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Erica J. McLaughlin; Executive Vice President, Chief Financial Officer and Director of Corporate Strategy; Cabot Corporation
Sean D. Keohane; President, CEO and Director; Cabot Company
Steven J. Delahunt; Vice President of International Relations and Treasurer; Cabot Corporation
Christopher John Kapsch; MARYLAND; Loop Capital Markets LLC, Research Division
David L. Begleiter; MD and Senior Research Analyst; Deutsche Bank AG, Research Division
John Ezekiel E. Roberts; former executive director and equity analyst in the chemical sector; UBS Investment Bank, Research Division
Joshua David Spector; Stock Research Associate – Chemicals; UBS Investment Banking, Research Division
Laurence Alexander; Vice President and Equity Research Analyst; Jefferies LLC, Research Division
Operator
Good morning and welcome to Cabot’s Q4 2023 earnings call. At this time, all participants are in listen-only mode. Following the speaker’s presentation, there will be a Q&A session. (Operator Instructions) Please note that today’s conference call is being taped Now I introduce you to Steve Delahunt, Vice President, Treasurer and Investor Relations.
Steven J. Delahunt
Thank you Andrés and hello. I would like to welcome you to the Cabot Corporation earnings convention. I’m joined today by Sean Keohane, CEO and President; and Erica McLaughlin, executive vice president and lead financial officer. Last night, we released our fiscal fourth quarter 2023 results, copies of which are posted in the Investor Relations segment of our online page. The slide deck incorporating this call can also be obtained in the Investor Relations segment of our online page and will be available together with the replay of the call. During this conference call, we will make forward-looking statements regarding our expected long-term operating and monetary performance. Each forward-looking view is subject to dangers and uncertainties that may cause actual effects to differ materially from those projected in such forward-looking statements. Additional information related to these items appears in the heading of forward-looking statements in the press release we issued last night and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as well as in the upcoming presentations. that we have filed with the SEC. Array, all of which are available on the company’s online page. To provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve changes for GAAP purposes. The non-GAAP monetary measures presented are not worthy of consideration as an alternative to the monetary measures required by GAAP. All non-GAAP monetary measures referenced in this call are reconciled to the directly comparable maximum GAAP monetary measure in a table at the end of our earnings release published last night and found in the Investors segment of our page at line. Additionally, as we typically do every year, I would like to remind you that over the next few weeks, as part of the investment of the limited inventory issued under our long-term incentive program, company executives will sell inventory to pay taxes and other obligations. related to their rewards. I’ll now hand it over to Sean, who will discuss the highlights from the full year and add an update on the Reinforcement Fabrics segment, our fiscal 2023 capital allocation, and our continued leadership and sustainability. Erica will review the company’s financial details, business segment effects, and our fiscal 2024 cash flow outlook and priorities. Sean will then provide a strategic overview and closing remarks and open the floor to questions. Sean?
Sean D. Keohane
Thanks Steve. Good afternoon, girls and gentlemen, welcome to our call today. Fiscal 2023 was characterized by a turbulent macroeconomic and geopolitical environment, but it was a year in which the ultimate strength of Cabot’s portfolio was revealed. We executed well and built momentum throughout the year, positioning us for a successful 2024. We achieved the highest adjusted earnings in corporate history of $5. 38 and grew the reinforcing materials business to a record $482 million in EBITDA. . margins of 22% and generated more than $350 million in free cash flow. During the year, we returned $186 million to shareholders through a combination of interest buybacks and dividends. Finally, we have made significant progress against our sustainability ambition and continue to demonstrate our leadership in the sector. I am immensely proud of the Cabot team for the resilience and agility they demonstrated throughout the year and for their focus on execution in service of our consumers. Turning to our effects for fiscal 2023. Segment EBIT decreased by five% year-over-year, largely due to decreased volumes due to prolonged inventory disposal in any of the segments and market demands due to end of the week, especially in the shape-consistent chemicals segment. Combined prices and earnings, net of charges, relate specifically to year-over-year effects, driven through the reinforcing materials segment, as we learned best in terms of form earnings. prices and products are combined through 2023 visitor agreements. The strengthening of the US dollar had a negative effect on the year due to the conversion of weaker foreign currencies into dollars. The biggest effects came from the euro, the Japanese yen and the Chinese renminbi. Although overall segment EBIT decreased only slightly, to five%, percentage-adjusted earnings decreased by 14% due to a consistent increase in net interest expense related to emerging interest rates, an increase in line with the current tax rate and unfavorable currency factors. I want to take a moment to talk to you about the reinforcing fabrics segment. Not only did this company achieve record EBIT in 2023, but I believe it is a structurally replaced business compared to a decade ago. Cabot is a global carbon improvement leader with a unique global footprint, cutting-edge generation and a long-standing commitment to sustainability. Cabot’s business style is largely based on production and sales activity in the region. This is explained by the economic fundamentals, but also by the importance that our consumers attach to regional supply security. While this has long been the case, the importance of source security has become even more pronounced given the way emerging geopolitical tensions have tested many global supply chains. The main finishing markets