Cabot Corporation (NYSE:CBT) Third Quarter 2022 Earnings Conference Call August 9, 2022 8:00 a. m. m. ET
Participating companies
Steve Delahunt – Vice President of Investor Relations and Treasurer
Sean Keohane – President and Chief Executive Officer
Erica McLaughlin, Senior Vice President and Chief Financial Officer
Conference Call Participants
Jeff Zekauskas – JPMorgan
Josh Spector – UBS
Chris Kapsch – Loop Capital
Operator
Hello and welcome to Cabot’s third quarter 2022 earnings conference call. Right now, all participants are in listen-only mode. Following the presentation of the speakers, there will be a question-and-answer session. As a reminder, this is being recorded.
I would now like to speak with Steve Delahunt, Vice President of Investor Relations and Treasurer. You can get started.
steve delahunt
Thank you, Michelle. Bonjour. Je, welcome to Cabot Corporation’s third quarter earnings convention. With me are Sean Keohane, CEO and President; and Erica McLaughlin, Senior Vice President and Chief Financial Officer.
Last night, we released our fiscal 2022 third quarter results, copies of which are published in the Investor Relations segment of our online page. it will be taken together with the repetition of the call.
During this convention call, we will make forward-looking statements about our expected long-term operating and monetary performance. Each forecast relates to hazards and uncertainties that may cause actual effects to differ materially from those projected in such emails. Data related to those points can be discovered in the press release we issued last night and in our 10-K for the year ended September 30, 2021, in our 10-Q for our fiscal quarter ended March 31, 2022, which are also to be available on the Company’s website.
In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP monetary measures that involve changes in GAAP results. All non-GAAP monetary measures referenced in this call are reconciled with the maximum GAAP monetary measure directly comparable 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 floor over to Sean, who will talk about the highlights of the third quarter and provide an update on our progress in the battery fabric and ESG spaces. Erica will review the company’s and industry results, as well as some of the company’s monetary details. Sean will then provide some closing comments and open the ground for questions. Are?
Sean Keohane
Thank you, Steve, good morning, girls and gentlemen, and welcome to our call today. I am very pleased with our functionality in the quarter, as adjusted earnings are consistent with a consistent percentage exceeding 28% at a record $1. 73 compared to the same consistent with fiscal 2021. This record point of functionality reflects the resilience of our commercial and end markets, our focus on execution, and the continued momentum of our strong expansion vectors. As a result, our team was able to navigate dynamic market conditions. , the effects of pandemic shutdowns in China, consistent with persistent logistical constraints, and emerging power and crude costs consistent with costs.
Results across our business were very strong, with consecutive record quarterly functionality in the reinforcing fabrics segment, where EBIT increased by up to 33% year-on-year. In the Performance Chemicals segment, we recorded a year-on-year EBIT expansion of 17%, thanks to effective value execution and strategic moves to enrich the product range.
Battery Materials continues to outperform the market, thanks to strong execution and continuous visitor penetration. And finally, at the core of our goal and strategy is a commitment to leadership and sustainability. And in the quarter, we released our 2021 Sustainability Report, highlighting our continued progress toward achieving our 2025 Sustainability Goals.
Since the beginning of the year, battery materials’ effects have continued to outpace market expansion rates. In the third quarter, volumes increased by up to 60% year-on-year, while EBITDA increased by approximately 70% over the same period. expand our relationships with the world’s largest battery brands and generate significant momentum outside the Asia region as our global consumers build factories in Europe and the United States at $35 million. The midpoint of this diversity equates to a one hundred percent year-over-year EBITDA expansion, driven through the immediate expansion of the electric vehicle market and continued momentum in visitor adoption of our products.
The expansion of Battery Materials is aided by strategic capability additions that are critical to meeting the volume expansion requirements of our visitors. Special carbon production network to meet visitor demand in a wide variety of programs while also releasing more conductive carbon capacity into our global network to help the expansion of Battery Materials.
