# A MESSAGE TO OUR SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_CBT_2017/NYSE_CBT_2017.mmd` · pages 3-9_

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A MESSAGE TO OUR SHAREHOLDERS

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Fiscal 2017 was a year of tremendous progress for Cabot Corporation. I'm proud to report that in fiscal 2017, we delivered on our financial commitments, extended our industry-leading positions and advanced a range of compelling strategic priorities to position the company for the future.

This is a very exciting time for Cabot Corporation. We sit at the crossroads of several significant and fundamental trends which offer distinct strategic opportunities to grow and transform our company. The end markets that we serve continue to grow at robust rates and our global footprint and industry leadership position offer unique opportunities to create value for our shareholders. Across our diverse set of end market applications, we are experiencing a convergence of global macro trends that can only be addressed

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by materials innovation. From green tires and lithium-ion batteries, to light-weight plastics and digital printing, our market spaces are rich with innovation potential.

We are also observing an ever-increasing global trend toward greater environmental stewardship and sustainability. As an industry leader, sustainability has always guided our investment decisions. For example, over the last 15 years, China has emerged as the largest tire producing country with approximately 40% of the world's capacity. This has resulted in incredible growth in supporting the chemicals value chain, but often at the expense of environmental sustainability. Throughout the years, as we invested to capture this growth, we did so with an unwavering commitment to implementing the best process technology and environmental controls. While there has not always been a level playing field, we recognized that this was the best way to build a durable and distinguishing leadership position. Today, we are experiencing a broad transformation in environmental enforcement across the entire industrial and chemicals landscape in China. We strongly support this initiative and are a recognized leader in the chemicals ecosystem advocating for responsible management practices. There is no global competitor that is as well positioned as Cabot to capitalize on this important and fundamental trend.

Against this backdrop of market opportunities, we continue to be guided by our vision "to be the most innovative, respected and responsible leader in our markets – delivering performance that makes a difference." This commitment informs our choices, inspires our global team and will be the source of compelling value creation for our shareholders.

"I'm proud to report that in fiscal 2017, we delivered on our financial commitments, extended our industry leading positions and advanced a range of compelling strategic priorities to position the company for the future."

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## DELIVERING ON OUR COMMITMENTS

When we launched our vision and strategy in mid-2016, we set an objective to deliver sustained and attractive total shareholder return (TSR). Our strategy and accompanying financial framework was built to deliver 7% to 10% annual adjusted earnings per share (EPS) growth over time. Complementing the earnings growth portion of the TSR package is a commitment to a balanced capital allocation strategy, whereby approximately 50% of our discretionary free cash flow will be invested for growth and 50% will be returned to shareholders. This balance in capital allocation philosophy will ensure that we invest sufficiently in our core businesses to capture opportunities and drive long-term earnings growth while also providing our shareholders with a meaningful cash return. While there will always be a cyclical dimension to our businesses, we believe this long-term value framework will provide top-tier performance for our shareholders.

In fiscal 2017, we continued to deliver on our financial commitments. Adjusted EPS increased by 9% on a year-over-year basis and we produced $340 million of operating cash flow, which clearly showcases the cash-generating power of the portfolio. As committed, we returned 57%, or $138 million, of discretionary free cash flow to shareholders through a combination of dividends and share repurchases. While we are very pleased with these results, we remain committed to long-term leadership and performance. On this front, we advanced several long-term strategic investments to strengthen our leadership positions and ensure sustained growth of earnings and cash flow.

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$340M
OPERATING CASH FLOW

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57% $2

DISCRETIONARY FREE CASH FLOW
RETURN TO SHAREHOLDERS

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$244M

DISCRETIONARY FREE CASH FLOW

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## STRATEGIC PROGRESS

Our "Advancing the Core" strategy is to extend our leadership in performance materials by driving three key themes of 1) investing for growth in our core businesses, 2) driving application innovation with our customers, and 3) generating strong cash flows through efficiency and optimization. Across each of these strategic pillars, we made notable progress in 2017.

## GROWTH IN OUR CORE

Our Reinforcement Materials and Performance Chemicals segments achieved volume growth in-line with or better than market averages while maintaining a commitment to earn fair value for the performance our products deliver in applications. We also advanced several key growth projects across the company. Specifically, we announced two new fumed silica plants in Wuhai, China and Carrollton, Kentucky, USA. These projects will allow us to meet the growing market demand for our high-performance fumed silica while strengthening our relationships with Dow and HYC, key leaders in the silicones industry.
In November 2017, we also completed the acquisition of Tech Blend, a leading North American producer of black masterbatches. This transaction is an excellent example of how we will use disciplined and focused M&A to strengthen our existing businesses. We have long held a position as a leader in black masterbatches and compounds in the EMEA and Asia Pacific regions, and this acquisition will establish a strong footprint in North America and a platform to better serve our global customers. Our long-standing participation in the plastics value chain as both a supplier of specialty carbon blacks and a masterbatch producer has allowed us to develop a deep understanding of plastics applications and bring unique performance to our customers. We acquired this business at an attractive multiple and have a clear plan to drive commercial synergies and generate above market growth.

