Cabot Corp (CBT) Q3 2021 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Third Quarter Cabot Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Steve Delahunt, Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Jerome, and good morning. I'd like to welcome you to the Cabot Corporation's 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 year 2021, copies of which are posted in the Investor Relations section of our website. The slide deck that accompanies this call is also available in 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 would cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Forward-looking Statements in the press release we issued last night and in our annual report on Form 10-K for the fiscal year ended September 30, 2020, and in subsequent filings we make with the SEC, all of 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 presented should not be considered to be an alternative to financial measures required by GAAP. 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 Investor Relations section of our website. I will now turn the call over to Sean Keohane, who will discuss the key highlights of the company's performance. Erica McLaughlin will review the business segment and corporate financial details. Following this, Sean will provide closing comments and open the floor to questions. Sean?

Thank you, Steve, and good morning, ladies and gentlemen, and welcome to our third quarter 2021 earnings conference call. I'm very pleased with our results this quarter, as we generated adjusted earnings per share of $1.35. This marks the second strongest quarterly earnings performance in the company's history. Demand across all businesses was strong, and we continue to leverage our global network of plants to serve our customers while managing the persistent challenges related to the COVID-19 pandemic and disruptions in international transportation and logistics markets. I'm very proud of the entire Cabot team for demonstrating great operating discipline across all aspects of our business and for their resilience in this very dynamic environment. Our culture of teamwork and our commitment to commercial and operational excellence serves as the foundation for our strong performance. While raw material markets remained somewhat volatile during the quarter, we were successful in implementing price increases to maintain robust margins. I'm also very excited about our continued progress across our portfolio of targeted growth initiatives, particularly in the battery application. I believe the battery market presents one of the most compelling new growth opportunities for the materials sector, and our strategic investments over the last several years have positioned Cabot very well to capitalize on this unique opportunity. Our Energy Materials business continued to build strong momentum in the quarter as we achieved qualification milestones and began commercial sales to an additional two of the global electric vehicle battery leaders. The top 8 EV battery producers represent approximately 90% of the industry, and we now have commercial sales to 6 of these top 8 manufacturers. In addition, we are supplying conductive carbon additives to the top 5 EV battery producers in China. The Cabot value proposition to the battery market is based on three factors: first, the breadth of our product line of conductive carbon additives, including conductive carbon blacks, carbon nanotubes, carbon nanostructures and blends of conductive carbon additives. Second, the depth of our application knowledge and our global research and development centers allow us to tailor products for our customers and respond quickly in this fast-changing environment. And finally, our global footprint of manufacturing plants and our sales and technical service support. As battery producers expand their manufacturing footprint outside of Asia to support auto OEMs with robust regional supply chains, we see the value of our global footprint becoming even more important for our customers. We believe these capabilities represent a compelling differentiator for Cabot and position our company as a key supplier and innovator to the leading battery manufacturers. Transitioning now to cash. Operating cash flow in the quarter was $71 million and $157 million year-to-date. While EBITDA generation has been very strong, conversion to operating cash has been impacted somewhat by higher oil prices, which contributed to over $100 million of the net working capital increase year-to-date. While oil price volatility can create short-term fluctuations in working capital balances, history has shown that over the long term, oil-driven working capital fluctuations tend to balance out. Given the size and strength of our balance sheet, we can easily absorb these changes in working capital without impacting our long-term capital allocation priorities. As oil prices stabilize, we expect to see a greater level of conversion of our strong EBITDA to operating cash flow. The strength of the balance sheet and our cash flow is reflected in our investment-grade credit rating. This has long been a priority for us, and we remain committed to this posture. We recently closed on a new $1 billion ESG-linked credit facility, which replaces our existing credit facility that was due to mature in October of 2022. The facility includes two ESG metrics centered around our annual sulfur dioxide and nitrogen oxides emission reduction goals. This agreement represents one of the first ESG-linked credit facilities in the chemical industry and further reinforces our commitment to sustainability. The facility matures in August of 2026, with key terms largely the same as our prior facility. In addition, during the quarter, we released our 2020 sustainability report, which provides enhanced transparency on our environmental, social and governance priorities. ESG leadership is central to our strategy, and the interactive digital report summarizes our progress and accomplishments. Overall, we had a very strong quarter in terms of financial performance and progress against strategic objectives. And I'll now turn the call over to Erica to discuss the financial results of the quarter in more detail. Erica?

