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.

Thanks, Corning. Now, turning to slide eight, Volumes were down 7.6% year-over-year, but rose 51% sequentially on higher demand in both segments and across all regions. Against this backdrop, adjusted EBITDA more than tripled to $55 million. Basic EPS came in at $0.15 per share, and adjusted EPS was $0.32 per share. Contribution margin declined 12.7% year-over-year, primarily driven by lower volume. but increased 59% sequentially. Overall, each division showed strong operating leverage with incremental margins adjusted for the impact of FX and oil on revenue and profitability in line with or better than expected with specialty exceeding the mid-40s plus range due to mix and rubber in the low to mid-30s range. Slide 9 explains the drivers behind contribution margin, adjusted EBITDA, and net income in greater detail. Starting at the upper left-hand side, contribution margin declined 12.7% year-over-year as lower volume, the impact of lower oil prices on margin, and unfavorable mix in specialty partially offset base price improvement in both segments. adjusted EBITDA fell 19.2% year-over-year to $55 million, reflecting the decline in contribution margin. Lower costs cushioned the impact somewhat, driven by a favorable VAT settlement and lower discretionary spending. Finally, we recorded net income for the quarter of $9 million down year-over-year, largely due to lower adjusted EBITDA. Slide 10 details the year-to-date sources and uses of cash. As expected, working capital rose during the quarter, primarily driven by higher accounts receivables, resulting from a sharp sequential sales increase. Notably, this surge-driven working capital increase was the primary factor preventing us from showing positive free cash flow for the quarter. Overall, as Corning noted earlier, from a cash flow perspective, We are pleased that on a year-to-date basis, despite the severe second quarter downturn and continuing to advance our EPA investments, our business has only required a moderate amount of funding, approximately $40 million year-to-date, with the rest of our borrowings to date, $34 million, simply reflecting elective actions taken to strategically bolster our cash position. All in all, we have come through the first part of this economic storm in a strong financial position. Finally, our EPA investments continue to advance our sustainability strategy while also creating a barrier to entry in North America. We expect these investments will continue at levels around the current run rate through 2022, temporarily diminishing our free cash flow before declining in 2023 resulting in higher free cash flow conversion at that time, all else being equal. Slide 11 summarizes our leverage and liquidity profile at quarter end. Liquidity available at any leverage level was $316 million at quarter end, and as a result of our success at converting a significant portion of our revolver to ancillary capacity, we can now borrow 100% of the €250 million commitment amount under our revolver at any adjusted EBITDA level without our leverage covenant being in play. Overall, the strong state of our liquidity and the absence of any debt maturities until 2024 give us great confidence in our ability to continue successfully navigating through this downturn. Moving to slide 12, Specialty volumes fell 2.6% year over year and rose 18.8% sequentially. Volumes were down across most in markets with Asia Pacific and Europe performing somewhat better than the Americas. From a profitability perspective, gross profit per ton declined 7.8% almost entirely due to lower volumes but rose 29% sequentially. Similarly, adjusted EBITDA declined 9.2% year-over-year, but rose 61% sequentially, reflecting strong operating leverage and incremental margins. The next slide breaks out the major year-over-year drivers of adjusted EBITDA, which were lower volume with mixed offsetting price. Turning to slide 14, Rubber volumes were down 9.1% year-on-year and were up 65.9% sequentially. Geographically, volumes were down in our tire business across all regions, particularly in North America and Asia. In our MRG business, volumes rose in China and were down in all other regions. From a profitability perspective, gross profit per ton declined 19.3%, but more than doubled sequentially. The year-over-year decrease reflected lower volumes, while the strong sequential profit recovery was driven by incremental margins adjusted for the impact of oil and FX on revenue and profitability in line with expectations, demonstrating good operating leverage. Slide 15 shows the development of adjusted EBITDA with sharply lower volumes and feedstock prices the primary drivers of the decline. With that, I will turn the call back over to Corning.