VOLUME
GROWTH
IN-LINE WITH GLOBAL MARKETS

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Groundbreaking ceremonies in Carrollton, Kentucky, USA and Wuhai, China.

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## APPLICATION INNOVATION

Materials will continue to drive and enable advancements in our world. In fact, many of society's most pressing global challenges are fundamentally a question of materials innovation. For example, driving greater energy efficiency is a macro trend that will play out across the materials sector. Light-weighting of cars requires the replacement of metals with plastics compounds and composite materials and improved structural adhesives. The electrification of the automotive fleet will demand advancements in battery chemistry to increase battery range and cycle life. Increasing the fuel economy of vehicles requires materials innovation in tires to reduce rolling resistance without compromising wear and other key performance characteristics. In each example, Cabot is positioned to capitalize on these clear trends.

Our commitment to growth and innovation is best exemplified by our investments in the high growth battery application. Conductive carbon additives are an essential performance material in battery formulations, both for lithium-ion and advanced lead-acid batteries. We have committed resources to the continued development and commercialization of battery materials and believe this application has the potential to become a material contributor to our growth objectives. Cabot has a strong "right to win" based on our current level of participation, a depth of application expertise, leadership in conductive carbon additive technologies and a strong footprint in Asia Pacific, where most of this development is occurring.

To support this corporate-wide commitment to application innovation, we are investing to build lasting capabilities. During 2017, we commissioned our new Asia Technology Center in Shanghai, China, which will serve as a key platform to drive collaboration and innovation with our customers in the Asia Pacific region. As China's economy transitions, innovating around new applications and collaborating more closely with our customers is an essential element of our strategy.

New Asia Technology Center in Shanghai accelerates application innovation capabilities in Asia Pacific.

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## EFFICIENCY AND OPTIMIZATION

As we enter a period of higher capital spending to support growth and innovation projects, we are proceeding with a laser focus on capital efficiency. This effort plays out in distinct ways across our asset base. We search for smart and efficient debottleneck projects to support capacity growth. In cases where we are building new assets, such as our fumed silica investments, each project undergoes a rigorous capital efficiency review where we bring the best practices of value engineering to ensure that we maximize the efficient use of our capital spending. Finally, we strive to operate our assets with the highest level of reliability and maximum energy recovery.
Throughout our global network of carbon black plants, we have made significant investments to recover waste energy. Our fleet of energy centers creates value through the recovery of thermal energy from waste heat generated from our processes. We monetize this recovered heat through avoided electricity purchases and energy sales to nearby industrial neighbors or the electrical grid. By driving improvements in the reliability and operating efficiency of our energy centers, we reduce our costs while also making a positive impact to overall greenhouse gas emissions. We had a successful year in 2017 and our efforts on this front were an important contributor to the improved profit results in our Reinforcement Materials segment.

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# RESPONSIBLE LEADER – MAKING A DIFFERENCE

The safety of our people and the sustainable development, production and use of our products are central to our corporate vision. Our 2017 total recordable injury rate of 0.45 continues to position us near the top of the broad industrial and chemical industry league tables. We have the highest expectations of our performance in this area and, as a result, include contractor safety in our performance measures – a practice that few in the industry do. We remain proud of our longstanding position as a leader in safety, but continue to reflect upon this performance with a healthy level of dissatisfaction as we know that zero injuries is possible.

During the past year, we enhanced our approach to sustainability by conducting an extensive materiality assessment that enabled a sharper focus on those areas of sustainability most important to Cabot. This effort included outreach to customers, investors and our employees around the globe. In June of 2017, we published our latest sustainability report which conforms to the Global Reporting Initiative (GRI) standard and reflects the insights from the materiality assessment. With this input, we are moving forward with confidence that our sustainability goals are relevant and have a strong connection to our business agenda.

Our leadership has been recognized by numerous important external parties. We are proud that Corporate Responsibility (CR) Magazine named Cabot one of its 2017 Most Responsible Companies in the Materials Industry Sector. In addition, for the second consecutive year, we were recognized with a gold level evaluation by EcoVadis, an independent assessment organization that specializes in evaluating sustainability programs and related performance of participating companies.

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I am proud of the work that we have been able to accomplish so far, but know that we can do more to positively impact our overall performance. Sustainability is a continuous journey for which we have established meaningful goals and milestones. With the support of our dedicated team across the globe, I know we will continue to improve our performance and make a difference.