Earnings Call Transcript - CBT Q3 2022

Operator, Operator

Good day, and welcome to the Third Quarter 2022 Cabot Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Steve Delahunt, Vice President-Investor Relations and Treasurer. You may begin.

Steve Delahunt, Vice President-Investor Relations and Treasurer

Thanks, Michelle. 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 of 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 statement is 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 and in our 10-K for the fiscal year ended September 30, 2021, in our 10-Q for our fiscal quarter end 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. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a 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 of Battery Materials and ESG. Erica will review the company and business segment results, along with some corporate financial details. Following this, Sean will provide some closing comments and open the floor to questions.

Sean Keohane, CEO and President

Thank you, Steve, and good morning, ladies and gentlemen, and welcome to our call today. I'm very pleased with our performance in the quarter as adjusted earnings per share were 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 impacts 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. Central to our purpose and strategy is a commitment to leadership and sustainability. During the quarter, we published our 2021 sustainability report, highlighting our continued progress towards achieving our 2025 sustainability goals. Year-to-date results in Battery Materials have continued to exceed market growth rates. In the third quarter, volumes grew 60% year-over-year, while EBITDA grew approximately 70% 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. Recently, we completed technical upgrades at our Xuzhou 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 carbon capacity in our global network to support the growth of Battery Materials. We are also well underway in the first phase of technical upgrades at our new Tianjin, China site, which is specifically targeted to support the growth of Battery Materials. We expect the first phase of the Battery Materials capacity expansion to come online in mid-fiscal 2024. Furthermore, we have completed the first phase of a carbon nanotube 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 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 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 co-generation units. 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. To that end, we collaborated with one of our suppliers to conduct a successful pilot project to test zero emissions trucking technology. Finally, we’re committed to continuing to develop innovative products that improve performance for our customers by imparting properties that provide sustainability benefits. 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 aim 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 TCFD in our sustainability 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 McLaughlin, Senior Vice President and CFO

Thanks, Sean. I will start by discussing results for the company and then review the segment results. We 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. CapEx 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. The balance sheet remains strong with total liquidity of $1.1 billion and net debt to EBITDA of 1.8x as of June 30. 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 increase of $3 million in the third quarter. Additionally, the strengthening of the U.S. dollar posed 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, reducing from 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 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. Globally, volumes were up 5% in the third quarter as compared to the same period in 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 are 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 2022, 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. Sequentially, 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 few metal oxide product lines, along with 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 lines 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’ve shared previously. We will prioritize high-confidence, high-return investments in our growth businesses, particularly those in battery materials and inkjet packaging. The growth projects we are funding have compelling business cases to grow the company, and we expect that we’ll be able to fund these with our operating cash flow. As we consider the hurdle rate for these types 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 WACC in the first three to five years. The recent acquisitions in China that Sean discussed earlier are good examples. We expect to maintain our industry-leading dividend yield and 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 purchases in the quarter. We believe we can do all this while maintaining a healthy balance sheet and our investment-grade credit rating.

Sean Keohane, CEO and President

Thanks, Erica. I’m 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 $0.15 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 Erica 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 tire customers have begun earlier than is typical this year, as both global and regional customers are focused on supply security. 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 vectors, 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’m 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 chains to ensure supply security. There are no material announced supply-side additions coming online 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 improved the profitability of the business. Such initiatives include changes to the structure of our formulas to eliminate lag and ensure 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 tailwinds of a changing mobility landscape and increasing focus on sustainability in the trend of becoming an ever more connected world through digitalization. As we outlined at our Investor Day in December 2021, we expect strong volume growth across this segment over the next few years. We’ve nurtured a great set of growth vectors that are inflecting, 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. Finally, we’re a leader in ESG and recognized by our customers and shareholders for excellence. Overall, I’m very pleased with our strong execution and the progress against our creating for tomorrow strategy. Thank you very much for joining us today. I will now turn the call over for our question-and-answer session.

Operator, Operator

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

Jeff Zekauskas, Analyst

Thanks very much. You said that you negotiated some multi-year contracts with tire manufacturers. Were price increases over a multi-year period also part of those agreements or were they simply volume commitments?

Sean Keohane, CEO and President

Hi, Jeff. This is Sean. Those were price increases in both years of the agreements where we entered into agreements.

