Orion Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Orion S. A. First Quarter 20 24 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.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Ryan. Good morning, everyone, and welcome to Orion's conference call to discuss our Q1 2024 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, our Chief Executive Officer and Jeff Gleich, our 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 1

We 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 the call. In addition, all forward looking statements are made as of today, May 3, 2024. The company is not obligated to update any forward looking statements based on our new circumstances or revised expectations.

Speaker 1

All non GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. I'll now turn the call over to Corning Painter.

Speaker 2

Thank you, Wendy. Good morning, everyone, and thank you for joining our call today. We started 2024 on a strong footing with adjusted EBITDA of $85,000,000 our 2nd best Q1 behind only last year's results. More importantly, we saw underlying improvement in the business. Our specialty volume grew 19% compared with last year.

Speaker 2

At the same time, we increased our gross profit per ton from $4.92 in Q4 to $6.59 to a level more in line with normal margin levels. Rubber gross profit margins of $4.35 per ton were well above last year's average of $409 per ton. Prior to 2022, our rubber gross profit margins typically ran in the $200 to $300 per ton range. These results clearly show that our key markets continue to restructure, and this is the new normal from which we can build. As a result of our progress in both markets, we continue to expect 2024 to be another year of growth leading to record EBITDA.

Speaker 2

In summary, we're on track to outperform expectations in specialty and to exceed per ton margins in rubber despite a more challenging geographic mix in both markets. Digging deeper into rubber, we expect strong demand in Europe, but weaker than expected demand in the Americas. We are confident that we can adapt to these changes with agility and remain committed to our guidance range of adjusted EBITDA at $340,000,000 to $360,000,000 and adjusted diluted EPS of 2 point to $2.20 per share, up 5% and 11%, respectively. In sustainability, we were recently notified that our EcoVadis rating has been raised from gold to platinum, the highest possible distinction. That means we are in the place amongst the top 1% of companies assessed by EcoVadis, one

Speaker 3

of the

Speaker 2

world's largest providers of business sustainability ratings. This ranking is quite prestigious with a well respected NGO validating our tremendous progress. A huge congratulations to the whole Orion team on this accomplishment. Thank you and well done. Looking at our 2 business units and starting with Rubber, our customers are gaining confidence looking towards 2025.

Speaker 2

This, combined with the EU ban on Russian carbon black, which begins in less than 2 months, shipping challenges from Asia to Europe, the seeming end of the U. S. Trucking recession and the industry restructuring in our value chain all makes for a very promising 2025 pricing cycle. We see customers already gearing up for the negotiations, perhaps preferring to wrap things up before the market strengthens further. Some are essentially kicking off the negotiations now, while others are in the framing stage, defining parameters for the 2025 negotiation.

Speaker 2

In terms of framing, for our part, we are open to starting early, but we want to avoid holding volume for a customer and then being left at the altar at the last moment. So we will be stricter in enforcing time bounded offers, utilizing volume rebates and consider shifting production towards our specialty business to support the strengthening polymer market. In our Specialty business, we advanced 2 significant products in Q1. First, last quarter, we shared that we achieved technical milestones related to the ongoing debottlenecking of our high performance and unique surface treated gas black grades for the coatings and ink markets. I am happy to report that technical marketing and customer uptake of the additional capacity is going well, exceeding expectations.

Speaker 2

2nd, last month, we also announced the introduction of Tapa10, a new conductive carbon aimed at batteries with more of a cost based value proposition. Here, I'm happy to say this product has been qualified by a leading player in the lithium ion battery space and commercial sales of Bugatti. Turning to Slide 4. With the EPA spending behind us, we will now focus our capital allocation on more financial and shareholder rewarding ways. I see capital allocation as management's top responsibility after safety.

