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Cabot Corp. (NYSE:CBT)

Norit N.V. Acquisition Conference Transcript

June 21, 2012 8:30 AM ET

Executives

Erica McLaughlin – Vice President, Investor Relations

Patrick Prevost – President and CEO

Eddie Cordeiro – Chief Financial Officer

Brian Berube – General Counsel

Analysts

Saul Ludwig – NorthCoast Research

Laurence Alexander – Jefferies

John Roberts – Buckingham Research

Jeff Zekauskas – JP Morgan

James Sheehan – Deutsche Bank

Christopher Butler – Sidoti & Company

Andrew Dunn – KeyBanc Capital Markets

Bruce Zessar – Advisory Research

Operator

Good day, ladies and gentlemen. And welcome to the Cabot Corporation Norit Acquisition Conference Call. At this time, all participants are in a listen-only mode. Later we’ll facilitate a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Erica McLaughlin, Vice President of Investor Relations. You may proceed.

Erica McLaughlin

Thank you. Good morning. I would like to welcome you to the Cabot Corporation Norit acquisition teleconference. Here this afternoon are Patrick Prevost, Cabot’s President and CEO; Eddie Cordeiro, Cabot’s Chief Financial Officer; and Brian Berube, Cabot’s General Counsel.

This morning we announced, we have entered into a definitive agreement to acquire Norit N.V., a copy of the press release is posted on the Investor Relations section of our website. For those on our mailing list, you received a press release either by e-mail or fax. 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 on 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 forward-looking statements.

A list of factors that could affect Cabot’s actual results can be found in the press release we issued this morning 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.

I will now turn the call over to Patrick Prevost, who will discuss the transaction and the strategic rationale for this acquisition. Eddie Cordeiro will then review the financial details of the deal. Following this, Patrick will provide closing comments and open the floor to questions. Patrick?

Patrick Prevost

Thank you, Erica, and good morning, ladies and gentlemen. I’m excited to announce that last night we entered into an agreement to acquire Norit N.V., the industry leader in activated carbon. This is a significant event in our company’s history and it’s a next step to becoming a higher margin leading specialty chemicals company.

This morning we issued a press release that providing details on the transaction and let me begin by covering a few of the highlights. We have agreed to acquire Norit’s $1.1 billion, which will be financed by combination of cash and debt. The deal is immediately accretive to EPS and we expect the transaction to close within calendar year 2012.

Instantly this acquisition will add over 20% to our current EBITDA base, all of this, while adding a stable earnings stream and end market diversification. This is a new growth platform for Cabot.

Norit will enable our participation in environmental and purification solutions worldwide. It will also provide us with further growth opportunities in emerging markets and new customer tailored applications.

Before we get to the details, I wanted to recollect a bit over the progress we have made in the last few years, which has positioned us to take advantage of this opportunity. During this time, we are substantially strengthen the overall profitability of the company through a focus on reducing our fixed and variable costs, while ensuring that our pricing reflects the value we bring to our customers.

In addition to strengthening our margins, we have also continued to make appropriate investments to support our existing businesses. We have improved the profitability of our business without sacrificing our commitment to developing our technology for new products, new processes and new businesses.

Through these efforts, we establish a new baseline of earnings per share of $3 per share last year and set a new target for 2014 of $4.50. With the sale of our Supermetals Business, we have reduced the volatility and cyclicality of our earnings, and strengthened our balance sheet.

All of these efforts have positioned us to be able turn our focus generating long-term sustainable growth. The acquisition of Norit is the next step of our strategy that positions us to achieve this growth.

In considering this acquisition we are looking for fit with Cabot, opportunities for growth and overall financial performance. Norit clearly met all of these criteria. We believe that Norit is an excellent fit with Cabot and qualifies as a premier specialty chemicals business.

Its leading market position, unique technology and applications development expertise is very similar to that of Cabot’s performance segment businesses. We are excited about the growth prospects as we leverage Cabot’s existing global footprint and capability.

Over the last five years, Norit has demonstrated annual growth rates of 12%, notwithstanding a difficult global economy and we expect future growth rates between 10% and 12%.

The users for activated carbon are non-discretionary and the end markets are non-cyclical. The business receive attractive EBITDA margin in excess of 25% for its specialty products that enable customer performance.

This transaction is clearly aligned with our portfolio management strategy. We remain consistent with our previously communicated M&A criteria which include a business with the leading industry position, unique and advanced technology, and strong financial performance. Norit fits each one of this.