in this segment are replacement tires and OE automobile production. As you may recall, replacement tires account for about 2/3 of the segment’s volume, while OE car production and advertising programs make up the rest. EBIT consistent with the shape of this segment has specifically increased over the past eight years, helped by the long-term resilience of the replacement tire market and increasingly tight balancing demand in mature regions. We expect uses in Europe to be even stricter this year, as Russian carbon black, which has traditionally been a vital supplier to the European region, will be subject to sanctions starting in July 2024. Furthermore, I think we have given a step forward structurally. our consistent way. through a commitment to advertising and consistent national excellence throughout the company. The industry is also facing stricter environmental regulations that require manufacturers to make significant relief investments to ensure a reliable and sustainable source for our consumers. These investments raise the barriers to access to more capacity, roughly doubling the cost of new capacity and requiring payback in the form of value accumulation. As a result of those factors, I believe the prospects for this business remain strong, helped by a favorable long-term call for drivers and a growing desire for innovation to meet our consumers’ desires for sustainability. Miles driven have been remarkably resilient over the long term, and global parking is expected to continue growing, which deserves to help our prospects for an upcoming earnings base and cash flow to fund our capital allocation priorities. Now let’s move on to the highlights of capital allocation. Cabot’s portfolio has strong money flow characteristics. And in fiscal 2023, we generated a very strong and consistent internal cash flow of five nine five million dollars, which allowed us to fund our balanced set of capital allocation priorities. Capital investments during the fiscal year were $244 million, adding approximately $143 million in maintenance and compliance capital, with the remaining investment being our high-reliance, high-performance expansion projects. Our expansion plans in 2023 focused on battery fabrics and inkjet expansion drivers, as well as productivity investments across our businesses. In addition to investing our investment plan, we returned $186 million to shareholders during the year. We have maintained an uninterrupted and growing division since 1968, when the company went public, and this commitment remains at the center of our capital allocation priorities. We paid $88 million in dividends in fiscal 2023, up 8% in May, reflecting our confidence in the company’s long-term cash flow prospects. We plan to continue expanding the divisfinish over time as our profits grow. We also repurchased $98 million of inventory in fiscal 2023. We have said going forward that we plan to offset dilution each year, which is approximately $20 million per year, and we will be opportunistic in making further redemptions based on our cash flow outlook. . and the moment of choosing investment opportunities. This is what happened in 2023, when our strong cash flow generation enabled buybacks above dilution. With strong cash flow, we can also reduce debt by $179 million. Debt relief is not a key priority of our capital allocation strategy, but rather a temporary use of money to reduce interest rates until money is needed to fund our expansion investments. We remain committed to our long-term investment grade credit rating as it provides us with continued access to the capital markets. Now let’s move on to sustainability. In June of this year, we published our 2023 Sustainability Report, which highlighted our recent formation and progress towards our five sustainability goals by 2020, as well as our vision to create a more sustainable world. At that point, we had achieved five of our five Sustainable Development Goals ahead of schedule, while the others remained on track. Among the five objectives that we have achieved is our goal of exporting 200% of the energy we import. I believe this goal is a wonderful example of our commitment to circularity by using waste energy from our production process to produce cogeneration energy, without CO2. Cabot has long been a leader in sustainability and is identified by external parties for his leadership in excellence. Financial year 2023 represented another year of significant progress in our sustainable progression approach, as evidenced by EcoVadis achieving the top productive platinum score for the third consecutive year. The Platinum score recognizes Cabot’s environmental, social and governance efforts and places Cabot among the top 1% of companies rated through EcoVadis. EcoVadis is one of the world’s leading sustainability assessment platforms that many of our consumers depend on to assess their chains of origin. Sustainability is at the heart of our goal and creates the strategy of tomorrow. And throughout the year, we made significant progress on several strategic fronts. It is worth highlighting in 2023 the launch of our EVOLVE Sustainable Solutions generation platform, aimed at the sale of sustainable reinforcing carbons. Our goal through the EVOLVE generation platform is to expand products for our consumers that offer sustainable, reliable content, consistent with form and, above all, advertising scale. The EVOLVE platform is based on 3 pillars. The first pillar is recovery, where we focus on finding answers from circular load chains, such as waste tire recycling and the plastics recycling load chain. The second pillar is that of renewable energies, in which we will be offering answers made from renewable materials or raw materials of biological origin. And finally, less finished when we seek to innovate new products made from procedures with a demonstrably smaller greenhouse fuel footprint. We believe our EVOLVE Sustainable Solutions platform will play a critical role in our sustainability journey as we seek to collaborate with our consumers to deliver answers that address some of their most pressing sustainability challenges. We have a number of projects in various stages of progression with our consumer and generation partners, and I am excited about the long-term inventions they are expected to produce. I will now turn the call over to Erica to communicate the monetary effects of the quarter in more detail. Erica?
