight year. At Cabot, our innovation philosophy is imagine, create, and monetize, which reflects our intent to drive new ideas that clearly contribute to our financial performance.

During 2011, we made continued progress in increasing customer acceptance of many of our new products and developing additional new opportunities. Example of these developments include Transfinity, which is an exciting new family of elastomer composite products, for military aerospace, mining, and automotive applications using Cabot proprietary technology. New fumed silica products for windmill bonding paste that will allow manufacturers to make longer windmill blades and meet the challenging needs of this growing application. Black matrix, a carbon additive for the production of LCD TVs that helps improve product – picture quality.

New inkjet colorants that enabled the growth of digital printing into high-speed commercial applications. Unique high performance battery material additives that are helping our customers enhance their products and capture growing markets for micro-hybrids and electronics. And aerogel-based composites that are helping architects and builders meet demanding energy efficiency requirements without sacrificing esthetics. These are only a few examples of the exciting work going on in our labs and with our customers.

In order to be successful in an increasingly competitive environment, we must have a performance culture. We have achieved strong earnings growth in the last two years, but this is not all. We also recognized that as a capital intensive business, return on invested capital is an essential performance metric for our shareholders. Excellent ROIC performance ultimately helps drive stock price and shareholder value. This chart illustrates our adjusted ROIC performance since 2008 and our success in moving from an 8% level, which is below our cost of capital to a level that meets or exceeds our 13% objective.

We aspire to be our customer's supply of choice and we work to earn their business everyday. Our customers deeply value our excellent product quality, our reliability of supply, and our service. And they desire to partner with us on business and technology developments. Our strong technology and innovation capabilities allow us to develop products to meet our customer's performance needs.

In 2011, we have partnered with customers in many different areas. We worked with Michelin on our CEC Technology for tire application with Dow Corning extending our fumed silica partnership in Barry, Wales; with Rockwool on mineral wool composites for high-end insulation containing aerogel; with Sto on polymer aerogel composites for critical architectural systems; with Risun Chemicals, our joint venture partner in China to build the new carbon black facility; and with Halsan, a Taiwanese customer for high-end automotive coatings in Asia. These are only a few examples of our customer and partner relationships.

With our corporate culture, we took steps in 2011 to put an even greater emphasis on our people. Integrity, respect, excellence, and responsibility are the four values that our employees share. These are the guiding principles for how we interact with each other and with the outside world. Underscoring that the manner in which we achieve our results is as important as the results themselves.

We have introduced the global framework for employee and leadership development. This includes a set of employee development principles and the launching of our developing leaders program for all people managers in the company. We are also giving our employees the opportunity to grow and develop through our Cabot College program. This is an intense 10-day event, which helps both young and experienced managers develop their business skills and engage at a deeper level with the senior leadership of the company. Our focus on these key elements of success has enabled our successful business performance in 2011 and will continue to do so in the future.

Now, I'd like to share with you our short-term outlook for the business. We have recently completed our first fiscal quarter of 2012 and reported solid earnings despite continued uncertainty in Europe and the U.S. We continued to increase our margins through actions we have been taking to improve the pricing and product mix in our businesses. We improved our performance despite the slowdown in volumes from customer inventory destocking. With the sale of the Supermetals business, we also further strengthened our balance sheet and focused our portfolio on what we are really good at, specialty chemicals and performance materials.

In January and February, as you can see in the slide, we have seen a rebound in performance segment volumes as our customers are restocking their inventories. Our core segment volumes remained robust and we are benefiting from margin upside due to the new calendar year supply contracts that are being implemented. The markets we saw remained solid with some differences by region and industry. Overall, the tire market continues to grow with increasing personal and commercial miles driven. In emerging markets, the growth is substantially stronger than in the more mature geographies. North America remained stable while Europe continues to experience some uncertainty from the broader economy.

Our customers have been showing a strong commitment to growth by announcing multiple investments around the world. This is a good thing. The OEM automotive market is recovering globally, although, we will continue to see some significant regional differences. As an example, the U.S. is projecting that it will produce 15 million units in 2012, a level of projection that we have not seen since 2008.

On the electronics market front, the prediction is 2% global growth for this year. This is considerably less than in the prior years, but we remained confident in the long-term growth potential of this market segment.

The construction and infrastructure markets have been the most affected by the global debt crisis. We are seeing some small improvements in North America, although housing starts are still very weak. In Europe, the debt crisis is keeping demand low. However, we still see robust growth of housing and infrastructure in many of the emerging markets in which we participate.

As a result of all these factors, we are expecting that the second fiscal quarter will be substantially stronger than the first. And all-in-all, I remain optimistic about 2012. As customers seek to grow in emerging markets, they need suppliers to be by their side. Our broad geographic footprint allows us to provide them with local support in North America, Europe, Asia, South America as well as the Middle East. One of the great strength that Cabot has always been its foreside to enter some of the most rapidly growing regions of the world with the local manufacturing presence and local management teams.

Today, more than half of our sales come from emerging markets and this is to be compared with only 20% just 10 years ago. Our continued investments in these markets are key to our future. As we look to the years ahead, I have great confidence in our ability to meet our long-term financial target. This confidence comes from the many factors we already discussed. It is important to remind ourselves of the unique features of Cabot. We and our customers sell many nondiscretionary products. We are global leaders in the businesses we have chosen. And finally, we have built a remarkable technology capability and reputation over the years.

