Orion Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Orion S. A. Q2 2024 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, Chris Kapsch, Vice President of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, Sachi. Good morning, everyone, and welcome to Orion's conference call to discuss both Q2 2024 results and to provide a mid year update on some strategic context, which we believe will be helpful for the investment community to consider. This is Chris Capps, new to leading Orion's Investor Relations efforts. I know many of you from prior roles and look forward to working with you in this new capacity. Joining our call today are Corning Painter, Orion's Chief Executive Officer and Jeff Glaick, our Chief Financial Officer.

Speaker 1

We issued our 2Q earnings after the close yesterday. We have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, I am obligated 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 Securities and Exchange Commission and our actual results may differ from those described during this call.

Speaker 1

In addition, all forward looking statements are made as of today, August 2. The company is not obligated to update any forward looking statements based on any new circumstances or revised expectations. All non GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release. And with that, I will turn the call over to Horne Pfizer.

Speaker 2

Thank you, Chris. Before walking through the details deck, let's skip to Slide 4 and go right to the heat. Why our Q2 EBITDA was below expectations and what is our path forward. You will see our revised 2024 guidance midpoint is now $25,000,000 to $30,000,000 below the expectations we set at the beginning of the year. Lower than expected rubber segment volumes and adverse cogeneration are the major factors.

Speaker 2

Our specialty business is performing well. Volume was up again in Q2 and I'm not concerned about the decline in GP per ton compared with last year. This was mainly due to prior year timing effects and one offs, lower cogeneration and higher maintenance. Most of these factors show us higher costs in our EBITDA bridge for this segment later in the deck. This business is improving with strengthening polymer and coatings markets, which netted to a slightly negative mix in the quarter, but that's fine.

Speaker 2

We respond to customer demand. The GP per ton level is within our expected range. Let's focus then on the rubber business. First and importantly, pricing is up year on year and we expect a gain in 2025 as well. Volume is nearly flat, but the underlying story is not as positive.

Speaker 2

Rubber carbon black demand is soft in our key markets with 3 drivers. First, as consumers adjust to higher inflation, they are currently trading down to lower value brands, which ultimately hurts us. 2nd, but related to the first item, higher imports have been up sharply in North America and Europe. I'll have more to say about that in a little bit. 3rd, trucking activity follows manufacturing and while this is perhaps bottomed, the recovery is gradual at best.

Speaker 2

This impacts truck replacement tire and OEM demand. Regionally, rubber volumes are down in North America and Asia for us and up in Europe, but only due to the European volume gains in last year's negotiations. To be clear, Europe and our other key markets are below expectations for the reasons I listed. Our cost performance in rubber is a mix between cogeneration, prior year one offs, timing and higher costs including inflation. We'll discuss costs later in more detail, but some of this is tied to maintenance spending.

Speaker 2

All considered, lower rubber volumes account for more than $20,000,000 of the reduction to our initial 2024 guidance. Looking forward to the second half of this year, specialty should continue to improve. We expect only a modest improvement in rubber volumes and we will likely execute an inventory build to prepare for 2025, which will help absorption. Cogen is an additional challenge. Our utility partner at our Louisiana plant was down intermittently in Q2 and is expected to be down for much but Q3.

Speaker 2

Further, European power prices have been below expectations. Looking to 2025, there are many reasons to believe rubber volumes will improve, and we continue to expect a favorable pricing cycle reflecting the restructuring of this industry. Personally, I think broadly applied higher tariffs are likely in our key markets, which will support demand and the value of local supply security. Pricing remains a key priority and I'll have more to say about that. Looking forward, we have 2 new facilities to load, Waive and then La Porte in the second half of next year.

Speaker 2

These are top priorities for us. We expect significantly lower CapEx spending until we do that, as you can see on Slide 5. We will continue to debottleneck and expand capacity for our most differentiated specialty grades, but these efforts typically require minimal capital. In rubber, we remain excited about bringing sustainable grades to the market and we'll have more to say about that in future calls. But again, we expect modest capital requirements associated with this effort.