Moving to slide 16, we have reinstated our EBITDA guidance for the fourth quarter, barring a further downturn in economic activity, and that could happen with rising COVID-19 infections. We expect adjusted EBITDA to be in the range of $44 to $54 million, which is roughly 10% lower sequentially. With that being said, our fourth quarter order book is constructed. The range of our guidance reflects the fact that historically, December is hard to predict, especially in a year like this, and the fourth quarter is typically our weakness. It's also difficult to gauge the extent to which the recent decline in mobility data is reflecting normal seasonal declines as the summer ends or whether other factors are in play. Our 2020 capital forecast remains in the $140 to $145 million range. with the upper end of the range increasingly likely as we execute a variety of safety, reliability, and productivity projects that will position us to emerge stronger heading into 2021, as noted in our previous earnings call. Our best estimate of the cost of the U.S. air quality investments remains $250 million, plus or minus 8%. As we've shared previously, we expect approximately 50% of this cost to have been spent between 2018 and the end of this year, with the remaining 50% spread between 2021 and 2023. We completed our first EPA project in June at our Orange facility and remain focused on executing the work at our Ivanhoe facility as rapidly as supply issues and the physical distancing required to safely advance the work will allow. We continue to communicate our intentions and project schedule to the EPA on a monthly basis, as we have done since we first declared force majeure. Turning to slide 17. In closing, I'd like to highlight a few takeaways from the quarter. I'm pleased that we've been able to demonstrate the resilience of our business model during these extraordinary times. From the demand lows in the second quarter to the demand surge over the last several months, we've proven that we can operate with focus and agility to efficiently respond to dramatic economic changes. This period has been a time of great change for the Global Alliance team. Just before it, we completed our first employee engagement survey with an amazing 91% participation. We've used this time to address a number of opportunities, including employee communications, Training and Development, and Work Simplification. These initiatives are part of the substance behind our goal of emerging stronger. For example, we have stepped up video communications, introduced an e-learning platform, simplified processes, consolidated SKUs, and reduced costs while maintaining momentum towards our sustainability objectives. One example is a dramatic simplification of our pricing approval process where we're cutting the number of steps by more than half while improving and simplifying controls at the same time. Through the early weeks of the fourth quarter, demand in both our rubber and specialty segments continues to recover. For sure, there's still much uncertainty with COVID-19 and the global economic recovery. But our third quarter financial performance and its remarkable rebound from Q2 demonstrates our people's and our businesses' resilience, that we're on the right track and that we will continue to show strong operating leverage if the global economy continues to recover. Operator, please open the line for questions.

Thank you. We'll now be conducting a question and answer session. In the interest of time, we ask that you please start off with one question and one follow-up, and we welcome you to rejoin the queue for any additional questions you may have. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Jeff Sakakis with J.P. Morgan. Please proceed with your question.

Thanks very much.

Can you talk about some of the negative mixed factors in the quarter? Your volumes were really not down very much year over year, but your EBITDA fell at a much greater rate.

Can you more concisely describe why that's the case?

I'll take a couple general comments and let Lauren jump in. So one element on mix is in the rubber area, the issue between MRG and tire. MRG being only going into new cars and a little bit more attractive than rubber carbon black going into the tire market. So the relative strength of replacement tires right now relative to OEM production, even though OEM recovered, that's one thing that plays into the next course.

And I would just add, that's right on a year-over-year basis. Sequentially, in terms of our incremental margins, once you back out the impact of oil on revenue and profit, specialty actually had better mix sequentially and was right in line with our mid-40s plus incremental margin. And rubber, again, sequentially, was right in line with our low 30s incremental margins. And so I think that's right.

I guess secondly, so Miles Driven has been touched by the recession and by COVID conditions.

To what extent do you think that that affects the growth rate of the tire market over a multi-year period? There's no question, if there's going to be less driving going forward over the long haul, then there's going to be less tire wear, and that would have an impact on the market, if that's what you mean. Right.

I was wondering if you guys had made an attempt to quantify that, given current conditions, or one can see a tendency, but one can't really do much more than that.

Yeah, I think right now I'm drawing conclusions from, you know, the current COVID-19 not being behind us. As we said in the script, I mean, I think there's going to be more working for home. I think there's going to be a stronger preference for cars over other modes of transportation. And I think we've just got to get a little bit of time to see where that balance is going to come out. Great. Thank you very much.