Erica J. McLaughlin
Thanks Sean. I’ll start by talking about the effects of the company. I am pleased to report the fourth quarter effects of adjusted EPS of $1. 65, which is the strongest quarter of this fiscal year. This consistent result was 6% higher than the same quarter last year, driven by record effects in the reinforcing materials business, partially offset by reduced EBIT in our Pershapeance chemicals business. Constant cash flow was strong at $138 million during the quarter, which included a $1 million reduction in working capital. Discretionary loose cash flow was $88 million during the quarter. We ended the quarter with a cash balance of $238 million and our liquidity position remained strong at approximately $1. 3 billion. Capital expenditures for the fourth quarter of fiscal 2023 were $78 million, and incremental uses of cash during the fourth quarter were $23 million for dividends and $50 million for buybacks consistent with percentages. Our debt balance was $1. 3 billion and our net debt to EBITDA ratio was 1. 7x. The constant tax rate for fiscal year 2023 was 28%, and we expect our constant tax rate for fiscal year 2024 to be between 28% and 30%. An additional detail to take into account is the obtaining of benefits that are generally noted as an unallocated source of profit. During the quarter, we suffered a foreign exchange loss due to the Argentine government’s devaluation. In August, the Argentine government devalued the currency against the US dollar by around 20% in one day, resulting in a currency loss of around $7 million. We treat this as a special issue, consistent with how we have treated similar government-induced tests in other countries, especially recently in Venezuela. Considering this as a certainty, the interest and investment source of the profits made during the quarter was not offset by currency headwinds as significant as in subsequent quarters. This general and allocated source of earnings and expenses item includes currency hazards similar to our net asset position, primarily similar to South American currencies and the source of investment earnings we earn in those countries, as well as the source of interest earnings on our world treasure balances. Although those currency fluctuations are quite difficult to predict, we expect fiscal 2024 on a quarterly basis to constitute a profit of between $6 million and $8 million per quarter, due to the interest-consistent earnings stream resulting from the emerging interest rates. and the network have an effect on South American currencies and the source of investment profits in those countries. Now let’s move on to the reinforcing fabrics. For the fourth quarter and full fiscal 2023, segment EBIT accretion increased by $25 million and $74 million, respectively, compared to the same constant periods last fiscal year. The increase was primarily due to improved unit margins as a result of an increase in pricing and an increase in product mix in our calendar year 2023 guest contracts, partially offset by reduced volumes. Volumes were down 2% for the quarter and 5% for the full year compared to the same period last year. Fourth quarter volumes included reduced volumes in the Americas and Europe, as well as a consistent increase with volumes in Asia, driven by strength in China. Full-year volumes were affected by destocking activities during the year, with volumes declining in all regions. For the first quarter of fiscal 2024, we expect a sequential reduction in EBIT due to seasonal volume declines in the Americas and the negative effect of currency translation. We expect year-over-year EBIT effects in the first quarter of fiscal 2024 to be particularly consistent with those of the first quarter of fiscal 2023 due to the improved mix of prices and offers for 2023 visitors and consistent with year-over-year volumes. Now let’s move on to Pershapeance Chemicals. EBIT was minimized by $13 million in the fiscal fourth quarter and by $109 million for the full year compared to the same constant period in fiscal 2022. The reduction in the fourth quarter was due to margin minimization, driven by a less favorable product mix in the specialty carbon and smoked steel oxides product lines. The segment was also affected by pricing pressures in the smoked steel oxide and battery fabric product lines. Volumes were slightly negative during the quarter, with year-over-year volume declines in the inkjet and steel fume oxide product lines largely offset by sales expansion. levels of special carbon products, special compounds and battery fabrics. The full-year volume decline was due to 4% volume and reduced unit margins. Volumes decreased across all product lines except battery materials and, in particular, a 17% year-on-year decline in fumed steel oxide volumes. The decrease in fuel steel oxide volumes was due to reduced demand in silicone systems and the effect of spouse downtime. The drop in margins is explained by a less favorable product mix in battery fabrics and special carbons. Battery was consistent with volumes up 43% over the fiscal year and EBITDA was $21 million, in line with our disclosure last quarter. Looking ahead to the first quarter of fiscal 2024, we expect volumes to decline sequentially due to seasonality in the Americas. We expect margins to remain relatively consistent sequentially as combined product prices and benefits combine to offset emerging costs. We expect year-on-year EBIT effects in the first quarter of fiscal 2024 to remain largely stable compared to last year, as increased volumes are largely offset by an increase consistent with costs. , lack of insurance products that we had in the first quarter of 2023 and an unfavorable effect. coming from foreign currencies. Now let’s move on to the flow of money. Sean spoke further about the strength of our cash flow in fiscal 2023 and uses of cash aligned with our capital allocation framework. Looking ahead to 2024, we expect cash flow to remain strong, driven by our advertising EBITDA outlook and the forward-looking oil value curve. The use of our cash flow will continue to be aligned with our capital allocation framework, with capital expenditures expected between $250 million and $275 million, as we invest in maintenance and compliance capital to ensure our factories remain operational. reliably and attractively. expansion assignments. We also expect the continued ability to return a significant amount of money to percentage holders in the form of dividends and percentage buybacks. For a little more detail on our key capacity investments in 2024, you can see those allocations impact either segment. In the reinforcing fabrics segment, we are proceeding to expand our factory in Indonesia. Engineering for this task began a few years ago, but we paused expansion during the pandemic. Today, we are the only carbon black manufacturer in Indonesia and this facility serves consumers throughout the Southeast Asia region, which is the fastest developing carbon black in the world. In the Pershapeance Chemicals segment, we plan to increase charging capacity in China similar to the battery fabrics we have highlighted in the future for charging conductive charging capacity. In addition to assembly, we expect an expansion in demand for battery materials outside of China, we are investing to expand conductive charging capacity in the United States and Europe. These capacity investments are intended to meet the desires of our consumers in regions with local supply as demand for electric cars increases in those markets. We will begin those allocations with the plan to align the timing of investments in line with the desires of our consumers. In the inkjet sector, we are decongesting our existing plants in the United States to cost-effectively lose more capacity to meet mounting demand requirements for packaging programs. I will now return to Sean to discuss our prospects. Sean?