Speaker 2

Considering lower anticipated capital spending, our recovering specialty business, the fundamental restructuring in Rubber and feedback from our shareholders, we have decided to opportunistically resume share repurchase activity at a modest pace. Depending upon working capital, our excess free cash flow may well be slightly negative this year, but on balance, we see this as the right move. On Slide 6 of the deck, we referenced being back on track for another year of solid EBITDA. While the results are disappointing to us, we will likely achieve underlying EBITDA growth, excluding timing and other one time benefits. Note, this would be despite a demand environment that isn't anything close to mid cycle conditions such as we saw in 2018.

Speaker 2

Compared with those levels, we have about 150 KT or conservatively $60,000,000 to $75,000,000 of EBITDA upside in rubber volume alone. Our rubber segment profit margins have held up well in spite of weak volumes. Replacement tire sell through to consumers had been okay, but worsened during the quarter and local tire builds have lagged end market unit sales. Absolute tire build numbers in Western markets are still substantially below pre pandemic levels. This is partly due to the surge of low value imports and is fueled by the consumer trade down because of inflation.

Speaker 2

Clearly, tire imports are impacting North American and European tire manufacturing. Just yesterday, a tire manufacturer spoke about this in their earnings release. We do not believe this is structural. We believe the on shoring and the capacity into North America and into Western Europe will continue. We have seen blips like this in our volumes before.

Speaker 2

A separate or a second tire company attributed the recent surge in imports to fear of a pending tariff increase. And I'll tell you, I do not see the United States or the EU surrendering their automotive markets. For Orion, these end market headwinds have been amplified by the lower than expected cogen contribution, but also costs largely tied to planned and unplanned maintenance turnarounds and inflation. A portion of the turnaround activity was associated with the ongoing upgrading of some of our manufacturing assets. These upgrades will reduce maintenance costs, enable greater reliability and higher plant throughput over time.

Speaker 2

For example, in Q2, we replaced a very old filtering system in one of our lines in Belfry, Ohio, which contributed to a month of downtime. Given the more challenging backdrop this year, we will be leaning more into efficiency initiatives that will trim costs and help us to achieve our revised guidance. On Slide 7, this mid year report is an appropriate time to frame expectations regarding our prospects for 2025 as the industry's annual tire maker supply contract negotiations have historically begun during the late summer months. We mentioned during our Q2 earnings call that some discussions had already commenced, but that we didn't need to rush into any deals and we're going to be reluctant to hold volume commitments during lengthy negotiation. Those initial negotiations indeed timed out without conclusion, reflecting our intent to more strictly enforce time bound offers.

Speaker 2

We're now in formal negotiations with a few major customers, but I would caution investors on expecting an early close. Some negotiations may be prolonged as we are determined to earn a return on capital for all our ongoing investments. We're anticipating a positive outcome for this year's negotiation cycle for several reasons. First is the ongoing industry restructuring with tire capacity expanding in our key markets contrasted with limited carbon black capacity additions. 2nd, I remind you, we're negotiating for 2025.

Speaker 2

This is not about 2024. 3rd, there are multiple positive indicators. Miles driven data remains strong. The freight market is stabilizing. The Russian ban is now fully in place.

Speaker 2

And just recently, Belarus has been added to the ban. And with specialty recovering, some carbon black industry capacity will shift from rubber back to specialty grades. 4th, the industry's recent EPA investments effectively reduced domestic industry's capacity by a few percentage points. These emission control systems have outages and when they go down, they usually take the entire plant with them. 5th, as you know, shipping is now more expensive and less reliable.

Speaker 2

And finally, the potential for increased tariffs on imported tires in North America and Europe would boost localized demand. I think this is looking pretty likely. All of these considerations make us confident about the Rubber segment heading into 2025. Given this, we intend to build back inventories in the second half. This should improve our profit metrics, thanks to a confluence of operating leverage and better unit costs.