Jeff Zekauskas, Analyst

Were they higher in the second year than in the first, or the same or lower?

Sean Keohane, CEO and President

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, remains the case and the structural dynamics that we’ve talked about remain intact. Again, customers are really placing a premium on supply reliability and leadership in ESG and these factors where I think we really stand out. I think that’s reflected in the agreements that we’ve reached.

Jeff Zekauskas, Analyst

There’s not really very much operating cash flow through the first nine months. Your inventories have moved up quite a bit. So if your receivables, not really payables so much, can you talk about cash flow prospects in the fourth quarter?

Erica McLaughlin, Senior Vice President and CFO

Yes, sure. Hi, Jeff. It’s Erica. You’re right. We’ve had a pretty significant increase in the working capital position. The biggest driver being the higher raw material cost that flowed through both the inventory and the receivables balances. In terms of payables, we have relatively short payment terms with raw material suppliers. So that is not as relevant in those balances. We have seen a significant increase in that. We do have the balance sheet to fund that. This is what we usually do as oil rises, is fund it with more short-term borrowings, which we have done here. I would say as oil now is starting to come down a bit, as we’ve seen in recent weeks, you would see that impact diminish. So if oil stayed flat, you wouldn’t have further increases. If it comes down, we’ll see more of a benefit from the lower values, more immediately in inventory and then usually in the following quarter. We wouldn’t expect to see this significant increase continue unless oil rose a dramatic amount again, but that’s not what’s happening currently.

Jeff Zekauskas, Analyst

Okay. Then lastly, can you talk about volumes in your specialty black business?

Sean Keohane, CEO and President

Yes, I think as we disclosed, volume trends were solid in the quarter, up about 2%. Given the dynamic environment in China around rolling COVID lockdowns, I think that represents a very solid performance. Of course, across this portfolio, it’s quite a diverse group of applications. We’re very well represented both on the application front and also geographically. We’ve performed quite well in the current environment on the volume front.

Jeff Zekauskas, Analyst

Does that 2% include the EV growth?

Erica McLaughlin, Senior Vice President and CFO

Jeff, yes, it does, 2% was performance additives, which includes EV. If we try to isolate specialty carbons, it’s up a bit more like 1% in the quarter.

Jeff Zekauskas, Analyst

Okay, great. Thank you so much.

Josh Spector, Analyst

Yes. Hi. Thanks for taking my question. I just wanted to drill into 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 the third quarter to fourth quarter. I mean, you clearly called out the maintenance impact in the performance business. And you also talked about seasonality. I guess, looking at it, maybe three of the past five years, EBIT has been up sequentially into the fourth quarter, so it’s not readily apparent to me what the seasonality is, or if there’s some exacerbated impact there this year because of some higher selling into Europe. So any additional color would be appreciated. Thanks.

Sean Keohane, CEO and President

Sure. Hi, Josh. In terms of our outlook, we continue to see strong demand as we progress into Q4, especially in reinforcement materials and battery materials. We expect this current trend of strength to continue into Q4. As Erica mentioned in her remarks, we are expecting to incur about $12 million of higher maintenance in Q4 compared to Q3. This is related to annual site turnarounds and maintenance turnarounds. The number is higher than expected due to a conscious decision to push Q3 maintenance into Q4 to help support our customers' volume demand, a significant swing in the maintenance expense. From a volume standpoint, our business typically sees a seasonal impact to volumes in Q4, which is most pronounced in Europe because of summer shutdowns. It’s typical to see extended summer shutdowns at manufacturing plants in Europe. We’ve seen that over a very long period of time and we’re expecting that historical pattern to flow through in Q4. Q1 and Q4 are typically the lower quarters, while Q2 and Q3 are the higher quarters from a volume perspective. Again, that’s the seasonality we expect. The Q1 would be the Christmas seasonality, and then Q4 would be the summer seasonality, which is most pronounced in Europe. Finally, with the tax rate catch-up in Q4, that did increase the Q4 results by about $0.04 on an EPS basis. So when you consider the higher maintenance, the expected volume impact from seasonality, particularly in Europe, and the tax rate catch-up, that sort of gets you squarely there.