In addition, the Norit business is a closely related adjacency to our existing businesses, which allows us to extend our competency and drive growth. The combination of Norit and Cabot creates a company with over 200 years of particle engineering expertise.

Those of you not familiar with Norit, I want to now spend a little time talking you about the business. Norit is a leading global provider of activated carbon, with 2011 sales of $360 million and EBITDA of $92 million.

Norit is an expert at modifying the surface area and chemistry of carbon to customize solutions for their customers, much like what we do at Cabot. Norit has the most differentiated products with more than a 150 formulations of activated carbon sold.

They also have the widest range of applications that are used in the variety of high growth end markets, such as air, water and food. In addition, they have a loyal and diverse customer base, and integrated raw material sourcing.

Activated carbon is a specialty material that is engineered for specific particle structure and chemistry to deliver differentiated performance for customers. It is the former carbon that has been treated with heat, steam or chemical, and this treatment creates a highly porous material that is capable of absorbing or entrapping contaminants out of the liquid or gas stream.

For example activated carbon can remove mercury from flue gases of coal burning power plants. It can purify water. It is use to decolorize sugar in food products and also improve the purity of pharmaceuticals. In addition, the high porosity of this material also makes it usable as catalyst for chemical production.

One of the key attributes that distinguishes Norit from the rest of the industry is its growth and margin profile. The management team at Norit has a proven record of delivering on growth and margin improvement.

This has resulted in annual revenue growth of 12% and annual EBITDA growth of 30% over the last five years. This growth was achieved despite the 2009 global recession and while growing EBITDA margins to more than 25%.

I will now turn it over to Eddie to discuss the financial deals of this transaction -- the financial detail, sorry, of this transaction. Eddie?

Eddie Cordeiro

Okay. Thanks Patrick. This is a highly attractive transaction for us, as we use our strong balance sheet to acquire this business that will be immediately accretive. We expect earnings per share accretion, excluding one-time charges for the inventory step up and transaction costs, be in the range of $0.20 to $0.25 in 2013, and $0.30 to $0.40 in 2014.

We remain confident in our previously communicated adjusted EPS target of $4.50 in 2014 from our base businesses. So I want to be clear that the accretion I just discussed from the Norit acquisition is incremental to this $4.50 adjusted EPS target.

The acquisition price of $1.1 billion represents the trailing EBITDA multiple of 11.9 times. We believe this reflects the quality of its high growth business and is consistent with high margin specialty chemicals transactions focused on environment, food and water.

We have a clear integration plan for Norit. Ron Thompson, Norit CEO will continue to lead the business reporting directly to Patrick. Additionally, we will quickly begin to leverage Cabot’s global footprint and technology to accelerate Norit’s growth, while bringing our manufacturing operation excellence expertise to improve Norit’s capital efficiency and project execution.

From an integration perspective, we do not anticipate significant asset rationalization. We expect to benefit from the utilization of tax NOLs, which will yield cash tax saving of approximately $50 million over the next five to 10 years.

On a pro forma basis for calendar year 2011, the combination results in the company with $3.5 billion in sales and over $500 million in adjusted EBITDA. The addition of Norit further enhances Cabot’s margin profile with increased EBITDA margin from 13.1% to 14.4%.

We plan to finance the transaction using approximately $200 million of cash and $300 million of existing revolver capacity. We also plan to issue approximately $600 million in long-term debt prior to the closing of the deal. Cabot has obtained committed [backstop bridge financing] to ensure that sufficient funds will be available to pay the purchase price at closing.

Our debt-to-EBITDA ratio will rise to 2.4 times in 2013. However, the strong operating cash flows to both company combined with the funds we will receive from the sale of our Supermetals Business will allow us to delever relatively quickly.

We remain committed to returning cash to shareholders, having recently raised our quarterly dividend to $0.20 per share. We expect our balance sheet to remain solid and maintain our investment grade credit rating. We also plan to maintain between $100 to $200 million of cash on hand to run our existing businesses and enable us to meet any working capital needs.

I’ll now turn the call back over to Patrick.

Patrick Prevost

Thank you very much Eddie. We are very pleased to add this excellent high growth, high margin business into Cabot’s portfolio. The strategic acquisition supports ongoing transformation to our higher margin less cyclical specialty chemicals and performance materials company.

