Q3 2022 Cabot Corp Earnings Call

August 9, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Okay.

Good day and welcome to the third quarter 2020 to Cabot earnings Conference call. At this time, all participants are a listen only mode.

After the Speakers' presentation there'll be a question and answer session. As a reminder, this call is being recorded I would like to turn the call over to Steve Delahunt, Vice President Investor Relations and Treasurer, you may begin.

Thanks, Michele good morning, I would like to welcome you to the Cabot Corporation third quarter earnings teleconference.

With me today are Sean Keohane, CEO , and President and Erica Mclaughlin Senior Vice President and CFO .

Last night, we released results for our third quarter fiscal 2022 copies of which are posted in the Investor Relations section of our website.

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.

During this conference call, we will make forward looking statements about our expected future operational and financial performance.

Each forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Additional information regarding these factors appears in the press release, we issued last night is that our 10-K for the fiscal year ended September 32021.

In our 10-Q for our fiscal quarter ended March 31, 2022, which are also available on the company's website.

In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results and.

Any non-GAAP financial measure referenced on this call are reconciled to the most directly comparable GAAP financial measure.

Table at the end of our earnings release issued last night and available in the investors section of our website.

I will now turn the call over to Sean who will discuss the third quarter highlights and provide an update on our progress in the areas.

Battery materials and ESG.

Erica will review the company and business segment results, along with them up corporate financial details.

Following this Sean will provide some closing comments and open the floor to questions Sean.

Thank you, Steve and good morning, ladies and gentlemen, and welcome to our call today.

I am very pleased with our performance in the quarter as adjusted earnings per share was up 28% to a record of $1 73 compared to the same period in fiscal 2021.

This record level of performance reflects the resilience of our businesses and end markets our focus on execution and the continued momentum in our high growth vectors.

As a result, our team was able to navigate dynamic market conditions, the impact of pandemic Lockdowns in China continued logistics constraints and higher energy and raw material costs.

Results across our businesses were very strong with consecutive quarterly record performance in the reinforcement materials segment, where EBIT was up 33% year over year.

In the performance chemicals segment, we delivered 17% year over year EBIT growth through effective pricing execution and strategic actions to enrich the product mix.

Battery materials continues to outperform the market driven by strong execution and continued customer penetration.

And finally central to our purpose and strategy is a commitment to leadership in sustainability and during the quarter. We published our 2021 sustainability report highlighting our continued progress towards achieving our 2025 sustainability goals.

Year to date results and battery materials have continued to exceed market growth rates in the third quarter volumes grew 60% year over year, while EBITDA grew approximately 17% over the same period.

We continue to expand our relationships with the world's largest battery manufacturers and are building significant momentum outside the Asia region as our global customers build factories in Europe and the U S.

For the full year, we continue to expect EBITDA to be in the range of $30 million to $35 million.

The midpoint of this range equates to 100% EBITDA growth year over year, driven by rapid market growth for electric vehicles and continued momentum with customer adoptions of our products.

The growth of battery materials is underpinned by strategic capacity additions, which are critical to meet our customers' volume ramp up requirements.

<unk> be completed technical upgrades at our shoe, Joe specialty carbons plant with the plant becoming operational during the third quarter.

The facility will optimize our specialty carbons production network to meet customer demand across a wide range of applications.

While immediately freeing up additional conductive carbons capacity in our global network to support the growth of battery materials.

We are also well underway and the first phase of technical upgrades at our new Tianjin, China site, which is specifically targeted to support the growth of battery materials. We.

We expect the first phase of the battery materials capacity expansion to come online in mid fiscal 2024.

And finally, we have completed the first phase of our carbon nanotubes dispersion capacity expansion at our Zhuhai China facility in July .

These investments will give us a combined capacity position that will enable us to continue growing at above market growth rates as.

As we outlined last quarter over the next three years, we plan to triple our capacity across our battery materials portfolio to ensure we are well positioned to capitalize on the transformational opportunity of electric vehicles.

