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spk03: Greetings. Welcome to the Orion Engineered Carbons FA Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on the telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Wendy Wilson, Head of Investor Relations and Corporate Communications. You may begin.
spk00: Thank you, Operator. Good morning, everyone, and welcome to Orion Engineered Carbon's conference call to discuss our third quarter 2021 financial results. I'm Wendy Wilson, head of investor relations. With us today are Corning Painter, chief executive officer, Lauren Crenshaw, our outgoing chief financial officer, and Bob Rivneck, interim chief financial officer. We issued a press release after the market closed yesterday, and we 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, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 5th. The company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. All 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.
spk02: Thank you, Wendy. Good morning, everyone, and welcome to our third quarter earnings conference call. Before I get started, I'd like to share a few words about Loren, as this will be his last earnings release with us. You all know that he worked hard to help us weather the steep downturn last year so successfully. What people may forget is that he had only been with us for a few months before COVID-19 surfaced and that he was immediately thrown into that storm. Being a quick study, Lauren was an able partner and leader during that time. Under his leadership, we completed the refinancing of our term loan B facility while adding a sustainability aspect to it. Lesser known to our investors perhaps, was that Lauren revamped how we manage and think about risk, and that he has been integral to our strategy development during this time. Lauren, thank you for your contributions, and I wish you all the best. Thank you for those kind words, Corning. It has been a privilege to serve as Orion's Chief Financial Officer over the past two years, providing financial leadership and partnering with you and the leadership team to refine Orion's strategy and position the company for success. Orion has an extremely bright future. I truly believe that the capital allocation pivot presently underway and its impact on the intrinsic value of this company is not well appreciated, except by a small but growing number of long-term investors. I intend to remain a long-term shareholder myself and look forward to seeing this leadership team execute the strategies that have been developed and realize the great promise of this company given the quality of its people and its assets, its competitive positioning, and core competencies. I want to thank you for the opportunity to serve this organization, Corning, which from a financial leadership perspective will now be in Bob's exceptionally capable hands as the search is conducted. Bob, I'm not sure I have ever made a finer hire, quite honestly. You have made an enormous impact over the past 18 months, and I have thoroughly enjoyed our partnership. I wish you the best and look forward to working to make the upcoming transition as smooth as possible. Thanks so much, Loren. It has been a pleasure working with you, and I look forward to continuing to implement the strategy that you and the leadership team have developed for Orion. I am also excited to lead the finance organization that you have developed, which I believe is very talented and dedicated to Orion's continued success. This company has a bright future, and I am looking forward to the dual role of chief accounting officer and interim chief financial officer to continue the path that has been established. It's going to be an exciting time for Orion now that we are close to finishing our EPA work and focusing on investing for growth. sustainability, and returning capital to shareholders. I am glad to be part of that journey. Corning, let me hand the call back to you. Thanks, Lauren and Bob. I'm pleased to report another solid quarter, continuing what has been an excellent recovery in our business. Specifically, third quarter adjusted EBITDA was $66.4 million, up 20.8% from the third quarter of 2020, which marked the beginning of the recovery in our business last year. Our results were powered primarily by the continued strong specialty performance, which represents 55% of our adjusted EBITDA year-to-date. Overall, against the backdrop of the downturn a year ago, Both of our businesses have demonstrated substantial operating leverage and an impressive recovery amid the surging demand for our specialty products across nearly all end geographies and applications. All that despite the reality that COVID is still with us and global supply chain efficiency is not. As you are aware, we recently reinstated our dividend by declaring an interim dividend to be paid in the first quarter of 2022 in the aggregate amount of $1.25 million, which is equivalent to approximately two cents per common share of the company. Our primary capital allocation objective remains to make prudent investments in differentiated applications that drive profit and raise our long-term earning capacity. The expansions underway in Ravenna, Italy, and Huawei, China, and the future efforts to advance our connectivity franchise are prime examples of this, with expected returns well more than our cost of