Thanks, Sean. I will start by discussing results in the Reinforcement Materials segment. The Reinforcement Materials segment delivered strong operating results with EBIT of $85 million, which is up $90 million compared to the same quarter in fiscal 2020. The increase is primarily due to significantly higher volumes across all regions and improved unit margins, driven by favorable pricing in the Asia region. Globally, volumes were up 71% in the third quarter as compared to the same period of the prior year due to 146% growth in the Americas, a 100% increase in Europe, and up 30% in Asia. Higher volumes were driven by key end market demand that continued to recover from COVID-related impacts in fiscal 2020. Looking to the fourth quarter, we expect the volumes to remain strong. Fixed costs are expected to be sequentially higher due to the timing of planned plant maintenance. Given the very strong demand in the last few quarters and limited inventory in most supply chains, our focus has been on supporting our customers' product needs. As a result, we have scheduled a higher-than-normal amount of maintenance in the upcoming quarter. Another factor that will affect our fourth quarter is the impact of an outage at a plant in the U.S. due to an equipment failure on our recently installed air pollution control system. Cabot completed this project on schedule according to the consent decree. However, controlling this level of SOx and NOx emissions is new for the carbon black industry in the U.S. With the start-up of any new technology, there can be unexpected issues, and this is the situation we currently face. We anticipate this site will be down for about one month to repair the equipment. In addition, we expect margins to moderate from the third fiscal quarter due to higher feedstock differentials. We anticipate this differential impact will be approximately $5 million in the fourth quarter, and we expect to recover this impact in the first quarter of fiscal 2022 through our DCA mechanism. Now turning to Performance Chemicals. EBIT increased by $33 million as compared to the third fiscal quarter of 2020, primarily due to strong volumes across this segment and improved product mix. The stronger product mix was driven by an increase in sales into automotive applications in our Specialty Carbons and Specialty Compounds product line. Year-over-year volumes increased by 17% in Performance Additives and 20% in Formulated Solutions, driven by higher volumes across all our product lines, underpinned by higher demand levels in our key end markets. Looking ahead to the fourth quarter of fiscal 2021, we expect overall volumes to remain strong with some impact from lower seasonal demand. We anticipate higher costs from planned turnarounds and an unfavorable impact from planned outages. The first outage is what I just mentioned at a plant in the U.S. This plant supplies both the Reinforcement Materials segment and the Performance Chemicals segment. Another planned outage is related to a specialty compounds plant in Belgium. This plant was severely impacted by the heavy rains and floods in the region in July, resulting in this plant remaining offline for the balance of the fourth quarter. With higher maintenance impacting both the Reinforcement Materials and Performance Chemicals segments, we estimate the sequential impact of higher maintenance costs for the company to be in the $8 million to $10 million range. We expect this elevated level to return to a more normal level in Q1 of fiscal 2022. With regard to the plant outages, this impact is also across both the Reinforcement Materials and Performance Chemicals segments, and we expect the impact across the company to be in the range of $7 million to $10 million in the fourth quarter. We expect to recover insurance proceeds that will help to offset the financial impact from these outages, but we do not anticipate any proceeds to benefit operating results until fiscal 2022. Moving to Purification Solutions. EBIT in the third quarter of 2021 increased by $4 million compared to the third quarter of fiscal 2020, driven by volume growth in specialty applications and an insurance reimbursement from a plant outage in the first quarter of this fiscal year. Looking ahead to the fourth quarter of fiscal 2021, we expect EBIT to decline due to lower volumes in our mercury removal application, and we will not have insurance proceeds in the fourth quarter. I will now turn to corporate items. We ended the quarter with a cash balance of $173 million, and our liquidity position remains strong at $1.3 billion. During the third quarter of fiscal 2021, cash flows from operating activities were $71 million, which included a working capital increase of $47 million. The working capital increase was largely driven by the impact of higher raw material costs that caused higher inventory balances, and as we pass these higher costs on in our pricing, which drove accounts receivable higher as well. Capital expenditures for the third quarter of fiscal '21 were $46 million. For the full year, we expect capital expenditures to be approximately $20 million. This estimate includes continued EPA-related compliance spending and the capital related to upgrading our new China carbon black plant to produce specialty products. We anticipate the new plant in China will be online in the second half of fiscal '22. Additional uses of cash during the quarter included $20 million for dividends. Our year-to-date operating tax rate was 28%, and we forecast our operating tax rate will be between 27% and 28% for this fiscal year. I will now turn the call back over to Sean.