Now moving to an update on the ESG front this.

This quarter, we published our annual sustainability report, which further advances our commitment to transparency and progress.

This year's report includes enhanced disclosures and reaffirms our commitment to the UN global compact.

Our sustainability report details the achievements and progress we have made toward our 2025 sustainability goals and discusses our focus on achieving our net zero ambition by 2050.

The report outlines the following noteworthy achievements.

We realized 91% of our 2025 greenhouse gas intensity goal by the end of 2021 and are evaluating options for establishing interim greenhouse gas reduction targets to support our ambition of achieving net zero emissions by 2050.

We also made significant progress against our 2025 energy goal, achieving an energy ratio of 157% by effectively operating our fleet of cogeneration unit.

By capturing and exporting excess energy from our operations, we are helping to provide neighboring businesses and communities with clean energy.

We see great potential in the evolution of our transportation fleet to electric and other low carbon vehicles and to that end. We collaborated with one of our suppliers to conduct a successful pilot projects to test zero emissions trucking technology.

And finally, we're committed to continuing to develop innovative products that improve performance for our customers by imparting properties that provide sustainability benefit.

Over the past year, 100% of our new products were evaluated and scored for their sustainability benefits.

We have long been dedicated to comprehensive reporting on our sustainability performance and aimed to provide transparent disclosures as a tool for engagement with our customers shareholders employees and communities.

To this end, we incorporated the climate scenario analysis and climate related risks and opportunities matrix. We completed in accordance with the task force on climate related financial disclosures or Tcs in our sustainability.

Inability report.

We are very pleased with our progress this quarter, both on the operational execution front and against our strategic priorities. Our products are helping to enable the transformation to a more sustainable world and our entire global team is excited about the opportunities that are in front of us.

I'll now turn the call over to Erica to discuss the financial and performance results in the quarter in more detail.

Erica thanks.

Thanks, Sean I'll start with discussing results for the company and then review the segment results.

Reported record adjusted EPS of $1 73 in the third quarter up 28% compared to the third quarter of fiscal 2021, driven by record results in reinforcement materials and strong earnings in performance chemicals.

Discretionary free cash flow in the quarter was $135 million driven by strong EBITDA and we ended the quarter with $208 million of cash.

Beck's in the quarter was $50 million and year to date is $121 million, we expect full year capex to be in the range of $200 million to $225 million.

Our balance sheet remains strong with total liquidity of $1 1 billion and net debt to EBITDA of one eight times as of June 30 in.

In the quarter, we issued a 10 year $400 million bond the proceeds of which were largely used to repay a maturing $350 million bond.

Rising interest rates have impacted both our bond refinancing and our short term commercial paper.

This resulted in a year over year interest expense increased $3 million in the third quarter.

In addition, the strengthening in the U S. Dollar was a headwind to business EBIT in the quarter of $8 million as compared to the prior year due to the unfavorable impact of translating foreign earnings into U S. Dollars. The primary driver of this came from the weakening of the euro and the yen against the U S dollar.

The year to date operating tax rate was 26%, which is now our expected operating rate for fiscal 2022.

Our operating tax rate in the third quarter was 24%, which included a benefit from the anticipated operating tax rate reduced income 27% to 26%.

Now moving to segment results.

During the third quarter reinforcement materials, EBIT increased by $28 million as compared to the same period in the prior year.

The increase was principally driven by improved unit margins from here.

Higher pricing in our 2022 calendar year customer agreements and higher volumes across all regions. This was partially offset by higher fixed costs associated with increased utilities and the unfavorable impact of foreign currency movements.

<unk> volumes were up 5% in the third quarter as compared to the same period of the prior year due to 6% growth in the Americas, 10% in Europe , and 1% in Asia as the global replacement tire demand remained resilient.

Higher volumes in Europe , and the Americas, largely due to increased demand for our products, our unique position in Mexico and supply tightness in the European market.

Looking to the fourth quarter of fiscal 2020, Q, we expect reinforcement materials to report significant year over year EBIT growth due to the impact from our 2022 customer agreements and strong volumes across all regions.