Speaker 2

One priority for us is strategic and profitable growth. Here, we recently celebrated the groundbreaking of our new plant in La Porte, Texas that is scheduled to be online in mid-twenty 25. When completed, this will be the only facility in North America producing high purity, acetylene based conductive additives to support the global shift to electrification. This site will produce conductive additives with about oneten the carbon footprint compared with alternative conductive carbon technology. As we've communicated in the past, this not only supports formulations for lithium ion batteries, but is also an essential material in the high voltage cables that are needed to build out electric grids around the world.

Speaker 2

With that, I would ask Jeff to provide additional insights into our financial results.

Speaker 3

Thank you, Corey. On Slide 5 are the consolidated results for the Q1. Compared with Q1 last year, volume was up in both businesses with specialty volumes increasing in all regions and rubber increasing in Europe and China. Gross profit and gross profit per ton were down. If you recall, as we discussed last year, in Q1 2023, we had some timing and one time benefits totaling $9,000,000 Those did not repeat.

Speaker 3

We also saw an adverse impact this year from the regional rubber volume mix with less North American and more China volume. On a sequential basis, all metrics were up, especially of note, a significant increase in gross profit and gross profit per ton, which was up 28% to $4.92 On Slide 6, we look at the EBITDA drivers. Stronger pricing and volume in rubber was primarily offset by poor regional mix. On the cost side, the $9,000,000 impact in timing and one time items from last year, as previously noted, higher labor costs and operating costs as well as less benefits from cogeneration. On Slide 9, rubber volumes increased in Europe, where we are already seeing the benefit of the upcoming Russian carbon black ban as well as in China, but this was mostly offset by lower demand in the Americas.

Speaker 3

Compared with Q1 last year, we experienced lower gross profit per ton despite strong contractual price increases. This was due to the timing issues previously mentioned, poorer regional mix, namely the weaker North American volume, higher fixed cost and lower cogeneration pricing. However, Q1 gross profit per ton of $4.35 was well above last year's average of $409 Reiterating what Corning said, we expect this higher level of gross profit per ton to continue across 2024. Slide 8 shows the impacts in a waterfall chart of the Rubber business. Pricing was up $5,000,000 versus 2023 due to the continued structural market improvement.

Speaker 3

While volume was up 2.5%, the impact of the regional mix adversely impacted EBITDA by $6,000,000 Cost impacts also offset the improved pricing. Just to be clear on this chart, the $5,800,000 cost impact is split roughly between cost increases and lower cogeneration pricing. On Slide 9 is the financial table for specialty. Volume increased across all regions and nearly all markets. Gross profit per ton decreased on a year over year basis, primarily due to the prior year timing impacts previously mentioned and higher fixed costs.

Speaker 3

As expected, our gross profit per ton was significantly higher than Q4 2023, up 34% to $6.59 While our trailing 12 month gross profit per ton has declined over the past four quarters, our Q1 level is above our trailing 12 month level and we expect the curve will be turning back up as we move into the second half of this year. As we look forward, we also expect specialty volumes to continue stronger as market conditions improve and volume and mix moves toward higher margin products. The surface treated Gas Black products, which Corning noted earlier, are an example of this. Slide 10 shows in the waterfall chart specialty EBITDA as discussed on the previous slide. Increased specialty volumes were offset by the impact of favorable timing items from last year as well as higher operating and labor costs.

Speaker 3

Slide 11 shows cash flow for the quarter. We had an increase in working capital, but also lower level of CapEx in Q1 compared with what we expect for the rest of 2024. Debt was down slightly, but since our trailing 12 month EBITDA was lower than our year end 2023 EBITDA, our debt ratio increased to 2.44 times, still within our targeted 2.0 to 2.5 range. We are comfortable with our debt level as we made a concerted effort to lower it significantly in 2023. Slide 12 shows our expected range for cash generation and usage in 2024.

Speaker 3

For this year, the majority of our discretionary cash usage will go towards the report plan. On this table, we have not shown any change in working capital for 2024. This is one area of risk as we saw in Q1, where working capital was up $26,000,000 We will monitor this closely as the year continues. With that, I will turn the call back over to Corning to discuss our 2024 guidance.