capital. Reinstating our dividend reflects our high level of confidence in our business. It also reflects our commitment to regularly returning cash to shareholders and maximizing the universe of potential investors in Orion shares. We believe our strategy of balancing capital reinvestment and a prudent capital structure with returning a portion of our capital to shareholders positions Orion to maximize long-term growth and value creation. Aside from delivering solid financial results during the quarter, we also began construction of our second plant in China. The plant, located in a chemical park near Huapei in Anhui Province, will produce both specialty and high-performance carbon black, and it's a key project to help us lay the foundation for a substantial increase in our long-range earnings power. We also achieved mechanical completion at our expansion in Italy and commissioning is now underway. This expansion is focused primarily on specialty applications and will expand our production by about 25 kilotons with Ravenna ramping up next year. Huawei is projected to ramp up in the 2023 to 2024 timeframe and is expected to provide in the order of 65 to 70 kilotons of incremental capacity. As previously shared, we expect these two investments to contribute roughly $30 to $40 million in adjusted EBITDA at steady state levels, representing a substantial increase in the inherent earnings capacity of our business and an excellent example of the sort of value-enhancing investments we intend to make from a capital allocation perspective. We also advanced the air emission controls project at Ivanhoe and brought the systems online last month. Getting this system, our largest and most complicated air emission control project, online in the throes of the ongoing pandemic is a major accomplishment. Although we were behind schedule, I congratulate the team for executing this project safely. The focus now is on working through startup issues and reestablishing normal supplies and inventories. With year-to-date rubber volumes at 90% of 2019 levels, we continue to expect 2022 market conditions to be very favorable for our rubber carbon black business, despite the semiconductor and other supply chain disruptions. We expect driving an automobile to remain the preferred mode of transportation for individuals and families, and commercial traffic to remain robust. These factors are likely to result in higher miles driven, which in turn drives demand for replacement tires, which makes up approximately 60% of rubber carbon black volume. Our positive 2022 outlook is also influenced by the projected tightening of the global supply-demand dynamics as measured by global utilization rates, which are projected to be roughly 300 basis points higher in 2022 versus 2019. Against this backdrop, as of today, we've agreed approximately two-thirds of our EMEA and America's volume. That's roughly in line with normal levels, with new signing pricing being up meaningfully, as it needs to be, with the increasing costs and to take another step towards improving returns on the capital that we have invested in the rubber carbon black business. Finally, during the quarter, we successfully refinanced our existing term debt with a seven-year dual-currency sustainability-linked term loan, which Lauren will discuss in greater detail later in the call. We believe that this is one of only three of its kind ever issued by an NYSE-listed public company. The response that we have received from investors for this sustainability-linked financing was impressive, validating our long-term commitment to responsible growth and reflecting confidence in our financial strength, future business performance, and long-term corporate strategy. Turning to our third quarter results in greater detail, as you can see on slide four, Adjusted EBITDA rose to $66.4 million year over year, primarily driven by our specialty business, with favorable mix and higher volume across nearly all applications and geographies. Our results were partially offset by higher fixed costs, reflecting higher incentive compensation and maintenance costs due to the heavy turnarounds. as we expected heading into the quarter and is expected to persist for the balance of the year. That concludes my opening remarks. For the remainder of today's call, Lauren and I will cover the third quarter results in greater detail and our outlook for the year. After our prepared remarks, we'll be happy to take your questions. Lauren? Thanks, Corning. Revenue increased 39.4% year-over-year, primarily reflecting the impact of passing through higher fee stock costs with higher specialty volume and favorable mix contributing to a lesser extent. Contribution margin increased 18.9% year-over-year, mainly due to strong product mix, higher cogeneration profitability, and the favorable effect of oil price movements. Adjusted EBITDA rose 20.8% year-over-year to $66.4 million, reflecting higher contribution margin, partially offset by higher fixed costs related to incentive comp and maintenance costs, reflecting a relatively heavy quarter for turnaround, as anticipated. Finally, we reported adjusted net income for the quarter of $27.2 million, up 32% year-over-year, on higher adjusted EBITDA, partially offset by higher fixed costs. It is also noteworthy that our effective tax rate year-to-date of 27% is tracking 400 basis points below our guidance