We are also quite complex in the first phase of technical upgrades of our new site in Tianjin, China, which in particular aims at the expansion of Battery Materials. We expect the first phase of Battery Materials’ capacity expansion to be launched in mid-2024. Finally, we completed the first phase of an expansion of carbon nanotube dispersal capacity at our plant in Zhuhai, China, in July. These investments will give us a combined capacity position that will allow us to continue to grow at expansion rates above those of the market.
As we highlighted in the last quarter, over the next 3 years, we plan to triple our capacity in our battery structure portfolio to ensure we are well placed to capitalize on the electric vehicle transformation opportunity.
Now let’s move on to an update on the ESG front. This quarter, we released our annual Sustainability Report, which reinforces our commitment to transparency and progress. This year’s report includes advanced data and reaffirms our commitment to the United Nations Global Compact. Our Sustainability Report highlights the achievements and progress we have made. towards our 2025 Sustainability Goals and analyses our purpose of achieving our net ambition 0 by 2050. The report describes the following notable achievements.
We are achieving 91% of our 2025 greenhouse fuel intensity target through the end of 2021 and are benchmarking to set interim greenhouse fuel relief targets to help our ambition to achieve net zero emissions by 2050. we made significant progress against our 2025 power target of reaching a power ratio of 157% through the successful operation of our fleet of cogeneration units. By capturing and exporting excess energy from our operations, we help nearby businesses and communities get white power. We see a wonderful future in the evolution of our transportation fleet towards electric cars and other low-carbon cars. And to that end, we’ve worked with one of our suppliers to complete a pilot assignment to verify zero-emission truck technology. And finally, we are committed to continuing to expand cutting-edge products that enhance functionality for our consumers by offering them homes that benefit from sustainability. In the last year, one hundred percent of our new products have been evaluated and rated for their sustainability benefits.
We have long been committed to providing comprehensive reporting on our sustainability functionality and aim to provide transparent data as a tool for engagement with our customers, shareholders, workers and communities. To this end, we have incorporated weather situation and hazard research and opportunity matrix, which we have completed according to 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 on our strategic priorities. Our products enable transformation towards a more sustainable world and our entire global team is excited about the opportunities we have had.
I will now turn the call to Erica to talk about the monetary and functionality effects of the quarter in more detail. Erica?
erica mclaughlin
Thank you, Sean. I will start by discussing the effects of the company and then review the effects of the segment. We recorded record adjusted EPS of $1. 73 in the third quarter, up 28% from the third quarter of fiscal 2021, driven by record reinforcement materials effects and strong earnings from Performance Chemicals.
Discretionary loose cash flow for the quarter was $135 million, driven by strong EBITDA and we ended the quarter with $208 million in cash. Capital expenditures for the quarter were $50 million and since the beginning of the year are $121 million. We expect capital expenditures for the full year between $200 million and $225 million. The balance sheet remains strong with total money of $1. 1 billion and net debt relative to EBITDA of 1. 8x as of June 30. During the quarter, we issued a $400 million 10-year bond with the proceeds widely used to pay off a maturing $350 million bond, higher interest rates affecting our bond refinancing and our short-term advertising role. 3rd quarter.
In addition, the strengthening of the US dollar affected trade EBIT in the quarter through $8 million compared to last year, due to the unfavorable effect on the conversion of foreign earnings to US dollars. The main driving force behind this progression has been the weakening of the euro and yen against the US dollar. The operating tax rate to date was 26%, which is now our planned operating rate for fiscal 2022. Our operating tax rate in the third quarter was 24%, which included taking advantage of the expected operating tax rate of 27% to 26%.
Now let’s move on to the segment results. During the third quarter, EBIT for reinforcing fabrics increased to $28 million compared to the same time last year. The buildup is basically due to improvement in unit margins thanks to higher costs in our calendar year 2022 visitor agreements and higher volumes in all regions. This was partially offset by higher ongoing costs related to higher profits and the unfavorable effect of foreign currency fluctuations.
