Orion S.A. Common Shares

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Orion Engineered Carbon Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I'll now turn the conference over to your host, Wendy Wilson, Head of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and welcome to Orion Engineering Carbon's conference call to discuss our second 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 risk and uncertainties as described in the company's filings with the SEC. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today, August 5th, 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 will now turn the call over to Corning Painter.

Thank you, Wendy, and good morning, everyone, and welcome to our second quarter earnings conference call. I don't want to let this moment pass without thanking our people for their dedication and flexibility during turbulent times. They have worked diligently and with great agility to ensure that both safety and production priorities were met. Thank you. I'd also like to congratulate the people who upgraded the air emission controls at our Orange, Texas plant. This project was executed on time despite the pandemic and associated physical distancing requirements necessary to work safely. The impact of this project is a reduction in the site's NOx emissions by 2,300 metric tons per year. The dedication of our people and the magnitude of this investment demonstrate our commitment to sustainability and to being a good community citizen. On today's call, Lauren and I will cover the second quarter results as always, but also devote time to two additional topics, our operational response to COVID-19 so far and select leading indicators of recovery in our business. As always, we'll be happy to take your questions at the conclusion of our comments. Turning to slide three. Second quarter demand for carbon black was dramatically impacted by the pandemic. Throughout the crisis, we focused on protecting Orion's employees and production capability, ensuring supply chain stability, enhancing our financial standing, and supporting our customers' needs as they ramp up their production. Each month since April, We saw rubber carbon black demand improve sequentially across all geographies. This trend continued into July. We believe our rubber carbon black business will continue to be one of the first economic sectors to respond to improvements in a broader situation. From a financial perspective, we reported adjusted EBITDA of $15.2 million and generated $85.7 million in operating cash flow despite Orion's lowest volume quarter on record, reflecting a $77.3 million working capital reduction and $10 million in fixed cost reductions year over year. We also continue to take proactive steps to enhance liquidity by drawing the entirety of our uncommitted lines of credit and installing ancillary lines that increase our liquidity accessible at any EBITDA level by $36 million. Turning to slide four, I'd like to provide an overview of the steps we have taken to manage our business in the face of the pandemic, starting with people. The most important topic is protecting our people. We continue to distribute personal protective equipment, such as masks, segregate work teams, implement daily temperature checks, maintain strict cleaning protocols, and in South Africa, We initiated a private shuttle service so our employees would not need to use crowded transport systems. We also continued our return to office protocols for office-based personnel, depending on geography. We'll continue to follow governmental and World Health Organization guidelines and modulate bringing employees back into offices as the virus wanes in geographies where it is not fully contained. Moving to production. First, plants can't operate without people, so keeping them safe and maintaining confidence that we care is important. Second, during the recovery phase, managing demand surge is critical. We are continuously adjusting our production plans and CBO procurement to support our customers in this very dynamic demand landscape. Notably, at several plants in the U.S., when production rates were quite low in the early months of the quarter, We worked collaboratively with union leaders and workers to achieve great flexibility in terms of roles and responsibilities across the labor pool. This allowed us to use this downtime to advance projects, enhancing the safety and reliability of our plants. Such efforts also temporarily lowered fixed costs as labor was capitalized. Despite these efforts, we have had to implement temporary layoffs and part-time work arrangements. Moving to customers, we're staying very close to our customers to keep them supplied in the face of what can be very large swings in demand and deviations from forecasts, as I alluded to earlier. From a financial perspective, during the quarter, we initiated actions to reduce expenses in 2020 by $10 to $15 million. A combination of strategies will drive these savings, some of which will result in temporary savings, such as salary freezes, Lower Discretionary Spending, Temporary Layoffs, and Lower Incentive Compensation, while others will result in permanent savings, such as select headcount reductions. Roughly $3 million of these savings are expected to result in permanent reductions to our cost base. From a liquidity perspective, we took two actions during the quarter that further solidified our financial standing. In April, we drew $40 million, the