Norit fits perfectly with our core competency and surface chemistry modification, and we believe there are strong opportunities to grow the business in new geographies and in new markets. Based on our interactions with the Norit team, we believe that strong cultural fit between our company and we are looking forward to welcoming them into Cabot.

I want to thank you for joining us today and I will now open the line for question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question is from the line of Saul Ludwig from NorthCoast Research. You may proceed.

Saul Ludwig – NorthCoast Research

Hi. Good morning, folks. Congratulations on doing the deal. I have two questions. First, Patrick, could you tell us the genesis of how this deal came to pass or this is the company you had identified as attractive for Cabot, kind of went after it, or was this the deal that just sort of coming your lap because banker understood what you guys were looking for and they brought this deal to you?

Patrick Prevost

Good. Good morning, Saul. Thanks for the question. Thanks for the congratulation. The -- we have been working, the industry space like for quite some time and this is one of the spaces that we have been targeting for sometime, and we were fortunate that this business came to markets, so this is the genesis of this transaction.

Saul Ludwig – NorthCoast Research

Okay. Just because your investor bankers know you were looking for this kind of deal and they in essence, say this company came available and they brought it to your attention, or was that the company you had identified and had asked your bankers to start go after?

Patrick Prevost

No. This is a space and we’ve been looking at various industry spaces in terms of potential acquisitions for several years now and this is the space that we had on our radar, because we believe that it has such a strong fit with our core competencies as the company.

Saul Ludwig – NorthCoast Research

Okay. The second question is, so this deal will be, let just say it be $0.40 accretive in 2014. So $0.40 accretive is approximately $24 million of net income incrementally. Now, we appreciate what a good company Norit is and all the aspects of its leadership that you pointed out will, let’s accept that? But how do you defend spending $1.1 billion for $24 million after tax return? How do you look at this from a return on investment deal, not the quality of the company and its leadership position and its high margin, but just, the absolute return that you are going to get on your money versus alternate uses of $1.1 billion?

Patrick Prevost

No. But, yeah, so, Saul, I hear what you are saying, we are looking at the cash contribution of this acquisition, representing approximately or actually more than 20% to our current EBITDA base.

I think the other thing that needs to be take into account is that there is a huge growth potential here, the business as I mentioned in my introductory remarks is, has been growing at 12% a year recently and the EBITDA growth has even been, say, beyond that.

We are looking at the excellent fit between Norit and us in terms of technology and product. And we also look at the very low cyclicality, I mean, during the last economic crisis, Norit continued to grow at a very strong pace. And so as I look at all of these factors, we see, we are very comfortable with having added this, well, we are very comfortable in adding this business to our portfolio because of the growth, because of the fit and because of the performance.

Saul Ludwig – NorthCoast Research

Okay. Thank you very much.

Patrick Prevost

Thank you, Saul.

Operator

Your next question is from the line of Laurence Alexander from Jefferies. You may proceed.

Laurence Alexander – Jefferies

Good morning.

Patrick Prevost

Good morning, Laurence.

Laurence Alexander – Jefferies

First on the close forecast, so you assuming any specific regulatory changes and without those changes, were there step down in the growth rate?

Patrick Prevost

Well we -- as you can imagine, we did a lot of work with regards to the industry environment, especially around the mercury removal business. As you know, this is the business that is very much driven by air emission clean-up. This represents approximately 38% of the company today.

Mercury removal is one part of that. We believe that’s where the highest value opportunity resides in the future. As we look at the North American environment, we’re seeing strong growth, independent actually, somewhat independent of the regulatory decisions that are still pending.

We believe that clean energy production from coal is going to continue to necessary develop in North America. We think that you will need multiple sources of energy in the future, including nuclear and coal. And as we look at the current demand or -- as we look at the current demand for activated carbon in the mercury removal space in North America, we’re looking at somewhere around 150 million pounds being sold. This is the data from consultants and the growth rate is expected at about 30% annually.

So we’re now considering approximately a market of 600 million pounds by 2017. The overall air emission market, we believe is going to be growing at about 20% a year and we haven’t even spoken about the impending demands for coal utilities in China and India. And I believe that the environmental situation there will certainly become -- we'll come to the point where there will be increasing needs to deal with these coal utilities.