heading into the year. This dynamic has also benefited our adjusted net income and reflects excellent planning and execution by our tax and business teams. We project that our full-year effective tax rate will be in the range of 26% and 28%. We will provide 2022 effective tax rate guidance in February. However, I can say that we believe that the drivers of our lower effective tax rate are the results of structural changes that should prove sustainable over time, drive a higher cash flow, and therefore intrinsic value of our company over time. I salute the efforts of both our tax and commercial teams and am pleased with their efforts. On slide six, you will find several useful bridges that provide greater financial details supporting the comments I just shared on our quarterly results. Slide seven details our year-to-date cash generation, which is essentially flat, with a favorable impact of strong financial performance and receipt of the Advanik settlement proceeds largely offset by a surge in working capital and EPA-related investments. As a reminder, when oil prices rise, our working capital increases by roughly $30 million for every $10 change per barrel of oil in our feedstock costs. Of the year-to-date increase in working capital, over 60% has been driven by higher oil prices, about a quarter by higher sales, and the balance by higher inventory levels, in line with the current robust demand dynamics we have experienced to date. Turning to slide eight, the first point I would like to make is that the combination of the strength of our year-to-date operating performance and receipt of the Evonik settlement proceeds earlier this year have resulted in our net leverage being restored back to pre-COVID levels at around 2.3 times, well within our targeted steady-state net leverage range of 2 to 2.5 times. The positive impact of our recent refinancing of our term debt is also evident on this slide. I'll highlight three attributes of the deal. First, it was completed at attractive rates, a blended spread on the euro and dollar tranches of around 238 basis points. Second, it opportunistically pushed our term debt maturity profile out by four years to 2028 from 2024. And third, it represented one of the first sustainability-linked term loans by a public corporate issuer in the United States. The loan is sustainability linked in that it includes an ESG adjustment to the spread that works as follows. We've established certain KPIs related to the combined SOX and NOX emissions of our North American plants with detailed targets for each year of the seven-year term loan. During the first four years of the loan, if we hit both targets, our credit spread declines 10 basis points, and if we miss both targets, our spread rises by 10 basis points. During the final three years of the term loan, we no longer enjoy a 10 basis point benefit from achieving our targets. However, if we miss one or more of the KPIs, our spread rises five to 10 basis points. We were excited to broaden our commitment to responsible growth by securing this first of its kind sustainability-linked term loan, clearly aligning the commitments we have made to our stakeholders with the financing costs of the company. Finally, I would like to highlight that in connection with the refinancing, both S&P and Moody's reiterated their credit ratings, with S&P maintaining a BB rating and Moody's maintaining its BA2 rating and revising its outlook to stable. As we look forward, our strong financial standing and capital structure positions us well to fund and execute the remaining EPA investments as rapidly and safely as possible while also advancing growth initiatives that bolster our earnings capacity. We also anticipate higher discretionary cash flow in the coming years as EPA investments ramp down, while our Ravenna expansion ramps up in 2022 and our WABE expansion ramps up in 2023 and 2024. Moving to slide nine, specialty volumes rose 8.7% year-over-year, showing strength across most end markets and geographies, with strong volume-driven operating leverage and favorable mix, the main drivers of the 47.4% year-over-year increase in adjusted EBITDA. As shown in the trailing 12-month gross profit per ton chart, we are pleased to see that specialty profitability is approaching levels above 2019 and approaching levels not seen since 2018 driven by extremely favorable mix, high loading rates, and the associated operating leverage. The next slide breaks out the major year-over-year drivers of adjusted EBITDA for the specialty business in greater detail, the most significant of which were higher volume and improved mix, partially offset by higher incentive and maintenance-related costs. We have increased prices significantly year-to-date, But these increases have simply allowed us to hold even with rising costs as opposed to expanding our margins. In market-wise, coatings, polymers, synthetic fibers, and wiring cable were particularly strong. Geography-wise, the Western Europe and North America region showed the greatest relative strength. Turning to slide 11. Lower volumes translated into rubber carbon black adjusted EBITDA of $27.4 million, 4% below year-ago levels. Specifically, volumes were down 3% year-over-year. In market-wise, replacement demand was relatively stronger than original equipment demand, reflecting the impact of the ongoing chip shortage on automotive production