Overall, volumes increased by 5% in the third quarter compared to the same time last year, driven by an expansion of 6% in the Americas, 10% in Europe and 1% in Asia, as global demand for spare tyres remained resilient. Volumes in Europe and the Americas are largely due to increased demand for our products, our exclusive position in Mexico and source adjustment in the European market.
For the fourth quarter of fiscal 2022, we expect Reinforcement Materials to enjoy significant year-over-year EBIT expansion due to the effect of our 2022 visitor agreements and significant volumes across all regions. Sequentially, we will expect EBIT to decline largely due to the overall seasonal effect on maintenance activities and volumes in Europe. We expect maintenance expenses to increase sequentially to approximately $5 million in the fourth quarter.
EBIT increased to $9 million in the third quarter of fiscal year compared to the same era of fiscal 2021. The buildup is due to higher unit margins due to advanced costs and product diversity in our specialty coals and some steel oxide product lines and higher volumes. In battery curtains. We’ve seen an impressive 60% volume expansion, as Sean noted, in products sold for battery-powered curtain applications, as we continue to see demand-driven expansion for improvements in electric vehicle construction. These benefits were partially offset by higher constant costs related to building up profits and adverse effects have an effect on foreign currency fluctuations.
For the fourth quarter, we expect strong year-over-year EBIT expansion, driven by higher volumes and strong unit margins. offset through overall seasonal decreases in volumes in our specialty coal product line and higher grades of maintenance expenses. We expect maintenance expenses to increase sequentially to approximately $7 million in the fourth quarter.
Now let’s move on to our capital allocation priorities for the future. We remain committed to the framework we shared above. We will prioritize high-trust, high-return investments in our expansion businesses, namely battery fabrics and inkjet packaging. The expansion projects the fund has compelling business instances to grow the business and we look forward to financing them with our operating cash flow.
When we think about the minimum rate of return for those types of projects, we usually fund projects with an IRR of 20% or more. We are also looking to make attractive complementary acquisitions. The focus will be on spaces that enhance functionality. of our existing businesses and our expansion drivers. Our investment criteria are opportunities for expansion and improvement of margins that accumulate and our competitive positions in our business and where we expect to see an ROIC above WACC in the first 3 to five years.
The recent acquisitions in China that Sean discussed earlier are clever examples of this. We expect to maintain the most productive dividend yield in our industry and plan to continue buying percentages opportunistically. During the third quarter, we did so with $21 million in dividends paid to shareholders and $13 million in percentage purchases during the quarter. We can do all of this while maintaining a healthy balance sheet and our high-quality credit rating.
Now I will pass the call on to Sean.
Sean Keohane
Thank you, Erica. I am incredibly pleased with a record quarter consistent with consistent effects in a challenging environment. Based on this functionality and our outlook for the fourth quarter, we are adjusting our full-year adjusted earnings consistently with a consistent percentage outlook to diversity. from $6. 10 to $6. 20, which is the most reasonable of our guide above from $5. 80 to $6. 20 and $0. 15 at the midpoint.
In fact, this is an exceptional functionality for our company and reflects our strong commercial and operational execution and the price of the possible strategic choices we have made in recent years. In the fourth quarter, we expect our strong functionality to continue. The effects will also reflect classic seasonality and superior maintenance, as Erica noted, as we shifted response times from the third quarter to the fourth quarter to meet the volume needs of our consumers. this year, as global and regional consumers focus on security of supply. This has led us to engage in agreements with several of those global and regional consumers, some for several years, that respond to the inflationary environment and have costs that meet our expectations.
I’m still very excited about the dynamics of our expansion drives, especially in the battery structures. We remain on track to increase volumes through double the market rate and the midpoint of our full-year 2022 EBITDA outlook for battery structures represents one year – a year-on-year growth of approximately 100%. At the same time, we are making investments in earning capacity as the automotive industry experiences the transformative shift toward electric vehicles.