So we believe that the -- this air emission environment is very strong point for us. And Norit has very strong market share in this area. Norit currently has about 50% market share in North America and we believe that the DARCO brand of Norit is actually the benchmark of the industry. And they’ve done an incredible job over the last few years that are becoming that reference and making the products fit the needs of our customers or their customers.

Laurence Alexander – Jefferies

And then just two quick questions on the -- how much intangible amortization are you running through your P&L to get to your accretion numbers and given that you justified the -- that you’re partly on the switch to over left cyclical mix. Any return on capital is looked to be around 6%, 6.5% initially. Is that indirectly also, sort of, expressing concern cyclicality of end markets over the next two to three years?

Patrick Prevost

Eddie, could you help me with the -- on the intangible questions?

Eddie Cordeiro

Yeah. Hi, Laurence. So currently, it looks like the intangibles will be about 330 but of course, we haven’t finished or completed the purchase accounting. And can you help me with the second half of the question I didn’t quite follow?

Laurence Alexander – Jefferies

This is more of a strategic question for Patrick. If you’re looking at a 6%, 6.5% return on capital deal, justified partly on being a switch into less cyclical market. Is that indirectly a call on your more cyclical exposure over the next two to three years?

Patrick Prevost

No. I wouldn’t say that. And I really believe it’s not non-cyclical. It’s not even lower cyclical. This is the business that has proven itself as being non-cyclical and clearly something that we think will strengthen our portfolio. I think the other point I would make is that it will also diminish our impact from petroleum products. So these raw materials for activated carbon are non-petroleum based. So that will also provide additional stability.

Eddie Cordeiro

Laurence, if I could just add one more thing. Obviously, return on invested capital has a non-cash measure and when you are evaluating one of these acquisitions, you’re of course looking at what the cash return is going to look like over some period of time. And so that’s why the ROIC, of course, is going to look depressed because there is a fair bit of depreciation, amortization, it’s running through that.

Laurence Alexander – Jefferies

Thank you.

Operator

Your next question is from the line of John Roberts from Buckingham Research. You may proceed.

John Roberts – Buckingham Research

Good morning, guys.

Patrick Prevost

Good morning, John.

John Roberts – Buckingham Research

Just to bridge the last two questions against Saul’s question was that $25 million on $1.1 billion didn’t see much a big return but that you’re employing the cash return, will be materially higher, just having got all the amortization numbers yet?

Eddie Cordeiro

Yeah. John, if I would take out just the purchase accounting impacts, the EPS accretion in ‘14 would be closer to $0.60 or $0.70, but that in and of itself also includes depreciation in it.

John Roberts – Buckingham Research

Right.

Eddie Cordeiro

So the actual cash accretion is quite a bit higher than that.

John Roberts – Buckingham Research

Okay.

Eddie Cordeiro

And it’s reflected in over $100 million of EBITDA as Patrick said growing at a rate of 10% to 12%. And as I’m sure, you’re aware that there are very, very few specialty chemical businesses that grow at that rate. And if you sort of pair it back, the base businesses are growing at a rate of 5% to 7% and then the air business is expected to grow at 20 plus percent.

And so this is really -- we really view this as a premier growth business and a real opportunity for growth over the next five years.

Patrick Prevost

Plus I would add that the leverage of our research and engineering capability is something that we believe will add some additional value to the business. And the other area that we’re looking at and have identified is that Norit’s access to some of the emerging markets has been fairly low.

So we see Asia as being a real opportunity in terms of leveraging our capability there to grow the business even faster. I mean, there is plenty of growth opportunities in Europe and in the U.S. which has consumed the resources of Norit. We believe we are going to be providing some additional leverage in the space.

John Roberts – Buckingham Research

I was going to ask you my second question with you was about 50% of your sales in the emerging economies and it looked like they had a very small presence based on their SEC filings that they had so. You believe you could take them into your end countries relatively aggressively?

Patrick Prevost

Absolutely. And we see some huge upside there actually.

John Roberts – Buckingham Research

Okay. And then European business, are the businesses specialty and after they have been relatively stable during this period of economic softening?

Patrick Prevost

Absolutely. As I mentioned earlier, this is really non-cyclical and the businesses have remained very stable.

John Roberts – Buckingham Research

Then lastly, since its going to report directly to you Patrick, does that mean you’ll keep it as a separate reporting segment rather than folded it in with the performance segment?

Patrick Prevost

We haven’t decided that yet. That is something that we’re looking at right now. But, yeah, Ron will be reporting directly to me. The reporting is still under review.

