NYSE:OEC Orion Q2 2023 Earnings Report $11.89 +0.17 (+1.48%) Closing price 04/17/2025 03:59 PM EasternExtended Trading$11.92 +0.02 (+0.18%) As of 04/17/2025 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Orion EPS ResultsActual EPS$0.53Consensus EPS $0.59Beat/MissMissed by -$0.06One Year Ago EPS$0.58Orion Revenue ResultsActual Revenue$458.80 millionExpected Revenue$501.83 millionBeat/MissMissed by -$43.03 millionYoY Revenue Growth-15.20%Orion Announcement DetailsQuarterQ2 2023Date8/9/2023TimeAfter Market ClosesConference Call DateThursday, August 10, 2023Conference Call Time8:30AM ETUpcoming EarningsOrion's Q1 2025 earnings is scheduled for Wednesday, May 7, 2025, with a conference call scheduled on Thursday, May 8, 2025 at 8:30 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Orion Q2 2023 Earnings Call TranscriptProvided by QuartrAugust 10, 2023 ShareLink copied to clipboard.There are 10 speakers on the call. Operator00:00:00Welcome to the Orion S. A. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Operator00:00:22As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Wendy Wilson, Head of Investor Relations. Thank you, ma'am. You may begin. Speaker 100:00:34Thank you, Kyle. Good morning, everyone, and welcome to Orion's conference call to discuss our Q2 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer and Jeff White, Chief Financial Officer. We issued our press release after the market closed yesterday, and we also posted a slide presentation to the Investor Relations portion of our website. Speaker 100:01:03We will be referencing this presentation during the call. Before we begin, I'd like to remind you that some of the comments made on today's call are forward looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC, and our actual results may differ from those described during our call. In addition, all forward looking statements are made as of today, August 10. The company is not obligated to update any forward looking statements based on new circumstances in the table attached to our press release. Speaker 100:01:53I will now turn the call over to Corning Panchard. Speaker 200:01:56Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. As you can see on Slide 3, we had another excellent quarter, 2nd only to the Q1 naturally making for record first half performance. Our results reflect the hard work of the Orion team to Fundamentally transform the company, providing the industry leading products customers demand and returns on investment that investors deserve. We've been aided in this by a restructuring in the broader marketplace that has been building for years in our key markets, Has now passed the tipping point and still continues to build. Speaker 200:02:37We continue to be one of the few specialty chemical companies On track for a stronger 2023 compared to 2022, and we expect record profitability this year. We delivered 2nd quarter adjusted EBITDA of approximately $87,000,000 a 5% increase year on year and adjusted diluted earnings per share of $0.53 This resulted in record adjusted EBITDA of approximately $188,000,000 for the first half, a 13% increase year on year and record adjusted diluted earnings per share of $1.27 We also delivered strong second quarter operating cash flow, Reduced our debt level while also completing our $50,000,000 share buyback and starting on the new buyback. We expect to generate more than $200,000,000 of discretionary cash flow this year, reflecting a conversion rate of over 60%. This is a huge step up for us, which we expect to maintain. Jeff will discuss this further. Speaker 200:03:44As you have seen, we recently published Our 2022 sustainability report. I highly recommend that you take the time to read it as sustainability is central to our strategy. In specialty, this manifests in conductive additives and in rubber as a circular economy. A concrete example of this is our acetylene based conductive carbons. They are ultra clean, highly conductive and there is a production mode from the limited availability of high volume clean acetylene gas streams. Speaker 200:04:18We continue to make progress on the construction of our acetylene based conductive additive plant in La Porte. Beyond that, We expect to add additional capacity in North America and Europe coming on stream in the next 3 to 5 years. Congratulations to the entire team who is bringing our strategy to fruition as we continue to operate as a responsible corporate citizen to all stakeholders. On the operations front, specialty demand reflecting the broader manufacturing economy is subdued. We see this as an opportunity to push customer qualifications and upgrade our plans while things are slow. Speaker 200:04:57Meanwhile, we have preserved value We have preserved the underlying value of our business by maintaining end segment per ton profitability. In Rubber, as I mentioned earlier, we believe the industry restructuring is evident in our results and will continue. The situation is simple. Industry supply dynamics coupled with our commitment to get a return on invested capital that we as a company and you as shareholders deserve are driving the reset to more balanced pricing. 2024 negotiations are well underway. Speaker 200:05:36We currently have about 60% of our Americas in demand committed or in late stage negotiations, well ahead of past schedules. The pricing outlook remains positive And we expect to pick up volume at our price points. A couple of items. First, I remind you, we are negotiating for 2024 and beyond, not for 2023, have care about slow demand in 2023 in this context, except that 1 year's deferred demand is the next year's supplemental demand. And that supplemental demand further tightens the market that we are actually negotiating for. Speaker 200:06:192nd, there is a growing carbon black imbalance in our key markets where tire capacity continues to be added. 3rd, the EU ban of Russian carbon black starting next July, Combined with growing OEM concern with Russian content in their supply chain further benefits European carbon black producers. 4th, our investments in maintenance, emission controls and reliability and abatement costs, they all demand higher prices. And 5th, The expected rebound in replacement tire demand, it's a tailwind. These 5 largely structural improvements in our markets are Positive drivers for us. Speaker 200:07:03Beyond all that, customers want strong, healthy suppliers. Speaking of abatement, we are the only carbon black producer to have completed 3 air emission control projects in the United States. We have one more plant to go, which we expect to have behind us entering 2024. Now let's talk about destocking and deferring, Starting with rubber. We supply tire manufacturers. Speaker 200:07:30They supply tire dealers and large tire retailers. Eventually, a tire retailer sells to the end customer who's the most important player here. On the bottom of Slide 4, you can see that passenger car and light truck owners are driving more than last year. On the top of the slide, you can see they're deferring buying replacement tires. I use the term deferring because those tires are getting worn and they will need to be replaced. Speaker 200:08:02Just look at the gas that Miles drew. Trucking companies, They're seeing a decline in loads and hence buying fewer replacement tires. That makes sense. Going forward, you should look at Manufacturing, PMI, is getting an understanding of where that is headed. Now all this is based on U. Speaker 200:08:21S. Data. We don't have good facts like gasoline or miles or kilometers driven in Europe. However, we believe the picture there is similar. There's also the question of inventory levels, higher manufacturers, distributors and dealers each peak. Speaker 200:08:40There is less visibility here. However, our understanding is that inventories are relatively low and there is little interest in restocking currently until end customer demand picks up. On top of this, our customers express limited confidence in their demand forecast accuracy. Switching to specialty. Here, we serve dozens of end markets. Speaker 200:09:03In general, customers want low inventories and By and large, they have them. But again, there is little interest in restocking. For both Rubber and Specialty, we expect end customers to defer purchases until the start of 2024 and manufacturers to take extended holidays this summer and winter. We in turn will use this time wisely preparing for 2024 and not destroy value by chasing volume. With that, Jeff perhaps you could provide some more color on our financial results. Speaker 300:09:39Thank you, Courtney. On Slide 5, you can see the continued path of growing profitability even with the headwinds in our end markets. In 2023, we expect at the midpoint to grow EBITDA 7% versus the full year 2022. And while not shown here, EPS is expected to grow 9%. Our portfolio is a combination of the Rubber business, which is benefiting from price increases that have more than offset the near term volume challenges and our specialty business, which has kept Stable pricing with its high value add products. Speaker 300:10:17Specialty 2 is facing near term volume headwinds, But the 50 plus percent growth in rubburt EBITDA in Q2 and in the first half of twenty twenty three has allowed us to deliver respectable earnings growth. Below, you can see our continued ROCE progress over the past few years During the time, we made substantial air emission control investments. The ROCE levels we achieved are Significantly in excess of our weighted average cost of capital, ROCE stands at 17%. This key metric keeps us aligned with our shareholders as stewards of their capital and focusing on the long term sustainability of the company. Now some more details. Speaker 300:11:04On Slide 6 are the consolidated results for the 2nd quarter. The contractual price improvements in Rubber outweighed the lower volume in both businesses as well as lower cogeneration revenue. The year over year adjusted EBITDA increase of 5% in the 2nd quarter and the 13% in the 1st 6 months of 2023 are a direct result of better pricing in Rubber. You may note that the adjusted EBITDA is down in the 2nd quarter despite the increase mode. In EBITDA adjusted EPS, I'm sorry. Speaker 300:11:37This is a combination of the higher tax rate in the quarter and a couple adjustment items to net income which went opposite to last year. Slide 7 provides the year to date results For the first half of twenty twenty three, adjusted EBITDA is up $22,000,000 or 13% and adjusted net income Adjusted