Orion S.A. Common Shares

Welcome to Orion Engineer Carbon's first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone to require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Wendy Wilson, Head of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbon's conference call to discuss our first quarter 2020 financial results. I'm Wendy Wilson, Head of Investor Relations and Corporate Communications. With us today are Corning Painter, Chief Executive Officer, and Lauren Crenshaw, Chief Financial Officer. We issued our earnings press release after the market closed yesterday. and have posted a slide presentation to the Investor Relations portion of our website. 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. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today, May 8th, and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, 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.

Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings conference call. Thank you, Wendy, and once again, welcome to Orion. Wendy brings a wealth of investor relations and communications experience from the vantage point of several different firms over the course of her 25-year career. We are excited to have her join the Orion team as a thought partner to Lauren and to me, as well as a partner to each investor and analyst who is interested in understanding our fundamentals and the strategies to drive shareholder value. First, a big thank you to our people for their commitment and discipline during these challenging times. With their leadership and dedication, we have been able to operate all of our plants in excellent form, including those in China, Korea, Italy, America, everywhere. Our people know their work is important and that our customers and investors count on us to deliver every day. Not only have our people been reporting to work, but they have been disciplined. Across a workforce of more than 1,400 people on five continents, we have had no employee-to-employee contagion. In our plants, at times when production slowed, union and non-union colleagues have worked in the spirit of teamwork, trust, and with great flexibility in terms of job descriptions. Together, we are striving not just to get through this, but to build a better Orion. We had an excellent Q1 until the second half of March when the impact of COVID-19 hit our European and American customers. On today's call, Lauren and I will cover the Q1 results as always, but also devote time to three additional topics. Our operational response to COVID-19, how we expect our business to develop from here, and our liquidity, which I believe you will agree is more than ample. As always, we'll be happy to take your questions at the conclusion of our comments. As I said, the first quarter started off with the positive sequential tone that we expected. Q4 had been especially seasonally weak, including, we believe, a customer inventory drawdown in late December that was followed by an uptick in January. However, in mid-March, we saw a rash of order cancellations from tire manufacturers globally, particularly in North America and Europe, as our customers began shutting and slowing plants as the impact of COVID-19 grew. As a result, our March results dipped sharply mid-month and the sheer scope, scale, and speed of the downturn caused by COVID-19 began to bite. Overall, we estimate the first quarter impact of COVID, combining the volume impacts and inventory revaluation impacts, to have been in the range of $7 to $8 million, which gives you a sense of the way the quarter may have ended up excluding the COVID-related impacts. Despite these headwinds, we delivered adjusted EBITDA of $63.8 million, of which rubber carbon black contributed $35.8 million, and specialty carbon black contributed $28.1 million. Our liquidity position stands at $283 million, and Lauren will have a lot more to say about that. With that said, I'd now like to shift gears and update you on the actions Orion has taken in the face of the COVID-19 pandemic and what we are seeing operationally through April. When COVID-19 was still largely seen as a Chinese phenomenon, we swiftly activated our business continuity plan for pandemics, which was based partially on the World Health Organization Pandemic Preparedness Plan. The values we established last year were another bedrock for us as we took action. I'm going to explain our actions across the six core pillars detailed on slide four. People. Our most important pillar is protecting our people, and our first actions were to secure their safety and health. In practical terms, we secured and distributed personal protective equipment, such as masks, segregated shifts and work teams, implemented temperature checks, stepped up cleaning protocols, shifted canteen arrangements, secured expert consulting physicians and a big thanks to them as well, shifted to remote working for office-based people, and massively stepped up employee communications with an emphasis on straight talk. It is a testament to the discipline of our employees and the overall disaster readiness that, thus far, we currently are aware of only two employees out of a total of 1,400 who have tested positive for the virus, neither of whom have required hospitalization. Looking forward, we will follow governmental and WHO guidelines as we slowly bring employees back into offices, establishing new protocols and maintaining physical distancing in order to continue to keep our employees safe. Moving to production. So first, you can't operate a plant without people. We've worked hard to maintain safe plants, and I'm proud to say our people continue