<unk>, we expect EBIT to decline largely due to the normal seasonal effect on both maintenance activities and European volumes.

We expect maintenance expense to increase sequentially by approximately $5 million in the fourth quarter.

Now turning to performance chemicals, EBIT increased by $9 million in the third fiscal quarter as compared to the same period in fiscal 2021. The increase was driven by higher unit margins as a result of improved pricing and product mix in our specialty carbons and fumed metal oxide product line and higher volumes in battery materials.

We delivered impressive volume growth of 60% as Sean noted in products sold to battery materials applications as we continue to see growth driven by higher EV demand.

These benefits were partially offset by higher fixed costs associated with increased utilities and the unfavorable impact of foreign currency movements.

As we look ahead to the fourth quarter, we expect strong year over year, EBIT growth driven by higher volumes and strong unit margins.

Sequentially, we expect strong volume growth in our battery materials and inkjet product line to be more than offset by normal seasonal volume declines in our specialty carbons product line and higher levels of maintenance spending we expect maintenance expense to increase sequentially by approximately $7 million in the fourth quarter.

Now moving to our capital allocation priorities going forward.

We remain committed to the framework we have shared previously we will prioritize high confidence high return investments in our growth businesses, particularly focused on those and battery materials and inkjet packaging the <unk>.

Growth projects. We are funding has compelling business cases to grow the company and we expect that we'll be able to fund needs with our operating cash flow.

As we think about the hurdle rate for these type of projects, we usually fund projects with an IRR of 20% or greater.

We also look to execute attractive bolt on acquisitions, the focus area will be in areas that enhance the performance of our existing businesses and strengthen our growth vectors.

Our investment criteria are for growth and margin enhancing opportunities that are accretive and strengthen our competitive positions in our businesses and where we expect to see an ROIC in excess of lack in the first three to five years.

The recent acquisitions in China that Sean discussed earlier, a good example.

We expect to maintain our industry, leading dividend yield and we plan to continue to opportunistically repurchase shares during the third quarter, we did both with $21 million of dividends paid to shareholders and $13 million of share repurchases in the quarter.

We believe we can do all this while maintaining a healthy balance sheet and our investment grade credit rating.

I'll now turn the call back over to Sean.

Thanks, Erika I am extremely pleased with another quarter of record operating results in what was a challenging environment.

Based on that performance and our outlook for the fourth quarter. We are tightening our expected full year outlook of adjusted earnings per share to be in the range of $6 10 to $6 20.

Which is at the high end of our previous guidance of $5 80 to $6 20.

And up 15 cents at the midpoint.

This is truly exceptional performance for our company and reflects our strong commercial and operational execution and the value of the strategic choices that we've made in recent years.

In the fourth quarter, we expect a continuation of our strong performance. Our results will also reflect traditional seasonality and higher maintenance as Eric outlined as we shifted turnarounds from the third quarter to the fourth quarter in order to support our customers' volume requirements.

Negotiations with our key tier customers have begun earlier than is typical this year as both global and regional customers are focused on security of supply.

This has led us to reach agreements with several of these global and regional customers. Some over multiple years that address the inflationary environment and have pricing that aligns with our expectations.

I continue to be very excited about the momentum across our growth factors, particularly in battery materials.

We remain on track to grow volumes at double the market rate and the midpoint of our fiscal year 2022, EBITDA outlook for battery materials represents approximately a 100% year over year increase.

At the same time, we're making the capacity investments necessary to win as the automotive industry undergoes the transformational change to electric vehicles.

Turning to the longer term I am excited about the positioning of our businesses and the market outlook.

Our reinforcement materials business is structurally stronger and is expected to be less cyclical due to the following factors.

The tire migration to China that played out over the past 25 years was very disruptive for the entire value chain, but this migration has stabilized and we believe we are in a new normal in terms of regional tire production.

Our business model was built on making and selling in region.