levels. Geography-wise, volumes in the EMEA and Korea regions were relatively weaker with Korean exports being particularly impacted, partially offset by stronger America's performance. Slide 12 breaks out the major year-over-year drivers of adjusted EBITDA for the rubber business in greater detail, with the unfavorable impact of lower volume and less overhead absorption offsetting mix. With that, I will turn the call back over to Corning. Turning to our outlook, As we approach the end of an exceptional year, we are narrowing our full year 2021 adjusted EBITDA guidance to a range of $265 to $280 million. Shaving the top of the higher end of our range reflects the impact of the delayed startup at Ivanhoe and dynamic market conditions, including supply chain and inflationary pressures. Capital spending continues to be on track towards approximately $190 to $200 million, and our estimate of the full ultimate cost of installing our U.S. air emission controls remains unchanged at between $270 and $290 million. In closing, there are four key messages I would like to reiterate. we're excited to be laying the foundation to deliver substantially higher earnings power in coming years. By the end of 2022, since the time of our IPO in 2014, we will have allocated over $600 million towards debt reduction, dividends, and EPA-related emissions technology. As we approach the next five years, we expect to have the wind at our back from a discretionary cash flow perspective. with net leverage in line with targeted levels, the EPA investments coming to an end, and our dividend rate at a fraction of prior levels, enabling our continued investment in growth opportunities in differentiated applications and sustainable offerings. While we've highlighted the Ravenna expansion and the WABE in recent quarters as one of a very small handful of leading producers of acetylene black, we also see significant growth opportunities in conductive carbons. Acetylene black is an important conductive additive in modern lithium ion batteries and other attractive markets. We have seen considerable traction year to date in getting SPECT in with battery customers and just completed a significant capability upgrade at our plant. This plant, which we purchased in 2018, provided a foothold in this space. Going forward, we look forward to sharing more about our plans to take the next steps towards making this attractive near adjacency a more substantial contributor and growth driver. Rubber carbon black marketing conditions are quite favorable and poised to take another step up in 2022 in terms of our goal to achieve higher returns on capital. Finally, I'm pleased that we have our most challenging air emissions control project commissioned. While I expect some challenges in the early months of operation, it's great that we will have about 70% of the projected EPA spending behind us by year end. We look forward to the ongoing support of our investors as we continue to grow Orion profitably and responsibly in the years to come. With that, operator, please open the line for questions.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you'd 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we pull four questions. Our first question is from the line of Josh Spector with UBS. Please proceed with your question.
spk01: Hi, guys. Thanks for taking my question. And first, thanks, Lauren, for the help over the past couple of years. And welcome, Bob. Thanks, John. On the rubber side, specifically on the contracts, I mean, first, congrats on getting higher pricing year over year. That's certainly positive as we look to 22. Is there any way to quantify what you'd expect from an EBITDA perspective or what you're getting price net of the higher cost that you expect to see?
spk02: No, I mean, it's very commercially sensitive, and we're still in the middle of this, so we're not going to be able to talk about that at this time.
spk01: Okay. Then maybe I'll just go to the cost side near term. Rubber EBITDA per ton stepped down a bit more meaningfully than we were expecting Q on Q. I understand some of that's probably downtime, but the higher oil might be a bit more of a positive offset there. Can you maybe walk through some of the sequential puts and takes and what's temporary versus permanent and how you see things perhaps shaking out over the next couple of quarters?
spk02: Well, so first of all, we had indicated that we thought it would come down from the GDP per ton that we had last quarter. And I would just say one aspect of what played out for us was just a draw in terms of an inventory draw, which has an implication on fixed costs. And we'll see similar activity in this quarter just because of the slow restart at Ivanhoe. And Josh, I would add that you had volumes down sequentially. And so our incremental margins work the same on the upside as they do on the downside. And you also had high turnarounds. So that combination, in addition to the draw, I would say were both unique. our second half run rate is not going to be our 2022 run rate and so i would suggest that both the volume dynamic and the turnaround dynamic are both unique and unlikely to persist as we go into next year and so you look at next year i think if you look at that gp per ton that's a good measure to use and we're in the sort of 275 type range and that's a good place for us to be next year Okay, thank you.