Thank you. Our next question comes from the line of Mike Leathead with Barclays. Please proceed with your question.

Great. Thank you, guys, and good morning. I guess, first, if I look at slide six, which I think is really helpful, by the way, it looks like rubber black is a bit more of a leading with the recovery, whereas specialty is a bit more concurrent in terms of economic factors. And then if I look at your volumes this quarter, Rubber is down about 9%, specialty is down about 3%. So can you maybe parse through why specialty was a bit better than rubber volumetrically this quarter? And with that, maybe how the different end markets demand trends you've seen there in specialty?

Yeah, so I think what we're trying to reflect is that we thought the first thing to bounce is where that green checkmark is in the replacement tire, and that is the first thing we saw bounce. And we did see rubber carbon black come back sooner than we saw... Specialty Carbon Black. It turned the corner sooner, let's say. But no question, Specialty Carbon Black has come back overall at this point to a higher level compared to last year, and that reflects just across a wide range of end markets. And in general, many of those have improved, even areas like pipe, which I've talked about before, although I suspect a portion of that that's just like oilfield services is going to still impact infrastructure and other activities and other regions of the world that continues to do well. Probably star areas in the specialty area would be anything related to food, food packaging, that kind of thing in the current environment with all the carryout is quite strong. Things like ink for printed materials, that's an area of weakness in the market today. Great. That's super helpful.

And then, Corning, any early indications about how you're feeling about base pricing heading into next year? And relatedly, you've talked in the past about trying to improve or restructure the contracts in the industry. My guess is COVID got a little bit in the way this year from doing that. But do you still think that's achievable maybe in the next two or three years?

Okay, yeah, so for two of those things. If I start just with a sense of pricing, I think one really critical thing about pricing is that this whole industry was tested this year during this downturn. I'm really happy to say, being relatively new to this space, that rubber, carbon, black pricing, you know, the contracts held, they really weren't even challenged. I think that's a really positive thing for us. And if you look at our behavior over the year or through this year, I think the same thing is largely said about specialty, although the contract structure there is different. In terms of talking about 2021, you have to keep in mind that our customers are listening to this as well. So let me just share a couple of observations. Number one, the customers we're working with for the tire market primarily we're talking about now, they have pretty different scenarios of what they think 2021 is going to look like. reflect the overall uncertainty in the market. But it's an interesting negotiating dynamic going on right now. And the second thing I'd say is that given that and given the limitation of the ability to store material, I'd say in a dynamic market like this with the potential for surges and we don't know how COVID is going to play out next year, capacity, having capacity is a valuable thing in my opinion. Beyond that, I just say, look, the long-term drivers for pricing in the carbon black industry is still with us. There's still increasing capacity of rubber, of tire manufacturing in the United States. There's not increases in carbon black. I mean, the trend there is still with us. In terms of long-term agreements, we are actually still in discussions with certain players. I think there's people who see that as a fluid way of thinking and a good win-win for everybody involved. COVID-19 does complicate things this year, but we continue to discuss with people. It's all talk until we have it done, but I continue to think it makes sense, and there are some parties in the industry who remain interested in it.

Great. Thank you.

Thank you. Our next question comes from the line of Josh Spector with UBS. Please proceed with your question.

Hey, guys. Thanks for taking my question. Just coming back to specialty volumes, pretty impressive performance in the third quarter. I wonder if you can quantify how much of that may have benefited from restocking and how much of that was maybe more normalized demand. And maybe a related question around that is, What are the volume scenarios that you're taking into your 4Q guidance around specialty? Thanks.

So it is difficult to tease out, and we made some comments of that in our script. What's restocking? What was pent-up demand from when things were locked down? And that's hard to gauge. If we think about automotive, you know, there was a hard stop in auto manufacturing for a period of time. Everybody wanted to burn through inventories. If you've bought a car recently, as I have, you can see there's very few cars on the lot right now, so they're still a little bit in catch-up mode. So I would say I don't think we're necessarily seeing steady state at this point. Our guidance is based largely on current forecasts that we have from our customers. So taking that as the primary versus guessing where they are in their inventory, and then with this kind of open question mark about what's December really going to look like. And I think our customers claim to have a great deal of insight exactly what's going to happen that month.