Sean D. Keohane
Turning to our outlook for 2024. Clearly, we entered the year with some uncertainty about how consistent the global economy will be. The ongoing conflict in Ukraine continues to weigh heavily on Europe and military escalation in the Middle East may have an effect on commodity values. In China, the timing and speed of recovery remain uncertain. And in the United States it is still unclear what effect the Federal Reserve’s restrictive economic policy will have. While those macroeconomic points point to all businesses, we are pleased with the resilience of our portfolio and our earnings expansion prospects for fiscal 2024. Overall, we expect consistent adjusted earnings with a consistent percentage for fiscal 2024 will be between $6. 30 and $6. 80, representing a 22% increase at the midpoint of fiscal 2023. Let me explain the key assumptions underlying our outlook. At a volume level, we believe stock reduction is largely complete in our key finishing markets, whether for reinforcing fabrics and functional chemicals. We believe that the speed of execution of the fourth quarter provides an intelligent basis for strengthening the tissues. If volumes increase from there, we may increase diversity. In the case of Performance Chemicals, we are not yet seeing external signs indicating improvement, so we expect near-term volumes will likely remain around Q4 levels. Again, if we see a recovery, I would say, potentially in the second part of FY24, then we could just increase diversity. On the margin side, we expect prices and combine to improve with our drastic reinforcement consistent with the agreements for Calfinishar 2024. The magnitude of the construction increases would have an effect on our position in diversity. For Performance Chemicals, we expect margins to be relatively consistent overall compared to the fourth quarter launch rate, with some differences across product lines. On the charges side, we expect additional construction charges to partially offset the strengthening of product mix pricing benefits and draconistency due to inflationary pressures as we begin our new air pollutant control projects in the USA. United States and return to the termination of general incentive payments. Exchange rates, interest rates, and energy values can all have an effect on diversity positioning. The midpoint of our diversity assumes exchange rates and interest rates relatively consistent with existing levels, and we assume the future oil curve. We also assumed that the tax rate would be between 28% and 30%. So at the midpoint, it is 1 point more consistent with that of fiscal 2023. If we think about the quarterly shape of earnings, the effects of the first quarter are expected to decline sequentially compared to the fourth quarter of the year. fiscal year 2023 due to general seasonality in the Americas and an increase consistent with the tax rate. But let’s accentuate our activities in the second quarter with the recovery of widespread volumes and the implementation of new contract values for the calendar year in reinforcing fabrics. While we expect short-term macroeconomic uncertainties to persist into fiscal 2024, our team is focused on long-term energy generation and understanding the expansion opportunities we have within our wallet. At Investor Day 2021, we presented our Create for Tomorrow strategy, which aims to leverage our strengths and exposure to favorable macroeconomic situations to generate strong profits and cash flow expansion through 2024. Delivering on our commitments is critical for this leadership team, and we are We are very proud of the progress we have made to date. When we set the objectives, we made sure of market demands and assumptions based on the existing environment. Although many of these key assumptions have been weakened since 2021, this has not affected our focus on achieving our business objectives. Let me first remind you of the economic goals of the company that we set for ourselves at the time. We have set a target expansion rate for the company’s adjusted earnings consistent with a percentage of between 8% and 12%, compounded annually from 2021 to 2024. At the same time, we expect to generate strong discretionary margin. flow of loose money that exceeds one billion dollars. We also defined our capital allocation frameworks, which called for capital expenditures of between $200 million and $300 million per year. This amount comes with maintenance and compliance capital to maintain and manage our assets and also to fund expansion projects at peak aggregate load rates, such as battery fabrics and injection molding for packaging. Turning to our diversity guidance for 2024, we are on track to achieve adjusted earnings consistent with the percentage target even though we expect weaker-than-expected macroeconomic activity and weaker demand in our key end markets. The midpoint of our 2024 forecast would put us at a CAGR of 9% over a rolling 3-year period. Although we hope that expansion in 2024 will be within diversity, our path to get there has not been what we expected when we set the goals. We expect an increase consistent with the expansion in underlying demand from points such as tire production, automobile production and polymer demand. We also expect currencies and interest rates to remain consistent with 2021 levels. We were able to overcome those headwinds, primarily due to the strong functionality of our Reinforcing Materials segment, and remain on track to achieve our EPS target. tight. Discretionary cash flow remains quite strong, at over $700 million through 2023, putting us in a smart position to reach our three-year target of over $1 billion. The strong cash flow has allowed us to make mandatory investments in maintenance and compliance, while participating in projects that will generate sustained profit expansion in the future. Capital expenditure was between $200 million and $300 million for FY22 and FY23 and is expected