Speaker 2

Now, while our Rubber segment has done the heavy lifting in terms of our step change in EBITDA in recent years, we expect the Specialty segment to continue to recover. Here, a broader end market recovery should enhance overall segment mix. When coupled with innovation led growth, the specialty segment will be an important driver of Orion's medium term growth trajectory. And without the need for meaningful additional growth capital beyond the ongoing La Porte investment. Shifting gears, I want to discuss sustainability where we believe we are misunderstood by the broader investment community.

Speaker 2

Despite perceptions about industries like ours, we have made substantial progress on sustainability. From our perspective, we see opportunity here, especially as our downstream customers increasingly strive for or have even made public commitments to circularity. In addition to considering the platinum rating we earned from EcoVadis, which places us in the 99th percentile of all companies having their sustainability programs evaluated, We hope you will take time to digest our latest sustainability report published last week. A few noteworthy points here. We completed upgrades at all 4 of our U.

Speaker 2

S. Plants well ahead of others completing their 3rd plants. We were the 1st major industry player to produce carbon black from purely bio circular feedstocks. During Q2, we made a small investment in a European tire recycling company focused on scaling up production of tire pyrolysis oil, which will be dedicated to Orion and help enable commercial scale volumes of circular grades of carbon black. In South Africa, before it became a crisis, we proactively invested in a state of the art technology process treated effluent water from a local wastewater treatment facility to repurpose that water for industrial use.

Speaker 2

This will help this water stressed community by reducing our use of potable water, improve our reliability and reduce costs. And finally, the construction of our low emissions conductive carbons plant in La Porte, Texas is on track to start serving the battery and other growth markets in 2025. All of these efforts place Orion as an industry leader in striving commercially viable sustainable products. All considered, we feel confident in our foundation and our journey towards unlocking much greater earnings power at Orion. With that, I'll turn the call over to Jeff.

Speaker 3

Thank you, Courtney, and good morning, everyone. Slide 8 covers the company financial results for the Q2. Overall volumes improved 3% compared to last year. This was driven by a 17% recovery in specialty volumes, which more than offset a small decline in rubber volumes. The overall EBITDA performance compared to the prior year was negatively impacted by softer than expected rubber volumes, a lower cogeneration contribution, one off benefits last year, timing issues and negative absorption, namely that we did not build inventory as we had planned during the quarter.

Speaker 3

To provide a little more transparency on the Q2, we had a strong April, but both May June fell well short of expectations. On the Slide 9 is the company's year over year EBITDA bridge. As I noted during our Q1 call, a more normalized earnings level for last year's Q2 was $80,000,000 after adjusting for one time items and the forward sale of power at elevated prices. You can see that both volume and price mix contributed positively overall. Timing issues primarily related to pass through formulas and differentials, higher maintenance costs, a portion of which are intended to improve our operating leverage over time and cogeneration were the primary factors.

Speaker 3

Slide 10 shows our Rubber segment's 2% year over year decline in volumes and an 8% sequential decline. As Corning referenced, the inflation driven consumer trade down in the passenger car tire market was a key contributor to the softer volumes as well as weaker tire demand in a softer Chinese economy. The consumer trade down to lower tiered brands and the related importation of lower quality tires from Southeast Asia represents a negative impact for Orion's customer mix in both North America and Europe. Gross profit moderated just slightly owing to the lower cogen, but was supported by the sturdiness of our supply agreements which included higher year over year pricing. We continue to expect full year gross profit per ton to exceed the 2023 level of $409 Slide 11 shows the EBITDA bridge for the Rubber business, which begins from a year ago level that excludes one time items and the benefit of the forward power sale.