Speaker 2

Thanks, Jeff. We're off to a good start, and I expect this to be another record year. Turning to Slide 13, we're reaffirming our guidance. Based on current conditions, we project 5% EBITDA growth in 2024 and 11% increase in EPS. This would be our 4th year of growth.

Speaker 2

Let me close with a few points for you. First, the industry restructuring, which has been underway for years, will continue. Tire factories, new tire factories continue to be announced in North America and in Europe. The EU ban on Russian carbon black starts in 58 days. The risks of a far flung supply chain are obvious.

Speaker 2

The supply demand balance continues to move in our direction and a strengthening polymers market also tightens the rubber carbon black supply and demand further. 2nd, specialty demand is recovering. 3rd, our La Porte facility is on track for mid next year, providing additional opportunities for expanding specialty margins. And 4th, we take capital deployment seriously. We are committed to increasing free cash flow, maintaining a strong balance sheet and deploying your capital wisely, providing increased returns through investments like La Porte, buying back shares or by reducing our leverage.

Speaker 2

And Ryan, with that, please open up the lines for questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from the line of Josh Spector with UBS. Please go ahead.

Speaker 4

Yes. Hi. Good morning, everyone. Porting, I was wondering if you could talk a bit about the volume trends that you're seeing in the market today and kind of some of your forward expectations. So I think your comments seem pretty optimistic or maybe more upbeat on where demand is at, but it's pretty clear that your guidance assumption assumes no improvement.

Speaker 4

So how have things changed and how does that compare versus what's baked into your guidance? Thanks.

Speaker 2

Sure. So we have never said that we saw for this year like a hockey stick necessary to achieve our guidance nor did we really think there is the confidence in the marketplace to do that. That said, in Q1, there's positive developments in it. I'd say in the specialty area, it's really quite broad across the market. So for example,

Speaker 5

in some of

Speaker 2

the higher margin areas like coatings, distributors who are often serving coatings margins or customers, those are very high, but so are things like thin film, pipe and so forth. So you can see that balance in how our GP per ton has developed in specialty. Broadly speaking, we think that it's going to be continuing on this path. I don't see customers being eager to really stock up and restock in a big way, but I do think the fear of inventory and that sort of thing is down a bit. On the tire space, you see, for example, in the North American market, increased purchase of tires, and that's in the mid teens, but you see tire production only up maybe like 4%.

Speaker 2

So they're still suffering for imports. We're still seeing the trucking volumes while maybe now bottoming, they haven't really come back stronger. So over the course of the year, it's possible that trend, I think, has stabilized and we'll have to see the rate at which it improves from here. We do need a little bit of improvement, right, from an $85,000,000 run rate to hit our guidance. So there's some growth expected in our numbers.

Speaker 4

Yes, thanks for that. And I guess maybe on that last point, I guess trying to think a little bit more near term here on second quarter. You had some pretty easy volume comps in specialty and rubber. And I mean, there was some noise in the Q1 from cogen credits last year. But I guess the simple way to ask this is, do you expect EBITDA up year on year in 2Q with the higher volumes with some maybe improving profitability in rubber or are there other offsets we should be considering?

Speaker 4

Thanks.

Speaker 2

So I think on a clean run rate basis, I think that we're in a good position for next year with improved margins and improving specialty market. Does that help Josh?

Speaker 4

A little bit. I guess I'll try to the top just on second quarter. I mean, I think volumes could be up something like 10%. I assume that would lift earnings year on year. What would be wrong with that thinking?

Speaker 2

Just in terms of last year where so I'm doing this without having looked precisely at that for you. But I think you have to think about what the power rates were last year and any other sort of timing impacts that can flow in and out of our P and L. So for example, if a particular input cost moves sharply and quickly, then that's the kind of thing that can have a lag in our pricing models.