to be at that range by FY2024. So while the macroeconomic environment has weakened since Investor Day ago two years, we remain confident in the resilience and strength of our portfolio and the achievement of the Investor Day objectives. I would like to end with a reminder of our corporate strategy and our priorities for fiscal year 2024. Our Create for Tomorrow strategy charts a new phase of expansion and charge creation by leveraging our strengths to become a leader in functionality and durability. Our purpose is to drive beneficial expansion, deliver cutting-edge chemicals to enable a better future, and tirelessly pursue constant improvements in everything we do. Two years into the strategy, we have made tremendous progress in executing the strategy and achieving our long-term purposes and we look forward to building on this in fiscal year 2024. As we look ahead to 2024, we are excited about the expansion opportunities. We have ahead of us and we have defined some key priorities for the coming year. First, we seek to achieve our financial objectives, which come with year-over-year expansion of adjusted earnings in line with the percentage and strong generation of flexible discretionary money flow to help expand investments and return liquidity to holders of percentage. Second, we will continue to invest in the expansion of Advantage. This means investments where we believe we have a right to earn. These speeds come with strategic investments in battery materials in the United States and Europe to take advantage of the developing electric vehicle market and our customers’ regional supply demand. Our priorities also include adding new carbon improvement features in Indonesia, where we are the only local supplier meeting the developing demand for tire production in this region, and this comes with the addition of cargo. capital-effective functions in our inkjet factory through a series of de-bottlenecking projects. Third, we will continue to advance at the speed of advertising excellence by maintaining value and market margin and maintaining national excellence by focusing on overall device effectiveness, performance and charge recovery. force. And finally, we look to finish our sustainability leadership by achieving our 2025 goals and building on the launch of a REVOLVE platform. I hope this gives some color to our priorities for 2024. Although the macroeconomic and geopolitical environment will likely remain turbulent, we believe we have the right strategy, a talented team committed to execution and balance sheet strength to ensure exceptional load building . for our consistent with shareholders. Thank you very much for joining us today and I will now return the call for a question and answer session.
Operator
(Operator Instructions) And the first comes from John Roberts’ lineage with Mizuho.
John Ezequiel E. Roberts
A great neighborhood. Could you explain a little more about the prospects for functionality?Is there a difference in perspective between masterbatch, silicon, and zinc?And there has been ample evidence of a slowdown in the expansion of electric vehicles. Have you ever noticed this in the expansion of your battery fabric business?
Sean D. Keohane
Let me run through some comments on direction and how we think about it. As I said, I think we are seeing a destocking of large components in our major finishing markets for reinforcing and functional chemicals. So I think it’s positive. But I would say that at Performance Chemicals, where is your consultation? We are not yet seeing any external symptoms that indicate improvement. Therefore, I think near-term volumes will likely remain close to Q4 points. I think to see an improvement from this, we would like to see key symptom signs in the end market, things like manufacturing, PMI, innovations in housing and structure and I think trusted customers, especially when it comes to durable goods. We still see a preference for installations over durable goods. Therefore, we want those metrics to deviate from the existing Q4 volume rate at Performance Chemicals. I would say that across the various Performance Chemicals product lines, I think the only notable difference would be the fumed silica. Erica commented on the silicone market in her comments. And clearly, in the fumed silica market, our volumes were down the most across all Performance Chemicals product lines. And this is due to the general weakness of silicones, which constitute an important finishing market, the silica consumer. So I think it’s similar to housing, structure and infrastructure, but we’re not seeing movement in that area yet. Again, I think the fourth quarter volume point, that kind of rate in Performance Chemicals, is the right way to think about it until we see an improvement in the end market. In the second component of your inquiry related to battery materials, we are still seeing strong volume growth year over year. So I think it’s positive. However, as you point out, there are signs that there has been some slowdown in the market. Certainly, some public comments on this topic would point in that direction. And I think as we see it, when we think about this long term, clearly, we believe that the move to electric vehicles is a once-in-a-lifetime transition and will replace the mobility industry. But I don’t think it’s going to be a direct line and there are a lot of moving parts here. Without a doubt, the point of penetration of electric vehicles, the moment and the launch of new battery factories. There are many regionalization pressures and government incentives. These things can be distorting in the short term. And I think the timing of the progression of the regional sourcing chain to help battery factories in the United States and Europe are points that come into play here. So it’s a confusing dynamic. But our long-term vision remains and we are positioning ourselves and making a prudent investment to win in this long-term goal.