Let’s move on to the long term. I am excited about the positioning of our business and the market outlook. Our reinforcement materials business is structurally more powerful and is expected to be less cyclical due to the following factors. The migration of tires to China over the past 25 years has been very disruptive. for the entire price chain, however this migration has stabilized and we are in a new general in terms of regional tire production.
Our business style was based on production and promotion in the region. This is based on economic fundamentals, but even more sustainable given our customers’ growing preference for regional supply chains to ensure source safety. There are no vital editions announced on the source side in mature regions and the source/demand dynamics are very balanced. In fact, it is only narrowing, given the Russian invasion of Ukraine.
Beyond this structural market dynamic, we have focused with laser on a wide diversity of projects of commercial and operational excellence in recent years that have structurally affected the profitability of the company. Such projects come with structural adjustments to our formulas to eliminate delays and ensure greater adjustment between our costs, energy recovery and performance investments to the economy and reduce emissions.
A radical overhaul in the plant’s operational functionality and strong business practices to ensure we remain our consumers by strengthening the carbon spouse of choice as we give them a price and are paid for that price. Our portfolio of functional chemicals benefits from an attractive business design and is poised for expansion driven by new products and supported by the compelling macroeconomic winds of a changing mobility landscape and the developing focus on sustainability in the trend towards becoming an increasingly connected world through digitalization.
As we highlighted our Investor Day in December 2021, we expect strong volume expansion in this segment over the next few years. We’ve fostered a giant set of changing expansion drivers, especially battery materials, and we’re making an investment behind this. transformative trend to win. We expect a significant discretionary loose cash flow to fund hot expansion investments and return capital to shareholders.
Finally, we are leaders in ESG and identified through our customers and shareholders for our excellence. Overall, I am very satisfied with our execution and progress in our artistic strategy for tomorrow.
Thank you so much for joining us today. And now I’ll pass the call for our question-and-answer session.
Q&A session
Operator
[Operator Instructions] Our first comes from JpMorgan’s Jeff Zekauskas. Your line is open.
jeff zekauskas
Thank you so much. He said he had negotiated multi-year contracts with tyre brands and that increases in value during a multi-year era were also part of them: were those agreements or were they just volume commitments?
Sean Keohane
Hi Jeff. I’m Sean. Il were worth the two-year increases of the agreements in which we made their agreements.
jeff zekauskas
Were they higher in the year of the time than in the first year or equivalent or lower?
Sean Keohane
This is competitive information, Jeff, I can’t divulge it. But what I can say is that the environment that puts the emphasis on source security is still the case and the structural dynamic that we’ve been talking about remains intact and again, consumers We place a lot of importance on source reliability and leadership and ESG and the points where I think we excel. And I think that’s reflected in the agreements that we’ve made.
jeff zekauskas
There is rarely much flow of operating money in the first nine months. His stock has gone up a bit. So if your accounts receivable are actually payable, can you tell us about the fourth quarter cash flow outlook?
Erica Mc Laughlin
Yes, of course. Hi Jeff. is Erica.
jeff zekauskas
Hi.
Erica Mc Laughlin
You are right. We have had significant construction in the current capital position. The most important thing is the top charge of the raw curtains, which is reflected in inventories and debt balances. In terms of debts, we have relatively short payment terms with raw curtain suppliers. Therefore, it also does not reside in the balances of the units. So we’ve noticed a pretty big buildup on that. We have the balance sheet to fund that. And that’s what we do regularly when oil goes up, finance it with more short-term loans, which is what we’ve done here.
I would say that as oil starts to go down a bit, as we’ve noticed over the past few weeks, you’ll see it have an effect on transmission. So if oil stayed flat, it would have no additional increases. it’s happening, we’re going to see more profits from declining stocks, more without delay in stock, and then regularly in the next quarter. Therefore, as costs fall, the flow through the stock is reflected in the P.
jeff zekauskas
It is ok. Finally, can you communicate about volumes in your black company?