This is driven by economic fundamentals, but even more durable given our customers' growing preference for regional supply chain to ensure supply security.

There are no material announced supply side additions coming on in the mature regions and the supply demand dynamic is very balanced in fact, this is only getting tighter given the Russian invasion of Ukraine.

Beyond these structural market dynamics, we've been laser focused on a broad range of commercial and operational excellence initiatives over the last several years that have structurally improve the profitability of the business.

Such initiatives include changes to the structure of our formula is to eliminate lag and ensure a better matching of our costs.

Energy recovery and yield investments to improve economics and reduce emissions.

A step change in plant operating performance.

And strong commercial practices to ensure we remain our customers reinforcing carbon partner of choice as we deliver value to them and get paid appropriately for that value.

Our performance chemicals portfolio benefits from attractive industry structure and is poised for growth driven by new products and underpinned by the compelling macro tailwind of a changing mobility landscape and increasing focus on sustainability and the trend of becoming an ever more connected world through digitalization.

<unk>.

As we outlined at our Investor Day in December 2021, we expect strong volume growth across this segment over the next few years.

We have nurtured a great set of growth factors that are inflect, a particularly battery materials and we're investing behind this transformational trend to win.

We expect strong discretionary free cash flow to fund compelling growth investments and return capital to shareholders.

And finally, we are a leader in ESG and recognized by our customers and shareholders for excellence.

Overall, I am very pleased with our strong execution and the progress against our creating for tomorrow strategy.

Thank you very much for joining us today and I'll now turn the call over for a question and answer session.

As a reminder, if you'd like to ask a question. Please press star one.

Our first question comes from Jeff Zekauskas with Jpmorgan. Your line is open.

Thanks very much.

Got it.

You said that you negotiated some multi year.

Contracts with tire manufacturers.

Okay.

Price increases over a multiyear period also part of that.

Those agreements or were they simply volume.

Hi, Jeff This is Sean.

Those those were price increases in in both years of the agreements, where we entered into a three year agreement.

Agreements.

Or are they higher in the second year than in the first or the same or lower.

That's competitive information, Jeff I can't disclose it but what I can say is that.

The environment.

Which is really putting an emphasis on supply security.

<unk> remains the case.

And the structural dynamics that.

We've talked about.

Remain intact, and again customers really placing a premium on supply reliability and leadership in ESG and these factors, where I think we really stand out and I think thats reflected in the.

The agreements that we've reached.

The.

There is not really very much operating cash flow through the first nine months.

Your inventory is safe moved up quite a bit Sylvia receivables not really payables so lunch.

Can you talk about cash flow prospects in the fourth quarter.

Sure Hi, Jeff It's Erica.

We've had a pretty significant increase in the working capital position.

Biggest driver being the higher raw material costs that flow through both the inventory and receivables balances.

In terms of payables, we have relatively short payment terms with raw material suppliers to that is not as resident in those balances.

So we have seen a pretty significant increase in that.

We do.

Have the balance sheet to fund that and this is what we usually do is oil rises.

Funded with <unk>.

Short term borrowings.

Which we have done here I would say as oil now is starting to come down a bit.

In recent weeks, you would see that impact.

Diminished, though if oil stayed flat you wouldn't have to have further increases if it comes down we will see more of a benefit from the lower values.

More immediately in inventory and then usually in the following quarter, so as prices reset back down.

As the flow through of the inventory happened.

The P&L. So we would we wouldn't expect to see this significant increase continue.

Unless oil.

Is it a dramatic amount again.

Not with happening currently.

Okay, then lastly.

Can you talk about the volumes and your.

Specialty black business.

Yes, I think.

As.

As we disclosed I think volume volume trends were solid in the quarter.

About 2%.

So I think given.

The dynamic.

Environment in China around sort of rolling Covid, Lockdowns and the like I think that that represents.

A very solid solid performance of course across this portfolio, it's a quite diverse portfolio of applications and we're very well represented.

Both on the application front and also geographically.

So we've performed I think quite well in the current environment on the volume front.

Does that 2% include.