Operator
The next one comes from Josh Spector’s lineage at UBS.
Joshua David Spector
So I wanted to ask a question about strengthening, I guess, especially with the assumptions of contract prices for next year. I assume that if I follow his advice, I will make a profit on the order of $10 million for the third calendar quarter, for next year. This year, we achieved a profit of more than $30 million consistent with the quarter. Is this the correct concept behind your hypothesis?And I guess how does that compare to how the negotiations are going so far?
Sean D. Keohane
José, thanks for the question. Let me take a step back and tell you about the timeline and the process. I think that this year the negotiations will take place according to the old schedule, according to which the maximum number of contracts is concluded in the fall. Therefore, we are in full debate with consumers. Therefore, it would be inappropriate to comment today on the effects of the contracts. Looking at the existing market environment, as I said, the destocking is largely complete and volumes are normalizing from the decline levels that we saw earlier in the previous year and we know that long-term fundamentals have not replaced. Commodity supply and demand remain favorable in both the Americas and Europe and no increase in primary capacity is expected. And as we see, coupled with positive demand for outcomes in end markets such as miles driven, those markets are expected to remain quite tight in 2024 and beyond. So it hasn’t really replaced it at all. I think the other thing at play here is actually our costs and those of our competitors, which are expanding due to the expanding environment and regulations. And to sustainably help our consumers, we will have to achieve a fair return on those investments and higher operating costs. And for this it is necessary to set more prices. And in fact, it’s an industry-wide issue, and our consumers care because they too appreciate our commitment to sustainability, and I think that’s vital to their own business proposition. cost to its consumers. in terms of selling more sustainable products. Again, those things have not replaced. Also, in Europe, we see that consumers are moving away from Russian sourcing in anticipation of EU sanctions, which will come into force in mid-2024. So those market things remain, and that’s how we understand the environment. And as a reminder, approximately 30% of our contract volumes are subject to multi-year agreements from last year with higher value accruals coming into effect in 2024, and we consider them as values - the values of those contracts as a benchmark for 2024 And so we sit here today, we are in command of about 2/3 of our contract negotiations with valuable gains to achieve those volumes. But I don’t think it would be appropriate to say more at this time. This is competitively sensitive information. But I hope it gives you a sense of the environment and our long-term view of things here.
Joshua David Spector
I mean, it’s useful. And maybe I can check another way: if you’re talking about solid volumes, right on the back of strengthening, you’re talking about functionality similar to Q4 levels. So, at most of the improvement over next year, if EBIT increases between $80 million and $100 million, maybe $20 million will be annualized in terms of functionality, the residual. That’s kind of how I get to this position or this value booster. Is this a fair way to think about it, or are there other moving parts that I deserve to add to the platform for next year?
Sean D. Keohane
Yes. Well, I think there are a lot of moving parts. Certainly, we expect volumes to increase in single digits compared to 2023. And as I said, the negotiations that we have concluded so far are accompanied by price increases. But I think there are several other points here. Without a doubt, China as a whole and its market habits are a vital factor, since it produces almost 40% of the world’s tires. And then there are other points here in terms of currencies, interest rates and commodity prices. And this is how all those points do not move in the same direction at the same time. So you want to think about all those points and we, our diversity, address them. But there are many conversion points here, so we want to establish a diversity that we are confident in, but that we believe is appropriate given the many uncertainties that exist lately.
Operator
The next one comes from the line of Laurence Alexander with Jefferies.
Alexandre Laurence
Just a few things. First of all, what effects do you foresee in Europe of the abandonment of Russian imports of carbon black this summer or next, if at all?
Sean D. Keohane
Well, that definitely exists. Looking at the overall environment, this is certainly an issue in discussions with consumers, as Russia has been a major supplier to the European rubber and tire industry and the sanctions will come into effect in the middle of calendar year 2024. I think Consumers Obviously, looking for security of the source is vital here. I think the other thing that is vital for consumers beyond the security of origin is ultimately this perception of sustainability. And I think that European manufacturers operate at a different point of sustainability than the Russian ones. And across the European trade complex, steps are being taken to introduce measures like carbon border adjustment taxes, etc. , because they know that suppliers outside the region are not performing as well. So I think the aspects of security of origin and sustainability are vital for our consumers and, in fact, there are things that are pushing consumers to set higher prices on regional sourcing. So I can’t comment on or isolate a specific amount for that variable, but it’s actually something that’s vital in consumer negotiations and it’s vital for our consumers.