Sean Keohane
Yes, I think, as we revealed, I think volume trends were forged in the quarter, with an increase of around 2%. So, I think given the dynamic environment in China around some kind of ongoing COVID lockdown, I think it’s a very strong performance. Of course, in this portfolio, it is a fairly varied portfolio of applications. And we are very well represented both on the application front and geographically. volume terms.
jeff zekauskas
Does this 2% come with the expansion of electric vehicles?
Erica Mc Laughlin
Jeff, yes, it is, 2% were functionality additives, which includes electric vehicles if we’re looking to isolate special carbons, it’s a little over 1% in the quarter.
jeff zekauskas
It is ok! Super. Thank you so much.
Operator
The next one comes from Josh Spector from UBS. Su line is open.
Josh Spector
Yes. Hello. Thank you for answering my question. I just wanted to dig into the recommendation for the fourth quarter and ask if you can do a little more detail on your sequential bridge from the third quarter to the fourth quarter. I mean, it’s clarified the influence of maintenance on the entertainment business. And he also talked about seasonality, I guess, I look at it, maybe 3 of the last five years, EBIT increased sequentially in the fourth. quarter, so I don’t see exactly what the seasonality is, or if there is an exacerbated effect in this year due to an increase in sales in Europe. Therefore, any additional color would be appreciated. Thank you.
Sean Keohane
Of course. So we continue: in terms of outlook, we continue to see strong demand as we move into the fourth quarter, namely in booster fabrics and battery fabrics. And again, we expect this current trend of strength to continue into the fourth quarter. As Erica indicated in her comments, we expect to incur approximately $12 million in additional maintenance in the fourth quarter compared to the third quarter. This is similar to annual site reviews, maintenance reviews. The amount is higher than expected. and this may be just a more typical profile due to a conscious resolution to drive maintenance from the third quarter to the fourth quarter to meet our customers’ call volume desires. So, a conscious resolution there, but it’s a pretty big variation in maintenance expenses.
And then, in terms of trade volume, our business sometimes sees a seasonal effect on volumes in the fourth quarter. It is more pronounced in Europe due to summer closures. You probably know that it’s pretty typical to see a longer summer. And we’ve noticed that over a very, very long period of time and we expect that old trend to materialize in the fourth quarter. So, a seasonal adjustment up to volumes. What you normally see from a volume perspective, Josh, is that our Q1 and Q4 are the lowest quarters and Q2 and Q3 are the highest quarters from a volume perspective. And again, it’s seasonality. Q1 would be Christmas seasonality, then Q4 would be summer seasonality, which is the highest pronounced in Europe. So, this old trend is what we expect to see here in the quarter.
I guess the other point I can point out is that with the tax rate catching up in the fourth quarter, the fourth quarter effects increased to around $0. 04 based on EPS. So when you look at the higher maintenance, the old expected has an effect on the volume of seasonality, especially in Europe and the tax rate update, I think that gets you there.
Josh Spector
It is ok. Thanks. It really is useful. And I mean, just to go on, I guess in Europe in particular, the 10% volume growth, I mean, it’s been a hectic few years, so getting a two-year build-up, maybe it’s a little difficult. But I guess, would you say you earned shares?Are you supplying more of your other regions to Europe?I think what drove this volume force and how sustainable is it until next year if this source structure remains in place?
Sean Keohane
Yes, so Europe is a dynamic environment at the moment, given the demanding situations inflicted in the region by Russia’s invasion of Ukraine, however, volumes have increased year after year in the Europe region, as you said, by 10%. And this is due to higher contract volumes in our 2022 visitor agreements, as well as higher spot volumes, as the source remains limited in the region given the influence of the Russian invasion. As you know, structurally it was a very balanced market before that and even more so now. So we picked up a few more volumes ici. And this is also similar to the maintenance increase in the fourth quarter as our consumers were looking for volumes. We also ran a bit more in the quarter. So I believe our position, we feel very smart in Europe.