Speaker 3

For this segment, you will see that volume despite being lower contributed slightly positively to EBITDA as a result of favorable geographic mix. Pricing was a more positive contributor year over year reflecting the annual the improved annual contracts. The negative cogen contribution in this year's Q2 was a big factor in the Rubber segment EBITDA bridge. Other costs include timing, higher maintenance and inflation. Switching to Slide 12, the volume strength in our specialty business, up 17% compared to last year's Q2, reflected a broad based demand recovery across essentially all geographic markets.

Speaker 3

Lower profitability metrics were a function of non repeating benefits in last year's Q2 as well as a lower cogen contribution and higher fixed cost. Reduced cogen along with adverse absorption contributed to the slight sequential decline in gross profit. Slide 13 shows the specialty segments year over year EBITDA bridge again from a more normalized year ago level before one time benefits. The big contributor here was a broad based volume recovery slightly skewed towards lower value markets. Higher costs this quarter were primarily adverse timing effects in contrast to last year's favorable timing effects.

Speaker 3

On the Slide 14, we look at the year to date free cash flow, which was negative in the first half. This was partly due to normal seasonal volume driven working capital increase as well as higher cash taxes. Because of the negative year to date free cash flow, our net leverage ratio is just above our targeted range. However, we are very comfortable with the absolute net debt level. With that, I will turn the call back over to Corning.

Speaker 2

Thanks, Jeff. As conveyed previously and as shown in Slide 15, we are reducing our full year guidance to reflect Q2 results and a generally subdued full year expectations for our Rubber segment, partially offset by better than previously projected specialty results. Our revised adjusted EBITDA guidance range is $315,000,000 to $330,000,000 and our revised EPS guidance range is adjusted commensurately. Our effective tax rate assumption is marginally higher, a function of the jurisdictional mix of our earnings this year. We still expect capital expenditures of about $200,000,000 this year, including the increase in maintenance capital that we've talked about, a continued progress on the Greenfield's investment in conductive carbons in La Porte, Texas.

Speaker 2

At a high level, our revised guidance range reflects expectations that rubber demand improves modestly from Q2 levels based on some encouraging market indicators and signals from certain customers. The Rubber segment's profitability should exhibit resilience with fixed cost absorption improving. We do not provide quarterly guidance, but note that our Rubber segment should not exhibit as much Q4 seasonality as appeared to be the case in each of the last 3 years when EPA project tie ins weighed heavily on those results in those periods. The specialty segment is expected to see continued year over year profit growth, thanks to end market demand recovery, the absence of downstream destocking in certain end markets and relatively easy year ago comparisons. We anticipate some sequential profit per ton improvement driven by favorable mix as demand for higher value products should recover disproportionately and thanks to the commercial ramp of newly qualified specialty products.

Speaker 2

Looking forward, our mid cycle EBITDA adjusted EBITDA capacity goal of $500,000,000 is on track. At mid cycle conditions, we would expect about 150 KT of higher rubber and 20 to 30 KT of higher specialty volumes, contributing $60,000,000 to $75,000,000 $20,000,000 to $30,000,000 incremental dollars respectively. Beyond that, we expect $20,000,000 to $30,000,000 of further mix and productivity. We believe there is $20,000,000 of upside from YBAY as we work through the issues there. The addition of $40,000,000 to $45,000,000 of EBITDA potential from La Porte gets us there.

Speaker 2

On Slide 16 and before factoring in the resumption of buyback activity, we continue to see free cash flow being positive in 2024, although the absolute level of free cash flow will be lower than our previous expectations because of the reduced EBITDA level as well as the slightly higher working capital draw and cash taxes. As mentioned earlier, Slide 5 offered some directional expectations for CapEx over the next couple of years. We have no intent to allocate capital to greenfield rubber or brownfield expansion projects. As we mentioned, we will likely want to ramp La Porte before considering another significant greenfield investment in specialty. Other growth opportunities we envision over the next couple of years are capital light.

Speaker 2

Therefore, we expect to have significant free cash flow over that period. Our maintenance CapEx will be targeted on pieces of equipment or unit operations that are problematic and or have exceeded their useful life. This spending should lower maintenance costs going forward, improve plant reliability and better throughput. Our effective capacity has declined over the years because of the business's legacy of having been deprived of maintenance capital. This is one of the reasons why improving pricing is fair and something to be built upon.