diluted EPS are both up 10%. All three of these are at record levels for 6 months. We achieved this despite a 50% drop in European power rates, which based on what we shared last quarter Has about a $25,000,000 annual impact, if rates hold where they are now, we expect an additional We do expect reduced power price and cogen volatility going forward. On Slide 8, The improvement in rubber pricing fully offsets the volume decline in Q2. Speaker 300:12:45Our view is that the price improvements in rubber are due to a structural shift to the market, while the volume declines will reverse next year. On the Slide 9, looking at specialty in Q2, Volumes decreased in most markets, reflecting weakness in the manufacturing sector. Gross profit per ton decreased compared with an extraordinary Q2 level last year. Our trailing 12 month gross profit per ton is also down, but above our average levels in 2022 and in the $800 to $900 per ton range we have previously discussed. We do not view this quarter's GP per tonne negatively, but rather it is near the expected range for this business. Speaker 300:13:30Importantly, for the mix of products that we sold in the quarter, our pricing remains stable. We have not chased volume by dropping prices. Slide 10 shows the key factors affecting adjusted EBITDA for the Specialty business compared with last year. As noted earlier, the volume reduction was significant. Margins were affected by fixed cost absorption and lower cogeneration revenue. Speaker 300:13:58As I noted on the last slide, pricing was stable for us despite the market conditions. We believe this reflects the strength of our value proposition. Turning to Slide 11. The headline is that Q2 Rubber EBITDA was up $19,000,000 or 51%, And the first half EBITDA was up $43,000,000 or 54%. The price improvements generated strong profitability metrics despite lower volume and lower oil prices. Speaker 300:14:29Gross profit per ton was up from $309 to $4.29 in the quarter driven by price improvements. You should expect the GP per ton to be at similar levels for the remainder of 2023. Slide 12 looks at the key factors affecting adjusted EBITDA for the Rubber business. Strong base price is clearly the key driver offsetting the lower volume and less advantageous geographic mix. For clarification, we gained volume in lower margin Asia, while we saw decreased volume in the higher margin regions. Speaker 300:15:13On Slide 13, I'd like to provide an update on cash flow and the impact on our debt level and stock buyback. With strong cash flow in the first half, We funded $20,000,000 in share buybacks in the quarter, dollars 49,000,000 year to date $54,000,000 since we started our buyback program in Q4 2022. This represents 4% of outstanding shares. As discussed during our Q1 call, As expected, we completed our initial $50,000,000 share buyback program in mid May. We purchased an additional $4,000,000 in shares toward our new buyback program in the rest of the quarter. Speaker 300:15:54We will pace the new buyback program slower and prioritize Growth and profit enhancing projects first. And as long as we stay in or near our target debt range, we plan to continue to look to opportunistically repurchase shares with a portion of our free cash flow. We reduced our net debt an additional $39,000,000 In Q2, dollars 76,000,000 in the first half of twenty twenty three to $783,000,000 Our debt to EBITDA ratio now stands at 2.34 times, down from 2.75 times in December and nearly 3 times at this point last year. As I look forward across the rest of 2023, I expect our debt level will stay near this Near where it is now and may increase a little since our CapEx is back end loaded in 2023. We benefited from lower CapEx in the first half of the year. Speaker 300:16:57On Slide 14, before I pass the call back to Corning, You can see the dramatic increase in our discretionary cash flow conversion as we have stepped up our profitability and nearly completed our EPA projects. This gives us much more flexibility to invest in growth projects, reduce our debt and opportunistically buy back shares. I expect the 60% plus conversion rate that we have in 2023 to continue in the coming years. With that, I'll turn the call back to Cory to discuss our 2023 guidance. Speaker 200:17:31Thanks, Jeff. Turning to Slide 15. As we've both said earlier, we continue to believe we will report another record year. We also believe that we're in a Strong position going into 2024 with about 60% of our Americas and EMEA rubber demand already essentially committed. For this year, we expect end customer purchase deferral and destocking to continue into Q3 and Q4. Speaker 200:18:01We also expect the lower power prices in Europe to continue to prevail. Taking that into consideration, Speaker 400:18:08We Speaker 200:18:08are upgrading our updating, excuse me, our adjusted EBITDA guidance to the $320,000,000 to $350,000,000 range, which is up over 7% at the midpoint. Our adjusted EPS guidance range of $2 to $2.25 per share and up 9% year over year at the midpoint. In closing, I would remind you that, 1st, Our specialty business is doing well. Naturally, volumes are down when manufacturing activity is down. However, our unit margin, reflecting the strength of our business, is holding at high levels. Speaker 200:18:50Meanwhile, we're driving our future growth by progressing our conductive additive plant in La Courte and advancing customer qualifications across many markets. 2nd, we believe the step up in our rubber pricing is necessary and at a sustainable level from which we will grow. 3rd, the current disconnect between miles driven, gasoline consumption and replacement tires is not sustainable. Those tires will need to be replaced. Also, the OEM market, which drives our higher margin specialty and MRG businesses, has begun its recovery. Speaker 200:19:294th, with higher profitability and the U. S. Air emissions spending nearly behind us, Our cash flow conversion has improved dramatically. I continue to see a great future for Orion as a company and as an investment. The steps we have taken and the strategy we have embarked upon provide a great foundation for sustained profitable growth, Free cash flow and exceptional returns for our shareholders. Speaker 200:19:57Thank you. Kyle, please open the line for questions. Operator00:20:02Thank you. We will now be conducting a question and answer session. Our first question comes from Chris Kapsch with Loop Capital Markets LLC. Please go ahead. Speaker 500:20:38Hey, thanks. Good morning. So thank you for the details around Characterizing the ongoing tire contract negotiations for next year. Could you remind us like what percentage of your existing contract Already had multi year agreements in place where there is already an increment in pricing baked in for next year or beyond. And curious about the agreements that are being resolved now. Speaker 500:21:06How does the magnitude of pricing that you alluded to compared to those that have already been baked into the multiyear deals? And if there's any way to characterize this by geography, that would be helpful too. Speaker 200:21:20Hi, Chris. So first of all, thanks for your question. I appreciate it. So We had about 50% of our volume under contract going into it. As you said, we had a step up in those contracts going from 2023 to 24. Speaker 200:21:37I expect that we will do better than that with the new contracts that we signed this year. It's early days, but that's my expectation. And I'm okay with that because I think it's a better allocation of risk and commitment between the companies and We're prepared to do that sort of thing. I think that's a good development overall for the industry. I'd say in general, there's More interest for people to get the contract quickly in Europe right now versus North America or South America Just because of the upset there with the Russian capacity, which was probably about 35% of that market. Speaker 200:22:17Some customers, as we estimated, As much as half of their carbon black was coming from Russia. So there's certainly some people who are quite interested in that. Did I miss anything there, Chris? Speaker 500:22:29No, that covers it. That's helpful. And then the follow-up would be, I like the way you characterize the Perm destocking presumably represents deferred or latent demand incremental demand for next year. But so assuming that this destocking runs its course, Let's just say by calendar year end and there's normalization in demand trends next year. There any way to characterize what you think the industry capacity utilization rates would be by region In sort of the core rubber black, not specialty area? Speaker 500:23:04Thank you. Speaker 200:23:05Sure. So just to clarify, I mean, I think It's not one day when every customer decides, okay, I'm going to stop deferring. I think we'll see that turning in the 4th quarter. I don't think we as a company will see the impact of that until January just because in the Q4, you've got holiday shutdowns and that kind of things. I think it's that kind of a timeframe. Speaker 200:23:28It's been a relatively long deferral. What I think that means for us then going forward Is rubber capacity in Europe will be at very high levels and that will be basically where people can operate it at. So I would say high 80s, low 90s. I think North America will also be very high levels of industry utilization, again, just because of supply demand. We get back to a more normal run rate and demand. Speaker 200:23:58I think capacity in both areas will be tight. We will have our EPA work behind us. At least one major competitor will not, right? So when they go through it, that will probably have an impact in demand or capacity for North America next year. Operator00:24:20Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead. Speaker 400:24:29Hi, thanks for taking my question. I was wondering if A little bit more color on the inventories at your customers compared to where they would normally be in this kind of demand environment and how long they can actually keep drawing down Before they reach critical levels or levels that put their business at risk, have your customers actually told you that they're specifically drawing down Or is that just more research on your end based on what you're seeing in the market? Just help us get more clarity on what's giving you the confidence that things will come back and kind of When they go? Speaker 200:25:01Sure. So two things there. Number 1 is, of course, cutting across many different customers in specialty