John Roberts – Buckingham Research

Okay. Thank you.

Patrick Prevost

Thank you.

Operator

Your next question is from the line of Jeff Zekauskas from JP Morgan. You may proceed.

Jeff Zekauskas – JP Morgan

Hi. Good morning.

Patrick Prevost

Good morning, Jeff.

Jeff Zekauskas – JP Morgan

What was the capital expenditures over the previous 12 months for Norit?

Patrick Prevost

I believe they were around 50 million. Eddie, could you help me with that?

Eddie Cordeiro

Yeah. For the last three years, Jeff, they have averaged about 50 million.

Jeff Zekauskas – JP Morgan

Okay. And in general, is that the sort of level of spending that you think that the business will absorb as you grow it at a low double-digit rate?

Eddie Cordeiro

So Jeff, if we’re able to capitalize on that type of growth, we would expect to spend a bit more in CapEx. That’s a pretty good story for us still because that would deliver that type of growth and one of the nice things about it is that the way the business operates, they try to get contracts for the business in advance of building assets.

And they have managed to put assets in place very quickly, meaning, less than a year to actually implement a new asset. And so that gives us some amount of risk mitigation in that. We can get some comfort around how the business is developing before we have to invest the capital.

Jeff Zekauskas – JP Morgan

Okay. And so a bit more means, I don’t know, 60 to 70, those sorts of numbers?

Eddie Cordeiro

I don’t think we’re quite yet ready to come out with how we view the whole capital unfolding over the next few years but I would say that the return on that type of investment would be quite high.

Jeff Zekauskas – JP Morgan

Okay. And in general, what’s the geographic distribution of Norit in terms of the revenues?

Eddie Cordeiro

Okay. It is about half in the U.S., half to 60% in North America, may be about a third or so in Europe and the remainder would be less in the world.

Jeff Zekauskas – JP Morgan

And roughly, what are the EBIT margins?

Eddie Cordeiro

The EBIT margins?

Jeff Zekauskas – JP Morgan

Yeah.

Eddie Cordeiro

I think the only thing we’ve been comfortable putting out at this point is sort of EBITDA margins in total, which is in the order of 25%.

Jeff Zekauskas – JP Morgan

Okay. Great. Thank you very much.

Operator

Your next question is from the line of David Begleiter from Deutsche Bank. You may proceed.

James Sheehan – Deutsche Bank

Good morning. This is James Sheehan in for David. Just wonder if you could break out some of the end markets besides air and what are their growth rates and what are the opportunities you see there?

Patrick Prevost

Okay. So as we include in one of the -- one of the slides, we have a very wide variety of markets that we serve. And again as I mentioned, air and gases is one of their big markets for Norit. It’s about 38% of the company’s revenue.

Water is the second largest market perhaps close to 25%. Water has been one of the more traditional applications. Water purifications has been one of the traditional applications for activated carbons. And it’s one that is actually one of the applications that is less differentiated. So it’s an important one but clearly, we think some of that applications have more potential value.

The third application that I will touch upon is the food and beverage industry application, where there is quite a bit of need for cleaning up of contaminated products and that being in the sugar space or in the other food products and you could imagine hazardous contaminates or components being filtered out or absorbed by the activated carbon. That’s about 15% market.

And then the fourth I will mention is the pharmaceutical market. It’s again about purification. A lot of what Norit is about is purification. Actually that tag line is leading in purification. And here we help in the process of cleaning up pharmaceuticals before their final production steps.

I will also mention automotive and catalyst applications. Here activated carbon can be used in as a catalyst for the production of herbicides. It can also be a support for chemical and refining catalyst production. And there the activated carbon is a support for a specialty metals.

And lastly in the automotive space, there is multiple applications but one that is kind of leading today is actually activated carbon gets used as -- in canisters to manage fuel evaporation when the cars are sitting in the sun, the temperature situation actually makes some of the gasoline volatile. The canister of activated carbon absorbs that gasoline. Once you are back in using the car, the absorbed fuel gets returned to the tanks.

So these are applications that are well known. In addition to that, we’re seeing, I would say more new applications such as the use of activated carbon in outer capacitor application as energy storage. We’re also seeing developments within the natural gas space as absorbent for natural gas as well as new and developing catalyst.