spk03: And our next question comes from the line of Kevin Hosovar with North Coast Research. Please proceed with your question.
spk04: Hey, good morning, everybody.
spk02: I wonder if you could comment on the mix in the specialty side of things. It seems like that's been nicely favorable here to the results. What's driving that, especially with the chip shortage and how that's impacting auto OE? I always thought that the coatings and auto OE side was probably the highest mixed up. So could you kind of comment on what's driving the mix in the specialty business? Yeah, so mixed, first of all, we're just in, say, big picture, comparing it from a year ago. I mean, it's up pretty much everywhere, all right? And if you were going to think sequentially, then you're correct. There's pressure sequentially in automotive, as you'd expect, so coatings, adhesives, that sort of thing. But we also see strength, for example, in engineered plastics in that timeframe, including having made some gains with some new products and that sort of thing. Okay. And then in terms of the dividend, it's good to see that get reinstated. What's the plans going forward with the dividend? I'm assuming it's going to be quarterly going forward. And then do you, you know, is it something you plan on raising going forward? And especially as you get, say, 2023 when cash flow will improve meaningfully, you know, could we see a step up in the dividend at that point? I'm just kind of curious your plans with the dividend from here. Right. So, you know, ultimately these things are voted each time by a board, right? But I would anticipate, yes, that we move back to a quarterly dividend from where we are. I'd encourage us to think about this in the broader picture, but just capital allocation. So we've got the balance sheet in a good place. We've got the net leverage in a good place. We're always going to prioritize safety and sustainability investments. And then, you know, we've got a tradeoff between things like growth, and we've talked a little bit about projects we have going. I think we've made it clear that we see opportunities for us in connectivity moving forward, especially in a settling black. And there's also the element of returning cash, whether that's in a dividend or a buyback to our shareholders. So going forward, I think we'll be looking at just what's the balance between those. I think our current dividend is one that you could grow off of, but I wouldn't necessarily signal necessarily a step change. I think a decision about a step change would, you know, be in context of, well, what do you see as your growth prospects and other demands for the capital? Okay.
spk04: All right. Thank you very much.
spk02: Thanks, Kevin.
spk03: Our next question comes from the line of Mike. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays.
spk02: Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question. Mike Hedwood, Barclays. Please proceed with your question you're talking about higher pricing, but your costs are also up meaningfully over the course of this year. So is it fair to assume the price is at some level that means higher unit margins for next year, or is it just going to roughly offset that cost inflation? Yeah, it has to do more than offset the cost inflation. I wouldn't be saying this if that's all I was expecting to achieve. I mean, think about all the capital we and other people are putting into that industry in North America in particular. So, yeah, no, I feel strongly that margins and profitability and return on capital does need to improve. We see ourselves taking a meaningful step forward in that regard. And, of course, that's more than just covering your costs. But costs are going up. And I would also add we have additional operating leverage. When you think about our total potential volumes for a full year, it's in excess of a million. And we're going to end this year somewhat shy of that. So just the operating leverage on the rubber carbon black business could also drive higher profitability next year in addition to the price. That's great. Okay. That's what I just wanted to clarify. And then second, I do want to talk about 22 for a minute. And I think, Lauren, you touched on it a bit in an earlier answer. But just if I look at the EBITDA cadence this year, I think you averaged about $75 million or so a quarter in the first half, $66 million in 3Q, and the mid-20-year guide is about $56 for 4Q. Now, Lauren, you touched some one-off stuff this quarter. But just in the first half of this year, that call at $300 million or so annualized level, the right run rate for earnings next year? Or I guess I'm just really just trying to get my hands around the right earnings power level as we kind of move our models into next year. Right. What I would tell you is that It is not difficult to get to something with a three in front of it for next year. When you think about, again, if our total volume is about $1.5 million, which we've said in the past, and we end this year around, say, $9.75-ish, That incremental leverage, and we've given you 30% operating margins, incremental margins for rubber, and mid-40s for specialty. Just that incremental leverage, getting back to, say, 2019, would be an increment. And then the pricing would be an increment. So it's not difficult to get to something with a three in front of it. Our first half this year was... very strong, in part because we waited our turnarounds for the second half. So we can't get into quarter by quarter, but it's not tough to get yourself to that kind of a level, which I think is where consensus is. Got it. Thank you.