many, many, In Rubber, let's say, many those customers don't always express tremendous confidence And exactly what is in all the downstream channel. So I know everybody is interested in this question of destocking. I'll just tell you, I think end customer demand And the deferring there, which you can see in that gasoline and miles driven versus replacement tires, I really think that's the best data we have. Speaker 200:25:34So now more anecdotally, when you talk to these guys, they talk about, yes, we're at a very low inventory level. If any customer demand dropped lower, well then That might be a little bit more inventory than they think they need. They might be able to draw that down. If it steps up a little bit, right, they would have to buy a little bit more. I think they're at low levels. Speaker 200:25:55I will never tell you. It can't get worse, so they couldn't destock more. But our view is and when we talk to these guys, They all express they all. They unbalanced express that they are at low inventory levels, but very reluctant to make a step up in inventory. The one thing we may see in this month is with the rise of oil prices, we may see some people buying in front of that In specialty, okay, that will help August, it will hurt September. Speaker 200:26:24I don't see that as very significant. Speaker 400:26:28Okay. Got it. Speaker 200:26:28And then And then Just one other thing. You have a few guys who have talked about A little bit of unconfirmed that they're like below their safety stock level. But again, that's some you have to really look across the balance of the whole industry. Speaker 400:26:46Okay, understood. As your customers get down to these clinical inventory levels, assuming demand stays roughly where it is, I mean, how much leverage does that create on pricing for you as you enter the new year? I know tire contracts are generally negotiated for ahead of time, but in the rest of your business, Wouldn't that give you also some a lot better leverage as you enter the new year, especially if capacity remains limited and these guys start to restock? Speaker 200:27:12Well, John, the way this game works is the buyers right now are saying, oh, demand's weak, you need to load, you need to give me a good price. And we're saying, No, no, no, no. We're not negotiating for 2023. We're negotiating for 2024. That's an obvious thing in the annual cycle for Rubber, What AI plays out in specialty as well. Speaker 200:27:32But the key point here is, in specialty, we're selling value, we're selling a solution, Right. So we're not looking to take advantage of the market conditions nor be a victim of them, right? We're looking to keep a fair price in our specialty and move it up where we need to and get our new products qualified And basically be agnostic to the current market conditions. But yes, I mean, I think to an intelligent buyer, they can see what's going to happen next year. Speaker 400:28:06Okay, great. And then just one more thing. Can you just break out the impact of cogeneration? Kind of what has been your expectation and what has been the change there, I guess, in the outlook that specifically from that piece of the business? Speaker 200:28:22Sure. I can let Jeff go more. But just to say, when we gave our last guidance right at the end of Q1, we We're really looking at what power rates were at that time, and we expected them to just stay where they are. I thought that they might actually pick up a bit this summer in Europe, which has not happened. And I think it was in my part of the script last quarter When I said that for every move of about 20% would be about $10,000,000 and it's moved about 50% down. Speaker 200:28:55So that's how you get to annual run rate of the 25% that Jeff mentioned. But Jeff, anything you want to add to that? Speaker 300:29:03Sure. John, yes, to Corning's point, the 50% reduction in power prices would Get you somewhere in the $25,000,000 range from a profitability standpoint. If you look right now In the key markets, I think if you were to look at Germany, it's down about 50% perhaps year over year. If you look at Italy, it's down maybe closer to 40. There's not been a step up in the summertime. Speaker 300:29:30Even though it's very hot there, there's not been a step up in summertime power costs. So we're As the year goes on, we're expecting this lower level to remain, which is lower than what our expectation had been 3 or 4 months ago. So we had a little bit impact in the Q1, a little bit more in the Q2 and expect a bigger impact in the 3rd Q4 if these levels remain where they're at. Speaker 200:29:53And just to keep in mind though, like this is a net positive for everybody, right? It's going to mean the European fee income economy is stronger. It's ultimately going to help consumer demand in Europe. One other thing to understand is that we did hedge last year. Congratulations to our energy team. Speaker 200:30:11It was Very good timing. Those hedges will expire at the end of this calendar year. So that's going to give us a headwind next year of about $10,000,000 Operator00:30:29Our next question comes from John Roberts with Credit Suisse. Please go ahead. Speaker 600:30:37Thank you. Slide 10 has the year over year bridge for the Specialty Chemical EBITDA. If you were going to build that slide On a sequential quarterly basis, what would it look like? The volumes were actually relatively flat sequentially. Speaker 200:30:57Yes. So I would have to take a quick look at that. I think that our price mix has not shifted dramatically time on quarter on quarter. Volume, Jeff, how do we look quarter on quarter? Speaker 300:31:13I think volume, it might be down a little bit versus Speaker 200:31:19It's there Speaker 600:31:20on the right hand column. Yes. You give the quarter I'm Speaker 200:31:26sorry, you're looking at Sorry, you're looking at Slide 9. I'm sorry. Different counter slides. So I'm sorry, your question then with Comparing these to what in particular Speaker 300:31:37would you call that? Speaker 600:31:38What caused the sequential decline, because volume was stable and it Sounds like price was mix significantly negative sequentially? Speaker 300:31:49Yes, mix was. John, I'm sorry. I thought you were asking about looking forward Q2 to Q3. Q1 to Q2, yes, mix was down. As well, we talked about the cogeneration piece that hits specialty pretty significantly. Speaker 300:32:03And with the lower volume, there was a little bit more Cost absorption, so you can throw it all in a basket and you can see it really hits the gross profit line. Speaker 200:32:11Plus we shared last time The $101,000,000 of EBITDA benefited from some one time and timing effects. And a lot of that was in specialty. That's partially how The GP per ton was so high in specialty in Q1. So just the absence of those things, we're going to take the profit quarter on quarter down a little bit well. Speaker 300:32:33Yes, that alone is probably a third of the reduction. Speaker 600:32:37Okay. And then how are your China operations doing? Speaker 200:32:42So we were volume positive there. We're in startup of a new plant. I think China is a weak market now. That is for sure. I think one thing to keep in mind for us is that on Rubber, we are like 100 KT, 4000, 5000 market, this is volume market. Speaker 200:33:04So for us to find ways to place our product It's maybe a little bit easier than other folks. We're very busy with the start up and everything associated by that, but otherwise, Tough market, but we're fighting it Speaker 700:33:20out. Thank you. Operator00:33:26Our next question comes from Josh Spector with UBS. Please go ahead. Speaker 800:33:33Yes. Hi. Thanks for taking my question. First, I want to make sure I understand the cadence through the rest of the year correctly and how thinking about the moving pieces. I guess from what I've heard so far, it seems like maybe there's a $5,000,000 sequential step down because of the Cogen Energy Dynamic, seems like demand sounds stable ish at these lower levels. Speaker 800:33:56So Maybe you're in the low 80s range for 3Q. 4Q typically is 10% lower or so. I mean, that gets me roughly to the high end ish of your guidance. I guess what else would be the moving parts in there volume or otherwise to consider? Speaker 200:34:15So, I'll just make a couple of general comments and I'll let Jeff. So, Jeff is probably going to go into specifics for you around it. But I would also just say, We and a competitor both mid quarter made some announcements about how we saw volume. It is a fairly dynamic time. I think the industry, Meaning the tire guys were surprised, for example, about the trucking volumes. Speaker 200:34:37And just as we had some positive things happen in Q1, These things can balance themselves out over time. But Jeff? Speaker 300:34:45Sure. Josh, I think your thought process on Q3 is probably not too far off. If I think about Q4, typically you see So shutdowns by our customers. As Corning mentioned earlier, the thought is perhaps those shutdowns may be a little longer The normal, I think that's probably a meaningful impact. If I think about if you look at last year's Q4, One way to look at our guidance, if you look at the midpoint of our guidance, it would suggest that Q3 and Q4 are in line with Q3 and Q4 looked like last year. Speaker 300:35:27Obviously, we've got the benefit of rubber pricing. But as you mentioned, we've got the impact of the cogeneration. Perhaps we've got a view on volume. We typically do see a drop off in Q4 and our thought process is with the dynamics going on in the market and our customers staying at lower inventory levels that we could see a similar kind of drop off in Q4 of 2023 that perhaps we saw in Q4 2022. Speaker 800:35:57Okay. No, that makes sense. And just maybe a little bit Near term and long term, I guess, your competitor talked about some more some pressure within some of the conductive carbon market pricing and demand. I'm curious if you could describe what you're seeing in your acetylene black demand and pricing at the moment. And also noticed you trimmed some of your growth CapEx. Speaker 800:36:19I don't know if you're delaying anything there or if it's just timing of some of those investments. Just curious on the driver there. Thanks. Speaker 200:36:27Yes. The change in our capital is more around execution and Looking at certain projects and where we are on the timing for them. We continue to advance the acetylene project. We also We agree. There's China is a more challenging market. Speaker 200:36:44There is some differentiation