If I ball down in terms of the various markets that Norit is serving, you’re looking at growth on a global basis in most of these applications that I mentioned beyond the air emission area at about 5% to 6% annually. And again on the gas and air emission side, approximately 20% for this whole sector and within that sector we’re seeing the mercury removal being at about 30%.

James Sheehan – Deutsche Bank

Thank you very much. And also you mentioned the opportunities for synergies on cash taxes from NOLs. I was just wondering if you could also quantify any opportunities from cost or growth synergies?

Patrick Prevost

So on the synergy side, I would say we mentioned in the NOLs that this acquisition is actually not a cost synergy acquisition. We do not see many opportunities in this space. We’re really looking at the growth of the business and the synergies from a technology and market point of view as well as the emerging market growth as carrying the day.

Of course, there will be some integration work happening but essentially this is not a cost driven acquisition.

James Sheehan – Deutsche Bank

Okay. Thank you very much.

Patrick Prevost

Thank you.

Operator

And your next question is from the line of Christopher Butler from Sidoti & Company. You may proceed.

Christopher Butler – Sidoti & Company

Hi. Good morning, everyone.

Patrick Prevost

Good morning, Chris.

Christopher Butler – Sidoti & Company

As far as Norit Management, do you have them all locked in that at this point to stay with you?

Patrick Prevost

I believe that Norit Management is very pleased to join Cabot. We’ve had interactions with them. They are looking forward to having another that is -- that has a longer term perspective perhaps and there is also the excitement about the technology exchanges and the ability to leverage application development and engineering and R&D capability. So I would say a strongly motivated team that’s going to be joining us.

Christopher Butler – Sidoti & Company

That actually segues very nicely into the follow-up question, which is -- you have indicated that outside of the accretion that you’re forecasting you think that the value here is in the growth opportunity. Could you talk to what’s the combination of Norit and Cabot is bring into the table that Norit on its own isn’t. You talked already about Asia a little bit. It sounds like there is some technology that can be a prize as well?

Patrick Prevost

Yeah. We really look at the fact that our scale and our engineering and research capabilities have been or are at a much, much higher scale level in Norit. And Norit having been owned by private equity had of course some constraints in terms of resources and the leverage that we are going to be able to bring across from that scale, both in the engineering and in the research side is something that we strongly believe is going to enable us to grow the business faster and also grow the margins in a more aggressive way. The other one is really around emerging markets and leveraging our capability and our strengths there.

Christopher Butler – Sidoti & Company

I appreciate your time.

Patrick Prevost

Thank you.

Operator

Your next question is from the line of Andrew Dunn from KeyBanc Capital Markets. You may proceed.

Andrew Dunn – KeyBanc Capital Markets

Hi, guys. Thanks for taking my question. These are related. Just two quickly, first, could you just give us some idea of what the cost of one of these facilities for producing products the type that Norit makes are? And then secondly, related to that there is a technology where you can produce this in your existing facilities or does it not really worked that way?

Patrick Prevost

It’s not the thing that we would produce at an existing facility but the process technology is very similar to what we would do in our special black and silica businesses and in fact the capital intensity is very similar to those as well.

Andrew Dunn – KeyBanc Capital Markets

Okay. Great. I appreciate it. Thanks, guys.

Patrick Prevost

Thank you.

Operator

Your next question is from the line of Bruce Zessar from Advisory Research. You may proceed.

Bruce Zessar – Advisory Research

Hi. Thank you for taking my questions as well. My first question is do you have any estimate of how much the deal costs are going to be?

Eddie Cordeiro

We don’t have that as yet.

Bruce Zessar – Advisory Research

Okay. Do you have any estimate of what the range might be?

Eddie Cordeiro

We don’t have one for you.

Bruce Zessar – Advisory Research

Okay. And I noticed in the presentation on page 11, you indicated the intangibles expected are to be amortized over 10 to 15 years. Would that be straight line or is it going to be more in the earlier years than the later years?

Eddie Cordeiro

It won’t be straight line because we have different groupings of intangibles that are amortized over different period of times.

Bruce Zessar – Advisory Research

Okay. I have a couple more questions, let’s rain it down. Have you talked with the credit rating agencies yet and did they indicated what your credit rating would be on closing this transaction?

Eddie Cordeiro

We have had discussions with the credit rating agencies and they are evaluating Norit. And they will get back to us probably in the next couple of weeks as we look to finance.