to get their job done. That is ultra-important right now. Next, we have multiple reactors at all of our plants, and in the normal course of business, we modulate these up and down according to demand and maintenance needs, while at the same time continuing shipping operations. As you can imagine, we've been doing a lot of modulating recently in response to customers. I want to be clear. Individual reactors have only been down in response to declines in demand. That is, we have not proactively shut down plants due to manpower. At several plants in the U.S., when production rates were low, we worked collaboratively with union leaders and workers to achieve great flexibility in terms of roles and responsibilities across the labor pool, allowing us to use this downtime to advance projects that focus on enhancing safety and reliability of our plants. Yes, this has meant higher cash consumption than laying people off. But as you will see, we have the financial flexibility to take this opportunity to build loyalty and to make plant improvements with a view towards emerging from this downturn even stronger. Moving to customers. Many of our customers, particularly tire customers, idled their manufacturing facilities. In April, we estimate roughly 90% of North America's and 75% of Europe's tire factories were idled or severely curtailed with plans to slowly begin production at reduced rates in May and June with auto OEM manufacturing plants on a similar schedule. Against this backdrop, in April, Orion's plants operated in the mid-40s in the Americas and Europe and in the mid-50s in Asia. I will discuss the outlook for our business later. However, in April, we saw rubber volume demand down approximately 60% in the Americas and EMEA, with Asia down approximately 34%. We have stayed in close communication with our customers to ensure good communication and coordinate transportation-specific issues, as well as monitoring customer plan operating levels. Financial. From a financial perspective, in late March we enhanced our financial flexibility by suspending our dividend and bolstering our cash position by drawing on our revolver. In recent weeks, we tapped nearly the entire capacity under our uncommitted lines of credit, bolstering our cash position by approximately a further $40 million to eliminate any funding risk under these lines. Over the past several weeks, we have evaluated our liquidity including financial covenants against a wide range of scenarios and stress tests. We've also taken cost actions that will increase our cash generation over the coming 12 months, including salary freezes, reduced discretionary spending across all businesses and functions, lower incentive compensation accruals, select headcount reductions, and temporary layoffs. We estimate the annual impact of these actions to be in the range of $10 to $15 million Excluding actions like temporary layoffs. Aside from cost reductions, we've also deferred select capital expenditures and are lowering safety stock levels where appropriate and stepping up the monitoring of customers and suppliers to protect our balance sheet while holding the line on terms. Supply chain. From a supply chain perspective, the key message is that we believe we have adequate access for all material supplies at all our plants for the foreseeable future. We continue to track those markets very closely. Beyond that, we are tightly monitoring our other supply chains, particularly for consumables and international shipping availability. We've qualified alternative suppliers as needed. We will need to stay close to this, and more generally speaking, I believe international shipping will be a point of friction for the global economy in the coming months. Communities in ESG. During this time, we have not forgotten what we could do to help our neighbors in the communities in which we operate. We have supported hospitals and other medical providers with masks and cleaning equipment at several sites where we operate. And lastly, we have continued to focus on and keep momentum going in ESG. We recently received notice that our ECHO VATA score improved this last year by 10 points, to a score of 62. While this continues to place us in the silver category, 45 to 64, the significant improvement last year is a sign that we are on the right track. This increase is a testament to the dedicated effort of our entire team and their focus on operating the company in a socially and environmentally responsible fashion. I'm very proud of the progress that has been made. Moving to slide five. Now, I would like to shed light on what we are seeing through April and looking further out which indicators we will be looking toward for signs regarding the likely pace and shape of a recovery. Slide 5 provides perspective on what we are seeing around the world and is not a pretty picture, with a large percentage of customer plans being idled, particularly in North America and Europe. Rubber volume demand declined between approximately 68 and 34% and specialty volume declined approximately 38 and 8% depending upon the geography. Under these conditions, we operate the reactors in campaign mode, running to build inventory and then idling the reactors while we continue to ship. We have had to lay off employees at one location so far. As you can see, From a rubber perspective, the trends in North America and EMEA resemble one another pretty closely, whereas declines in APAC were significant but more muted, reflecting that most of our exposure is in Korea, which has navigated the pandemic quite well. As a comparison, the single worst quarter rubber experience during the 2009 