And Josh, I would just add that if you look at the midpoint of our fourth quarter guidance, I don't want to get into specialty versus rubber, but if you look at the midpoint and you just think about our typical EVA dot per metric ton, it implies that we're expecting about a 10%-ish sequential decline in volume. And that's true across both businesses, generally speaking.

Okay, fair enough. Thank you. I guess if I look at rubber profitability for the quarter, even though it was around $160 per ton, if I assume oil is still kind of constant in the low to mid-40s and maybe some of the other pricing factors remove that as well, is there anything I should add or remove to that when I start to look at maybe first half next year, assuming volumes are still down 10%? So just trying to think if there's anything. and many more. Thank you.

permanent. And so you should anticipate an increase in S&A for that delta. And that would flow between both businesses. And so that's the main to think about 2021. That's the main thing I want to make sure that you consider.

Thanks. One more clarification around that. So the $15 million, can you clarify how much you maybe benefited this quarter versus last quarter?

Yeah, I'm not prepared to break that 15 down in terms of the impact this particular quarter. But as you look at 2021, yeah, I just ask you to consider that. Okay, thanks.

Thank you. Our next question comes from the line of John Tanwentang with CJS Securities. Please proceed with your question.

Yes, good morning.

It's Pete Lucas for John. You guys have covered most of my questions. I guess just one on gross profit per ton. In either segment, do you think that we've reached a trough there? And if not, when would you expect to see recovery there? Well, I mean, a lot of the impact has been volume. And so I think what you're really kind of getting at is are we seeing a trough or did we see in the prior quarter a trough on volume? I certainly hope so, and that's certainly how things look right now. Great. That's it for me. Most of the others have been answered. Thanks.

Thank you. Our next question comes from the line of Chris Capps with Loop Capital Markets. Please proceed with your question.

Yeah. Hey, good morning, guys. So, obviously, yeah, good morning. Obviously, the tire industry wasn't the only one impacted by COVID, but the refining industry in particular has been impacted by lower miles driven tires. Demand Destruction for Gasoline and Kerosene. And so I'm just curious if with that industry's pressure that I've seen, has that affected at all your availability of feedstocks and notwithstanding, you know, the IMO 2020, Greg, that everybody's sort of, you know, no longer focuses on. I'm just wondering if it's resulted in any changes or opportunities with respect to your differentials. in sourcing feedstock.

Yeah. So, I'd say the ability to source feedstock is really unchanged. We have no problem with that. I think it's slightly commercially sensitive what exactly we experience in differentials. I'd like to hold on that.

Okay.

So, The other question I had was, and I appreciate the details on the profitability metrics and differentials on a sequential basis, but I'm curious, I forget what your cost accounting is. I'm curious if it's FIFO, because if it is, does it understand that there would therefore be maybe some sequential drag on the profitability metrics to the extent you're selling inventories that were Produce when your utilization rates were lower. So I'm wondering if that's dampening, even though they obviously improve nicely, the margins in the third quarter vis-a-vis the second quarter, or just dampening margins because of your cost accounting period.

Yeah. We have not had that sort of dynamic. We did experience something of that sort during the teeth of the crisis earlier in the year, but that was not an impact on the quarter. The main drag from the absorption perspective was simply the fact that our utilization rates year over year were lower, although we did fine in terms of sales volumes in the 90s year over year. Our operating rates were not in the 90s of 2019 levels. And so that was the main driver.

Okay. And then one last one, I guess, is a little more nuanced on, you know, as you completed some of the EPA investments or as you worked through that. Will that, you know, effectively with the scrubbing that will be in place, Does that change the flexibility that you'll have in terms of sourcing different feedstocks? Will you be able to opportunistically use effectively higher sulfur feedstocks since you can abate the SOX associated with combusting those feedstocks? Is that effectively a sort of hidden benefit of these investments? Thank you.

Chris, I just want to acknowledge on that question, there's a lot of things in play, including questions between ourselves and Evonik and all of that. So let me just say that once you put in the abatement equipment, you're now tracked on what your actual emissions coming out of it are. And let me just leave the answer there, which I think gets to it.

