Orion S.A. Common Shares

It is now my pleasure to introduce your host, Chris Kapsch, which we believe will be helpful for the investment community to consider. This is Chris Kapsch, new to leading Orion's investor relations efforts. I know many of you from prior roles, and I look forward to working with you in this new capacity. Joining our call today are Corning Painter, Orion's Chief Executive Officer, and Jeff Gleick, our Chief Financial Officer. our 2Q earnings after the close yesterday, and we have posted a slide presentation to the investor relations portion of our website. We will be referencing this deck during the call. Before we begin, I am obligated 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 Securities and Exchange Commission, and our actual results may differ from those described during this call. In addition, all forward-looking statements are made as of today, August 2nd. The company is not obligated to update any forward-looking statements based on any 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 tables attached to our press release. And with that, I will turn the call over to Corning Painter.

Thank you, Chris. Before walking through the detailed deck, let's skip to slide four and go right to the heat. Why our Q2 EBITDA was below expectations, and what is our path forward? You will see our revised 2024 guidance midpoint is now $25 to $30 million below the expectations we set at the beginning of the year. Lower than expected rubber segment volumes and adverse cogeneration are the major factors. Our specialty business is performing well. Volume was up again in Q2, and I'm not concerned about the decline in GP per ton compared with last year. This was mainly due to prior year timing effects and one-offs, lower cogeneration and higher maintenance. Most of these factors show as higher costs in our EBITDA bridge for this segment later in the deck. This business is improving with strengthening polymer and coatings markets, which netted to a slightly negative mix in the quarter, but that's fine. We respond to customer demand. The GP per ton level is within our expected range. Let's focus then on the rubber business. First and importantly, pricing is up year on year, and we expect to gain in 2025 as well. Volume is nearly flat, but the underlying story is not as positive. Rubber carbon black demand is soft in our key markets with three drivers. First, as consumers adjust to higher inflation, they are currently trading down to lower value brands, which ultimately hurts us. Second, but related to the first item, tire imports have been up sharply in North America and Europe. I have more to say about that in a little bit. Third, trucking activity follows manufacturing, and while this is perhaps bottomed, the recovery is gradual at best. This impacts truck replacement tire and OEM demand. Regionally, rubber volumes are down in North America and Asia for us and up in Europe, but only due to the European volume gains in last year's negotiations. To be clear, Europe and our other key markets are below expectations for the reasons I listed. Our cost performance in rubber is a mix between cogeneration, prior year one-offs, timing, and higher costs, including inflation. We'll discuss costs later in more detail, but some of this is tied to maintenance spending. All considered, lower rubber volumes account for more than $20 million of the reduction to our initial 2024 guidance. Looking forward to the second half of this year, specialty should continue to improve. We expect only a modest improvement in rubber volumes, and we will likely execute an inventory build to prepare for 2025, which will help absorption. Cogen is an additional challenge. Our utility partner at our Louisiana plant was down intermittently in Q2 and is expected to be down for much of Q3. Further, European power prices have been below expectations. Looking to 2025, there are many reasons to believe rubber volumes will improve, and we continue to expect a favorable pricing cycle reflecting the restructuring of this industry. Personally, I think broadly applied higher tariffs are likely in our key markets, which will support demand and the value of local supply security. Pricing remains a key priority, and I'll have more to say about that. Looking forward, we have two new facilities to load, Y-Bay and then LaPorte, in the second half of next year. These are top priorities for us. We expect significantly lower CapEx spending until we do that, as you can see on slide five. We will continue to de-bottleneck and expand capacity for our most differentiated specialty grade. but these efforts typically require minimal capital. In rubber, we remain excited about bringing sustainable grades to the market, and we'll have more to say about that in future calls. But again, we expect modest capital requirements associated with this effort. Considering lower anticipated capital spending, our recovering specialty business, the fundamental restructuring in rubber, and feedback from our shareholder, we have decided to opportunistically resume share repurchase activity at a modest pace. Depending upon working capital, our excess free cash flow may well be slightly negative this year, but on balance, we see this as the right move. On slide six of the deck, we referenced being back on track for another year of solid EBITDA. While the results are disappointing to us, we will likely achieve underlying EBITDA growth including timing and other one-time benefits. Note, this would be despite a demand environment that isn't anything close to mid-cycle conditions, such as we saw in 2018. Compared with those levels, we have about 150 KT, or conservatively $60 to $75 million of EBITDA upside in rubber volume alone. Our rubber segment profit margins have held up well in spite of weak volume. Replacement tire sell-through to consumers had been okay, but worsened during the quarter, and local tire builds have lagged in market unit sales. Absolute tire build numbers in Western markets are still substantially below pre-pandemic levels. This is partly due to the surge of low-value imports and is fueled by the consumer trade down because of inflation. Tire imports are impacting North American and European tire manufacturing. Just yesterday, a tire manufacturer spoke about this and their earnings relief. We do not believe this is structural. We believe the onshoring of capacity into North America and into Western Europe will continue. We have seen blips like this in our volumes before. A separate or a second tire company attributed the recent surge in imports to fear of a pending tariff increase. And I'll tell you, I do not see the United States or the EU surrendering their automotive markets. For Orion, these end market headwinds have been amplified by the lower than expected co-gen contribution, but also costs largely tied to planned and unplanned maintenance turnarounds and inflation. A portion of the turnaround activity was associated with the ongoing upgrading of some of our manufacturing assets. These upgrades will reduce maintenance costs, enable greater reliability, and higher plant throughput over time. For example, in Q2, we replaced a very old filtering system in one of our lines in Belfry, Ohio, which contributed to a month of downtime. Given the more challenging backdrop this year, we will be leaning more into efficiency initiatives that will trim costs and help us to achieve our revised guidance. On slide 7, this mid-year report is an appropriate time to frame expectations regarding our prospects for 2025, as the industry's annual tiremaker supply contract negotiations have historically begun during the late summer months. We mentioned during our Q2 earnings call that some discussions had already commenced, but that we didn't need to rush into any deals, and we're going to be reluctant to hold volume commitments during lengthy negotiations. Those initial negotiations, indeed, timed out without conclusion, reflecting our intent to more strictly enforce time-bound offers. We're now in formal negotiations with a few major customers, but I would caution investors on expecting an early close. Some negotiations may be prolonged as we are determined to earn a return on capital for all our ongoing investments. We're anticipating a positive outcome for this year's negotiation cycle for several reasons. First is the ongoing industry restructuring, with tire capacity expanding in our key markets, contrasted with limited carbon black capacity additions. Second, I remind you, we're negotiating for 2025. This is not about 2024. Third, there are multiple positive indicators. Miles driven data remains strong. The freight market is stabilizing. The Russian ban is now fully in place. And just recently, Belarus has been added to the ban. And with specialty recovering, some carbon black industry capacity will shift from rubber back to specialty grade. Fourth, the industry's recent EPA investments effectively reduced domestic industry's capacity by a few percentage points. These emission control systems have outages, and when they go down, they usually take the entire plant with them. Fifth, as you know, shipping is now more expensive and less reliable. And finally, the potential for increased tariffs on imported tires in North America and Europe would boost localized demand. I think this is looking pretty likely. All of these considerations make us confident about the rubber segment heading into 2025. Given this, we intend to build back inventories in the second half. This should improve our profit metrics thanks to a confluence of operating leverage and better unit costs. While our rubber segment has done the heavy lifting in terms of our step change in EBITDA in recent years, we expect the specialty segment to continue to recover. Here, a broader end market recovery should enhance overall segment mix. When coupled with innovation-led growth, the specialty segment will be an important driver of Orion's medium-term growth trajectory. And without the need for meaningful additional growth capital, beyond the ongoing Laporte investment. Shifting gears, I want to discuss sustainability, where we believe we are misunderstood by the broader investment community. Despite perceptions about industries like ours, we have made substantial progress on sustainability. From our perspective, we see opportunity here, especially as our downstream customers increasingly strive for or have even made public commitments to circularity. In addition to considering the platinum rating we earned from EcoBuddies, which places us in the 99th percentile of all companies having their sustainability programs evaluated, we hope you will take time to digest our latest sustainability report published last week. A few noteworthy points here. We completed upgrades at all four of our U.S. plants, well ahead of others completing their third plant. We were the first major industry player to produce carbon black from purely bio-circular feedstocks. During Q2, we made a small investment in a European tire recycling company focused on scaling up production of tire pyrolysis oil, which will be dedicated to Orion and help commercial, help enable commercial scale volumes of circular grades of carbon black. In South Africa, Before it became a crisis, we proactively invested in a state of the art technology to process treated effluent water from a local wastewater treatment facility to repurpose that water for industrial use. This will help this water stress community by reducing our use of potable water, improve our reliability, and reduce costs. And finally, The construction of our low-emissions conductive carbons plant in LaPorte, Texas, is on track to start serving the battery and other growth markets in 2025. All of these efforts place Orion as an industry leader in striving commercially viable, sustainable products. All considered, we feel confident in our foundation and our journey towards unlocking much greater inherent earnings power at Orion. With that, I'll turn the call over to Jeff.