Josh Spector, Analyst

Okay. Thanks. That’s really helpful. I mean, just to follow up, I guess on Europe specifically, the 10% volume growth, I mean, it’s been a choppy couple of years, so getting a two-year stack there is maybe a little bit challenging. But would you say you gained share? 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 how sustainable is that into next year if this supply construct stays in place?

Sean Keohane, CEO and President

Yes, Europe is certainly a dynamic environment right now, given the challenges inflicted on the region from the Russian invasion of Ukraine, but volumes grew year-over-year in the Europe region, as you said, 10%. This is due to higher contractual volumes in our 2022 customer agreements, as well as increased spot volumes, as supply remains tight in the region due to the impact from the Russia invasion. The market was structurally balanced prior to that and even more so now. We have picked up some additional volumes here. This connects to the maintenance push-out into Q4 because our customers were looking for volumes. We ran a little harder in the quarter as well. We feel very good about our position in Europe. We think there's a growing preference for regional supply here, which should provide a durable position as we progress into 2023.

Chris Kapsch, Analyst

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 how it is feeding into the EV supply chain. Just curious if the traction is balanced across, I guess, conventional conductive carbons and carbon nanotubes or if it skews towards one or the other. Other than your global footprint, your presumed world-class manufacturing and quality control, is there anything these customers are asking for that isn't currently part of your portfolio or solutions that requires some innovation or other investment to address those needs? Thanks.

Sean Keohane, CEO and President

Yes. Hey Chris, thanks for the question. I’m very pleased with our performance in Battery Materials, and I think we're executing very well against the growth strategy while putting the investment behind this as we called out earlier. The results and our expectation for the full year are running ahead of where we sort of called out on Investor Day. We're executing key customer wins that continue to build momentum. Our belief is that the use of conductive carbon additive blends, which would be blends of conductive carbon black and carbon nanotubes, is the direction the industry is moving in. We talked about a top-five battery manufacturer that has adopted one of our blends. We still see that building momentum here because the optimal battery chemistry needs both long-range and short-range conductivity. Blending conductive carbons and CNTs is the best way to achieve that. Market expectations call for a CAGR of about 25% to 30% for demand through the balance of this decade. We expect to outperform that target. So, the 50-plus percent number we discussed at Investor Day remains our ambition. Customers are focused on building out regional supply chains, particularly with China in a key role at about 50% of the market. We believe that strong supply will be critical as a value proposition for customers, and we are well-positioned with our global footprint. We intend to invest alongside that requirement to support our customers.

Chris Kapsch, Analyst

I appreciate the color. And I have one quick follow-up on the conversation around the supply agreements in the Reinforcement Materials business. I understand you don't want to talk about the magnitude of the price increases in the next couple of years. Could you talk about the magnitude of the price increases for calendar 2023 compared to what you received for calendar 2022? I'm just asking because we're coming into 2022, back in the middle of 2021, there wasn't this crisis in Ukraine and less acute concern about supply security. So just wondering if that translates into a bigger increment? The deals you have in place already, do they skew towards Europe versus North America?

Sean Keohane, CEO and President

Sure. So in terms of the agreements, we reached so far, they are a mix of global tire customers and regional customers, and they are a mix of one-year and two-year agreements. The one-year agreements have price increases embedded, and the two-year ones have price increases in both years. This reflects the outlook for growth in the tire industry, the supply dynamics, and the preference for regional supply. The situation is more acute this year given the Russia dynamic, but even prior to that, the market was set up for this and has become more pronounced. The market remains very tight, and customers are placing a premium on supply security. Cabot has distinguished itself on that front over the years, which is showing through here. As for magnitude, I can't comment on that as we're still in the middle of negotiations. We try to wrap up and provide visibility into that outlook in our November calls, but we feel good about the outlook for 2023.

Jeff Zekauskas, Analyst

Can you talk about industry capacity expansions in India or any major expansions outside of Europe and the United States in the carbon black industry?

Sean Keohane, CEO and President

Yes. So Jeff, you're seeing some capacity investments both in China and India. In China, the bigger and more established players are investing as part of a long-term continuation where the number of players is shrinking, with larger players becoming bigger and smaller ones falling off. The growth rates have moderated in China from double-digits to mid-single digits, which is causing a restructuring. Most investments are primarily for the domestic market. In India, there have been announcements of investments by various players, but nothing really new here. India remains a decent market, with significant investments from domestic firms. Some of that production will flow into other areas outside of India, mainly Southeast Asia. Overall, the market is tight but balanced.