Speaker 2

Based on reasonable EBITDA growth expectations over a multiyear horizon, a stable maintenance capital spend and with declining growth and discretionary CapEx in each of the next 2 years, we expect a significant improvement in our free cash flow, We should be much stronger in 2025 and then still higher in 2026. Considering our share price, we continue to see our stock is undervalued. Given the confidence in the Carbon Black Industries fundamentals, our competitive position, prospects for 2025 as well as our overall strategy moving forward, we see share repurchases at current valuations as a prudent use of capital. With that, we'll turn it back over to Satya for Q and A. Thank you.

Operator

Thank you. We will now be conducting a question and answer The first question is from Josh Spector from UBS. Please go ahead.

Speaker 4

Good morning, everyone. It's Chris Perrella on for Josh. A question, I guess, on the volume cadence in the second half of the year. With things being softer, do you see volumes down in the 4th quarter for both specialty and rubber? And how should we think about that?

Speaker 2

So looking forward, first thing I'd say is July was on track for us and a bit of a recovery, especially I'd say in rubber, it's only 1 month, but it was an improvement. We would expect some seasonality still in Q4, but just not as much as we've seen in the past given the absence of a big EPA style tie in at that time period. Does that answer your question, Chris?

Speaker 4

Yes. And then I just had a follow-up on the cash flow and the buybacks. Given the inventory build and sort of the absence of working capital, how do you opportunistically balance the buybacks? And would you guys increase leverage a little bit to do some of those opportunistically in the second half?

Speaker 3

Hey, Chris, this is Jeff. Yes, we would be willing to have a slight increase in leverage if we needed to do that. But it's not that meaningful an impact both on an absolute and on a leverage ratio basis.

Speaker 4

Okay. And then I guess one more. I guess what were the maintenance costs in the second quarter that and do you will that subside in the 3rd Q4? Kind of what were those one off maintenance upgrades that you guys talked about?

Speaker 2

Yes. We had simply planned more maintenance in the 1st and second quarter. Of course, that was in our guidance. But we also had some unplanned maintenance in the Q2. We have less planned maintenance going forward.

Speaker 2

We expect less unplanned maintenance going forward. So things like the Ohio, the change out of that filtering system, we did a lot of other maintenance at the same time, why we had the downtime. That's the kind of thing that can make one quarter higher than another.

Speaker 4

Is there a way to quantify kind of the unplanned maintenance impact?

Speaker 2

I'd say we're in let's say, dollars 2,000,000 to $3,000,000 in the quarter.

Speaker 4

Okay. Thank you very much. I appreciate that.

Speaker 2

You're welcome.

Operator

The next question is from Laurence Alexander from Jefferies. Please go ahead.

Speaker 5

Hi. Good morning. This is Dan Rizzo on for Laurence. Just in terms of to the strength the relative strength in specialty, is there any end markets that are kind of doing better than others, anything that's outperforming, anything that's underperforming by end product?

Speaker 2

Yes. So the coatings area has been relatively strong as more than just automotive, but I'd say in general coatings as well. We speak of polymers, but polymers is a really broad market. So let me say some of the lower value areas in that area, Master Batch going into those applications was strong for us. On a relative basis, actually, ink was a little bit stronger than usual.

Speaker 2

So those were a couple of areas that looked good in that quarter. I just caution people, there's some movement quarter to quarter where we see that buying activity.

Speaker 5

Okay. And then, could you I mean, do you publish or release what your capacity utilization is in Rubber Black for you guys and what do you think it is for the industry?

Speaker 2

We don't speak for the industry. There is some third party data you could go for, but we were in, let's say, mid-70s. So that's relatively low compared to where we would see mid cycle for sure. But with the current conditions, that's where we were.

