Orion S.A. Common Shares

Greetings and welcome to Orion Engineered Carbon's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. The 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. I would now like to turn this conference over to your host, Ms. 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 fourth 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 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 and the rest. In addition, all forward-looking statements are made as of today, February 19, 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. Good morning, everyone, and welcome to our fourth quarter earnings conference call. 2020 tested just about every company's ability to be nimble and responsive. I'm pleased to say the Orion team passed the test with flying colors. They ensured that our customers' needs were met both during the depths of the reception and through the demand surge. They implemented many improvements to our plants and work processes. Most importantly, their exceptional discipline in adhering to our COVID-19 safety protocols resulted in our having zero workplace transmission of the disease in 2020. A truly extraordinary accomplishment. I congratulate them again on their dedication. 2020 was our first major recession as a standalone entity. And so by getting through it well proves something about resilience that's hard to convey with just words on a call. I'm quite pleased with the speed of our recovery and the strength of our financial position through the end. Ultimately, we borrowed a modest net $27 million to fund operations for the year and experienced a one-turn increase in our leverage at year end. From a capital allocation perspective, in March we suspended our dividend to provide financial flexibility to weather the impending economic storm. Going forward, we will emerge stronger as we establish a capital allocation policy that maximizes shareholder value First, ensuring our financial standing across the severe economic downturn like 2020. And second, by ensuring that we have adequate capital to fund value-enhancing growth initiatives, that is, projects with economic returns significantly in excess of our cost of capital. And third, by establishing a mechanism to guide the size and frequency of capital return to shareholders over time. We also significantly enhanced our board independence and diversity in 2020, further demonstrating our commitment to effective, transparent, and accountable corporate governance practices. From a financial perspective, in the fourth quarter, we reported adjusted EBITDA of $66 million, up 30.4% year-over-year, reflecting the substantial operating leverage we expected the business to deliver as the economy recovered. Our company-wide adjusted EBITDA margin was 20.9%, and the specialty carbon black margin was 30.5%. These strong results were primarily attributable to our specialty carbon black business unit, which saw volumes rise low double digits sequentially. We also experienced slightly less seasonality than anticipated in our rubber carbon black business, where volumes declined mid-single digits sequentially. I believe the strong tone also reflected a mix of restocking in some markets and a fundamental increase in underlying demand. Finally, we continue to make progress with our sustainability efforts. We published our latest sustainability report during the quarter. It highlights progress across multiple ESG dimensions, including our governance, emissions reductions, strategic collaborations, employee engagement, culture and community We're working diligently to ensure that sustainability is an opportunity for us and to make it an integral part of our strategy. From a product perspective, our emphasis reflects a threefold focus on recycled carbon blacks, such as those made from oil recovered from end-of-life tires, green carbon blacks derived from renewable feedstocks, and enabling carbon blacks, which refers to grades that enable lower fuel consumption or extend useful lives. The report also details how we are partnering with leading companies across the value chain to drive a circular economy and sustainable solutions via the Black Cycle Consortium. I invite our stakeholders to discover more about the path we are charting towards a more sustainable future by downloading the report from our website. On today's call, Lauren and I will cover the fourth quarter results, comment on 2021 rubber pricing negotiations, discuss two growth initiatives, and finally share perspective on our outlook for the year. After our prepared remarks, we'll be happy to take your questions. We began providing slide four early in the crisis, and it remains illustrative today. It breaks down our business by end market, and more. Replacement Tire, which makes up roughly 60% of that business, has led throughout the recent recovery as expected. We saw a sharp bounce off the bottom driven by a combination of rising passenger car mobility earlier in recovery and relatively high commercial truck driven demand. Despite the mobility restrictions in certain parts of the world, global rubber volumes during the fourth quarter were nonetheless quite strong at 98% of 2019 levels. This exceeded our expectations for this stage of the recovery, given that so few people have been vaccinated and that the infection rates remain high in many countries. With this backdrop, we negotiated 2021 rubber carbon black pricing for most of our markets outside of Asia. Although the conditions were not ideal, particularly in North America, we achieved pricing and share broadly consistent with 2020 levels. We are determined to continue the march towards higher pricing in 2022. Shifting gears to the original equipment side, which makes up approximately 40% of our rubber volumes and 15% of our specialty volumes, this market has picked up sharply in recent months and also beat expectations. Global light vehicle sales showed a classic V-shaped rebound through December 2020, according to LNC Automotive. A recovery shape that some did not anticipate, but that we have been pleased to see. The automotive chip shortage is a new challenge for the industry, and we expect this to dampen OEM demand slightly during 2021. Most of the 85% of our specialty business that does not go into automotive we characterize as coincidence or lagging in nature. Certain markets, such as printing for traditional publications, continue to lag. However, in the fourth quarter, Quite a few proved to be what I'd call fast followers, with many remarkably exceeding 2019 levels. Examples in this category include general plastics, wiring cables, industrial coatings, and batteries. A few segments did particularly well through the recession, including food packaging and those linked to consumer DIY, like architectural paint and mulch. Now, turning to our fourth quarter results in greater detail. As you can see on slide five, adjusted EBITDA increased to $66 million year over year. We achieved higher volumes driven by a combination of higher baseline demand across nearly all of our specialty end markets, restocking, and new specialty business. In addition, we benefited from higher base price, primarily in rubber and favorable specialty mix. These drivers and less-than-expected rubber seasonality were partially offset by the margin impact of lower oil prices and higher fixed costs. We remain very confident in the long-run growth outlook for carbon black demand, which we expect to continue to grow in line with GDP over time, with certain geographies such as Asia growing faster than others. Our strategy continues to emphasize positioning the line to capture a disproportionate share of growth in specialty and technical grade credit in black. You can see this in our business mix, with approximately 25% of our volume being specialty and fully 75% of our adjusted EBITDA is driven by specialty and technical grades. This strategy guides our capital allocation, prioritizing growth capital towards specialty and technical grade markets. In that vein, slide six details two strategic initiatives that will expand our capacity to meet increased demand in higher margin market segments and higher growth geographies. The first initiative highlighted a 25 KT expansion of our Ravenna Early facility, primarily dedicated to specialty grades, was originally announced in 2018. This expansion is now expected to be mechanically complete by end of year and to begin ramping up in 2022, providing much-needed additional capacity for our polymer and coatings customers in particular. We are also pleased to announce a project-constructed greenfield facility in China to serve the robust demand for our specialty and technical rubber grades there. Our plant in Huabei, Anhui Province, will make 65 to 70 KT's, cost about $60 to $70 million and begin production in 2023. The plant design allows for further expansion. Given where we are in the economic cycle, a common question we get from long-term investors is, what's around long-range earnings capacity? Slide 7 starts with our 2020 volumes and then adds in our approximate leverage to our existing capacity and then layers on the two projects I just discussed. At this time, I'll turn the call over to Lauren.