Orion S.A. Common Shares

Greetings and welcome to the Orion Engineered Carbon Third Quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations and Corporate Communications. Thank you, Ms. Wilson. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbon's conference call to discuss our third 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 our 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, November 6th, and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. 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 third quarter earnings conference call. I don't want to let this moment pass without thanking our people for their dedication and flexibility during the second quarter downturn and subsequent demand surge. Most importantly, they have kept up COVID-19 safety protocols and we have had no workplace transmission of the disease. Thank you for your focus, flexibility, and dedication. I'd also like to specifically congratulate the employees involved with the various upgrades of our facility in Borger, Texas. The upgrade of the cogeneration facilities at that site allows us to run the plant without drawing power from the grid while still providing excess energy back to the regional grid for use in the local area. On today's call, Lauren and I will cover the third quarter results and also devote time to pricing negotiations for 2021, our operational response to COVID-19, select leading indicators of recovery that may affect the business and examples of initiatives that we have undertaken to emerge stronger. As always, we will be happy to take your questions at the conclusion of our comments. Turning to slide three, third quarter demand for carbon black recovered rather well versus the historic low experienced during the second quarter. In most months since April, we have seen rubber carbon black demand improve across all geographies, and specialty carbon black has recently improved as well. While we cannot predict the future course of the pandemic, our year-to-date financial results demonstrate our ability to withstand its ups and downs. From a financial perspective, we reported adjusted EBITDA of $55 million, down 19.2% year-over-year, and more than tripled second quarter levels sequentially, reflecting the substantial operating leverage we expected the business to deliver as the economy recovered. Also note that on a year-to-date basis, our business has required only a moderate level of funding for operations, approximately $40 million, despite the severe economic downturn, reflecting the underlying strength of our business and financial wherewithal. Slide four lists some of the actions we have taken in the face of COVID-19. We've used a variation of this slide before, so I'm just going to speak to the new developments, starting with people. As I said earlier, we continue to have no workplace transmission to the best of our knowledge. We continue to offer work-from-home policies for office workers in areas where COVID-19 levels remain high. Our people have had to deal with hurricanes Laura and Delta as well, and we have assisted employees with items such as generators. Moving to production. Managing demand surge has been critical over the past few months. Product mix and order pattern shifted abruptly to the upside during the quarter, requiring our teams to adjust production to meet demand and ensure that as many customer orders as possible were filled. We operated at strong utilization rates in every geography in October, up sharply from the mid-40s in April and similar to the high 70 rates we experienced in July. We continue to use downtime to execute select projects to improve facilities and uptime. Moving to customers, we're staying very close to our customers to keep them supplied in the face of what has been very large swings in demand, deviations from forecasts, and transportation challenges. We are well into our 2021 pricing negotiations, and while specific information is commercially sensitive, as one might imagine, Communities in ESG I mentioned the upgrade at the Borger plant earlier. We also accelerated EPA-related work at Ivanhoe as the COVID-19 situation there improved. In addition, we provided financial support in South Africa to teach students environmental and sustainability best practices. Both initiatives support our ongoing ESG efforts aimed at operating sustainably and being a trusted community citizen. With an eye to the long-term horizon, we became a partner in the EU-supported Black Cycle project that was launched in September. The project, coordinated by Michelin, is a consortium involving 13 organizations and is a unique European public-private partnership. It aims to demonstrate the technical, environmental, and economic viability of circular processes to produce new tires from end-of-life tires. You'll hear more from us on this project in the future. Now, turning to slide five, I'd like to share a few thoughts on the current pace and shape of global demand. This slide shows the demand pattern around the world in the third quarter. As you can see, on a year-over-year basis, our rubber-carbon black business has recovered sharply since April. As a reminder, back in April, rubber volumes were down year over year in the high 60s percent range in the Americas and EMEA and 30% in APEC. You may recall at the time of our second quarter call in July, I expressed the point of view that July could prove to be the strongest month of the quarter. I'm happy to report that demand held up well throughout the quarter with volumes coming in at levels that were roughly 90% of 2019 levels. Quite a strong result. Our specialty carbon black business, as expected, given the nature of its end markets, initially lagged rubber. However, ultimately, this business not only recovered nicely, but delivered an even stronger quarter than rubber volume-wise, with third quarter volumes coming in at 97% of 2019 levels. Importantly, we did this without sacrificing pricing, as Lauren will show you later. As a reminder of where this business has come from, In April, specialty volumes were down year over year in the range of 38% to 8%, depending on the geography. So overall, we are quite pleased to see this business come on so quickly in this still evolving recovery. Slide six is a slide we began providing when the crisis began. Thank you for joining us. Recent public policy actions in Europe are a reminder of the risk that industry faces through the balance of the quarter and going into 2021. From a replacement tire perspective, which makes up roughly 60% of our rubber business, we have seen a sharp bounce off the bottom driven by a combination of rising passenger cargo building, which you can see in various metrics, and relatively high demand for trucking, as confirmed by improving measures of truckloads rate trends. Globally, volumes remain below 2019 level and may not return to those levels for another 12 to 18 months or more, according to forecasts that we track. However, demand has clearly picked up significantly from the April trawl. 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 market also picked up sharply in recent months. Global light vehicle sales have shown a classic V-shaped rebound through August, according to LNC Automotive. This trend is quite encouraging, but tempered by the fact that it is impossible to know the impact that temporary factors such as pent-up demand and inventory replenishment following the second quarter lockdown phase. Overall, we were encouraged by both the degree and speed of improvement in our business results, which implied that inventory levels across the supply chain entering the third quarter were quite lean. We continue to assess how the pandemic may impact our business in the short and longer term. If there's another set of shelter-at-home lockdowns, our business will suffer, no question. But we have shown that we can weather a lockdown. And when that passes, people are going to drive. And I believe we would see a strong rebound all over again. For the time being, people are most comfortable riding in their cars, not on planes or public transportation. It's also clear that delivery trucks need to run even during a lockdown. It's also likely that there's going to be more working from home in the future, cutting down on commuting. However, time will tell. But again, we think a greater share of commuting will be done in cars than in public transportation. So it's impossible to know exactly how things will play out. But what we're seeing on the ground in terms of current demand is promising. Within the 85% of our specialty business that does not go into automotive at this stage, it appears the impact of the recent downturn is proving to be more cyclical than secular, as evidenced by this quarter's performance and sharp recovery. Overall, specialty is well positioned to recover as the broader economy rebounds. Given the breadth of our specialty end markets, a leading indicator for this business is manufacturing purchasing manager indices. which JP Morgan and IHS, amongst others, produce. Such PMI indices have shown a sharp recovery from April levels, corresponding with the trend that we have seen in our specialty business. As of recently as September, they remained in positive territory, which is historically correlated with an expansionary economic environment and is a positive indicator for our specialty business. Now, turning to our third quarter results in greater detail, as you can see on slide seven, adjusted EBITDA declined by approximately $13 million, primarily reflecting the impact of lower rubber and specialty volumes, lower feed stock prices, and mixed offsetting prices. And with that, at this time, I'll turn the call over to Lauren.