of different materials used in different kinds of batteries So forth. What I'd add to that is we also see that as an opportunity. And that for the LSP, we're also looking at some other products that are Better price for that market and for their needs and the price points that they work out at. So given our overall size in this market, We see that as basically an opportunity for us and one that gives us the ability to have multiple tiers of offerings going forward. Operator00:37:26Our next Question comes from Laurence Alexander with Jefferies. Please go ahead. Speaker 900:37:32Hi. This is Dan Rizzo on for Laurence. You mentioned that the rubber black supply demand tightness. I was wondering if you would consider, I don't know, adding either brownfield or greenfield capacity. And if not, what would have Change to kind of make that viable. Speaker 200:37:48Sure. When you think about making an investment, you have to think about Return of capital, which means you have to think about what's the right hurdle rate. And that means you have to think about what's the business model. And the current business model where most customers do a short term contract and by that I mean 1 to 3 years. All right. Speaker 200:38:08It's a little bit longer now than it used to be, but still very few more than 1, 3 years. I think that puts you in a certain risk position around adding capacity. So we would really be looking for more of a longer term mutual commitment between the two parties They would just give us more surety. And with that assurety, of course, we'd be willing to accept a lower hurdle rate. And personally, I think that is the way forward for this industry, And we'll see if we can move in that direction. Speaker 300:38:39So I think we could describe it Speaker 900:38:41as something more akin to what we see in industrial gases where there's a, I don't know, like a 10 year commitment and kind of co building, is that what we're probably thinking about? Speaker 200:38:51Yes. So I come from the industrial gas industry. I think there's 2 business models there. There's where there's dedicated capacity, those tend to have a 10 year agreement. It's also more of a merchant approach, which is more like 5 years. Speaker 200:39:03There's a little more flexibility. I think something in those areas is what could make sense to add capacity. That's our view of it. Speaker 900:39:13Okay. And then just one other question. I think you mentioned adding new capacity in carbon additives in Europe. I was wondering if, I don't know, just the fluctuations, particularly in energy costs is maybe having you rethink that, that building in that region Would be better or is maybe just better to export into the region? Speaker 200:39:30Well, so let's be clear. We said that in the next 3 to 5 years, We see ourselves adding capacity in North America and in Europe. I think those will be growing markets, right? There's already a pretty large market in China. I think that we're going to see gigafabs of batteries become more democratic, so to speak, and spread out geographically. Speaker 200:39:51And there's all these things about geopolitical concerns about trade and everything else. So we think there's going to be demand in each space. Based on that, we'd be interested in being there. Remind you, we're typically using a byproduct for not making our carbon black, I'm sorry, our settling and conductive material. So that's something that we would look to see how that balance out. Speaker 200:40:14But to be clear, If there isn't a good return on investment, we will not do that. Speaker 900:40:21All right. Thank you very much. Operator00:40:27Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead. Speaker 200:40:49Yes. Good morning, John. Speaker 800:40:51Sorry about Speaker 700:40:51that. Yes, good morning. In the Rubber Black area, you said that 60% of your Contracts for next year were in good shape or signed. Is that all Europe? Or Is that large number really reflecting the European market? Speaker 200:41:12Yes. So let's be clear. That is EMEA And the Americas combined. Speaker 700:41:20Right. But if you strip it out and like how much is in Americas And how much is in EMEA? Because they're very different markets, no? Speaker 200:41:30I think for us though, The percent contracted is going to be similar, maybe it's a little bit higher in EMEA right now, just because people are going a little more quickly on that. But when we did last year, right, we ended last year with about half of our volume committed. That was the ratio we chose to take. So that was pretty well split between Americas and EMEA. Speaker 100:41:59So Speaker 700:42:01In listening to what all the different companies that make Carbon Black say, some companies Point to a more contentious price negotiation. Are your carbon black prices Simply lower in Rubber Black than some of your competitors historically. And so you have more room to raise your prices? Speaker 200:42:28Is that a fair characterization? So I don't know Exactly what my competitors' prices are. The only feedback we get on that is from our customers who are, of course, very unlikely To lay out the scenario you just said, Jeff. So I have no idea what their pricing is, what their pricing policy is Or anything else. I'd say these situations a little bit like, let's imagine there's an airline route and there's only let's imagine, I don't know. Speaker 200:43:00There's 5.50 people who want seats and but across the various airlines, there's only 500 seats. That's kind of how Europe is, it's kind of how North America is. So if someone's going to be discount offering, Freddie Lakers out there selling seats at a real It doesn't matter because Freddie can fill up his airplane. You can't like lease the new plant. It's not like the airline business, our business. Speaker 200:43:26And then what's left is left. It's just a fact. I think it's also important to know, like I don't think our prices or the industry prices are that high. People are like getting to return on capital pricing. This is where pricing needs to be. Speaker 200:43:40This is why that plant closed in North America, in my opinion. This is why this company closed Ambez in 2016. When I joined this company in 2018 and I did my first round out there with customers, I got people giving me very harsh words that Orion had closed this plant in France 2 years ago, Right. But why? I mean, it's because the pricing was too low and people were buying from Russia. Speaker 200:44:08So we're just kind of like getting back to a balanced place in my view. I don't think it is extraordinarily high or anything else. Yes, it's a change, but that's the change you need if you want to have reliable supply and Plans to get invested in and maintain. I think what's happening is, it is a reset to normality. Speaker 700:44:30I guess finally, can you talk about the trends in specialty pricing And where they're going? Are they moving lower? Are they moving higher? And What the future of those returns is? Speaker 200:44:49So we work hard for our end markets To have a value proposition in those places and yes, prices can move up and down with different impacts, energy amongst them. But we're not looking to fundamentally say, what we get in coatings isn't a high enough return for us. I think what Our view is that our position is we're looking at this time When demand is soft, not to chase volume by lowering price, so that then when the market turns and the volume comes back like your business is damaged. It is not as good as it once was. Our view is we're providing value. Speaker 200:45:36We're providing a Solution to our customers that we should maintain the, let's say, unit price in that space. You are still going to see Fluctuation in our overall GP per ton on mix, on things like power, but our view is the value of this product It's not diminished just because demand is a little slow right now. Speaker 700:46:00Okay, great. Thank you so much. Our Operator00:46:05next question is a follow-up from Jon Tanwanteng with CJS Securities. Please go ahead. Speaker 400:46:13Hi. Yes, I was just wondering if you could give a little bit more color on your plans for the buyback. I think you said you're going to be a little bit more measured and less aggressive mode compared to the $50,000,000 that you already spent. But if share prices go lower, I mean, how does that rank compared to the other Uses of cash that you're considering with a debt pay down or investments and I see you took down your CapEx as well. Speaker 300:46:37Sure, John. This is Jeff. If you think about our buyback, Our first $50,000,000 buyback, we bought back shares at approximately $10,000,000 per month To get that $50,000,000 by mid May. And then since mid May, we Took that pace down a little bit. But to your point, we are looking at this opportunistically. Speaker 300:47:00I think it's probably fair to assume That we'd be a little more aggressive if prices were a little lower and a little less aggressive if prices were higher. So it's not a static model. It's our thought process is very dynamic there, and we will be more aggressive if Prices are perhaps a little bit lower. Speaker 400:47:24Great. Thank you. Operator00:47:32There are no further questions at this time. I would like to turn the floor back over to Speaker 200:47:47This is an exciting time for our company and for the industry, and we really appreciate our investors' continued support. We look forward to seeing you very soon. We're going to be escaping the heat of Houston by coming up for 2 conferences in New York in September, And we welcome other opportunities to meet you. We're out on the road this fall. Thanks again. Speaker 200:48:08Have a good day.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallOrion Q2 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Orion Earnings HeadlinesOrion Engineered price target lowered to $13 from $15 at MizuhoApril 18 at 12:23 AM | markets.businessinsider.comOrion S.A. Announces First Quarter 2025 Earnings Release Date and Conference Call Information | ...April 15, 2025 | gurufocus.comGet Your Bank Account “Fed Invasion” Ready with THESE 4 Simple StepsStarting as soon as a few months from now, the United States government will make a sweeping change to bank accounts nationwide. It will give them unprecedented powers to control your bank account.April 19, 2025 | Weiss Ratings (Ad)Orion S.A. Announces First Quarter 2025 Earnings Release Date and Conference Call InformationApril 15, 2025 | businesswire.comJefferies Sticks to Its Buy Rating for Orion Engineered (OEC)April 8, 2025 | markets.businessinsider.comOrion S.A. to Participate in Investor Conferences in MarchMarch 10, 2025 | finance.yahoo.comSee More Orion Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Orion? