Cabot Corporation (NYSE:CBT)
Jefferies Group Inc. Global Industrial and Aerospace & Defense Conference
August 9, 2012
Patrick Prevost - Chief Executive Officer
Good afternoon. I’m Lucy Watson. I’m with the Chemicals Equity Research Group for Jefferies and it’s my pleasure to introduce Patrick Prevost, CEO of Cabot.
Thank you Lucy and good afternoon. I’ve got about 24 minutes here to walk you through the latest developments of Cabot and looking forward to do that. There will be a general outline of the company and a few key messages. Then I’m going to speak about the Norit acquisition, then we will spend a little time on our key strengths, global footprint, as well as the macro trends that are affecting our business, and then I will close with a review of our strategic levers and how we are doing against those leavers.
So before I get going with the main body of the presentation, I just wanted to remind you that our conversation will include forward-looking statements which effects the risks and uncertainties and Cabot’s actually results may different materially from those expressed in the forward-looking statements and you can find a list of those factors in our From 10-K.
So having gotten that out of the way, I’m sure you don’t want me to read that do you? Let me start with a brief review of our portfolio. We are currently organizing four segments, starting from the left you have the core segments, which is the business within which we produce and sell the rubber blacks that is used in the tires and the other industrial rubber applications. The main areas of focus here are process technology, relative cost position, value pricing and of course also industry structure and competitive environment.
Moving to the, right, the next segment is our performance segment. This is a segment where we have had our specialty carbons, our fumed silica and our master batch compound business. This is a business that sells to a variety of business, amongst which the adhesives industry, the sealants, coatings, plastics, toners and polishing slurries industries.
This is a business segment where applications development is key, new product introductions, value and use understanding, as well as the need for technology driven strong, long-term customer relationship approach.
Moving to the right, specialty fluids segment. Here we are in a very niche application of the drilling and completion fluids industry. This is going in oil and gas as well as applications. We have a very unique – actually we are the sole producer of cesium formate and we serviced our customers, we ramped our products to them and the application is very high end, high pressure, high temperature drilling situations.
Last but not the least, on new business segment is a technology driven segment with a variety of businesses that tend to be in high growth industries and application and here we are looking for profitable growth through the commercialization of new technologies.
Quickly, our vision and our strategy where we are about delivering growth through leadership and performance materials and we have four strategic leavers. First one is about margin improvement where we are looking at yield, value pricing, portfolio optimization, as well as energy efficiency. We are looking at capacity expansion as a way to create value, with special focus on emerging markets, higher GDP type growth geographies.
Now moving down to new products, we are a technology base company. We are about innovation, applications development, working closely with customers to develop new products and then finally we see value also in portfolio management and we are looking at projects that fit with our core competencies and tend to have leading technologies and also stronger market positions.
A little bit of history here. I said that we are about growth in earnings. In the ’06, ’08 period we were operating in an EPS level of approximately $1.50 per share and our ROIC was below our weight of average cost of capital. We have been focusing our strategy on leveraging the portfolio, restructuring assets and building a performance culture and as you can see, we’ve been successful. We’ve increased our performance significantly in the last few years.
We’ve been on the transformational path and journey and we’ve moved the needle with regard to our performance and are now on our next stage of target setting and have committed to delivering between $4.90 and $5 per share in 2014. This is on an adjusted EPS basis.
Let me now move to the Norit acquisition. This is an acquisition that has just been completed. We closed on the acquisition on July 31, so we are in the process of integration. We’ve been very fortunate to add a very high growth, higher margin business to our portfolio. Norit is the global leader in activated carbon. Activated carbons are used for purification of water, air, food and beverages, pharmaceuticals. It also gets used in catalyst type applications.
We see the addition of Norit continue to support the transformation of Cabot into a higher margin, less cyclical, specialty chemicals company and we saw the possibility of adding a business that had quite some similarities with our existing company, similarities around technology. The process of manufacturing activated carbon has some strong similarities. We used somewhat similar engineering and processes to achieve performance in carbon black as we do in activated carbon and we see the possibilities of leveraging those synergies between the two companies.
The other area of similarity is applications developments, solving customer problems and here again we are seeing the possibility of leveraging of the capabilities between the two companies.