Speaker 4

Okay. Thanks.

Speaker 2

I mean, in general, I mean, so Josh, I'm not trying to be downbeat. I think that we'll be looking at a stronger quarter in Q2. I think that's implied in our guidance without giving out specific numbers. And Josh, this is Jeff.

Speaker 3

Just one additional thought. If you think about the midpoint of our guidance relative to the last three quarters of last year or clearly whether it's in 1 quarter, but certainly over the course of 3 quarters, we got to have significantly higher EBITDA in the last three quarters to hit the midpoint of our guidance. So we would have to be at $265,000,000 in last year. In the last three quarters, we were at roughly 2 $30,000,000 to $31,000,000 So there's a pretty significant ramp over the 3 quarters, whether you see some of that in the second quarter or it's more back end loaded, we'll have to see. We did have if you look at last year, we did have a bit of a stronger second quarter and then the 3rd Q4 weren't nearly as strong.

Speaker 3

So you perhaps would see more growth in the 3rd Q4 year over year.

Speaker 4

Yes, thanks. I'll leave it there. Thank you guys.

Speaker 2

Thanks, Josh.

Operator

Thank you. Our next question is from the line of John Roberts with Mizuho Securities. Please go ahead.

Speaker 6

Thank you. It's been a while since we've had kind of normal seasonality, I guess. Would you characterize the Q over Q, the March quarter versus the December quarter, 10% volume growth overall, 8% in rubber, 15% specialty, normal seasonal pickup or better or worse than normal seasonal?

Speaker 2

I would describe the specialty as a little bit better than normal. I looked back over the time. There were a few times when we had a bigger, let's say, EBITDA step change. But that's when we saw, let's say, power prices really move sharply in Europe or a special circumstance like that. So I put the specialty at a little bit better than your normal seasonality.

Speaker 6

And then industrial rubber has a fair amount of automotive OEM exposure and it seems like in at least in the developed markets, North America, Europe, auto OEM has slowed here. Are you seeing that in your industrial rubber products?

Speaker 5

Well, as I said,

Speaker 2

we see North America a bit slower and some of that's probably in the OEM space. Some of that I think is also just the impact of import tires on the replacement market. And it's difficult for us to tease out exactly where that is. But I'd say, North America a little bit less. In Europe, I'm not saying the tire to market is like that dramatically better than North America.

Speaker 2

It's just I think the Russian ban has really tightened things up.

Speaker 6

Okay. And then lastly, I know China is not that big, but you've got new capacity there. And you sounded pretty upbeat about China. It's confusing I think to a lot of companies what's actually going on. What's your read in the sustainability of the strength in China right now?

Speaker 2

So I think sectors of the Chinese economy that are really set on exports,

Speaker 6

you can look at, well, is

Speaker 2

there a recovery in European consumer demand, North American consumer demand, that kind of thing. In general, like maybe it's like the story of the purchaser managed index, right? It's like slightly above 50, but not much. So I think it's a slightly improved situation and sentiment from where like when I was there last in November, but I don't think I don't I wouldn't read into that, that it's extremely bullish or that there isn't still some negative sentiment in that market.

Operator

Thank you. Thank you. Our next question is from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Speaker 5

Hi, good morning. Thank you for taking my questions and nice quarter. I was wondering if you could talk a little bit more about pricing and the remaining capacity you have in 2020 ahead of this Russian import ban. Exactly how much upside are you seeing there or movement, I guess, are you seeing there? 1st in 'twenty four?

Speaker 5

And then 2, is it impacting 'twenty five pricing negotiations if it doesn't start it yet?

Speaker 2

Sure. So in Europe specifically, a lot of the, let's say, premier tire brands, they had already locked in their supply and they had locked in their supply without Russian carbon black. So I'd say it's more of a play in the second area. So I'd see we do see opportunities to pick up some additional volume there. Competition is really with Indian supply in that space.