We have a developing preference for regional sourcing here, and it is given an even higher priority. Therefore, consumers are looking to secure this regional supply. And so this position deserves to be quite sustainable as we move into 2023.
unidentified analyst
OK thanks.
Operator
The next one comes from Chris Kapsch of Loop Capital. Su line is open.
chris kapsch
Hey HELLO. I was hoping to get a little more detail about the battery materials business. I wonder if you can further characterize the traction momentum of the ad you see there that fuels the electric vehicle supply chain. I’m just curious if the traction is balanced between, I suppose, traditional carbon conductors and carbon nanotubes, or is it biased towards one or the other?And then just one component of its global footprint, its supposed world-class production and quality control and all that. I wonder if there is any demand or the wishes of consumers that are not lately part of your portfolio or answers, that they are asking for and that may require innovation or other investment to meet the wishes?Thank you.
Sean Keohane
Yes. Hi Chris, thanks for the question. So, certainly, I’m very satisfied with our functionality in battery materials, and I think we’re executing the expansion strategy very, very well, and we’re putting the investment that, as we call it in our comments here, to win as automotive business transitions. . So we’re really satisfied with the execution here. The effects and our expectations for the full year are ahead of what we announced on Investor Day. So, from the beginning here, we are a little ahead of the curve, as a key visitor earnings continue to grow here. I mean, our confidence is that the use of mixtures of conductive carbon additives. So those would be mixtures of carbon black conductor and carbon nanotubes, which is the direction the industry is moving.
And you may not forget that last quarter we talked about one of the five most sensible battery brands that followed one of our mixes. And we believe this portfolio is unique among conductive carbon additive brands and we see it gaining momentum. here because the optimal chemistry of batteries actually requires conductivity at long and short range. And the combination of conductive carbons and CNT is the most productive way to achieve this.
So I think the continuous traction on that front is great. In a way, that’s the core of our strategy. That’s one of the reasons we bought the CNT business in China and I think it’s going well. While we wait here, of course, market expectations are for a fairly giant CAGR this decade, a compound annual demand expansion rate of 25% to 30%.
In fact, we’re still hoping to get through that. Therefore, the figure of more than 50% that we talked about on Investor Day is still our goal. I think lately consumers are very focused on creating regional supply chains. playing a key role with approximately 50% of the market. But there are factories that come into operation in Europe and are structured and come to the United States, so it will be built over time. And having a low source, I think, will be an essential component of the price proposal for consumers. And I think on that front, we’re very well placed with our global footprint here.
Therefore, we will invest in this requirement for our customers. So, I feel really smart where things are printed here. Therefore, we will invest in this requirement for our customers. So I feel really smart where things are, Chris. And I think this is a real transformational opportunity for the automotive industry, but also for Cabot, and we intend to invest to win it.
chris kapsch
I appreciate color. And I have a quick follow-up of the verbal exchange on the origin agreements in the reinforcement fabric sector. Therefore, I perceive that it is not necessary for me to communicate the magnitude of the value increases in the next two years. Communicate about the magnitude of the accumulated value for the 2023 calendar compared to the increase you were given for the 2022 calendar. I just ask because we are coming in 2022, in the middle of 2021, obviously there is not, this crisis in Ukraine and stuff, there is no kind of fear about the safety of the source. So, I wonder if this has translated into a bigger construction.
And the agreements that they already have in force, are. . . I guess they’re global tire players, but are they oriented toward Europe rather than North America?Any color out there, I appreciate it. Thank you.
Sean Keohane
Of course. So in terms of the deals we’ve made so far, it’s a combination of global tire consumers and regional consumers and it’s a combination of one- and two-year deals. And as I said before, in fact one-year agreements. they come with value increases as well as two-year value increases over the two years. And I think this reflects the expansion of customers in the tire industry and the dynamics of the tire supply and also the preference for the regional tire offering. And that in fact, as you said, Chris, is sharper this year, given the Russia-like dynamic. But the market, even before that, was structurally prepared for this and this is only expanding here given the Russian-Ukrainian situation.