Bruce Zessar – Advisory Research

Okay. And what is your intent in terms of the thermal long-term debt you may, sure, you are expecting this to 10-year debt. What’s your thinking right now?

Eddie Cordeiro

I think we would look for something in sort of the -- in sort of that medium term type range 5 to 10 years, probably what we are looking at.

Bruce Zessar – Advisory Research

And if you had any indication I mean literally if you were to issue the debt today and I know it’s not going to be issued for few months, but if you issued it today, do you have indication of what those interest rates might be?

Eddie Cordeiro

Interest rates today are very attractive. We are looking at something in the 4% or potentially lower range. They depend on how quickly we can get out to market and we do intent to get out there very quickly.

Bruce Zessar – Advisory Research

And you indicated in your presentation and also in comments today that you estimate debt-to-EBITDA to be 2.4 times in 2013. Do you mean by the end of fiscal 2013 you expect to be there or the beginning of fiscal 2013?

Eddie Cordeiro

It should be at the end of 2013. It wouldn’t be that much higher at the beginning or immediately on doing the transaction.

Bruce Zessar – Advisory Research

Okay. And is there a target where you’d like to get debt-to-EBITDA or debt-to-equity too, say looking now in over three year period, say the end of fiscal 2015?

Eddie Cordeiro

Yeah. We’d probably be in the 1.5 to 2 range, which is kind of where we’ve been for some time.

Bruce Zessar – Advisory Research

Okay. And can you tell me a little bit more about, I guess, I saw the information this morning. I wasn’t familiar with Norit but what their market share is and who their key competitors are?

Patrick Prevost

So the -- as we mentioned, Norit is the leading player in this industry. There are several competitors out there. There is one competitor which is a publicly-quoted company in the U.S. Beyond that, there is several smaller players that are more local or regional. So this is kind of a general indication of what the industry structure looks like. It’s not very different than what we are seeing for example in the carbon black phase.

Bruce Zessar – Advisory Research

Okay. And who is the competitor in the U.S. that’s listed?

Patrick Prevost

Well, it is -- the company is Calgon.

Bruce Zessar – Advisory Research

Calgon, okay, Calgon Carbon. Okay. And then are any of the others, the smaller player or any of them publicly traded?

Patrick Prevost

I do not believe that there are any other companies that have publicly traded. I think the other companies tend to be part of larger groups.

Bruce Zessar – Advisory Research

Okay. And then looking at the slide again on page -- what page, I think may have been page 11, where you list you are going to acquire about $450 million in powered assets. You are going to have 330 million in intangibles. So that means you are expecting roughly about 320 million in goodwill coming under the balance sheet in this transaction?

Patrick Prevost

This is, yeah. This is a good estimate. Right now, of course, we are very early in terms of getting these numbers to line up and -- but I think that’s a good estimate, yeah.

Bruce Zessar – Advisory Research

All right 320 is a good estimate. Okay. And then just to confirm, when you use the term incremental, isn’t same at the EPS accretion that they are going to add. When you are targeting $4.50 in 2014, what you are saying is that the $0.30 to $0.40 that will come from Norit is above and beyond that $4.50. Am I reading that correctly?

Patrick Prevost

That is correct. So we are sticking to our guns with regard to 450 being the target for our base business and anything that comes from Norit will be on top of that.

Bruce Zessar – Advisory Research

Okay. Thank you very much for your time. I appreciate it.

Eddie Cordeiro

Thank you.

Operator

And your next question is a follow-up from the line of John Roberts from Buckingham Research. You may proceed.

John Roberts – Buckingham Research

Thanks. Your core carbon black business has pretty lower efficiency, a lot of the carbon doesn’t make it final product. I think activated carbon has much higher efficiency but I don’t know exactly how high it is and has Norit done a lot of energy integration as well or -- I mean do -- how do you view their efficiency on their operations?

Patrick Prevost

So, first of all the raw material is very, very different in terms of activated carbon is made from wood, from lignite, from coconut, from olive pads. They -- it’s a very broad range and Norit is actually the company that has a broadest range of raw materials.

The effectiveness in terms of carbon-to-carbon is potentially actually lower than in the case of carbon black. And as you can imagine from an energy point of view somewhat of a similar situation as carbon black and again, Norit has focused on energy and has some very efficient energy recovery operations attached to the activated carbon business or sites. So similar type of response with regard to manufacturing here.