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Orion and other key companies, straight to your email. Email Address About OrionOrion (NYSE:OEC), together with its subsidiaries, engages in the manufacture and sale of carbon black products. It operates in two segments, Specialty Carbon Black and Rubber Carbon Black. The company offers post-treated specialty carbon black grades for coatings and printing applications; high purity carbon black grades for the fiber industry; and conductive carbon black grades for batteries, polymers, and coatings. It also provides rubber carbon black products for applications in mechanical rubber goods, as well as in tires under the ECORAX brand name; and acetylene-based conductive additives for lithium-ion batteries and other applications. It operates in the United States, Brazil, rest of the Americas, Germany, South Africa, Italy, Spain, Turkey, France, Rest of EMEA, China, the Republic of Korea, and rest of Asia. The company was formerly known as Orion Engineered Carbons S.A. and changed its name to Orion S.A. in June 2023. Orion S.A. was founded in 1862 and is headquartered in Senningerberg, Luxembourg.View Orion ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Archer Aviation Unveils NYC Network Ahead of Key Earnings Report3 Reasons to Like the Look of Amazon Ahead of EarningsTesla Stock Eyes Breakout With Earnings on DeckJohnson & Johnson Earnings Were More Good Than Bad—Time to Buy? 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There are 10 speakers on the call. Operator00:00:00Welcome to the Orion S. A. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Operator00:00:22As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Wendy Wilson, Head of Investor Relations. Thank you, ma'am. You may begin. Speaker 100:00:34Thank you, Kyle. Good morning, everyone, and welcome to Orion's conference call to discuss our Q2 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer and Jeff White, Chief Financial Officer. We issued our press release after the market closed yesterday, and we also posted a slide presentation to the Investor Relations portion of our website. Speaker 100:01:03We will be referencing this presentation during the call. Before we begin, I'd like to remind you that some of the comments made on today's call are forward looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC, and our actual results may differ from those described during our call. In addition, all forward looking statements are made as of today, August 10. The company is not obligated to update any forward looking statements based on new circumstances in the table attached to our press release. Speaker 100:01:53I will now turn the call over to Corning Panchard. Speaker 200:01:56Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. As you can see on Slide 3, we had another excellent quarter, 2nd only to the Q1 naturally making for record first half performance. Our results reflect the hard work of the Orion team to Fundamentally transform the company, providing the industry leading products customers demand and returns on investment that investors deserve. We've been aided in this by a restructuring in the broader marketplace that has been building for years in our key markets, Has now passed the tipping point and still continues to build. Speaker 200:02:37We continue to be one of the few specialty chemical companies On track for a stronger 2023 compared to 2022, and we expect record profitability this year. We delivered 2nd quarter adjusted EBITDA of approximately $87,000,000 a 5% increase year on year and adjusted diluted earnings per share of $0.53 This resulted in record adjusted EBITDA of approximately $188,000,000 for the first half, a 13% increase year on year and record adjusted diluted earnings per share of $1.27 We also delivered strong second quarter operating cash flow, Reduced our debt level while also completing our $50,000,000 share buyback and starting on the new buyback. We expect to generate more than $200,000,000 of discretionary cash flow this year, reflecting a conversion rate of over 60%. This is a huge step up for us, which we expect to maintain. Jeff will discuss this further. Speaker 200:03:44As you have seen, we recently published Our 2022 sustainability report. I highly recommend that you take the time to read it as sustainability is central to our strategy. In specialty, this manifests in conductive additives and in rubber as a circular economy. A concrete example of this is our acetylene based conductive carbons. They are ultra clean, highly conductive and there is a production mode from the limited availability of high volume clean acetylene gas streams. Speaker 200:04:18We continue to make progress on the construction of our acetylene based conductive additive plant in La Porte. Beyond that, We expect to add additional capacity in North America and Europe coming on stream in the next 3 to 5 years. Congratulations to the entire team who is bringing our strategy to fruition as we continue to operate as a responsible corporate citizen to all stakeholders. On the operations front, specialty demand reflecting the broader manufacturing economy is subdued. We see this as an opportunity to push customer qualifications and upgrade our plans while things are slow. Speaker 200:04:57Meanwhile, we have preserved value We have preserved the underlying value of our business by maintaining end segment per ton profitability. In Rubber, as I mentioned earlier, we believe the industry restructuring is evident in our results and will continue. The situation is simple. Industry supply dynamics coupled with our commitment to get a return on invested capital that we as a company and you as shareholders deserve are driving the reset to more balanced pricing. 2024 negotiations are well underway. Speaker 200:05:36We currently have about 60% of our Americas in demand committed or in late stage negotiations, well ahead of past schedules. The pricing outlook remains positive And we expect to pick up volume at our price points. A couple of items. First, I remind you, we are negotiating for 2024 and beyond, not for 2023, have care about slow demand in 2023 in this context, except that 1 year's deferred demand is the next year's supplemental demand. And that supplemental demand further tightens the market that we are actually negotiating for. Speaker 200:06:192nd, there is a growing carbon black imbalance in our key markets where tire capacity continues to be added. 3rd, the EU ban of Russian carbon black starting next July, Combined with growing OEM concern with Russian content in their supply chain further benefits European carbon black producers. 4th, our investments in maintenance, emission controls and reliability and abatement costs, they all demand higher prices. And 5th, The expected rebound in replacement tire demand, it's a tailwind. These 5 largely structural improvements in our markets are Positive drivers for us. Speaker 200:07:03Beyond all that, customers want strong, healthy suppliers. Speaking of abatement, we are the only carbon black producer to have completed 3 air emission control projects in the United States. We have one more plant to go, which we expect to have behind us entering 2024. Now let's talk about destocking and deferring, Starting with rubber. We supply tire manufacturers. Speaker 200:07:30They supply tire dealers and large tire retailers. Eventually, a tire retailer sells to the end customer who's the most important player here. On the bottom of Slide 4, you can see that passenger car and light truck owners are driving more than last year. On the top of the slide, you can see they're deferring buying replacement tires. I use the term deferring because those tires are getting worn and they will need to be replaced. Speaker 200:08:02Just look at the gas that Miles drew. Trucking companies, They're seeing a decline in loads and hence buying fewer replacement tires. That makes sense. Going forward, you should look at Manufacturing, PMI, is getting an understanding of where that is headed. Now all this is based on U. Speaker 200:08:21S. Data. We don't have good facts like gasoline or miles or kilometers driven in Europe. However, we believe the picture there is similar. There's also the question of inventory levels, higher manufacturers, distributors and dealers each peak. Speaker 200:08:40There is less visibility here. However, our understanding is that inventories are relatively low and there is little interest in restocking currently until end customer demand picks up. On top of this, our customers express limited confidence in their demand forecast accuracy. Switching to specialty. Here, we serve dozens of end markets. Speaker 200:09:03In general, customers want low inventories and By and large, they have them. But again, there is little interest in restocking. For both Rubber and Specialty, we expect end customers to defer purchases until the start of 2024 and manufacturers to take extended holidays this summer and winter. We in turn will use this time wisely preparing for 2024 and not destroy value by chasing volume. With that, Jeff perhaps you could provide some more color on our financial results. Speaker 300:09:39Thank you, Courtney. On Slide 5, you can see the continued path of growing profitability even with the headwinds in our end markets. In 2023, we expect at the midpoint to grow EBITDA 7% versus the full year 2022. And while not shown here, EPS is expected to grow 9%. Our portfolio is a combination of the Rubber business, which is benefiting from price increases that have more than offset the near term volume challenges and our specialty business, which has kept Stable pricing with its high value add products. Speaker 300:10:17Specialty 2 is facing near term volume headwinds, But the 50 plus percent growth in rubburt EBITDA in Q2 and in the first half of twenty twenty three has allowed us to deliver respectable earnings growth. Below, you can see our continued ROCE progress over the past few years During the time, we made substantial air emission control investments. The ROCE levels we achieved are Significantly in excess of our weighted average cost of capital, ROCE stands at 17%. This key metric keeps us aligned with our shareholders as stewards of their capital and focusing on the long term sustainability of the company. Now some more