As a result, the market remains very tight and consumers attach great importance to the security and reliability of supply. And Cabot has definitely excelled on this front in recent years. And I think you see this exhibit around here. Obviously, I can’t comment on that because we’re still in the middle of negotiations. But as we did during the November call, we tried to conclude and give some visibility to this when we communicate the outlook for 2023. But certainly, we are very happy with the outlook for 2023.
chris kapsch
That’s fine with me. Thank you.
Operator
The next one comes from Jeff Zekauskas with JP Morgan. Su line is open.
jeff zekauskas
Can you talk about the expansion of industry capacity in India?Or the primary outdoor expansions in Europe and the United States in carbon black?
Sean Keohane
So, Jeff, you see capacity investments in China and India. And what you see there in China are regularly the biggest players, the more established players, I think their investments are probably, in my opinion, a component of what will be a no-stop the long-term restructuring as the number of players in China decreases, the big one grows and the number of players consolidates. This is not surprising, as expansion rates have moderated in China, going from a double-digit rate type for a long, long time to some kind of single-digit average GDP, which would lead to a reorganization of the competitive landscape. And I think you’re seeing the bigger players investing in the smaller players fall off the table. That’s how I would describe what’s happening in China.
And basically, China is for China because the design of charges to export out of China given the structurally higher value of coal tar, the fact that there is a very extensive export VAT, as well as transportation charges, let’s leave source security aside for a minute. But just take a look at the economy looking to move this to another region, this is in fact the estimated maximum landing capacity. So I think those investments in China go to China.
As far as India is concerned, there have been investments there also through announcements, I mean, through [indistinguishable] in particular. India is a fairly giant market and [indistinguishable] being a leading domestic player, it continues to invest. Part of this product will be regularly routed to other regions outside of India, basically Southeast Asia, which we have seen historically. So, I wouldn’t be surprised if this continues to happen. But again, the market there is tight and quite balanced.
They announced an investment in Poland [indistinguishable], and I think it’s probably motivated by the scenario in Russia. But overall, I think what you’re seeing is a very constructive symbol and a balanced picture, and that’s our view. in that one.
unidentified analyst
Do you plan to expand carbon black production in the U. S. ?U. S. or Europe over the next few years? And, in a way, what is your usage rate in those areas?
Sean Keohane
Yes. Usage rates are high, Jeff. So they worked at 80 or 90%, which is pretty tight in this industry. So, we expect this scenario to continue. In terms of expandability, we actually have, from the point of view of capital allocation, the priorities around the expansion of battery materials. And, in fact, there will be investments in Europe and the United States, because we will actually have this business over time here.
And then, with regard to reinforcement materials, we must continue with the expansion desires of our customers. So our first domain of interest in doing that is building what we call OEE or the overall power of the team. It’s the — you can think about it, it’s the uptime and the speeds of the factories. And we’ll continue to push that and there are more avenues to do that.
And then each and every factory has decongestion opportunities that tend to be quite effective in terms of capital. And that would be the next priority domain we would paint to help our customers expand. And then the question of whether or not, there are new sets for reinforcement materials in Europe, I think remains to be seen. I think we want to see: in fact, we would first paint those other two spaces, and we think this will provide a smart street for expansion. in the coming years. And then let’s see how things work from there.
unidentified analyst
During the quarter, its expansion in EMEA 10%. Does this mean that you have exported curtains to Europe?Does this turn out to be a very high figure to extract from European operations themselves?
Sean Keohane
Yes, we haven’t imported other regions to Europa. De done, our stuff is operating at a very smart point in terms of OEE. And as I mentioned earlier, we also moved some of the maintenance to the fourth quarter to help our consumers. what’s online was a little higher in the quarter because of that, because our consumers needed products. So it’s actually a combination of those two Jeff factors that allowed us to grow from that 10% figure.
unidentified analyst
And finally, for Erica. In the Q, we talk about the sales of by-products. Are by-product sales a component of cogeneration grid-based electric power sales in the United States?and are cogen sales all lucrative?