spk03: Our next question comes from the line of Chris Cash with Loop Capital. Please proceed with your question.
spk02: Yeah, good morning. Happy Friday. Lauren, congrats on the new role. Look forward to chatting with you about that. Thank you. Yeah, the follow-up was really on the profitability of the rubber business. Talking directionally, if you think about next year, if you look at the gross profit per ton TTM chart that you guys provided, I think, Lauren, you said being kind of in that ballpark next year would be something to think about. But if you If you look back to, say, 2019, when the levels were north of 280, you got pricing in calendar 2020, although then the pandemic ensued, and then no pricing in 21 because of the pandemic, but then another level-based pricing in 2022, which was just referenced in the contract negotiations, and operating leverage. So why wouldn't we be thinking something materially higher than kind of what your TTM is around now? You know, you're right. Between price and operating leverage, we should do better than that TTM average. You're absolutely right. And the way you would think about that, again, if you assume incremental margins in the low 30s for rubber, you can make your own assumptions about how much our incremental volume growth would be next year, but you use sort of low 30s incremental margins. And you can also make your own assumptions about what price we're going to get in excess of our costs. To Corning's point, we're not just going to cover our costs. Then you're right. We could do better than that on an oil price neutral basis. If oil prices go down, then you know that that's to the detriment of the rubber business. But on an oil price neutral basis, we can do better than that. Yep. Okay. I'm just sticking with the rubber business, and I totally appreciate the commercial sensitivity around these negotiations. But is there any way you can characterize maybe just the nature and tone of the conversations? Because clearly you're sending the message to customers that you need, and you've been, you know, been stalwartly mentioned, you know, conveying that the customers, since you arrived at the company Corning, is that you need, the industry needs better returns on capital. So just wondering, you know, given the setup and the, you know, generally healthy trajectory and demand, just any characterization of business, the nature and the tone of those conversations, be interested to hear. yeah so chris i think one element of it is just supplying demand dynamics and you know what people see for next year you know maybe there's a chip shortage in the beginning of the year okay but it just drives more replacement tire demand in that same same time frame and you know you're basically reserving capacity you know in instantaneous how much carbon black are you signing up for so if you think the second half is going to be stronger you know you need to make that commitment now So I think all that plays out very well. I'd say the dynamics in South America are extraordinarily strong. It's positive in North America, Europe as well. So I think, and to a certain degree, it's simply supply and demand as well as every supplier. Well, I can speak for ourselves. There's cost pressures and there's big investment. And I think I had in the script, You know, that comment about loading, and that came from a third-party data source, but that was saying, let's say overall, about a 300 basis point tightening in terms of utilization of capacity. And it's cleanest to look at places like North America because, you know, Europe, you've got this balance with what comes in from Russia. But I just say it's another data point that says that it gets tighter and and you can see that because you can see the onshoring for example of tire capacity and no no increasing capacity in carbon black okay and can i just follow up on one um one prior talk about mix in the specialty business because there's a little counterintuitive you improve sequentially despite higher oil prices where there's, you know, you have to fight more to get that through because it's not automatically contractually passed through. And in the past, you've described the automotive end market as being the more favorable mix. And then given sort of the weakness in the automotive late in the third quarter, you would have thought that may have been a headwind for that segment. So just trying to reconcile a little bit and look a little bit more color what why that mixed on a sequential basis was so much better than the second quarter. Thank you. All right. Yeah, good question, Chris. So one element of that is we did have a fixed cost advantage. We had outages coming, so we had a bit of an inventory build. So that's a plus for us. And I'd say without that, if I compared to prior quarter, it would have been roughly on par. In a broader sense, across all the products that we make, We've been working hard to refresh our products, to enhance our investments and innovation. We talked over a year ago. We started up a lab in the United States, for example. And as you do these, you just upgrade your overall portfolio. So don't get me wrong. Mix is still a factor, right? And if certain segments go down and other segments grow, it can go down from where it is today, no question about it, or even where its natural runway is without, let's say, that inventory build. But we have worked hard to improve that overall picture. I appreciate that, Colin. Thanks.
