Orion S.A. Common Shares

Greetings and welcome to the Orion SA Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a list and 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 our host, Wendy Wilson, Head of Investor Relations. Thank you, man. You may begin.

Thank you, Kyle. Good morning, everyone, and welcome to Orion's conference call to discuss our second quarter 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corrine Painter, Chief Executive Officer, and Jeff White, Chief Financial Officer. We issued our press release after the market closed yesterday, and we also 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 our call. In addition, all forward-looking statements are made as of today, August 10th. The company is not obligated 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 Corian Painter.

Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. As you can see on slide three, we had another excellent quarter, second only to the first quarter, naturally making for record first half performance. Our results reflect the hard work of the Orion team to fundamentally transform the company, providing the industry-leading products customers demand and returns on investment that investors deserve. We've been aided in this by a restructuring in the broader marketplace that has been building for years in our key markets, has now passed the tipping point and still continues to build. We continue to be one of the few specialty chemical companies on track for a stronger 2023 compared to 2022, and we expect record profitability this year. We delivered second quarter adjusted EBITDA of approximately $87 million, a 5% increase year on year, and adjusted diluted earnings per share of 53 cents. This resulted in record adjusted EBITDA of approximately $188 million for the first half, a 13% increase year on year, and record adjusted diluted earnings per share of $1.27. We also delivered strong second quarter operating cash flow, reduced our debt level while also completing our $50 million share buyback and starting on the new buyback. We expect to generate more than $200 million of discretionary cash flow this year, reflecting a conversion rate of over 60%. This is a huge step up for us, which we expect to maintain. Jeff will discuss this further. As you have seen, we recently published our 2022 Sustainability Report. I highly recommend that you take the time to read it, as sustainability is central to our strategy. In specialty, this manifests in conductive additives and in rubber as a circular economy. A concrete example of this is our acetylene-based conductive carbons. They are ultra clean highly conductive and there is a production moat from the limited availability of high-volume clean acetylene gas streams. We continue to make progress on the construction of our acetylene-based conductive additive plant in La Porte. Beyond that, we expect to add additional capacity in North America and Europe coming on stream in the next three to five years. Congratulations to the entire team who is bringing our strategy to fruition as we continue to operate as a responsible corporate system to all stakeholders. On the operations front, specialty demand, reflecting the broader manufacturing economy, is subdued. We see this as an opportunity to push customer qualifications and upgrade our plants while things are slow. Meanwhile, we have preserved the underlying value of our business by maintaining end segment per ton profitability. In rubber, as I mentioned earlier, we believe the industry restructuring is evident in our results and will continue. The situation is simple. In industry supply dynamics, coupled with our commitment to get a return on invested capital, We as a company, and you as shareholders deserve, are driving the reset to more balanced pricing. 2024 negotiations are well underway. We currently have about 60% of our Americas in demand committed or in late-stage negotiations, well ahead of past schedules. The pricing outlook remains positive for 2024, and we expect a pickup volume at our price points. A couple of items. First, I remind you, we're negotiating for 2024 and beyond, not for 2023. I don't care about slow demand in 2023 in this context, except that one year's deferred demand is the next year's supplemental demand. And that supplemental demand further tightens the market that we are actually negotiating for. Second, there is a growing carbon black imbalance in our key market. or tire capacity continues to be added. Third, the EU ban on Russian carbon black starting next July, combined with growing OEM concern with Russian content in their supply chain, further benefits European carbon black producers. Fourth, our investments in maintenance, emission controls, and reliability, and abatement costs, they all demand higher prices. And fifth, the expected rebound in replacement tire demand, it's a tailwind. These five largely structural improvements in our markets are positive drivers for us. Beyond all that, customers want strong, healthy suppliers. Speaking of abatement, we are the only carbon black producer to have completed three air emission control projects in the United States. We have one more plan to go, which we expect to have behind us entering 2024. Now, let's talk about destocking and deferring, starting with rubber. We supply tire manufacturers. They supply tire dealers and large tire retailers. Eventually, a tire retailer sells to the end customer, who's the most important player here. On the bottom of slide four, you can see that passenger car and light truck owners are driving more than last year. On the top of the slide, you can see they're deferring buying replacement tires. I use the term deferring because those tires are getting worn and they will need to be replaced. Just look at the gas at Miles Group. Trucking companies, they're seeing a decline in loads and hence buying fewer replacement tires. That makes sense. Going forward, you should look at manufacturing PMIs, get an understanding of where that is headed. Now, all this is based on U.S. data. We don't have good fast data like gasoline or miles or kilometers driven in Europe. However, we believe the picture there is similar. There's also the question of inventory levels, tire manufacturers, distributors, and dealers each keep. There's less visibility here. However, our understanding is that inventories are relatively low and there's little interest in restocking current until end customer demand picks up. On top of this, our customers express limited confidence in their demand forecast accuracy. Switching to specialty, here we serve dozens of end markets. In general, customers want low inventories and by and large, they have them. But again, there's little interest in restocking. For both rubber and specialty, we expect end customers to defer purchases until the start of 2024, and manufacturers to take extended holidays this summer and winter. We, in turn, will use this time wisely, preparing for 2024, and not destroy value by chasing volume. With that, Jeff, perhaps you could provide some more color on our financial results.