Growth.

Jeff Yes. It does 2% was performance additives, which includes EV. If we tried to isolate specialty carbons, it's up a bit.

More like 1% in the quarter.

Great. Thank you so much.

Our next question comes from Josh Spector with UBS. Your line is open.

Yes, hi, thanks for taking my question.

I just wanted to drill in on the guidance for the fourth quarter and ask if you can do a bit more of a detailed walk in terms of your sequential bridge from third quarter to fourth quarter, I mean, clearly called out the maintenance impact and performance business.

And you also talked about seasonality I guess, maybe looking at it.

Maybe three of the past five years EBIT has been up sequentially in the fourth quarter. So it is not readily apparent to me what the seasonality is or if there is some exacerbated impact there this year because of some higher selling into Europe . So any additional color would be appreciated. Thanks.

Sure Hi, Josh.

So we continue in terms of our outlook, we continue to see strong demand as we progress into Q4, especially in reinforcement materials and battery materials and so again, we expect.

This current trend of strength to continue into Q4.

As Eric called out in her remarks, we are expecting to incur about $12 million of higher maintenance in.

In Q4 as compared to Q3.

This is related to annual site turnarounds maintenance turnarounds the number is higher.

Then than expected and what might be a more typical profile due to our conscious decision to push Q3 maintenance into Q4 to help support our customers' need for vol.

Volume for demand.

Conscious decision there, but that's a fairly material swing in the maintenance expense and then at at the suite of business volume level, our business typically does fee.

Seasonal impact to volumes in Q4, it's most pronounced in Europe because of summer shutdowns, you're probably familiar with.

It's pretty typical that you would see.

And the more extended summer shutdowns at manufacturing plants in Europe , and we've seen that over a very very long period of time.

And we're expecting that historical pattern too.

To flow through in Q4, so seasonal adjustment down to volumes. What you typically see from a volume standpoint, Josh is that our Q1 and Q4 are are the lower quarters.

In Qs two and three of the higher quarters from a volume standpoint.

And again, that's the seasonality that Q1 would be the Christmas seasonality and then Q4 would be to the.

The summer seasonality, which is most pronounced in in Europe . So that historical pattern is what.

We're expecting to see here in.

In the quarter I guess, the other point that I might call out is that with the tax rate catch up in Q4 that did increase the Q4 results by about <unk> <unk> on an EPS basis. So when you look at the higher maintenance.

The historical expected.

Volume impact from seasonality, particularly in Europe , and the tax rate catch up I think that.

That debt.

Gets gets us gets you sort of squarely there.

Okay. Thanks, that's really helpful and just a follow up I guess on Europe , specifically, the 10% volume growth.

It's been a choppy couple of years, so getting a two year stack. There is maybe a little bit challenging, but I guess would you say did you gain share or are you supplying more spot volumes are you supplying more out of your other regions into Europe , I guess, what drove that volume strength and kind of how sustainable is that into next year, if the supply construct stays.

In place.

Yes so.

Europe is certainly a dynamic environment right now given the.

The challenges.

Inflicted on the region from the Russia.

Invasion of Ukraine, but volumes grew year over year in the Europe region is as you said.

10%.

This is due to higher contractual volumes.

In our 2022 customer agreements as well as increased spot volumes because supply remains tight in the region given.

This impact from the Russia invasion as you know was structurally.

A very balanced market prior to that in <unk>.

Even even more so now so we have.

We have picked up some additional volumes here and this connects to the maintenance push out into Q4 as well because our customers were looking for volumes.

We ran a little harder in the quarter.

As well so.

I think our position we feel very good about in Europe , We think there is.

A growing preference for regional <unk>.

Supply here, even more of a priority being put on that.

So our view is that customers are are looking to secure that regional supply and therefore.

That physicians should be pretty durable as we progress into 'twenty three.

Okay. Thank you.

Our next question comes from Chris Capps with loop capital. Your line is open.

Hey, good morning, I was hoping to get a little more granular on the battery materials business I'm wondering if you could further characterize the.