Unidentified Analyst, Analyst

Do you plan to expand carbon black capacity in the United States or Europe over the next several years? And what’s your utilization rate roughly in those areas?

Sean Keohane, CEO and President

Yes, utilization rates are high, running in the high 80s or 90% which is quite tight for this industry. We expect this situation to continue. Regarding growth capacity, we have capital allocation priorities centered around supporting growth in battery materials, with investments planned in both Europe and the U.S. to support that business over time. With respect to Reinforcement Materials, our first focus is to drive up Overall Equipment Effectiveness. There’s further runway to improve uptime and throughput and debottleneck opportunities tend to be capital efficient. Whether or not there will be new units in Europe for Reinforcement Materials remains to be seen, but we will see how things settle out from here.

Unidentified Analyst, Analyst

In the quarter, your growth in EMEA was 10%. Does that mean that you exported material into Europe? That seems like a very high number to grow from European operations themselves?

Sean Keohane, CEO and President

Yes, we did not import from other regions into Europe. We had our plants running effectively, and due to maintenance pushed into Q4, we ran harder in the quarter. That’s the combination of factors that allowed us to achieve that 10% growth.

Unidentified Analyst, Analyst

In the Q, there’s a discussion of byproduct sales. Are byproduct sales in part sales of power to the grid from co-generation in the United States? And maybe you could discuss that. Are co-gen sales all profit?

Erica McLaughlin, Senior Vice President and CFO

So it is exactly what you’re saying: not just the steam sales, but the revenue from co-generation is what the byproduct revenue consists of. The increase in that revenue stems largely from the increase in energy prices around the world. The disclosed sales are reflective of our standards under GAAP. There’s a cost associated with running those, which would be embedded in our cost profile, but overall, these are profitable investments.

Unidentified Analyst, Analyst

Is it high margin or low margin? What’s it like relative to carbon black?

Erica McLaughlin, Senior Vice President and CFO

It moves around quite a bit based on energy price fluctuations, but it remains high margin and is a good profit stream for us, which is why we've made those investments. While it varies based on electricity and steam prices, it's a good contribution overall.

Unidentified Analyst, Analyst

And does that flow through Reinforcement Materials, mostly?

Erica McLaughlin, Senior Vice President and CFO

Mostly Reinforcement Materials, but there's also a piece that benefits Specialty Carbons.

Josh Spector, Analyst

Yes. Hi. Thanks for taking the follow-up. I'm just curious, given all the moving pieces in Performance Chemicals, the battery startup, and the outage you had last year at your Belgium site. What are you thinking volumes look like in Performance Chemicals in your fourth quarter? And of the startups, how much of that carries forward into higher volumes next year?

Sean Keohane, CEO and President

Hi, Josh. So we will see higher volumes in Q4 across Performance Chemicals, continuing our growth in batteries. As for the new plant, as we commented, the Xuzhou plant became operational in the quarter. It did not have a material impact on the quarter; it was mainly for commissioning and starting up which typically takes a month or two for optimization. Generally, we expect to see a ramp over multiple quarters, but it will likely be slower this time due to COVID challenges in China around customer qualifications on the new unit. Overall, we feel very good about the investment, and it will help free up capacity in our global network for batteries as well.

Josh Spector, Analyst

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 get some growth from these new projects. I guess, I can calculate volumes being up something in the range of mid-teens year-on-year in the fourth quarter. Is that realistic or not?

Erica McLaughlin, Senior Vice President and CFO

Yes, Josh. You’re thinking about it correctly. The year-over-year Q4 numbers should show a substantial increase in specialty compounds, particularly because we did have the one plant offline for most of that quarter. Sequentially, performance from inkjet is the main driver, as we did have that plant back online in Q3. The volumes for Formulated Solutions year-over-year were roughly flat for Q3, so expect a significant increase in Q4 because of the plants being online now.

Sean Keohane, CEO and President

Great. Thank you very much for joining today and for your continued support of Cabot. We look forward to a great day. Thank you.

Operator, Operator

This concludes the program. You may now disconnect.