Alexandre Laurence
Speaking of sustainability, can you provide an update on the evolution of Rubber Black’s elastomeric compounds program? And when do you think methanolysis will have a real effect as soon as possible if this generation becomes genuine?
Sean D. Keohane
Of course. Yes. That’s why we’re excited about the advancements in our elastomeric compounds or our E2C generation platform here. And I definitely think this generation continues to penetrate and succeed in the off-road tire segment, which is a very high price segment for tire manufacturers. And we continue to see smart advances in this area. We’re also seeing good luck with customers looking to expand this generation into parts of the TBR, the truck and bus segment here. And we believe that, in the long term, this generation actually has the possibility of penetrating that component of the market, which would open up the entire addressable market in a fairly component way, particularly for E2C. Here it is difficult to verify the exact commercialization rate or schedule. I think the tire industry is rightly cautious about the emergence of new technologies. It takes time, extensive checks, etc. , to make sure functionality exists before putting those products, especially customer products, on the market. And so this timeline can definitely take a while. We have seen an increase in profits this year in this segment on E2C, which I think supports the trend, as I said, on OTR and some encouraging signs on the TBR side. I believe the launch of our EVOLVE generation platform this year complements E2C. You can consider these two details as a true detail of sustainability in the tire sector. Actually, E2C focuses on improving the location and rolling resistance or fuel economy prospects of tires. And then our EVOLVE generation platform, which actually looks at facets of sustainability like circularity and tries to improve it. That is why we can consider that they are very complementary. And I’m thinking very transparently about the technologies that our customers are interested in because they’re actually making a lot of effort in this sustainability-related space. So we’re excited about the long term and we’re seeing some smart signs. But it is clear that the time for that to become a reality in this industrial test takes a little longer. But we are seeing encouraging signs that we are moving forward to invest in those spaces, and we believe it is the right thing to do for the long term in this industry.
Alexandre Laurence
And then about methanolysis?
Sean D. Keohane
I’m sorry, Laurence, what is that?
Alexandre Laurence
Sorry, just in terms of. . . Sorry, in terms of methane pyrolysis, the kind of time, if we’re going to see an effect on the market, how much would be the earliest we could see it?
Sean D. Keohane
Well, it’s hard to say, because even if some carbonaceous tissue comes out of this process, it’s not carbon black. It is not a synthetic carbon black like the one that the tyre industry has become accustomed to and around which it is formulated. That’s why I think there are still doubts about the good fortune of this generation. And we know that using elements of our EVOLVE generation platform is a very viable technique for our consumers to drive circularity and improve the footprint of the reinforcing carbons they want in their fabrics. Because I think critically that one of the things that matters most to consumers is generating fabrics on a commercial scale. So we think our technique here, whether it’s between E2C and our EVOLVE generation platform, is the right one.
Operator
Next up is Chris Kapsch of Loop Capital Markets.
Christopher John Kapsch
So we stick to the RM segment and concentrate not so much on the price, but on the characteristic, although perhaps underrated, resistance and stability of this business. So in a year like ’23, let’s say volumes are down 5%. Obviously, there’s been some destocking and just a decline in demand. But I’m curious if you have any old data that might provide insight into how the company tends to perform in the year following a year like ’23. I’m just wondering if we’re worth thinking about low single-digit volume by 2024 , a somewhat risky assumption based on an ancient context.
Sean D. Keohane
So obviously I think there has been a significant destocking this year. I’m thinking about the entire business landscape. I think many are saying this is probably the biggest destocking cycle we’ve ever noticed. So I think while there have been microcycles of destocking and restocking, I think it was actually much more pronounced when we came out of COVID and saw things ramp up in ’21 and ’22 and a lot of supply chain disruptions and other people actually. maybe buy just to have a product. And now that this is set around ’23, it’s a little bit of a different environment, I would say, than the old one. But typically what we see is stock drawdowns coming back because consumers have to operate at widespread stock levels. And if there is a need, they must ensure that they have the stock to meet the fulfillment rates and that the stock-out rate is higher in the calculation. So other people will sometimes have a little more stock to protect against that out-of-stock charge. But I wouldn’t say we’ve seen signs of repopulation yet. I think what we are seeing is that the destocking has largely been completed. And I think there’s a lot of knowledge out there, public knowledge from our clients on their earnings calls and some industry publications that I think highlight that. So I think what we’re seeing now is something much closer to general demand. But I think any significant replenishment would likely require a physically more powerful economic expansion. Again, because I think the math is this: if there is a strong expansion and other people expect it to continue, then the stockout charge is increasing and therefore they would have a little more stock to protect against this. I wouldn’t say we’re seeing symptoms yet.