details. Speaker 300:11:04On Slide 6 are the consolidated results for the 2nd quarter. The contractual price improvements in Rubber outweighed the lower volume in both businesses as well as lower cogeneration revenue. The year over year adjusted EBITDA increase of 5% in the 2nd quarter and the 13% in the 1st 6 months of 2023 are a direct result of better pricing in Rubber. You may note that the adjusted EBITDA is down in the 2nd quarter despite the increase mode. In EBITDA adjusted EPS, I'm sorry. Speaker 300:11:37This is a combination of the higher tax rate in the quarter and a couple adjustment items to net income which went opposite to last year. Slide 7 provides the year to date results For the first half of twenty twenty three, adjusted EBITDA is up $22,000,000 or 13% and adjusted net income Adjusted diluted EPS are both up 10%. All three of these are at record levels for 6 months. We achieved this despite a 50% drop in European power rates, which based on what we shared last quarter Has about a $25,000,000 annual impact, if rates hold where they are now, we expect an additional We do expect reduced power price and cogen volatility going forward. On Slide 8, The improvement in rubber pricing fully offsets the volume decline in Q2. Speaker 300:12:45Our view is that the price improvements in rubber are due to a structural shift to the market, while the volume declines will reverse next year. On the Slide 9, looking at specialty in Q2, Volumes decreased in most markets, reflecting weakness in the manufacturing sector. Gross profit per ton decreased compared with an extraordinary Q2 level last year. Our trailing 12 month gross profit per ton is also down, but above our average levels in 2022 and in the $800 to $900 per ton range we have previously discussed. We do not view this quarter's GP per tonne negatively, but rather it is near the expected range for this business. Speaker 300:13:30Importantly, for the mix of products that we sold in the quarter, our pricing remains stable. We have not chased volume by dropping prices. Slide 10 shows the key factors affecting adjusted EBITDA for the Specialty business compared with last year. As noted earlier, the volume reduction was significant. Margins were affected by fixed cost absorption and lower cogeneration revenue. Speaker 300:13:58As I noted on the last slide, pricing was stable for us despite the market conditions. We believe this reflects the strength of our value proposition. Turning to Slide 11. The headline is that Q2 Rubber EBITDA was up $19,000,000 or 51%, And the first half EBITDA was up $43,000,000 or 54%. The price improvements generated strong profitability metrics despite lower volume and lower oil prices. Speaker 300:14:29Gross profit per ton was up from $309 to $4.29 in the quarter driven by price improvements. You should expect the GP per ton to be at similar levels for the remainder of 2023. Slide 12 looks at the key factors affecting adjusted EBITDA for the Rubber business. Strong base price is clearly the key driver offsetting the lower volume and less advantageous geographic mix. For clarification, we gained volume in lower margin Asia, while we saw decreased volume in the higher margin regions. Speaker 300:15:13On Slide 13, I'd like to provide an update on cash flow and the impact on our debt level and stock buyback. With strong cash flow in the first half, We funded $20,000,000 in share buybacks in the quarter, dollars 49,000,000 year to date $54,000,000 since we started our buyback program in Q4 2022. This represents 4% of outstanding shares. As discussed during our Q1 call, As expected, we completed our initial $50,000,000 share buyback program in mid May. We purchased an additional $4,000,000 in shares toward our new buyback program in the rest of the quarter. Speaker 300:15:54We will pace the new buyback program slower and prioritize Growth and profit enhancing projects first. And as long as we stay in or near our target debt range, we plan to continue to look to opportunistically repurchase shares with a portion of our free cash flow. We reduced our net debt an additional $39,000,000 In Q2, dollars 76,000,000 in the first half of twenty twenty three to $783,000,000 Our debt to EBITDA ratio now stands at 2.34 times, down from 2.75 times in December and nearly 3 times at this point last year. As I look forward across the rest of 2023, I expect our debt level will stay near this Near where it is now and may increase a little since our CapEx is back end loaded in 2023. We benefited from lower CapEx in the first half of the year. Speaker 300:16:57On Slide 14, before I pass the call back to Corning, You can see the dramatic increase in our discretionary cash flow conversion as we have stepped up our profitability and nearly completed our EPA projects. This gives us much more flexibility to invest in growth projects, reduce our debt and opportunistically buy back shares. I expect the 60% plus conversion rate that we have in 2023 to continue in the coming years. With that, I'll turn the call back to Cory to discuss our 2023 guidance. Speaker 200:17:31Thanks, Jeff. Turning to Slide 15. As we've both said earlier, we continue to believe we will report another record year. We also believe that we're in a Strong position going into 2024 with about 60% of our Americas and EMEA rubber demand already essentially committed. For this year, we expect end customer purchase deferral and destocking to continue into Q3 and Q4. Speaker 200:18:01We also expect the lower power prices in Europe to continue to prevail. Taking that into consideration, Speaker 400:18:08We Speaker 200:18:08are upgrading our updating, excuse me, our adjusted EBITDA guidance to the $320,000,000 to $350,000,000 range, which is up over 7% at the midpoint. Our adjusted EPS guidance range of $2 to $2.25 per share and up 9% year over year at the midpoint. In closing, I would remind you that, 1st, Our specialty business is doing well. Naturally, volumes are down when manufacturing activity is down. However, our unit margin, reflecting the strength of our business, is holding at high levels. Speaker 200:18:50Meanwhile, we're driving our future growth by progressing our conductive additive plant in La Courte and advancing customer qualifications across many markets. 2nd, we believe the step up in our rubber pricing is necessary and at a sustainable level from which we will grow. 3rd, the current disconnect between miles driven, gasoline consumption and replacement tires is not sustainable. Those tires will need to be replaced. Also, the OEM market, which drives our higher margin specialty and MRG businesses, has begun its recovery. Speaker 200:19:294th, with higher profitability and the U. S. Air emissions spending nearly behind us, Our cash flow conversion has improved dramatically. I continue to see a great future for Orion as a company and as an investment. The steps we have taken and the strategy we have embarked upon provide a great foundation for sustained profitable growth, Free cash flow and exceptional returns for our shareholders. Speaker 200:19:57Thank you. Kyle, please open the line for questions. Operator00:20:02Thank you. We will now be conducting a question and answer session. Our first question comes from Chris Kapsch with Loop Capital Markets LLC. Please go ahead. Speaker 500:20:38Hey, thanks. Good morning. So thank you for the details around Characterizing the ongoing tire contract negotiations for next year. Could you remind us like what percentage of your existing contract Already had multi year agreements in place where there is already an increment in pricing baked in for next year or beyond. And curious about the agreements that are being resolved now. Speaker 500:21:06How does the magnitude of pricing that you alluded to compared to those that have already been baked into the multiyear deals? And if there's any way to characterize this by geography, that would be helpful too. Speaker 200:21:20Hi, Chris. So first of all, thanks for your question. I appreciate it. So We had about 50% of our volume under contract going into it. As you said, we had a step up in those contracts going from 2023 to 24. Speaker 200:21:37I expect that we will do better than that with the new contracts that we signed this year. It's early days, but that's my expectation. And I'm okay with that because I think it's a better allocation of risk and commitment between the companies and We're prepared to do that sort of thing. I think that's a good development overall for the industry. I'd say in general, there's More interest for people to get the contract quickly in Europe right now versus North America or South America Just because of the upset there with the Russian capacity, which was probably about 35% of that market. Speaker 200:22:17Some customers, as we estimated, As much as half of their carbon black was coming from Russia. So there's certainly some people who are quite interested in that. Did I miss anything there, Chris? Speaker 500:22:29No, that covers it. That's helpful. And then the follow-up would be, I like the way you characterize the Perm destocking presumably represents deferred or latent demand incremental demand for next year. But so assuming that this destocking runs its course, Let's just say by calendar year end and there's normalization in demand trends next year. There any way to characterize what you think the industry capacity utilization rates would be by region In sort of the core rubber black, not specialty area? Speaker 500:23:04Thank you. Speaker 200:23:05Sure. So just to clarify, I mean, I think It's not one day when every customer decides, okay, I'm going to stop deferring. I think we'll see that turning in the 4th quarter. I don't think we as a company will see the impact of that until January just because in the Q4, you've got holiday shutdowns and that kind of things. I think it's that kind of a timeframe. Speaker 200:23:28It's been a relatively long deferral. What I think that means for us then going forward Is rubber capacity in Europe will be at very high levels and that will be basically where people can operate it at. So I would say high 80s, low 90s. I think North America will also be very high levels of industry utilization, again, just because of supply demand. We get back to a more normal run rate and demand. Speaker 200:23:58I think capacity in both areas will be tight. We will have our EPA work behind us. At least one major competitor will not, right? So when they go through it, that will probably have an impact in demand or capacity for North America next