spk03: Our next question comes from the line of John Hamilton with CGS Securities. Please proceed with your question. Hi. Good morning, guys.
spk02: Thank you for taking my questions. And again, congrats, Lauren, on finding something new and Bob for stepping up. My first one, Cornell, I was wondering if you could talk more about that factory downtime, the EPA upgrade, and just kind of maybe how it's taking longer than expected. Maybe you talked about it earlier, but I missed it. What's the actual cause there, and are you on track with the expected CapEx and spend in that facility? Yeah, I don't think this is going to have a huge impact on CapEx. There might be more startup costs that we have to end up capitalizing, that kind of thing. I would describe it having been a startup engineer many, many years ago, that we're in the throes of the startup and you kind of work your way through, you know, kind of like the typical issues that come up with that. It's a more complicated control system, but one that's got certain advantages, and we're just working our way through that. And I think this period of time, which I refer to as sort of like a shakeout time as we go through that process, to run well through this quarter and potentially into next slightly. Okay, got it. And then just approaching the rubber pricing question from another perspective, you mentioned getting paid for the capital investor makes a replacement cost. I'm not sure which one. Has the model itself changed how you price the customers, and are there better escalators and maybe de-escalators for how volatile inputs are now? So, Lincoln, one more comment to the startup. Let me also just be clear so that it doesn't sound overly pessimistic. I mean, we're up and running. The issue is you have trips, you have things you shut down for, things you want to shut down and check, because we want to make sure we don't damage the equipment in a fundamental way like that. So, again, I just mean that it's going to be a little less reliable in this timeframe. If I move – I'm sorry, could you repeat your second question briefly? Yeah. Revisiting the rubber pricing question, I think earlier you said you want to get paid more for the capital invested, maybe for, I guess, the replacement costs. And I was wondering if the algorithm has changed how you price the customers, or is it more the traditional one where you just raise prices and hope for the best? Are there better escalators, de-escalators in that, just given how the input and supply chain has been so volatile? Yeah, so I think by and large, our formulas work well for us. A couple years ago, we made an enhancement on how we handle differentials and the pass-through on that. And the deal we have with our customers is essentially that we're going to pass through these variable costs as they go up or down. And that's what we strive to achieve in the contracts, and I think that's understood. Perhaps the only structural thing I point to is that in Europe, Many of our contracts had a CO2 clause in them. And as the trading scheme ratchets up in Europe, we're seeking in this round to have a CO2 aspect of those pricing formulas. So that's, I guess I'd say that's the enhancement that we've made in that marketplace. okay understood and then last um just wondering as you look forward um i think one of the the things that you you've been hoping for long term was just increasing the mix of specialties um you know as a portion of the business uh i'm wondering you know if there are any updates to that outlook and then kind of how that trends and um if that does take any more of your capacity online uh excuse me offline as you do that Right. So I think, first of all, you can already see it's moved up for us as this percentage of our EBITDA. It's going to step up with the Ravenna project. It's going to step up with the WABE project. And we've obviously talked a bit, and we're looking at conductives. A little bit of that might go into the rubber market, but the vast majority of that would be in the specialty area as well. So I think we'll continue to see a larger and larger proportion of our EBITDA coming out of specialty. And just in regards to the rubber capacity, does that cannibalize it at all? It does in some cases. Yeah, that's true. Okay, got it.
spk03: Thank you. And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question comes from the line of Art Rulak with 3Court. Please proceed with your question. Hi, guys.