financial downturn from a volume perspective was 33%, evidencing that the results of 2009 may not prove a useful or accurate predictor of the current situation. Also noteworthy on that slide is the relative strength of specialty. Certainly specialty benefits from a greater market diversity than rubber, and many of its markets are not quite as directly impacted by the physical distancing restrictions that cause miles driven and light vehicle sales to come to a screeching halt. However, We believe specialty volumes will get worse before they get better because of continuing softening in demand. To place the April trends in a bit of context, the single worst quarter specialty experience during the 2009 financial downturn from a volume perspective was 34%. I think we need to be prepared for it to be deeper this time. Let me say again, that the experience of our business during the 2009 period may not prove a useful or accurate predictor of the future or of the magnitude of the impending 2020 decline, and they do not represent guidance in any way. We are sharing this data to provide perspective as Orion was not public in 2009, so this information would not otherwise be available to investors. Turning to slide six. We provide an overview of our two global business units by end market, our sense of the recovery prospects for each, and some signposts to watch along the way. Keep in mind, the business environment is very uncertain. That said, here is one way it could play out. Starting with rubber, as a reminder, approximately 90% of this market segment's volumes are driven by the automotive end market. Roughly 60% of rubber carbon black goes into replacement tires, demand for which is linked to miles driven. The balance goes to the OEM end market as tires, or MRG, demand for which you can largely trace to global truck and light vehicle sales. First of all, certain aspects of the economy held up better than others, such as home delivery. Truck tires have been fairly resilient, and we believe this will only strengthen. Secondly, passenger cars are not cruise ships. People are not afraid to get into their car. Driving by car, I believe, will be the preferred transportation mode and tires will wear out and need to be replaced. To this end, in a recent Financial Times article, the first economic indicator to fully recover in China is traffic congestion. Thirdly, household purchases of new cars will certainly be depressed in the likely event of a recession. But new car sales are unlikely to be as weak as they have been recently. Longer term, we don't believe the underlying growth in demand for rubber carbon black has changed as a result of the current downturn, with motor vehicle production, miles driven, and automobile servicing likely to continue supporting growth and demand within the tire and non-tire markets in line with a 3% rate this business has reliably delivered on average over long periods of time once the current downturn has subsided. Turning to specialty. In the past, we have indicated that roughly 25% of this business is driven by global automobile OE production and new vehicle sales. However, upon refreshing our assessment of volume by end market at a more granular level, We now estimate this number to be in the order of 15%, the remaining 85% being driven by a diverse mix of end markets ranging from engineering plastics and pipe to films, wire and cable, adhesives, and synthetic fibers. Clearly, the automotive segment will see a sharp decline in the second quarter volumes and for the full year. Also of note is that roughly 10% of specialty volumes serve the pipe and the market of which a substantial portion ultimately ends up in the oil and gas space. Given the severe strain that sector is under right now, a steep decline in oil and gas infrastructure spending is expected with a corresponding impact on this part of the business. As far as pockets of strength, I would point to certain film applications such as food grade that have held up relatively well. Longer term, With the possible exception of pipe into the oil and gas space, we don't think the underlying growth in demand for specialty carbon black will change as a result of the current downturn. We still expect consumer spending on durables and non-durables, construction activity, infrastructure investment, and automotive builds should allow this business to continue growing in the 3% range in line with its growth rate over the past decade once the current downturn has subsided. Now, turning to our first quarter results in greater detail. As you can see on slide seven, adjusted EBITDA declined by $800,000 year-over-year. Price and mix were favorable for us, while volume was the primary offsetting factor. Within specialty, the year-over-year decline volumetrically was driven primarily by our two largest sales regions, North America and Europe. As far as underlying end markets, Year-over-year weakness was broadly and evenly widespread across all end markets, coatings, polymers, printing. Within rubber, volumes were down year-over-year but flat sequentially on both the MRG and the tire side of the business. The year-over-year decline reflected, one, lower volumes due to a deliberate commercial strategy as part of the 2019 contract negotiations, emphasize raising pricing closer to reinvestment levers over volume. Two, weak automotive OE demand trends impacting MRG. And three, order cancellations from tire makers late in the quarter reflecting a pullback in tire production in all geographies as tire production facilities commence shutdowns due to COVID-19. With that, I'd like to turn the call over to Lawrence.