Okay, fair enough, thanks.

Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Kevin Hosovar with North Coast Research. Please proceed with your question.

Hey, good morning, everybody. Good morning, Kevin. I wanted to make sure I was understanding something correctly. Lauren, I think you just mentioned in the fourth quarter guidance it seems to imply, you know, the midpoint kind of 10% quarter over quarter decline in volumes. And I think you mentioned that's kind of similar for both businesses. And then on one of the slides it mentioned, you know, that October utilization rates, are up year over year versus the prior October. I think that's what that's saying on slide four, which seems to imply What volumes might be up in October? So I guess I just want to make sure I'm understanding that right. Because I guess volumes down 10% sequentially would imply volumes down something year over year. And again, that October comment seems to imply that volumes are up unless you're building inventory or something. But curious if you could help me reconcile what you're seeing October versus what's implied in that guidance.

Sure. So, the key uncertainty around the next 60 days is really with regard to our customers and how they choose to position themselves. And so, one month does not make a trend, and so, yes, October has been very solid, and that might take us towards the higher end of our guidance, but we just don't know how the next 60 days are going to Transpire, and so that's how you end up at the midpoint. Okay, gotcha.

And then you guys mentioned the expectation is, I think, Corning, you mentioned in the prepared marks that, you know, we wouldn't return back to 2019 levels of demand until for another, you know, 12 to 18 months. So curious what that implies for, you know, 2021 demand. does that, obviously volumes I would imagine would be up quite a bit year over year, but sounds like down something versus 2019. So does that imply we're within five-ish percent or something from 2019? Just kind of curious what, if you could just give a little more color on that comment in terms of what that implies for volumes over the next 12 months or so.

Yeah, so...

I think one answer on that, and if you were going to look for just independent data, you can look at what the Notch data is suggesting, which is saying that more or less on par with 2019. and then they give various scenarios from there. If we were going to look at forecasts from customers, as I said earlier, that's a bit up and down themselves amongst different customers as well. So as you would expect, there's a certain amount of uncertainty for exactly what is going to happen, but certainly the volatility dampening down considerably compared to where we were this year.

And I would also add that who knows what Notch is considering, but it's really important to have an assumption around will we have a safe, effective, widely distributed vaccine in 2021? And that's a key question that is difficult to know, but I just throw that out there. Okay. All right.

Thank you. I think that also just plays into the whole commercial dynamic because people are essentially right now negotiating to reserve capacity. And you could be in a situation where, I don't know, halfway through the year, a quarter of the way through the year. I mean, at some point next year, I think we're going to get that vaccine. And people are going to want the capacity because I think we'll see quite a bit of uptake in the economy when that happens. So it all adds for just a very exciting and interesting time right now. but a time that we're very well prepared to take care of, take advantage of, to use the volatility and to perform well in this environment.

All right. Thank you.

Thank you. Once again, as a final reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Lawrence Alexander with Jefferies. Please proceed with your question.

Hi there. Could you discuss CapEx from a slightly different angle?

How much could you grow the top line or grow volumes before you would need to undertake your next significant increase in CapEx spending?

That's an excellent question. And so our opportunities there is, number one, well, we've got about 1.1 million KT of capacity. So you can look at where sales come out and say, okay, there's an opportunity there and use the guidelines we've put in for how to look like that would turn up as an incremental margin for us. Beyond that, we clearly have the project underway in Ravenna, so that gets us some added capacity slated towards specialty with some differentiated rubber in that. And there's also the opportunity to, let's say, repurpose a lot of the capacity that we have in Bayer. Beyond that, though, you are looking at additional capacity.

And let me just add, Lawrence, if you accept that 1.1 is our maximum and you annualize what we're doing today volume-wise, you get to about 840, and that would imply about 30% growth to our max utilization.

Perfect. Okay.

Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the conference back over to Mr. Painter for any closing remarks.

Well, thank you again, everyone, for joining us today, and we appreciate your attention and your interest in Orion Engineered Carbons. Once again, thank you to the Orion team for their great performance in this quarter, working diligently to keep up with just surging demand from our customers. Thank you all, and to our shareholders, we appreciate your support and are doing our best for you. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.