Thanks, Erica. I'm very pleased with our third consecutive quarter of strong operating results, and we are raising our expected full year outlook of adjusted earnings per share to be in the range of $4.85 to $5.05. This is truly exceptional performance for our company and reflects our strong commercial and operational execution and the value of the strategic choices we have made in recent years. Our Advancing the Core strategy is focused on strengthening our industry-leading positions through great execution and by making smart targeted growth investments. We've invested aggressively in our operating platform to build excellence in our commercial and manufacturing operations. On the commercial front, our focus has been on strengthening our capabilities and the disciplines of key account management, data analytics, strategic pricing and voice of the customer, and all of these have been underpinned by a world-class CRM platform. On the manufacturing front, our focus has been on overall equipment effectiveness, or OEE; energy recovery; process and yield optimization; and capital efficiency. Through these actions, we have demonstrated the earnings power of our two high-margin segments in Reinforcement Materials and Performance Chemicals, and we have enabled this growth in a more capital-efficient manner. On the growth front, we have a philosophy of building from positions of strength and investing in market spaces where we believe we have a right to win. This led us to invest for breakout growth in conductive carbon additives or batteries and to complete the Sanshun acquisition, and we are growing in the battery space as we expected. In addition, our capacity investments in Asia over the years have positioned us as a leader in the region across carbon black, fumed silica, and specialty compounds. These investments are enabling us to drive strong earnings and returns in this high-growth area of the world. Through these foundational capability investments and smart growth choices, we have structurally increased the profitability of the company and have moved the EBITDA base to a new level. As I look forward, the underlying performance of our business is very strong and customer demand remains robust. Our growth investments are well positioned to take advantage of macro trends in the area of mobility, alternative energy generation and storage, connectivity and infrastructure reinvestment. I feel very good about how Cabot is positioned for fiscal '22 and the coming years. In closing, I want to thank and recognize our global Cabot team. The strength of our culture and the resilience of our employees has never been more apparent than it has been during these challenging times. Thank you very much for joining us today, and I will now turn the call back over for our Q&A session.

Your first question comes from David Begleiter with Deutsche Bank.

Sean and Erica, just looking at the Q4 guidance that remains - it's a bit wide, about $0.20 a share. Can you discuss why it is so wide, given we're almost halfway through the quarter?

Yes. Sure, David. I think, as Erica outlined, the three main drivers there, the higher-than-normal maintenance spending as we were really focused on supporting customers and the rapid increase in demand earlier in the year. So that's one. The second is the outages, and then the third is the differentials, which will recover in the DCAs in the first quarter. I think the primary reason for a slightly wider range than would be normal at this stage is really related to the outages of both the specialty compounds plant in Belgium and the carbon black plant in the U.S. And so we've estimated that. But given the dynamic nature of the situation, that's really the reason why the range is slightly wider than what we might normally do.

Understood. And I know it's early to look at 2022, but when you think about Reinforced Materials for next year, is this level of earnings you think sustainable at around this high level?

Yes. I think it is early as we talk about 2022, but I think the business has really done a great job over the last several years improving the structural profitability of the business. And so you can look at this business today and see that volumes are in and around the 2019 levels. If you look at where tire production is, for example, yet the profitability is substantially up in this business. And I think the efforts focused on commercial excellence and strategic pricing and market management have been, one, our continued focus around yield, energy recovery and overall equipment effectiveness has certainly been the second. And then the third is the Asia Pacific market, and in particular, China, represents somewhere in the order of 35% to 40% of the world's tires and 40% of the world's carbon black, and our position there and our ability to manage in that dynamic market, I think, has been proven out over a long period of time. So we feel really good about the level of performance in this business. And as we look forward into 2022 for the company, I think there are a few things that are on our mind. First, demand in some of these key end markets like tires and autos still remain below pre-COVID levels. The tire side is still a few percent below, if you look at LMC's forecast and then on the auto build side, IHS' outlook is still a little below. So I think there's growth runway there, number one. Number two, as we look at the tire contract season, we certainly see demand as strong, inventories are low, supply-side investments in the West have not happened. Our view on that hasn't changed. So it should lead to a favorable environment as we move forward. And then third, our growth investments like in batteries and a number of our other targeted areas are really beginning to perform quite well here, and we think there's good momentum. So we feel good about the drivers for next year. And I would say those are the key ones, David, that are on our mind.