Commercial traction momentum, you're seeing there and feeding into the EV supply chain.

Curious if the traction is sort of balanced.

Across.

I guess conventional conductive carbons and carbon nanotubes or is it skewed towards one or the other.

And then.

Just other than your your your global footprint year, Presumable World class manufacturing and quality control and all of that Im just wondering if theres any.

<unk> needs from these customers that arent currently sort of part of your portfolio or solutions that you are.

That they are asking for that you may take.

Some innovation or other investments to address those needs.

Yeah, Hey, Chris Thanks for the question. So certainly very pleased with our performance in battery materials and I think we're executing very very well against our growth strategy and we're putting the investment behind this.

As we called out in our remarks here to win as the auto industry transitions, So really really pleased with the execution here.

The results and our expectation for the full year.

Are running ahead of.

<unk> of where we sort of called out on Investor day. So early on here, we're running a little bit ahead is key.

Key customer wins continue to build.

Momentum here I mean, our belief is that the use of conductive carbon additives blends. So this would be blends of conductive carbon black and carbon nanotubes.

Is the direction the industry is moving in.

You might recall last quarter we.

We talked about a top five battery manufacturer that has adopted one of our blends and we think that.

That portfolio is is unique among conductive carbon additives producers and we still see that building momentum here because.

The optimal battery chemistry really needs, both long range and short range connectivity and.

The blend of.

Conductive carbons and Cmt's.

Is is the best way to get that so so continued traction on that front, I think which is which is great.

Core to our strategy one of the reasons why we we.

We bought the CMT business in China, and I think thats playing out well.

We look forward here of course market expectations are for a pretty significant CAGR out through the balance of this decade, 25% to 30%.

Our compound annual growth rate in.

In demand were certainly continuing to expect to outperform that and so that 50 plus percent.

The number that we talked about at Investor day remains.

Remains.

Our target I think customers right now, we're very focused on building out regional supply chains. Most of the industry is still very Asia Pacific focused.

With China, playing a key role there at about 50% of the market, but there are plants that are coming on stream in Europe and under construction and coming on in the U S and so that will build over time and having supply I think will be a critical part of the value proposition for customers and I think on this.

Ron.

We're very well positioned with our with our global footprint here. So we will be investing alongside.

That that requirement to support our customers. So feeling really good about where things are global footprint here. So we will be investing alongside.

That that requirement to support our customers. So feeling really good about where things are Chris and I think a real transformational opportunity for the automotive industry, but certainly.

A transformational one for Cabot as well and we intend to invest to win on this one.

I appreciate the color and I have one quick follow up on the conversation around.

The supply agreements.

The reinforcement materials business.

So I understand you don't want to talk about the magnitude of the price increases.

Next couple of years, but could you just talk about the magnitude of the price increase for calendar 'twenty. Three these are the the.

The increment that you got for calendar 'twenty, two I'm, just asking because we're coming into 'twenty two back in.

Middle of 'twenty, one there wasn't obviously this crisis in the Ukraine and the things there wasn't.

As an acute.

Sort of concerned about security of supply. So just wondering if that translated into a bigger increment and and.

The deals that you have in place are ready do those I'm, assuming those are global tire player.

Players, but are do they skew towards Europe , <unk> North America any color there I appreciate it thanks.

Sure. So in terms of the agreements we have reached so far.

We are a mix of global tire customers and regional customers and they are a mix of one year end.

Two year agreed.

The agreements.

And as I commented earlier.

On certainly the one year agreements have had price increases embedded in them and in the two year as well price increases in both years.

I think this reflects the the outlook in terms of.

Growth for the tire industry and the supply dynamics and also the.

The preference for regional supply and that certainly as you commented on chris' use more acute.

This year given the.

The dynamic related to related to Russia, but.

The market even prior to that.

Structurally.

Set up for this and it's only become even more.

Even more pronounced here given given the Russia, Ukraine situation. So.

The market remains very.

Very tight and.