year. Operator00:24:20Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead. Speaker 400:24:29Hi, thanks for taking my question. I was wondering if A little bit more color on the inventories at your customers compared to where they would normally be in this kind of demand environment and how long they can actually keep drawing down Before they reach critical levels or levels that put their business at risk, have your customers actually told you that they're specifically drawing down Or is that just more research on your end based on what you're seeing in the market? Just help us get more clarity on what's giving you the confidence that things will come back and kind of When they go? Speaker 200:25:01Sure. So two things there. Number 1 is, of course, cutting across many different customers in specialty many, many, In Rubber, let's say, many those customers don't always express tremendous confidence And exactly what is in all the downstream channel. So I know everybody is interested in this question of destocking. I'll just tell you, I think end customer demand And the deferring there, which you can see in that gasoline and miles driven versus replacement tires, I really think that's the best data we have. Speaker 200:25:34So now more anecdotally, when you talk to these guys, they talk about, yes, we're at a very low inventory level. If any customer demand dropped lower, well then That might be a little bit more inventory than they think they need. They might be able to draw that down. If it steps up a little bit, right, they would have to buy a little bit more. I think they're at low levels. Speaker 200:25:55I will never tell you. It can't get worse, so they couldn't destock more. But our view is and when we talk to these guys, They all express they all. They unbalanced express that they are at low inventory levels, but very reluctant to make a step up in inventory. The one thing we may see in this month is with the rise of oil prices, we may see some people buying in front of that In specialty, okay, that will help August, it will hurt September. Speaker 200:26:24I don't see that as very significant. Speaker 400:26:28Okay. Got it. Speaker 200:26:28And then And then Just one other thing. You have a few guys who have talked about A little bit of unconfirmed that they're like below their safety stock level. But again, that's some you have to really look across the balance of the whole industry. Speaker 400:26:46Okay, understood. As your customers get down to these clinical inventory levels, assuming demand stays roughly where it is, I mean, how much leverage does that create on pricing for you as you enter the new year? I know tire contracts are generally negotiated for ahead of time, but in the rest of your business, Wouldn't that give you also some a lot better leverage as you enter the new year, especially if capacity remains limited and these guys start to restock? Speaker 200:27:12Well, John, the way this game works is the buyers right now are saying, oh, demand's weak, you need to load, you need to give me a good price. And we're saying, No, no, no, no. We're not negotiating for 2023. We're negotiating for 2024. That's an obvious thing in the annual cycle for Rubber, What AI plays out in specialty as well. Speaker 200:27:32But the key point here is, in specialty, we're selling value, we're selling a solution, Right. So we're not looking to take advantage of the market conditions nor be a victim of them, right? We're looking to keep a fair price in our specialty and move it up where we need to and get our new products qualified And basically be agnostic to the current market conditions. But yes, I mean, I think to an intelligent buyer, they can see what's going to happen next year. Speaker 400:28:06Okay, great. And then just one more thing. Can you just break out the impact of cogeneration? Kind of what has been your expectation and what has been the change there, I guess, in the outlook that specifically from that piece of the business? Speaker 200:28:22Sure. I can let Jeff go more. But just to say, when we gave our last guidance right at the end of Q1, we We're really looking at what power rates were at that time, and we expected them to just stay where they are. I thought that they might actually pick up a bit this summer in Europe, which has not happened. And I think it was in my part of the script last quarter When I said that for every move of about 20% would be about $10,000,000 and it's moved about 50% down. Speaker 200:28:55So that's how you get to annual run rate of the 25% that Jeff mentioned. But Jeff, anything you want to add to that? Speaker 300:29:03Sure. John, yes, to Corning's point, the 50% reduction in power prices would Get you somewhere in the $25,000,000 range from a profitability standpoint. If you look right now In the key markets, I think if you were to look at Germany, it's down about 50% perhaps year over year. If you look at Italy, it's down maybe closer to 40. There's not been a step up in the summertime. Speaker 300:29:30Even though it's very hot there, there's not been a step up in summertime power costs. So we're As the year goes on, we're expecting this lower level to remain, which is lower than what our expectation had been 3 or 4 months ago. So we had a little bit impact in the Q1, a little bit more in the Q2 and expect a bigger impact in the 3rd Q4 if these levels remain where they're at. Speaker 200:29:53And just to keep in mind though, like this is a net positive for everybody, right? It's going to mean the European fee income economy is stronger. It's ultimately going to help consumer demand in Europe. One other thing to understand is that we did hedge last year. Congratulations to our energy team. Speaker 200:30:11It was Very good timing. Those hedges will expire at the end of this calendar year. So that's going to give us a headwind next year of about $10,000,000 Operator00:30:29Our next question comes from John Roberts with Credit Suisse. Please go ahead. Speaker 600:30:37Thank you. Slide 10 has the year over year bridge for the Specialty Chemical EBITDA. If you were going to build that slide On a sequential quarterly basis, what would it look like? The volumes were actually relatively flat sequentially. Speaker 200:30:57Yes. So I would have to take a quick look at that. I think that our price mix has not shifted dramatically time on quarter on quarter. Volume, Jeff, how do we look quarter on quarter? Speaker 300:31:13I think volume, it might be down a little bit versus Speaker 200:31:19It's there Speaker 600:31:20on the right hand column. Yes. You give the quarter I'm Speaker 200:31:26sorry, you're looking at Sorry, you're looking at Slide 9. I'm sorry. Different counter slides. So I'm sorry, your question then with Comparing these to what in particular Speaker 300:31:37would you call that? Speaker 600:31:38What caused the sequential decline, because volume was stable and it Sounds like price was mix significantly negative sequentially? Speaker 300:31:49Yes, mix was. John, I'm sorry. I thought you were asking about looking forward Q2 to Q3. Q1 to Q2, yes, mix was down. As well, we talked about the cogeneration piece that hits specialty pretty significantly. Speaker 300:32:03And with the lower volume, there was a little bit more Cost absorption, so you can throw it all in a basket and you can see it really hits the gross profit line. Speaker 200:32:11Plus we shared last time The $101,000,000 of EBITDA benefited from some one time and timing effects. And a lot of that was in specialty. That's partially how The GP per ton was so high in specialty in Q1. So just the absence of those things, we're going to take the profit quarter on quarter down a little bit well. Speaker 300:32:33Yes, that alone is probably a third of the reduction. Speaker 600:32:37Okay. And then how are your China operations doing? Speaker 200:32:42So we were volume positive there. We're in startup of a new plant. I think China is a weak market now. That is for sure. I think one thing to keep in mind for us is that on Rubber, we are like 100 KT, 4000, 5000 market, this is volume market. Speaker 200:33:04So for us to find ways to place our product It's maybe a little bit easier than other folks. We're very busy with the start up and everything associated by that, but otherwise, Tough market, but we're fighting it Speaker 700:33:20out. Thank you. Operator00:33:26Our next question comes from Josh Spector with UBS. Please go ahead. Speaker 800:33:33Yes. Hi. Thanks for taking my question. First, I want to make sure I understand the cadence through the rest of the year correctly and how thinking about the moving pieces. I guess from what I've heard so far, it seems like maybe there's a $5,000,000 sequential step down because of the Cogen Energy Dynamic, seems like demand sounds stable ish at these lower levels. Speaker 800:33:56So Maybe you're in the low 80s range for 3Q. 4Q typically is 10% lower or so. I mean, that gets me roughly to the high end ish of your guidance. I guess what else would be the moving parts in there volume or otherwise to consider? Speaker 200:34:15So, I'll just make a couple of general comments and I'll let Jeff. So, Jeff is probably going to go into specifics for you around it. But I would also just say, We and a competitor both mid quarter made some announcements about how we saw volume. It is a fairly dynamic time. I think the industry, Meaning the tire guys were surprised, for example, about the trucking volumes. Speaker 200:34:37And just as we had some positive things happen in Q1, These things can balance themselves out over time. But Jeff? Speaker 300:34:45Sure. Josh, I think your thought process on Q3 is probably not too far off. If I think about Q4, typically you see So shutdowns by our customers. As Corning mentioned earlier, the thought is perhaps those shutdowns may be a little longer The normal, I think that's probably a meaningful impact. If I think about if you look at last year's Q4, One way to look at our guidance, if you look at the midpoint of our guidance, it would suggest that Q3 and Q4 are in line with Q3 and Q4 looked like last year. Speaker 300:35:27Obviously, we've got the benefit of rubber pricing. But as you mentioned, we've got the impact of the cogeneration. Perhaps we've got a view on volume. We typically do see a drop off in Q4 and our thought process is with the dynamics going on in the market and our customers staying at lower inventory levels that we could see a similar kind of drop off in Q4 of 2023 that perhaps we saw in Q4 2022. Speaker 800:35:57Okay. No, that