And your next question comes from Mike Leithead with Barclays.

Great. First question, I did want to just circle back on the Q4 guidance. It seems like sequentially, you're guiding to, I don't know, $20 million to $30 million lower EBIT sequentially. And Erica did a good job trying to help size some of those buckets. So I was hoping you could just repeat in aggregate how much you're attributing to outages and downtime versus feedstock differentials and other factors? I just want to make sure I got that walk correct. And then as we think to fiscal '22, I appreciate you're not giving guidance yet, but it sounded like most of that gets resolved in fiscal Q4 and won't carry into 2022. Is that a correct interpretation?

Thank you, Mike. Erica, I appreciate your efforts to clarify our Q4 numbers as they include some unusual elements. To summarize, the first factor is an increased level of maintenance activity, impacting the quarter by an estimated $8 million to $10 million. This is due to the sharp demand recovery we've experienced this year along with low inventory levels in many supply chains, prompting us to schedule more maintenance than usual to support our customers. The second factor concerns the two outages mentioned in Belgium and the U.S., which are expected to impact the quarter by about $7 million to $10 million. The Louisiana plant is expected to be down for one month, likely back in operation by September, while the situation in Belgium is projected to affect us through the remainder of the fourth quarter, but we don’t anticipate these outages to recur beyond this period. Lastly, we estimate that differentials will contribute around $5 million. We've implemented measures for recovery, known as delivered cost adjustments, to address temporary feedstock price fluctuations. Given the current volatility in the refining sector globally, we expect to recover these adjustments in the next quarter. I believe that captures everything accurately, Mike, and should clarify our outlook as we move past Q4.

Great. That's super helpful. And then maybe secondly, Cabot obviously has quite a large China presence, especially relative to some of our other U.S. companies. There's been probably some added consternation from investors of late around China auto numbers, some mixed economic data points. Just kind of curious if you could give us your view on the ground, kind of what you're seeing today and expectations moving forward in China?

Yes. Yes. Well, China is an important market for us and one that we have demonstrated for a long period of time here, an ability to manage and be strongly profitable and generate strong returns in that business. So we know how to operate there. Our view on China right now is that volumes are expected to be solid here. And so I don't see any fundamental change there. Underlying demand is strong and expected to continue as GDP grows and as the China car park continues to expand. And again, at the end of the day, in our biggest end markets, if we take reinforcement, for example, they make almost 40% of the world's tires. So I think from a structural standpoint, the world is structurally dependent on Chinese tires, even if tariffs sometimes shift around the global flows a bit from time to time. So I think our long view on China is unchanged here. In the short term, there's certainly some challenge in global logistics markets right now. And so Chinese exporters of tires are challenged to find container availability. It's pretty scarce and pricing has gone up on international container shipments. So this may result in some on-the-margin shifting of tire production back to importing regions. So we may see a little bit of movement here between Chinese exporters and volumes that might be picked up in the importing region. But as you know well, we've got a strong global footprint everywhere in the world. So if that happens, we'd expect to pick it up on the other side. I think there are limits to what can happen there, though, because again, the world is structurally dependent here. So our view on China remains bullish over the long term here. And if there are any short-term dislocations, I think we've proven an ability to manage those over a long time.

Your next question comes from Josh Spector with UBS.

Just a question on the volume side of things. As you look at the September quarter and then the December quarter, just wondering how you think about seasonal volume movements? And how much of you're talking about your fourth quarter is impacted by your own supply issues versus demand? So any kind of early read on how you're thinking about December, I think, would be helpful, if you can provide context?