And customers are really putting a premium on on supply security and supply reliability and Cabot is definitely distinguished itself.

On that front over the last several years and I think youre seeing that.

Show through here with respect to commentary on magnitude.

Obviously I can't comment on that as we're still in the middle of negotiations, but as we always do in the November call.

We try to.

Wrap up and provide some visibility into that as we as we talk about outlook for 2023, but certainly we feel very good about the outlook for 2023.

Fair enough. Thank you.

Our next question comes from Jeff Zekauskas with Jpmorgan. Your line is open.

Thanks very much.

Can you talk about industry capacity expansions.

Or.

Any major expansions.

Outside of Europe .

<unk> blocks.

Yes.

<unk>.

Jeff you are seeing some capacity investments both in in China.

And India.

And.

What you what you see there in China is.

Typically the bigger players Dia staff more established players I think their their investments are really probably my view part of <unk>.

What will be.

Longer term continued restructuring as the number of players shrink.

In China, the big get bigger.

And the number of players consolidate that's not that's not surprising as the growth rates have moderated in China from sort of double digits for a very very long time down to sort of mid single digit GDP.

That you would see a reordering of.

Of the competitive landscape and so I think you see the bigger players investing in smaller players stood a fall off the table thats, how I would sort of characterize.

What's happening in China in and basically China is for China.

Because.

Yes.

The cost structure to export out of China, given the structurally higher coal tar price. The fact that there is a substantial export.

As well as then transportation costs, let's put supply security to the side for a minute, but just looking at the economics.

China trying to move that into into another region.

Certainly.

<unk> is the highest cost landed capacity. So so I think generally these investments in China for China.

With respect to India.

Have been some investments there as well by announcements I mean by.

<unk> in particular.

And I would say nothing really new here India is.

<unk>.

Large market and.

<unk>.

A leading domestic player there continues to invest some of that some of that product will.

Typically flow into.

Other areas outside of India, mostly into southeast Asia is what we've historically seen and so.

I wouldn't be surprised if that continues to happen, but again the market.

Is is pretty tight and pretty balanced there.

And they did announced an investment in Poland.

<unk> and I think that is.

Probably motivated by.

These.

The Russia situation and but.

On balance what you see is.

A very constructive picture in a pretty balanced picture and that's our that's our view on it.

Thanks for that.

Plant to expand.

Carbon black capacity in the United States.

For Europe over the next several years.

Sort of whats your utilization rate roughly in those areas.

<unk> utilization rates are.

Hi, Jeff so they've been kind of running in the high <unk> or 90 ish percent, which is.

Pretty tight in this.

In this in this industry and so we would expect that.

That that situation to continue with respect to growth capacity.

We certainly have from a capital allocation standpoint.

Priorities around.

Supporting growth in battery materials, and they will they.

It will definitely be.

Investment.

In both Europe and in the U S. As we to support that business over time here for sure and then with respect to reinforcement materials, we want to continue to support our customers.

Growth.

Acquirements.

And so our first.

Focus area in doing that is to drive up what we call OE or overall equipment effectiveness. This is you can think about this as the uptime and the throughput on the on the plants and so we'll continue to push that and there is there is there is further runway to do that and then every plant.

Always has.

Debottleneck opportunities.

Tim tend to be pretty capital efficient and so that would be the next priority area that we would we would we would work on to support our customers' growth.

And then the question of whether or not.

There is.

New units for reinforcement materials in Europe , I think remains to be seen I think we have to.

We would certainly work. These two other areas first and we think that provides good growth runway over the next few years and then we'll see how things.

Settle out from there.

In the quarter your growth in EMEA was 10% does that mean that you exported material and to Europe .

Seems like a very high number to grow from European operation itself.

Yes, we did not improve.

Import from other regions into into Europe , We certainly have.

Our plants running at a very good level in terms of OE.

And as.

As I mentioned, a little bit earlier, we also moved some maintenance into Q4 to support our customers. So.

The on stream factor was was was a little higher in the quarter.