makes sense. And just maybe a little bit Near term and long term, I guess, your competitor talked about some more some pressure within some of the conductive carbon market pricing and demand. I'm curious if you could describe what you're seeing in your acetylene black demand and pricing at the moment. And also noticed you trimmed some of your growth CapEx. Speaker 800:36:19I don't know if you're delaying anything there or if it's just timing of some of those investments. Just curious on the driver there. Thanks. Speaker 200:36:27Yes. The change in our capital is more around execution and Looking at certain projects and where we are on the timing for them. We continue to advance the acetylene project. We also We agree. There's China is a more challenging market. Speaker 200:36:44There is some differentiation of different materials used in different kinds of batteries So forth. What I'd add to that is we also see that as an opportunity. And that for the LSP, we're also looking at some other products that are Better price for that market and for their needs and the price points that they work out at. So given our overall size in this market, We see that as basically an opportunity for us and one that gives us the ability to have multiple tiers of offerings going forward. Operator00:37:26Our next Question comes from Laurence Alexander with Jefferies. Please go ahead. Speaker 900:37:32Hi. This is Dan Rizzo on for Laurence. You mentioned that the rubber black supply demand tightness. I was wondering if you would consider, I don't know, adding either brownfield or greenfield capacity. And if not, what would have Change to kind of make that viable. Speaker 200:37:48Sure. When you think about making an investment, you have to think about Return of capital, which means you have to think about what's the right hurdle rate. And that means you have to think about what's the business model. And the current business model where most customers do a short term contract and by that I mean 1 to 3 years. All right. Speaker 200:38:08It's a little bit longer now than it used to be, but still very few more than 1, 3 years. I think that puts you in a certain risk position around adding capacity. So we would really be looking for more of a longer term mutual commitment between the two parties They would just give us more surety. And with that assurety, of course, we'd be willing to accept a lower hurdle rate. And personally, I think that is the way forward for this industry, And we'll see if we can move in that direction. Speaker 300:38:39So I think we could describe it Speaker 900:38:41as something more akin to what we see in industrial gases where there's a, I don't know, like a 10 year commitment and kind of co building, is that what we're probably thinking about? Speaker 200:38:51Yes. So I come from the industrial gas industry. I think there's 2 business models there. There's where there's dedicated capacity, those tend to have a 10 year agreement. It's also more of a merchant approach, which is more like 5 years. Speaker 200:39:03There's a little more flexibility. I think something in those areas is what could make sense to add capacity. That's our view of it. Speaker 900:39:13Okay. And then just one other question. I think you mentioned adding new capacity in carbon additives in Europe. I was wondering if, I don't know, just the fluctuations, particularly in energy costs is maybe having you rethink that, that building in that region Would be better or is maybe just better to export into the region? Speaker 200:39:30Well, so let's be clear. We said that in the next 3 to 5 years, We see ourselves adding capacity in North America and in Europe. I think those will be growing markets, right? There's already a pretty large market in China. I think that we're going to see gigafabs of batteries become more democratic, so to speak, and spread out geographically. Speaker 200:39:51And there's all these things about geopolitical concerns about trade and everything else. So we think there's going to be demand in each space. Based on that, we'd be interested in being there. Remind you, we're typically using a byproduct for not making our carbon black, I'm sorry, our settling and conductive material. So that's something that we would look to see how that balance out. Speaker 200:40:14But to be clear, If there isn't a good return on investment, we will not do that. Speaker 900:40:21All right. Thank you very much. Operator00:40:27Our next question comes from Jeff Zekauskas with JPMorgan. Please go ahead. Speaker 200:40:49Yes. Good morning, John. Speaker 800:40:51Sorry about Speaker 700:40:51that. Yes, good morning. In the Rubber Black area, you said that 60% of your Contracts for next year were in good shape or signed. Is that all Europe? Or Is that large number really reflecting the European market? Speaker 200:41:12Yes. So let's be clear. That is EMEA And the Americas combined. Speaker 700:41:20Right. But if you strip it out and like how much is in Americas And how much is in EMEA? Because they're very different markets, no? Speaker 200:41:30I think for us though, The percent contracted is going to be similar, maybe it's a little bit higher in EMEA right now, just because people are going a little more quickly on that. But when we did last year, right, we ended last year with about half of our volume committed. That was the ratio we chose to take. So that was pretty well split between Americas and EMEA. Speaker 100:41:59So Speaker 700:42:01In listening to what all the different companies that make Carbon Black say, some companies Point to a more contentious price negotiation. Are your carbon black prices Simply lower in Rubber Black than some of your competitors historically. And so you have more room to raise your prices? Speaker 200:42:28Is that a fair characterization? So I don't know Exactly what my competitors' prices are. The only feedback we get on that is from our customers who are, of course, very unlikely To lay out the scenario you just said, Jeff. So I have no idea what their pricing is, what their pricing policy is Or anything else. I'd say these situations a little bit like, let's imagine there's an airline route and there's only let's imagine, I don't know. Speaker 200:43:00There's 5.50 people who want seats and but across the various airlines, there's only 500 seats. That's kind of how Europe is, it's kind of how North America is. So if someone's going to be discount offering, Freddie Lakers out there selling seats at a real It doesn't matter because Freddie can fill up his airplane. You can't like lease the new plant. It's not like the airline business, our business. Speaker 200:43:26And then what's left is left. It's just a fact. I think it's also important to know, like I don't think our prices or the industry prices are that high. People are like getting to return on capital pricing. This is where pricing needs to be. Speaker 200:43:40This is why that plant closed in North America, in my opinion. This is why this company closed Ambez in 2016. When I joined this company in 2018 and I did my first round out there with customers, I got people giving me very harsh words that Orion had closed this plant in France 2 years ago, Right. But why? I mean, it's because the pricing was too low and people were buying from Russia. Speaker 200:44:08So we're just kind of like getting back to a balanced place in my view. I don't think it is extraordinarily high or anything else. Yes, it's a change, but that's the change you need if you want to have reliable supply and Plans to get invested in and maintain. I think what's happening is, it is a reset to normality. Speaker 700:44:30I guess finally, can you talk about the trends in specialty pricing And where they're going? Are they moving lower? Are they moving higher? And What the future of those returns is? Speaker 200:44:49So we work hard for our end markets To have a value proposition in those places and yes, prices can move up and down with different impacts, energy amongst them. But we're not looking to fundamentally say, what we get in coatings isn't a high enough return for us. I think what Our view is that our position is we're looking at this time When demand is soft, not to chase volume by lowering price, so that then when the market turns and the volume comes back like your business is damaged. It is not as good as it once was. Our view is we're providing value. Speaker 200:45:36We're providing a Solution to our customers that we should maintain the, let's say, unit price in that space. You are still going to see Fluctuation in our overall GP per ton on mix, on things like power, but our view is the value of this product It's not diminished just because demand is a little slow right now. Speaker 700:46:00Okay, great. Thank you so much. Our Operator00:46:05next question is a follow-up from Jon Tanwanteng with CJS Securities. Please go ahead. Speaker 400:46:13Hi. Yes, I was just wondering if you could give a little bit more color on your plans for the buyback. I think you said you're going to be a little bit more measured and less aggressive mode compared to the $50,000,000 that you already spent. But if share prices go lower, I mean, how does that rank compared to the other Uses of cash that you're considering with a debt pay down or investments and I see you took down your CapEx as well. Speaker 300:46:37Sure, John. This is Jeff. If you think about our buyback, Our first $50,000,000 buyback, we bought back shares at approximately $10,000,000 per month To get that $50,000,000 by mid May. And then since mid May, we Took that pace down a little bit. But to your point, we are looking at this opportunistically. Speaker 300:47:00I think it's probably fair to assume That we'd be a little more aggressive if prices were a little lower and a little less aggressive if prices were higher. So it's not a static model. It's our thought process is very dynamic there, and we will be more aggressive if Prices are perhaps a little bit lower. Speaker 400:47:24Great. Thank you. Operator00:47:32There are no further questions at this time. I would like to turn the floor back over to Speaker 200:47:47This is an exciting time for our company and for the industry, and we really appreciate our investors' continued support. We look forward to seeing you very soon. We're going to be escaping the heat of Houston by coming up for 2 conferences in New York in September, And we welcome other opportunities to meet you. We're out on the road this fall. Thanks again. Speaker 200:48:08Have a good day.Read morePowered by