entirety of borrowings available under our uncommitted lines, solely to eliminate any funding risk under those lines. Secondly, in June, we added two new ancillary lines that together bolster liquidity available at any leverage ratio by $36 million. Finally, we continue to take efforts aimed at lowering safety stock levels and have continued to step up credit monitoring of customers to protect our balance sheet while holding the line on terms. From a supply chain perspective, we continue to believe that we have adequate access to raw material supplies at all our plants for the foreseeable future. Friction we experienced during the quarter was primarily around uncertainty in demand and order patterns. and continued reliability issues in the logistics sector, which we were able to manage through agile production scheduling and adapting inventory strategies. Nevertheless, we are tightly monitoring our supply chains, particularly for consumables and international shipping ability and have qualified alternative suppliers as needed. Communities and ESG. As I mentioned earlier, We successfully completed our air emission control project at our Orange, Texas plant despite the requisite physical distancing protocols. Additionally, we have continued to support the communities surrounding our sites by donating PPE cleaning equipment to those on the front lines. For example, in South Africa, the team donated hundreds of blankets and thousands of masks to the COVID-19 isolation facility located at the Nelson Mandela Bay Stadium in Port Elizabeth. Now turning to slide five. I'd like to shed light on what we are seeing and share a few thoughts on the current pace and shape of the recovery. This slide shows the demand pattern around the world as of July. As you can see, on a year-over-year basis, our rubber carbon black business has recovered sharply since April. Specialty carbon black, as we predicted, deteriorated in May before improving sequentially in June and July. As a reminder, back in April, rubber volumes were down year over year in the high 60s percentage range in the Americas and EMEA and 30% in APAC. In April, specialty volumes were down year over year in the range of 38% to 8% depending upon the geography. with the Americas and EMEA's regions lagging and the APEC region clearly holding up much better. As of July, specialty volumes had recovered somewhat but now lag rubber. Clearly, volume showed strong resilience in July. I would just caution that we benefited from some restocking, some timing-driven purchasing, and some reliability-based volumes in the month. It's quite possible that this might be the strongest month in the quarter considering the continued spread of COVID-19 in many of our markets. Slide 6 provides a breakdown of the complexion of our business by end market and our view of how select markets will emerge as the economy rebounds. It's still quite early, but the dynamics are playing out largely as predicted on this slide. From a replacement tire perspective, which makes up roughly 60% of our rubber business, we have seen a relatively sharp bounce off the April bottom. Levels are still below 2019, but demand has significantly picked up vis-a-vis the doldrums of March. Mobility and congestion are good coincident gauges of miles driven, and therefore the health of this business. Based on Apple's mobility data, these measures were much stronger than April across all geographies, although recently there has been some leveling off in the U.S. Shifting gears from the replacement side of the rubber business to the original equipment side, which makes up 40% of rubber volumes and 15% of our specialty volumes, this business will ultimately track global sales of new trucks and light vehicles. This market has also picked up from April. According to IHS, Whereas in April, global light vehicle production was down 61%, as of June, production was down 26%. While we're encouraged by the improvement, we expect this business to lag the replacement market and be more tethered to the key indicators of a classic downturn in the business cycle, such as unemployment levels, discretionary consumer spending, and consumer confidence. A common question in recent months has been what's likely to change long-term for the carbon black business as a result of this crisis? I don't think there's going to be a change. Miles driven, automobile servicing, and motor vehicle production, the drivers of the rubber carbon black business are likely to continue supporting the 3% growth this sector has reliably delivered over many years. Meanwhile, are likely to continue feeling most comfortable riding in their cars, not on planes or public transportation for some time to come. Within the 85% of our specialty business that does not go into automotive, at this stage, the trends we're observing across the broad range of diverse end markets we serve are proving to be more cyclical than secular in nature, and specialty is well positioned to recover as the broader economy rebounds. On slide seven, now turning to our second quarter results in greater detail, as you can see on slide seven, against the backdrop of the lowest volume in Orion's history, even compared with 2009, adjusted EBITDA declined by approximately $56 million, reflecting the broad-based rubber and specialty volume declines. Price in the rubber segment, particularly in the U.S., and specialty mix were favorable during the quarter. and now I'll turn the call over to Lor.