Cause of that because our customers needed.

Needed products. So it's really a combination of those two factors.

Jeff that that.

Allowed us to grow by that 10% number.

Good luck.

Last thing maybe for aircraft.

In.

In the Q.

A discussion of byproduct sales.

Our byproduct sales.

Part sales.

Power to the grid from co churn in the United States.

And maybe and maybe you could discuss that and is that our co gen sales all profit.

So it is exactly what youre, saying not just in sales, but the co. Gen revenue is with the Bionic Matthew is Jeff. So it is that what we call our energy centers that.

Yeah.

That's what that is.

And I think the.

The increase in outcomes from the increase in basically the energy prices around the world that has happened over the last year.

Sales is just the sales numbers. So there is a cost associated with running those which will be embedded.

And our cost profile what is disclosed as.

As required.

GAAP is the same.

This is high margin or low margin.

Relative to pipe in blood.

Yes, no I mean, it moves around quite a bit based on the price of energy. It is I think a good margin and it's a good profit stream for us. So it is these are profitable.

Investments and why we have made them.

So they are good but they do move.

Around quite a bit depending on what either the electricity prices in a given country. The theme that we might sell that as well.

Also connected to either natural gas or oil type rate.

And does that flow through reinforcement materials Leslie.

Most of the reinforcement materials, but plans, where we have also specialty carbons theres a piece that goes to specialty carbons as well.

Okay, great. Thank you so much.

Our next question comes from Josh Spector with UBS. Your line is open.

Yes, hi, thanks for taking the follow up.

I was just curious given all the moving pieces and performance accountants. The battery startup. The outage you guys had last year at your Belgium site. What are you thinking volumes look like in performance comes in your fourth quarter and all of the startups I guess, how much of that carries forward into higher volumes.

Next year.

Yes, So hey, Josh So we will see higher volumes in Q4 across performance chemicals.

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Growth in batteries, but also.

Broadly broadly speaking with respect to the new.

A new plant so as we commented the Xuzhou plant came.

Became operational in the quarter did not really have.

Any material impact on the quarter, it was really commissioning and starting up.

Which.

It takes usually.

Or two to kind of shake it down and get everything working well, which is which is to which is the case now what normally happens in a startup as you go through a ramp.

Where you're getting customers qualified on the new units and so that.

Generally than you what you see here is a ramp over.

Multiple quarters here and we'd expect that pattern to continue it will likely be a little bit of a slower ramp.

This time than our historical experience given the COVID-19.

Situation in China, where just simply.

Moving product around getting customers too.

To adopt.

Product off the new line qualify often new lines.

There's definitely a little more challenging in this dynamic China COVID-19 environment, but we feel really good about that investment of course, it immediately unlocked some capacity in our global network for batteries.

But we also feel really good about how that's going to support growth across the specialty carbons.

Applications, so youll see that begin to ramp up in Q4 and in the in the following quarters Josh.

Okay. Thanks, maybe I could try it a little bit more explicitly I guess, if I look at the formulated solutions and the headwind you had last year and say that kind of normalizes to a two year stack and you've got some growth from these new projects I guess I can calculate volumes being up something in the range of mid teens.

Year on year, and fourth quarter is that realistic or not.

Yes, Josh So I think youre thinking about it right I think on specialty compounds, particularly the year over year Q4 numbers pretty substantial because we did have the one plant offline for most of that quarter. If you think about it sequentially.

Q3 to Q4, I would say the bigger driver in formulated solutions as inkjet because we did have that plant back online this third quarter.

As you saw in the volumes in formulated solutions year on year. They were roughly flat for Q3. So the sequent, it's less of a sequential story, but as youre looking year over year.

Yes, there should be a pretty significant pick up given the plants online.

Okay. That's helpful. Thank you.

There are no further questions I'd like to turn the call back over to Sean Cohen for closing remarks.

Great well. Thank you very much for joining today and for your continued support of Cabot and we look forward to it and we look forward to.

Have a great day. Thank you.

This concludes the program you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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