spk04: Thanks for all the hard work at Orion the last few years. A couple observations and then maybe just some questions. First, on the capital allocation side, OEC has been public for about six or seven years at this point. Paid some dividends, didn't pay dividends. Now it's paying a very small dividend, which is great. I think leverage is 2.3 times your cost of capital for that. Cost of debt is around 3%. Enterprise ID EBITDA is around 5.5 or 6 times, depending on what you use for EBITDA next year. Sid Richardson was acquired for over 10 times when you adjust for environmental spend. And next year, even with, let's say, CapEx being 200 million, probably your last year of elevated CapEx, you're still going to probably produce some free cash flow unless working capital expands a lot if oil goes from, let's say, 80 to 100. I'm curious why, just from a board level, there hasn't been more of a thought about buying back and taking advantage of the, uh, the market's view that, you know, you should only be valued at five and a half times where you have a specialty business that could probably sell on the private market easily, you know, double digit multiple. Uh, and then let me add to that. I haven't even, you know, to what you said earlier today, that these growth projects, which are sort of potentially adding 30 to 40 million of EBITDA, which I don't think are any, uh, really are in the model for next year. It's probably a 23 event or 24. Um, Why not buy back some stock now prior to sort of all of these things, you know, CapEx ending in terms of the environmental stuff before the growth project EBITDA kicks in and, you know, spend some of your money that way versus not?
spk02: All right. Well, thank you, Art. That's a question that I think is out there with some people. So let me just take it back to the overall look at allocation of the capital, right? That we would agree we've got our balance sheet in a good position today. We always could, and I think we'd all agree, safety and sustainability. We feel right now, number one, after robust discussion with management, with the board, and so forth, that we have very important growth opportunities for it. And some of those, like connectivity, are essentially strategic. There's very few players in our particular area within the acetylene black market, and either we move forward or we don't at this time, and we see that as important. I think when you look at what can be done with Wabe and Ravenna and the gas black debottlenecking expansion that we talked about before, you get yourself with that, I think, well into the mid-300s. And with going with a settling black, I think you can get yourself into the 400s at some point. So I think there's a positive path forward, and I think as a board and as a management team as we look at it, It's just saying that that's important. It's strategic. And for some of that, you know, it's now. Now's the time. And it's a choice of strategic growth, I guess I would say, versus taking advantage of what I'd agree is an attractive purchase price today. I don't argue that. You know, what I would also add is that Since the IPO, we spent over $600 million. If you grant me through next year for the EPA, we would have spent over $600 million on initiatives that don't drive economic profit. EPA, debt reduction, dividends. The pivot that's underway over the next five years is to allocate capital towards projects that drive a higher earnings for this business. And so we think we'll be rewarded eventually for doing that.
spk04: You know, I guess the question would be why can't we do both? Even if you're doing small share repurchases, you know, if you're spending $200 million of CapEx to your 300 EBITDA, cash taxes of $40 to $50, cash interest of around $25, $5 million for your dividend today, you're still producing $70 to $80 million of free cash flow Why not allocate some of that to, I guess, share repurchases at this point in time? And I appreciate, hey, growth capex is always better. If you can show growth, you get a higher multiple. You need to be competitive. That's how businesses thrive. No question. But the question is, why can't there be a balance of even allocating $25 million of share repurchases? Just something to start reducing the float that's been out there for more than half a decade.
spk02: Well, I think this gets into that realm where reasonable people can disagree and, you know, you can get to the point of, well, what's the point of a purchase that is small? Is that satisfying? And so forth. And I would just say that, you know, a wide range of options have been really very thoroughly discussed and debated. with our board. And for the time being, your points are noted, but for the time being, this is what we thought made the most sense, especially when you look at next year, where we still do have significant EPA spending.
spk03: Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to CEO Corning Painter for closing remarks.
spk02: Okay, well, thank you all for your time and your attention today. We appreciate it very much. Lauren, thank you very much for the last couple years of partnership as we've gone through this. I'll miss not being able to do earnings releases with you going in the future, but, Bob, looking forward to working with you even more closely now. Thank you all, and have a good rest of your day.
spk03: This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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