Speaker 2

So it's a positive environment. It's not like it's unchecked positivity, I would say. And I think definitely all this sets up for a very strong negotiation for next year.

Speaker 5

Okay. Have those discussions started yet for next year? Is that later this

Speaker 2

year? Yes. I tried to make that clear in it. So some people are in the framing, some people want to talk numbers. So that's going already.

Speaker 5

Yes. And also congratulations on the platinum rating. I was wondering if that impacts your pricing ability or is it just more nominal at this point?

Speaker 2

I think that for many of our customers are really concerned about sustainability and that is their preferred metric for sure. So I think it really is just another validation that we're a leader in this industry that we're a supplier you can count

Speaker 5

on and you can count on for

Speaker 2

the long haul. And that sense of reliability and long term commitment surely is worth something in this. And I think people have learned the risk of not playing the not locking up serious suppliers. So I think it's a net positive for us.

Speaker 5

Okay, got it. What areas do you still see weakness in and kind of what are the prospects for improvement in those areas as you go through the year?

Speaker 2

Yes. Well, I would say North American tires is still a weaker area. Tire purchases are up much more than manufacturing. So let me clear. What I mean when I say North America tires, I mean North America tire manufacturing to a certain degree European tire manufacturing.

Speaker 2

And this then relies on the brands with really a better cost of ownership value proposition to customers, start earning back people's business as people adjust to the pricing changes that have happened in the market and incomes are up and people sort of expect the new normal. I think that's a big opportunity for the marketplace. I mean, in general, the in the specialty area, almost every market is up, some more than others. So for example, in North America, if offshore wind and grid 2.0 and connecting up far flung wind on land, wind farms, as that progresses, that's the kind of thing that would increase demand in that particular market, that sort of thing. Does that help, John?

Speaker 5

It does. Thank you. And then finally, just an update on capital allocation you mentioned is important. I'm just wondering where is it most likely that you deploy excess cash in the next 6 to 12 months?

Speaker 2

All right. So when we think about capital allocation, we think, number 1, just in terms of a framework about, hey, what's our cash flow? What are the other uses for cash? We also think about our share price relative to different ways of valuing and thinking about what the share price should be. Of course, the balance sheet and not just the balance sheet today, but what are the exposures to that working capital, as Jeff mentioned, with the oil prices, that sort of thing, and significant milestones such as the little forest start.

Speaker 2

So we were not in the market in the Q1. And I think if things play out relatively stably for this year and continue the trend, we're likely not to be in the market. We do definitely see the share price is significantly undervalued and a really good opportunity. With the EPA spending, we don't have that draw on us, and we do have positive cash flow, but it's not of the magnitude that we really like. We did see our balance sheet, the ratio move up to 2.44.

Speaker 2

That's really an artifact of EBITDA TTM effects. But nonetheless, that went a little bit higher. So on the balance of that, I think we're unlikely to be in the market this year, but things can change as the year plays out.

Speaker 5

Got it. Thank you.

Operator

Thank Our next question is from the line of Josh Spector with UBS. Please go ahead.

Speaker 2

Josh, I thought we might hear from you again.

Speaker 4

I got to try again. So I'm definitely reading here that you don't want to be specific on 2Q, but I do want to walk through some of the moving parts, I guess, because obviously, Q1 had the cogen impacts that you specifically called out. Europe Gas was higher last year, but it was flat through the quarter. Oil was lower last year, it's higher now. So I'm looking at trying to think about the energy side of things.

Speaker 4

Oil is probably a little bit of a positive. That gas, I mean, as it relates to specialty, is probably a little bit of a negative. I guess, is there anything we should be looking at outside of volume growth that should be drivers there? And I guess, I'll ask again specifically if 2Q EBITDA could be higher year over year. And I'm focusing that there because obviously the second half of last year, the comps are easy.