Christophe John Kapsch
That’s fine with me. And then I tracked the activity of the battery materials. And the question is more or less about the evolutionary dynamics around the origin chain of electric vehicles and energy storage. So, out of curiosity, you talked about a kind of intensification of competition. A dynamic ensued as 2023 and price pressure, which he denounced in the last quarter, set in. Out of curiosity, such as when you promote in the cost chain, is there a more pronounced competitive intensity when you use cathode or LFP battery brands compared to superior ones?Power density NMC or NCA batteries? I wonder if this bifurcation, if it occurs, becomes more pronounced or understood in the conductive carbon sector and its surroundings in particular.
Sean D. Keohane
Well, actually there are. . . I think there are some vital differences or branching points, Chris would say. The first is that obviously the market will be divided into a Chinese market and the rest of the global market. Now, even in what those geographic divisions look like in terms of market, you see differences based on battery chemistry. So, for example, sometimes LFP is less effective in terms of range, but also less expensive, while NMC chemistry is greater in terms of range. Therefore, it is a more effective chemistry and, at the same time, more expensive. Our view of the market is, therefore, that there will be room for both technologies. What is seen today is that China is moving closer to the LFP. And that makes sense, because if you take a look at the Chinese EV market, first of all you have a significant number of hybrid cars on the road. Therefore, the battery functionality of hybrids is not as demanding. But then there is the less expensive EV segment where, again, expectations for battery functionality are lower. And so a giant component of this market is quite competitive in terms of value in terms of automobiles and goes all the way back to the chemical input level. But what we see in the NMC aspect is anything else where the functionality requirements are higher. Therefore, the competitive intensity is lower. So when we sell to NMC consumers or programs for high-value cars or to export batteries to Western car manufacturers, we find that our values remain stable. And if we sell outside of China, again, where the market is very different, more skewed towards NMC and the quality requirements of Western auto OEMs are very different from the lower end of the OEM market in China, we also see price stability. there. So we think the market will be divided geographically and chemically. But in the end there will be a role for any of the chemistries, and we participate in any of the chemistries, but it will be about segmentation, where we take components, what consumers, what programs, what geographies and how to optimize this over time to create. value added. long term business. That’s the question here.
Christopher John Kapsch
That’s helpful. With just a little bit of tracking, perhaps that would be an oversimplification, but it turns out that the price pressures within conductive carbons are aligned with the fork, which China has skewed to LFP and the Western markets, NMC and NCA. But can you just let me know about the fact that you had a major visitor in the Western markets that delayed the increase?I’m just curious if there’s more color as you see how this market evolves.
Sean D. Keohane
Yes. Clearly I can’t add color to that, Chris, because we have confidentiality requirements with clients. But I actually think the rise of Western markets is a little tricky to map. And as I said before, it may not be a direct line. I think there are a lot of moving parts here. I think the long-term achievement and momentum remains, but the precise rate of vehicle penetration, the timing of new battery factories and how they come online, all the pressures around regionalization and governments making investments cash. Money in this area can have an impact, but it can also create distortions. So there are a lot of moving parts here that are difficult to map in the very short term with a high degree of precision, but we’re really focused on building a valuable long-term business. Because in the end we see that the entire mobility sector will be in transition and mobility will be a key end market for us. Not only in this new battery space, but also in our fabrics, that lightening will continue to be very vital; in fact, more vital, I would say, because electric cars are heavier than internal combustion engines. Therefore, the lightening finishes will be maintained. And then in the end, I think the tire market is reformulating them to expand functionality that better suits electric vehicles. So this full mobility transition is very vital for Cabot Corp. and that’s why we’re thinking about it long term.
Operator
Next up is David Begleiter of Deutsche Bank.
David L. Begleiter
Just one question. Sean, do you have a 2024 EBITDA forecast for Battery Materials?
Sean D. Keohane
Yes. For 2024, David, we don’t offer an express consultant because I think there are a lot of moving parts, as I said here. But we expect 2024 EBITDA to increase with continued volume expansion and greater product mix in China as we optimize our participation and drive greater penetration of the higher-yielding grades that I just talked about here. have earnings expansion during 2024, probably something that is in line with the overall market expansion. And then you remove the lens here, again, we’re playing the long game here. We, the company, have the opportunity to contribute significantly to Cabot’s profits in the future. And so, to give you a sense of that outlook in about five years, we might be expecting this business to generate around $100 million in EBITDA. But again, there will be no direct line here and many moving parts. So I hope this gives you an idea of how we look at the long term and the business we expect to grow, whereas in this short-term environment, it’s complicated and dynamic, but we expect EBITDA expansion. in 2018.
Operator
Merci. Je will now turn the floor to President and CEO Sean Keohane for any final comments.
Sean D. Keohane
Well, thank you all for joining the call today and for our ramp for 2024 and our priorities, 2023, I’m sorry, and our priorities for 2024, and I thank Cabot and I look forward to speaking with you in the next quarter. Thank you. .
Operator
Ladies and gentlemen, thank you for your participation. This concludes today’s program and you can now sign out.