Our continued success in growing the business to a new level of performance will come from a combination of capacity expansion, margin improvement, and new products and business development.

In closing, I am pleased to see that we are creating value for our shareholders. A group, which I enthusiastically belong to, we have the robust strategy. We are on track to meet our objectives. We are building a high performance culture. We have an excellent record of meeting our commitments and we have a solid pipeline of growth opportunities. I am proud of the transformation that has occurred within the 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 optimism. Here I thank you for your time today, and I will now read the results of the voting, and then open the floor for questions.

Okay. So, the results of the voting, the inspectors' report that John McGillicuddy, John O'Brien, Lydia Thomas, and Mark Wrighton have been elected directors of the corporation for terms expiring in 2015. The inspectors' further report that on an advisory basis the compensation paid to Cabot’s named executive officers as described in the proxy statement for this meeting has been approved. The inspectors' further report that the amendment to the Cabot Corporation 2009 long-term incentive plan increasing the number of shares available for each (solutions) has been approved. And finally, the inspectors report that the appointment of Deloitte & Touche as Cabot's independent auditors for fiscal year 2012 has been ratified.

I will now open the floor to question. If anyone should have the question, please raise your hand and will ensure that we have a microphone for you.

Question-and-Answer Session

Patrick Prevost

Are there any questions?

Patrick Prevost

George?

Unidentified Analyst

Thank you, Patrick for the comprehensive report. Can you comment on couple of the large shareholders basically State Street, I know they are a basically in a custodian, capacity and also BlackRock, how much contact you have with them or how much actual interest they have in Cabot. I know in the past we had some hedge funds that were in and out with large holdings, but no long range interest in the company?

Patrick Prevost

Thank you, George. I believe that today approximately a close to 50% of our shareholding is in the hands of about 20 very large shareholders that are mostly institutional shareholders. These are shareholders that are very interested in how the company develops. These are shareholders that my management team and I meet on a regular basis and we have a clear direction for our Investor Relations team to be working very closely for this, very important shareholders.

Unidentified Analyst

Thank you. Can you also comment on the pension and retirement fund how that’s doing? How much funding it takes each year?

Patrick Prevost

I’m sorry, I think, I would say that at this stage the pension fund is very well funded. There is no issue on this front. Don’t think I can give you much more detail here. I believe that, that can be provided to you by our investor relations department.

Unidentified Analyst

Okay. One of the financial people will address that or?

Patrick Prevost

I believe that beyond the fact that the pension fund is properly funded. I’m not sure we can go into more detail at this meeting, George.

Unidentified Analyst

Thank you. And then I happen to notice the plants it listed five facilities in China and four out of the five, well, we owned all the plants, but four out of the five were on leased land. Is there a special reason for that?

Patrick Prevost

Well, in China, the land is ultimately owned by the government, which means that everyone in China is actually operate on long-term leased land. So, this is not something unusual.

Unidentified Analyst

But there is one that shows that we owned the land and the facility.

Patrick Prevost

This could be our Hong Kong facility, well, I know actually even our Hong Kong facility is leased land. So, I believe all of the facilities in China are in leased land.

Unidentified Analyst

I will double check then.

Patrick Prevost

Okay. Maybe we can catch up on that later.

Unidentified Analyst

Okay. And then can you comment on the Cabot Foundation, what the criteria is for giving with the foundation and how the funds are allocated to that on an annual basis?

Patrick Prevost

Certainly.

Unidentified Analyst

And also what sort of discretion do managers overseas have to give locally?

Patrick Prevost

Certainly, no I’d be happy to do that. We have a very active foundation as Cabot, and we – a portion approximately in the vicinity of the $1 million a year of funds. The main objectives of the foundation are about science, education, and we have a foundation board that reviews request that come from all around the world to fund worthy projects. And in many cases, we try to focus these projects on the communities in which we operate and try to apply them to where they causes that actually advance in many cases education and science.

Unidentified Analyst

So, the actual decisions are made here in Boston, the requests are made from all over?

Patrick Prevost

That is correct, yes.

Unidentified Analyst

Yeah, thank you. And then I was wondering, can you give us an update on the litigation that’s going on generally speaking and how much we pay to outside law firms versus how much of the legal work is done in-house?

Patrick Prevost

I’m sorry (George), but I don’t have that information on hand and I’d be happy to take that offline if you….

Unidentified Analyst

There will be made some general information on it.

Patrick Prevost

I’m sure that Brian could speak with you, but I would suggest we do that after the meeting, if that’s okay with you?

Unidentified Analyst

Okay.

Patrick Prevost

Thank you.

Unidentified Analyst

Well, on a positive note, I am happy to get the feeling that there was more settlement rather than…

Patrick Prevost

There has been a lot of very good work and…

Unidentified Analyst

Rather than litigation going on there.

Patrick Prevost

Absolutely, absolutely.

Unidentified Analyst

So congratulations on that.

Patrick Prevost

Thank you.

Unidentified Analyst

Thank you.

Patrick Prevost

Thank you very much, (George).

Patrick Prevost – President and Chief Executive Officer

Are there any other questions? So, there being no further questions, I declare the Cabot Corporation’s 2012 Annual Meeting of Shareholders adjourned and I thank you very much for your attention and for your participation. Thank you.

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