Speaker 4

I mean, I would hope you're going to be higher year over year. 2Q is probably more informative of the run rate for us, which is why my focus is there. So any additional color would be helpful.

Speaker 3

Okay. Hey, Josh, this is Jeff. Let me give you a little more clarity on Q2 last year, just to get us all in the same starting place. So our EBITDA last year in Q2 was $87,000,000 Included in that was about $4,000,000 of one time items, which I think we discussed in the call last year, as well as we had some cogen benefit because of some forward sales of power that we had set up in late 2022 that benefited all of 2023 that across the year is probably about $10,000,000 So you can kind of think about that as $2,500,000 a quarter. So between that $2,500,000 and $4,000,000 the operating result last year would have been right around $80,000,000 I just want to get us kind of balanced in the same place there.

Speaker 2

So do we expect to exceed that number? Yes, we do. Do we necessarily think we're going to blow past 87? Well, we certainly aspire to, but there's that element. There's the forward power sale that we've talked about before, but just to remind us that's in last year's numbers.

Operator

Yes. So I guess,

Speaker 4

I mean, if I look at the earnings per ton and assume that some of that's baked in, we think specialty normalizes year on year, maybe slightly better than the Q1. Rubber, you have some benefit. I guess the other piece of that comes down to volumes. I think Don asked about it before a little bit, but I mean year on year there's a easy comp that should be up 10% -ish. Is that a fair way to think about it?

Speaker 2

Well, I would say if we take the pieces, I would expect specialty GP per ton to continue to improve from where we are today. I would expect the rubber GP per ton to more or less hold where we are just because the majority of the contracts are locked in at this point. And so yes, volume growth from there as the year progresses on a modest level is sort of what takes us into higher levels. Jeff, anything

Speaker 5

you want to add? No, I think you hit

Speaker 3

that well. We will continue to see weakness in volume in the Americas, we believe. But again, that's built into the GP per ton number that we gave you.

Speaker 4

I appreciate that. And I do want to ask one beyond focusing on 2Q. On the La Porte project, I mean, it's good to see the groundbreaking. I guess when I look at that startup within a year of groundbreaking seems pretty good.

Speaker 3

So I

Speaker 4

guess there's 2 questions with that. Is 1, the level of comfort or maybe buffer baked into that timeline for us to be actually running and commissioning, call it, 12 months or less from now? And then 2, how do you see that rent plant ramping up and what does that mean for profitability over 25, 26? Do we have muted profitability because there's startup costs and other things in 2025 or do we actually start to see that in the second half?

Speaker 2

Gosh, excellent question. I was wondering if we're going to get that about groundbreaking and then commissioning just a little bit more than a year later. The majority of this plant is being built offshore in super modules. It's, I think, a leading manufacturing technique. It derisks a lot of the cost inflation that you see in the U.

Speaker 2

S. Gulf Coast and labor availability. We are right on the Houston shipping canal. So this site is a great opportunity to use those techniques. And that's really where the how the bulk of the plants going to come in.

Speaker 2

And that's all on schedule. So I think we feel really very good for that. Those modules will be coming in late this year. So we do expect to be in startup, let's say, mid next year, that kind of thing. Now I do not expect any financial contribution qualification process is going to take some time.

Speaker 2

And the higher the differentiated product, the higher the margin you're striking to achieve, the longer that it takes. And I would say well into 2026, I really wouldn't expect a big contribution.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, I now hand the conference over to Corning Painter for his closing comments.

Speaker 2

Well, thank you all again for your time today. As an investor myself, I'd just like to thank you all for the trust that you've put into us. And thank you for again for listening and for the thoughtful questions that we received as well. Please reach out if you have any further questions. We'd really be happy to hear from many of our investors.

Speaker 2

Thank you all and have a good rest of your day.

Operator

Thank you. The conference of Orion S. A. Has now concluded. Thank you for your participation.

Operator

You may now disconnect your lines.

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Orion Q1 2024
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