Yes. Yes. So I mean, we are, Josh, expecting volumes to remain strong here, and we continue to see that inventories are low across pretty much every value chain. So if economic activity remains robust, and of course, there are questions here around surges in COVID. But let me sort of put that aside for a minute. If you look at underlying economic growth and low inventories across the chains, we would expect demand to remain robust here. Now in our fourth quarter, we do normally see a little bit of seasonality, and so we're expecting that same level in the coming quarter. But again, we would expect nothing really out of the normal here as we transition. As we go forward here and you think about turning the bend on 2021 and into '22, we really look at it in terms of our key end markets. And the tire market is still about 3% below 2019 levels. And so I think there's more recovery runway there. We've definitely seen a very strong recovery in the truck and bus market because I think there's been such strength in industrial markets. So naturally, the truck tire market is very strong. What is still lagging a bit 2019 is the passenger car market because the mobility and miles driven are not yet back, though they have rebounded pretty sharply here. So we see runway as we move into 2022 in terms of further room just to recover back to the pre-COVID level. So hopefully, that gives you a little bit of perspective, normal seasonality in Q4 and still runway just to simply get back to the pre-COVID levels into '22.

I appreciate that. I guess what I was trying to dig into a little bit is just some of the supply issues in September quarter mean that perhaps there's less seasonality for Cabot specifically into the December quarter. Do you have any thoughts around that?

I wouldn't say that while we have a higher level of maintenance turnarounds here, we'd expect to be filling most of that demand from inventory. We would typically build inventory ahead of maintenance turnaround. So no, I don't see anything that you're describing there, any sort of shift of that sort.

Okay. No, that's helpful. And if I could just ask on the margin side quickly within reinforcement, was there anything abnormal within this most recent quarter? So you've had some benefits from the China price cost dynamics. Was there any benefit embedded there in June Q? Or is that a relatively normal quarter for us to think about bridging into next year off of?

Yes. I would say things developed pretty much as we outlined last quarter with the exception that we thought that the cost flow through in China, you remember we were in a rising feedstock environment, pricing ahead of the flow-through in our P&L, and we expected that impact to hit us in Q3. And the impact was a little more muted than we originally thought because feedstock prices, coal tar prices continued to surge up across the quarter in Q3. So the impact was a little bit less than we would have thought. But I think when you look at all the different puts and takes, I would say it was fairly normal. And I think Erica wanted to comment, Josh, on your earlier question as well. Maybe you can provide a little more color.

Yes, Josh, I wanted to add that as you consider the transition from Q4 to Q1, the outages we have in Q4 are important to note. The U.S. plant is expected to be operational again within the quarter, so there will be an impact in Q4 but not in Q1. The Belgium plant, however, is expected to remain offline for the rest of the quarter, and it is still uncertain when it will be back online, if at all, in Q4 or Q1. This is something to keep in mind as you think about the transition from Q4 to Q1. It's too early for us to determine the exact timing, but it's worth noting that this is a specialty compound plant and, while it's smaller, its outage could affect us into the first quarter.

Your next question comes from Jeff Zekauskas with JPMorgan.

Your working capital was negative $226 million through the 9 months. What should it be for the year? How much should it improve in the fourth quarter?

Yes, Jeff, we are heavily reliant on oil. As we've mentioned for the year-to-date, the direct impact from oil is just over $100 million. With oil prices stabilizing recently, we anticipate that a larger portion of the strong EBITDA will be reflected in our results. Ultimately, it all hinges on the movements in oil prices.

Okay. Typically, there are different turnarounds in the fourth quarter. Is this year's difference due to an unusual amount of outage costs? What makes this fourth quarter unusual? Is there an outage cost of around $8 million to $10 million or $7 million to $10 million compared to last year, with everything else being relatively the same as in previous fourth quarters?

No, you're correct in recalling that seasonal maintenance is typically somewhat higher in the fourth quarter. However, what we're observing this year is an additional $8 million to $10 million above that normal amount. This increase is simply due to the strong demand recovery and thin inventory, necessitating that customers receive products. As a result, we've planned for a higher level of maintenance than usual this quarter, falling within that $8 million to $10 million range. The outages represent a separate matter, amounting to between $7 million and $10 million. Overall, we are experiencing a significantly elevated level of maintenance activity. Once again, this year has seen most supply chains operating at a high capacity due to robust demand and limited inventory, leading to necessary postponements. However, these delays can only be sustained for so long to ensure quality of assets and similar considerations. Thus, we have a substantial amount to accomplish this quarter.