The acquisition will add over 20% to our current EBITDA base and we believe that the earnings stream will be very stable and we are going to get a strong end market diversification. So we see the possibility beyond that to utilize the scale and the capability of Cabot in emerging markets, an area that Norit has not developed as much as it could have in the past. So here again, we think that Cabot will be able to add to the Norit portfolio and we are looking forward to the margins, which are currently in excess of 25%.
Norit is a great compliment and will add some strength and will complement the existing global footprints of Cabot. The company is innovative, customer focused and the products are essential in terms of today’s needs.
The raw material is somewhat different, so an area where although the carbons are similar, the raw materials for carbon black is oil or oil based products in the case of Norit. We are talking about a variety of raw materials starting from products like bituminous coal to lignite to wood, coconut and even olive pits. So a very broad range of raw materials and actually delivers about 150 different types of activated carbons to meet the various needs of our customer base.
As you can see the markets are varied. We serve the air and gas cleaning market. It’s all about purification. We purify water, we purify foods, pharma, chemicals, we act as a catalyst, so a broad range of applications. And one of the applications I just wanted to spend a few minutes on is the mercury removal application.
There is a strong demand for mercury removal in the air and this is especially is a U.S. market currently and we see strong potential there and we are looking at participating in that growth. About 11 states in the U.S. have implemented regulation and we are waiting for federal regulation that will compliment that and this will lead to approximately 30% growth per year over the next five years and this is on a conservative basis.
We are also looking at potential for growth within India, countries like India and China where coal based utilities are also in need of cleaning up their air; so strong potential in that Norit acquisition and a very good fit for Cabot.
Now with the addition of Norit to the portfolio we’ve had to make some small changes to our segment structure and our reporting structure. We will be reporting Norit as a separate segment, which will be called purification solutions, the far right on this graph.
We will be changing some of the names; the core segment will be named Reinforcement Materials and will house the rubber black segment. The performance segment will be renamed Performance Materials and we’ll be combing the new business segment with the specialty fluids segment and we’ve decided to name it Advanced Technologies.
So this is a strong portfolio. If you look at the line, that is the purple line, three of the segments are showing EBITDA margins in excess of 20% and the core segment is on its way of doubling its profitability in the last four years. So the combination is a very strong combination.
Let me now say a few words about the strength of the company. We have a robust portfolio as I just said. Leading position number one in carbon black, number one in cesium formate, number two player in fumed silica number, one in activated carbon, so we are strong believers in leading positions. We have strong leadership on the technology front. We are seen as experts in particle management and particle treatment.
We have a global footprint, which I will come on to in a second, where more than 80% of the company is actually outside of North America and we are working very closely with all leading customers out there and we believe that we have developed long standing relationships over the years.
Coming back to the emerging market growth point that I made earlier and the general global footprint of the company, as you can see, we have developed our emerging market position from about – and here you can see that in the blue part of the graph. From about 20% of the company in 2001 to almost 50% by now and this is a combination of South America and Asia Pacific revenue. You can also see that the total of business in North America is only 21%, so we are at close to 80% outside of North America.
Moving onto macro economic trends, we see four trends driving our businesses. We see the trend of energy efficiency and sustainability being important for us and also we believe that the middle class growth is a factor as consumers are spending more on things like automobiles and tires and electronics in these markets.
Mobility of course as the key supplier to the tire industry, we are driven by that, no pun intended. And then of course, the last but not the least with the addition of Norit, we are clearly driven by environmental needs, both in terms of clean air and clean water.
As I mentioned earlier, we have a target of delivering between $4.90 and $5 a share in 2014. This is underpinned by a solid plan for growth. We are clearly understanding how this growth will be delivered. Its about margin improvement, its about the capacity expansion, new products, new businesses and some portfolio management and in that respect we’ve had two significant moves in this last year. One has been the sale of our tantalum business in January of 2012 and the recent acquisition of Norit. Let me say a few words on these four areas.
So on the margin expansion this has been a key area for us over the last four years. We’ve been working very strongly on value pricing. Our reinforcement materials business, rubber blacks has shown some very steady improvement in EBITDA margin, which is the graph on the top right.