John Roberts – Buckingham Research

It feels good. Even though it’s a solid feedback set of liquid, do you see kind of similar efficiencies to the carbon black business?

Patrick Prevost

I would say yeah similar efficiency, yeah. I think variety of raw material makes this answer it little more difficult. I think carbon black tends to have more consistent raw materials here. We have a very wide variety because we are trying to sell a very -- a much broader range of applications.

John Roberts – Buckingham Research

I asked because about, I think, 30% of Cabot’s earnings growth over this three year window that you have is coming from process improvements around the manufacturing process. And I didn’t know whether there is an opportunity there at Norit that it would be of a similar type opportunity?

Patrick Prevost

I -- so I wasn’t exactly sure where your question was going, but clearly what I mentioned that we would be leveraging our engineering and process technology capability, some of that would go in that direction, absolutely.

John Roberts – Buckingham Research

Thank you.

Operator

And your next question is a follow-up from the line of Saul Ludwig from NorthCoast Research. You may proceed.

Saul Ludwig – NorthCoast Research

Thank you. Is this product sold by the pound that physical form in which the transaction takes place?

Patrick Prevost

Yeah. To a great degree that is how the product is sold.

Saul Ludwig – NorthCoast Research

And of the revenue growth over the last couple of years, how much of that’s been price appreciation versus volume?

Patrick Prevost

It’s been actually mostly volume driven.

Saul Ludwig – NorthCoast Research

Okay. And I noticed that, for instance, in 2011 versus '10, your revenues were up $30 million and EBITDA was up $10 million, so that’s about 30% incremental margins. Same thing was true the year before, would that be what we should look for going forward that they -- there could be that type of earnings growth relative to revenue growth?

Patrick Prevost

Well, I think it’s difficult at this time to say that the pattern will be the same in the future. What we can’t say is that we look at the market and we look at the opportunities for growth in the 10% to 12% range and again this will be a combination of volume growth and then also product mix shift which will be favoring the more attractive market such as the air emission area.

Saul Ludwig – NorthCoast Research

Eddie, last year in Norit, the year before what was the D&A in dollars?

Patrick Prevost

D&A, Eddie can you help me with that?

Eddie Cordeiro

Yeah. So I think it was in the order of about $25 million.

Saul Ludwig – NorthCoast Research

$25 million and then for you it will be…

Eddie Cordeiro

Saul, I just want to be clear that’s before any purchase accounting adjustment.

Saul Ludwig – NorthCoast Research

Yeah. That’s under no risk accounting, right.

Eddie Cordeiro

Yeah.

Saul Ludwig – NorthCoast Research

Historically. And then what do you think it will be for you?

Eddie Cordeiro

Do you want to know what the step up is?

Saul Ludwig – NorthCoast Research

Yeah. When you look at your D&A and if you look at the new D&A after acquired and you have the step up in assets and the goodwill.

Eddie Cordeiro

Yeah.

Saul Ludwig – NorthCoast Research

I mean in the intangibles, what do you think it will be for you?

Eddie Cordeiro

It’s looking like about another $25 million.

Saul Ludwig – NorthCoast Research

Plus $25 million. Okay. And then the one final question on the tax, you said there’s going to be $50 million in tax synergies. What do they come from, I mean, for it’s like a profitable company, it doesn’t look like there was NOLs or anything.

Eddie Cordeiro

Yeah.

Saul Ludwig – NorthCoast Research

How does that come about?

Eddie Cordeiro

Yeah. It was NOLs, Saul, and as you imagine being owned by private equity now for some years, there was substantial amount of debt, different kinds of debt that was placed on the asset. And so there is a tremendous amount of interest, we could have generated those types of losses.

Saul Ludwig – NorthCoast Research

And I assume, taking any of your debt?

Eddie Cordeiro

No. No.

Saul Ludwig – NorthCoast Research

Okay. That’s it. Thank you very much.

Eddie Cordeiro

Thank you.

Patrick Prevost

Thank you.

Operator

And at this time, there are no other questions in the queue. I would like to turn the call back over to Mr. Patrick Prevost for closing remarks.

Patrick Prevost

Well, thank you for joining us this morning. We are very excited about the announcements of the impending Norit acquisition. We believe this is a strategic acquisition and that we have multiple opportunities to continue to grow this company in front of us. So, thank you again for joining us today.

Operator

And ladies and gentlemen, this concludes the presentation. You may now disconnect and have a good day.

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