Erica Mc Laughlin
So that’s precisely what you’re saying, not just steam sales, but the profit you take is what the profit is through the product, Jeff. That’s what we call our centers of power. And I think the construction in that comes from the building. Increase in energy charges around the world that has happened. In the last year, sales are just the amount of sales. Therefore, there is a position related to your operation, which would be incorporated into our position profile. But what is disclosed as required through GAAP is sales.
unidentified analyst
Is it a higher margin or a low margin?What is carbon black?
Erica Mc Laughlin
Sí. No, I mean, moves a little bit depending on the value of the energy. That’s, I think, a smart margin and it’s a smart flow of profits for us. Those are beneficial investments and that’s why we made them. So they’re smart, but they move a little bit, depending on the value of electric power in a given country, the value of steam that we can also sell. And some are also connected to a value like fuel or vegetable oil.
unidentified analyst
And does this basically involve reinforcing materials?
Erica Mc Laughlin
Mainly reinforcing materials, but factories where we also have special coals, there is a component that also goes to special coals.
unidentified analyst
It is ok! Super. Thank you so much.
Operator
The next one comes from Josh Spector from UBS. Su line is open.
Josh Spector
Yes. Hello. Thank you for following up. I’m just curious, I provide all the moving parts of Performance Chems, the battery start, the breakdown it had last year on its Belgian site. What do you think Performance Chems volumes will be?Do you look like in your fourth trimester? And among startups, I guess, how much of that will affect the top volumes next year?
Sean Keohane
Yes, hello, Josh. We will see higher volumes in the fourth quarter in performance Chemicals’ continued expansion into batteries, but also in general. As for the new plant, as we discussed, the Xuzhou plants have come into operation during the quarter. , didn’t actually have a curtain effect in the quarter. It was actually about commissioning and commissioning, which often takes a month or two to fix and everything works fine, which it does.
Now, what happens in a startup is that it goes through a ramp where it gets qualified consumers in the new units. And usually what you’re seeing is a ramp for several quarters here and we expect that trend to continue. Chances are this time it will be a bit slower as our old experience, given the COVID scenario in China, which simply moves the product to catch consumers to adopt the product from the new line, qualifying for the new line is a bit more complicated. in this dynamic COVID environment in China.
But we are very happy with this investment. Of course, this will immediately release some capacity in our global battery network. But we are also very satisfied with the way this will help the expansion in the application of special coals. So you’ll see that it will start to boost in the fourth quarter. and in the following quarters, Josh.
Josh Spector
Ok, thank you. Maybe I can review a little more explicitly, I guess. I’m in the answers formulated and the headwind that you had last year and I say that you’re normalizing to a two-year stack, and you’re getting some expansion out of those new projects. I guess I can calculate that volumes overlook anything in the year-on-year diversity of mid-adolescence in the fourth trimester. Is it realistic or not?
Erica Mc Laughlin
So I think he’s thinking about it, no. I think the special compounds, especially the fourth quarter numbers year over year, are quite vital because we had the only plant out of service during the peak of this quarter. If you think about it sequentially from the third quarter to the fourth, I would say that the biggest driving force of Formulated Solutions is inkjet, because we put this factory back into operation this third quarter. And as you saw in Formulad Solutions’ year-over-year volumes, they were pretty flat for the third quarter. So, it’s a less sequential story, but since you’re looking from year to year, yes, there will be a pretty big recovery considering plants online.
Josh Spector
It is ok. It’s useful. Thank you.
Operator
There are no additional questions. I would like to call Sean Keohane for his final comments.
Sean Keohane
Super. Eh well, thank you so much for joining today and for your continuation of Cabot and we hope you have a wonderful day. Thank you.
Operator
This concludes the program. You can now log out.