Speaker 5

Would you consider mid cycle like mid-80s or higher? And I mean, I think we've seen up to like mid-90s in the past, if memory serves, I mean, going back a couple of years.

Speaker 2

Yes. No, I think mid-90s, if you compare it to nameplate, would be really hard for this industry, maybe as maintenance continue to match up for others. No, I would expect to get it in the high upper 80s kind of area. So, say, 85 to 90 in that range.

Speaker 3

Got you.

Speaker 5

All right. Thank you very much. And just to

Speaker 2

be clear, we were like a little bit below exactly midpoint in the 70s. So there's substantial leverage for us there.

Speaker 5

Okay. Thank you.

Speaker 2

You're welcome.

Operator

The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking my questions. I was wondering, if you could give us a little more color or maybe a snapshot of the economics of tire imports versus domestic production, how that changes as higher shipping costs maybe flow through supply chains and inventories, and if you think that's going to change consumer minds at all, or if that's not going to matter just given maybe importers may try to push through more volume ahead of what might be tariffs on that kind of stuff?

Speaker 2

Sure. Maybe just an anecdotal story. There's a young person in our life, not a direct child of ours, but early 20s, getting started in life and a lot of issues with their vehicle. And they went to get it inspected, which meant they had to then go get some new tires. And they recounted how the tire salesperson said, I'll sell you the same tire if you really, really want it.

Speaker 2

But if you would spend like $10 or $15 more, you can get a way better tire. And I mean, I think that conversation is playing out and that ultimately gets people to a value proposition that's a little bit more of a long term as people get used to the inflation and wage growth improves and so forth relative to that as we see inflation coming down. In general, I think what you see is really low value import tires coming through as we see tariffs coming in and being so hit the same competitiveness point. You either have to go to even cheaper, lower value, less reliable tires or I think what we're going to see is just consumer sentiments moving back towards the higher value, really lower cost of ownership product.

Speaker 6

Got it. And to be clear, are you expecting on the trucking and manufacturing side improvement through 'twenty four and 'twenty five just given some uncertainty in

Speaker 5

the macro here that's appearing to crop up?

Speaker 2

Yes. If you look at the freight waves data, it certainly suggests that we bottomed and we're coming up. We're beyond even the second derivative. The first derivative has improved, but like there's a long way to go. So we see that coming.

Speaker 2

I think the data speaks for itself in that right now that's a gradual improvement, but it does look to be improved.

Speaker 6

Okay. And then finally, just in terms of capacity and how you're positioning it, are you more likely to be switching rubber reactors to specialty as that trajectory continues to improve? Or is there a

Speaker 3

change in the expectation there? Well, we'll see as

Speaker 6

this plays out during the

Speaker 2

competition in competition for our reactor hours and we'll see how that goes. But my point would be, if there is softness ongoing in rubber, I don't think there will be for all the things I said, that would certainly give you a place to move it. But also beyond that, just simply rubber even improving, specialty improving at the same time as we're seeing means just natural, some of that capital or that capacity is going to be reallocated and tighten up the rubber market as well.

Operator

The next question is from John Roberts from Mizuho. Please go ahead.

Speaker 7

Thanks. John Roberts on for John Roberts. I'm looking at the chart on Slide 12. So it sounds like gross profit per ton for specialties has bottomed. I think you said it's going to be up sequentially, but it sounded like mix, not really price broad spread improving.

Speaker 7

We're a long ways from where we were a little more than a year ago. So what's how do we get the margin to go back materially here? Do you have a lot of price increases going on or we're just going to slowly grind up with mix?

Speaker 3

Hey, John, Jeff. A couple of things, if you're looking at the trailing 12 months number, first off, you've got a pretty rough Q4 2023 in there, which is kind of dragging it down. That's the first thing. Second thing is the last two quarters, this past quarter has been above that, last two quarters have been above that, the 609 number. So we would expect that will turn up in Q3 and certainly by Q4, we should see a meaningful turn off.