Okay. And in China, coal prices have really elevated there. In general, are higher coal tar prices good for Cabot in China because of whatever raw material differentials you have? And low coal tar prices tend, on the margin, to be tougher for your pricing or your margins? Is that generally true or no?

Yes, I think you’ve got it right, Jeff. There are two factors to consider: absolute price and price direction. Regarding absolute price, you’re correct that coal tar prices have increased because the entire coal and coal chemicals sector has seen a rise in pricing. This increase is generally favorable for us as it limits the ability of Chinese carbon black producers to export, due to the unfavorable economics. In the past, there were more opportunities for carbon black to flow out of China, but that is not the case now. On the second point about absolute price, we tend to achieve higher profitability when feedstock prices are elevated because our investments in energy recovery are linked to fuel prices, which positively affects our outcomes. However, what needs to be managed in China is the direction of pricing since it operates on a spot market. When prices are rising, we can adjust our pricing and benefit slightly before the impact is reflected in our profits, as we’ve seen this year. Conversely, when prices fall, market prices tend to adjust more quickly than our inventory flow-through, leading to a negative impact. Therefore, the direction of pricing affects us in the short term. Overall, maintaining stability at a slightly higher pricing level is best for our business.

In Energy Materials, has the rate of growth changed? You talked about this different customer wins, and this is a higher growth area for you. Do you have enough capacity to serve your customers? Has the rate of change in the business altered over the past three quarters?

Yes, I would say the rate of change has not changed from our outlook shared last quarter. Our growth expectations are quite strong. The customer wins we have are what we anticipated, and we integrated that expectation into our EBITDA range estimate. We are executing effectively, gaining qualifications, and ramping up commercial sales as planned. This is all about execution, and I believe we are doing exceptionally well. I am very pleased about that. I recognize this as a unique opportunity that is somewhat time-sensitive because the market is rapidly increasing. The momentum continues to build, driven by both government policy and importantly, the automakers' plans as they transition their product lines to 100% electric vehicles over the next decade. Once this shift occurs, there will be no return to internal combustion engines, requiring a complete reallocation of R&D investments away from them. These significant moves further reinforce our growth expectations. On the capacity side, we will need to invest over time to maintain growth capacity for our customers, and we have plans in place for that. You may recall our acquisition of a carbon black plant in Suzhou, China, from Nippon Steel, which we are converting to specialty carbons. This will provide additional capacity to help us better serve energy materials. Regarding the Sanshun acquisition focused on carbon nanotubes, we have been increasing our utilization over the past year to one and a half years. As we ramp up, we will need to address bottlenecks and add some capacity, but I would view this growth as a normal business progression, leading to high-value growth and investments that yield strong returns.

Lastly, you expressed some optimism about carbon black pricing in 2022. And it's just early August. I mean, normally, it's hard to make out these issues at Thanksgiving or before Thanksgiving. But what makes this year so different that you have, it seems, a little bit more forward vision than you normally do?

Yes. I mean, certainly, it's early in the process, Jeff. So no change there, but I think our optimism is really grounded in the fundamentals here, where demand is strong, inventories right now are particularly low. So we see that being just supportive. It's not like there's a lot of inventory that's been built. And so I think, in general, demand recovering, still some room to go just to get back to the pre-COVID levels, inventory is pretty thin. And as we've been calling for a long time here, no real changes on the supply side. The only other thing that might be a slight difference as we sit here today in a more favorable direction is simply that global flows of product are just more challenged today given the logistics and transportation issues. And so I think that's causing most companies to emphasize a little bit more supply reliability and local supply chains. We're certainly seeing trends of that sort across a whole host of different value chains. And so that then means that local suppliers, regional suppliers, the value proposition there to support our customers is going to be a little bit stronger. I think that was always the case. As you know well, the reinforcement business is largely a regional business. But there are global flows, but I would say those are more challenging these days because of the transportation. So a couple of points that might be accented a little more now than normal, but the optimism is grounded more than anything in the fundamentals.