We’ve basically moved the needle from somewhere being in the 9% EBITDA margin in 2009 to achieving 16% this year on a year to date basis. We’ve been using tools, technology, we’ve done some restructuring of assets, we’ve instituted the performance culture, so there’s been a lot of things that have happened here and we’ve done a very solid job in raising the bar in terms of the performance of the business.
We are also continuing to work at adding technology, process technology in most of our plants and are looking at spending approximately $50 million over the next three years on these projects. These are margin improvement projects that are good for all seasons.
Moving onto capacity expansion, we are moving very well with our announced capacity expansion plan. These are all very highly efficient expansions on existing sites in most of the cases. A lot of them have been completed in the past year and we have added the capacity in Indonesia on the Rubber Black side. We’ve added fumed metal oxide and master batch capacity in China and we’ve doubled our inkjet capacity in Massachusetts.
We are looking at further capacity additions in 2012; Rubber Black capacity in South America and in Europe. In Europe this is going to be very targeted capacity for our high end products in the carbon black space and we are also doing a small bottleneck in the fumed metal oxide business in Europe. So all of that will result in approximately 80,000 tones of new carbon black capacity by the end of calendar year 2012.
We continue to work through calendar year of 2013. Here we are build a new carbon black pant on a new site in China. Demand in China for carbon black has continued to grow aggressively and we are also looking at an efficient debottleneck of one of our specialty carbon black production in Europe.
Moving on to the new product side of things, as I mentioned earlier technology is key for us. We need to keep engaging on the innovation front, our customers are expecting and demanding new products to meet the changing needs of their markets and we launched a few new products just recently.
A couple of highlights here; we’ve launched two new fumed silica products. Its an improvement on the application of bonding paste for windmill blades, a very critical application where the windmill blades we reaching sizes where the bonding is very complex. We’ve also launched a product that goes into epoxy formulations and adhesives that are now used to replace the typical welding or riveting that was using mostly in the automotive industry or aerospace industry. This is now done with adhesives.
In the new business segment we’ve launched elastomer composites under the brand name Transfinify, and here again its about automotive type applications where we are enabling longer, better performance in weight reduction type applications with these products and the durability level of our products is providing much better performance. And then we’ve also bough a new conductive additive for a lithium-ion battery applications to market. Here again it’s about performance and the ability to use batteries in different type of temperature conditions.
And lastly, I will speak with regard to these strategic levers about our portfolio management. I mentioned that we have sold our tantalum business, which was not fitting our specialty chemicals portfolio and was quite volatile. So we produced the volatility by disposing of this business for $450 million in January of this year and then we’ve just made the Norit acquisition come true and it was an acquisition that met our strategic portfolio management tests, which is a leading industry position.
We bought the number one player in activated carbon. It has the unique technology, it has the broadest portfolio of any of the activated carbon players out there, it is the benchmark in terms of air emission purification, and also of course has a strong financial performance.
We believe it has a strong relationship and a strong adjacency to our existing businesses and this business will be immediately accretive to Cabot. We have closed the business about 10 days ago. It will add about $0.04 to our fiscal year 2012. We’ve got two months of Norit added to our portfolio and then we were seeing accretion of $0.30 to $0.35 in fiscal year 2013, and $0.40 to $0.50 in fiscal year 2014. So again, $0.30 to $0.35 in ‘13 and $0.40 to $.50 in fiscal year ’14.
So let me close with the last slide here. As you can see, we are progressing well as a company. We are progressing well against our plan. I’m confident that we will deliver on our objectives. The objectives that we’ve set for 2014 are to be seen at mid-cycle economic conditions.
We are continuing to drive our value pricing initiatives across the broad for margin expansion. We are implementing yield and energy efficiency technologies across the board to reduce our fixed cost and variable cost. We will be continuing to build new efficient capacity around the world, especially in emerging markets and this will provide significant leverage once the demand picks up again.
We are about delivering new and innovative products to our customers and we are clearly focused on differentiation, and then we are looking at the addition and the integration of Norit and that will allow us to participate in some new high growth sectors such as the air and water purification markets.
So our portfolio business is continuing to develop into higher margin, less cyclical, high growth type markets and we are looking at continuing to position our selves as one of the top tier specialty chemicals and performance materials companies.
Thank you very much for joining us today and I believe there is no time for questions. Thank you very much.
[No Q&A session for this event]