Speaker 3

I think we talked last call about our expectation for the GP per ton for specialty to be somewhere in the $650,000,000 to $700,000,000 range, which we would be in if it wasn't for that one really rough quarter in Q4, which was under $500,000,000 So you should absolutely be seeing that turning up as we go through the rest of the year.

Speaker 7

And we need a much stronger volume recovery to get back towards a 900 ish

Speaker 3

number? That has I don't think we view the 900 number as a kind of a normal number. That had a pretty significant positive impact from cogen if you look back at 2022 and the 1st part of 2023. So I don't think we would expect to see that. And I think also if you go back a year or so, when we saw our volumes dip in 2022 early 2023, What we saw dipping was some of the lower end specialty products.

Speaker 3

And as Corning mentioned a few minutes ago, where we've seen a pickup, which is good, has been in some of the lower in the polymer area, some of the lower value master batch and even the coatings pickup that we have seen has been a little bit in the lower end of coatings. So I don't think that we don't believe that 900 number is kind of a sustainable number, not that we wouldn't strive for it. But I think realistically, this year we're thinking 650 to 700. Perhaps there's some upside to that as we look forward, but probably not to that 900 level.

Speaker 7

Thank you.

Speaker 3

Thanks, John.

Speaker 2

May I just build on that? So we don't see an upper limit on what can be. As we drive innovation and upgrade reactors and so forth, we can still move that on. It wasn't really obvious at the time where European electricity prices were going to land. They've come down significantly.

Speaker 2

And so that part of the cogeneration story has been difficult there. And just keep in mind, because of the relatively small volume of specialty, when compared to rubber, a movement in power prices has a much bigger impact on the GP per ton for specialty than in rubber.

Operator

The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Speaker 6

Hi. I was just wondering if you could discuss conditions on the ground in China right now and what your expectations are in the guidance that you've provided?

Speaker 2

So if we talk about China macro, I'd say China is still an area of greatly reduced economic confidence, people holding off to make investments, people worried about trade barriers and where they're going to export to. You start to see the government now trying to spur some domestic demand, which would ultimately, I think, be very good for China. That's the bigger picture there. For us, the picture is really about Waibe. We've had startup issues with that plant.

Speaker 2

I've talked about that before, getting it really to the higher grade value materials that we're aiming for. We've made progress in that. We'll have one more outage coming up where we advance that further. But so for us, the opportunity there is a little bit more to getting Yobei back on track. I'd say the overall China macro, not so great.

Speaker 2

OEM build is probably an area of some strength as they continue to act for cars. There's something recently out about their impact in the market in Thailand. But I think in general, it's a tough market.

Speaker 6

Okay, great. And maybe just a little

Speaker 5

bit more on what the mix is there in OE versus tire

Speaker 6

and how do you expect that to trend?

Speaker 2

So generally speaking, the amount of people drive a car in China is relatively lower than, let's say, in the United States and Europe. So the impact of OE is higher. We talk about here, you buy a car, you probably change the tires 3 or 4 times. I would say it's more like 2 or 3 times in Asia typically or in China in particular. So the replacement market has always been a little bit weaker.

Speaker 2

And we see overall tire for local tire companies, which is where we are in the qualification process, that that's tough going right now. Got it. Thank you.

Operator

There are no further questions at this time. I would like to turn the call back over to Corning Painter for any closing remarks.

Speaker 2

First of all, I appreciate everyone's time and joining our call today and your very good questions. It was a challenging quarter. But when you have a quarter like that, it's important that we get the questions out, we address them. We think the underlying business is very strong and the more we can talk to that transparently, the better this is going to be. We value our shareholder views and we look forward to speaking to you over the next couple of days and at some upcoming corporate access events including the Zoho's conference in New York on August 14, the UBS Global Materials and Jefferies Industrial Conference in New York on September 4th 5th as well as some regional NDRs that we have in the pipeline in coming months.

Speaker 2

Thank you again.

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