Your next question comes from Laurence Alexander with Jefferies.

This is Daniel Rizzo on for Laurence. Just one quick question. You mentioned free cash flow conversion is obviously being hurt by higher oil costs. I was just thinking if you think about over the long term, what's the goal? Or how should we think about what fresh free cash flow conversion should be?

Yes, I believe that the movements in oil prices are the primary factors influencing cash flow generation. Over a long timeframe, oil price volatility has generally evened out. The net change in dollar investment in working capital has been consistently close to zero over time. We have a strong balance sheet to manage inflation or deflation caused by stable oil prices. Therefore, consider operating cash flow as robust EBITDA minus some growth-related increases in working capital, which are simply tied to volume and growth. This should result in strong operating cash flows if earnings translate effectively into cash flow. Regarding free cash flow, it's dependent on our capital expenditures. Our approach involves reinvesting about half of our discretionary free cash flow into growth and returning the other half to shareholders. This strategy has proven to be reasonable over time. While working capital fluctuations can cause short-term distortions, they have not been significant concerns over longer periods, and we have a solid balance sheet to manage these variations.

And your next question comes from Chris Kapsch with Loop Capital Markets.

Yes. I appreciate your comments about the burgeoning conductive carbons business. So as that EV battery technology roadmap evolves, there's a big emphasis on improving range via energy density and also an emphasis on charging cycle times. And to address these improvements, there's evolutions in the cathodes and especially the anode technology. And there's a lot of scuttlebutt, of course, about solid-state lithium-ion batteries, maybe eventually becoming broadly adopted. So my question to you in terms of how this business develops is, are you agnostic about how the technology roadmap evolves? In other words, do you simply benefit from a transition to EV from ICEs? Or are there certain battery technologies where you see your products being sort of disproportionately increasing in terms of content per battery?

Yes, yes. I think the primary driver here, Chris, is the conversion from internal combustion engines to electrification. And the current battery technology has strong needs for conductive carbon additives to improve both range as well as cycle life. So the conductive carbon additives are really critical in the chemistry. Now I think the current technology platforms have quite a bit of runway here. And so that's the basis on which so many plants and capacity increases are being installed today by the big battery manufacturers. Now there are a number of technology developments, the next-gen technology developments like solid-state batteries that you talked about, they're thought to be safer and higher energy density than conventional lithium-ion battery products are today. But since solid-state batteries will use either ceramic or polymer as the electrolyte, neither of which is conductive, solid-state batteries will likely need even more conductive carbon additives. So in that sense, we're somewhat agnostic, but I think the key for us is we want to be in this for the long haul. And so we want to win today and then we want to be with our customers as this technology transition occurs and be their conductive carbon additive innovator to do that.

You mentioned working with or possibly even being specified in six of the top eight research firms. Are you also pursuing any development efforts with companies positioning themselves for solid-state technology in the future? Or is your current commercial effort focused on existing battery producers? I appreciate your insights.

Yes, as I mentioned earlier, the top eight producers account for about 90% of the market today. We are now qualified and have commercial sales with six of those eight and have development programs and qualification efforts ongoing with all of them. Our focus is very much on this area. The future of technology here will depend on the current leaders adapting to technological developments, and we are actively participating in those discussions. Additionally, there are some emerging companies aiming for next-generation technology, and we are closely engaged with them as well. Ultimately, the outcome is uncertain; my assumption is that once the major players achieve scale, they will also pursue next-generation technology. It's still early to determine how everything will unfold, but we are currently engaged with all customers on next-generation initiatives.

All right. I'm showing no further questions at this time. I would now like to turn the conference back to Sean Keohane.

Great. Thank you very much for joining us here today. We're excited about the momentum we've built and our growth prospects, and we plan to share more of that with you at our Investor Day, which we'll be hosting in Boston on December 2. And at that Investor Day, we'll be taking a deeper dive into our key businesses and provide more insight into our long-term strategy, our key growth initiatives and our sustainability leadership. So hopefully, we can see you all there in person. In the meantime, thank you for joining today for your support of Cabot, and I hope you all remain healthy and safe.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.