Thank you, Corning, and good morning, everyone. Slide 8 covers the company financial results for the second quarter. Overall volumes improved 3% compared to last year. This was driven by a 17% recovery in specialty volumes, which more than offset a small decline in rubber volumes. The overall EBITDA performance compared to the prior year was negatively impacted by softer than expected rubber volumes, a lower co-generation contribution, one-off benefits last year, timing issues, and negative absorption, namely that we did not build inventory as we had planned during the quarter. To provide a little more transparency on the second quarter, we had a strong April, but both May and June fell well short of expectations. On to slide nine is the company's year-over-year EBITDA bridge. As I noted during our Q1 call, a more normalized earnings level for last year's second quarter was $80 million after adjusting for one-time items and the forward sale of power at elevated prices. You can see that both volume and price mix contributed positively overall. Timing issues, primarily related to pass-through formulas and differentials, higher maintenance costs, a portion of which are intended to improve our operating leverage over time, and cogeneration with the other primary factors. Slide 10 shows our rubber segment's 2% year-over-year decline in volumes and an 8% sequential decline. As Corning referenced, the inflation-driven consumer trade-down in the passenger car tire market was a key contributor to these softer volumes, as was weaker tire demand in a softer Chinese economy. The consumer trade down to lower-tier brands and the related importation of lower-quality tires from Southeast Asia represents a negative impact for Orion's customer mix in both North America and Europe. Gross profit moderated just slightly, owing to the lower co-gen, but was supported by the sturdiness of our supply agreements, which included higher year-over-year pricing. We continue to expect full-year gross profit per ton to exceed the 2023 level of $409. Slide 11 shows the EBITDA bridge for the rubber business, which begins from a year-ago level that excludes one-time items and the benefit of the forward power sale. For this segment, you will see the volume, despite being lower, contributed slightly positively to EBITDA as a result of favorable geographic mix. Pricing was a more positive contributor year-over-year, reflecting the improved annual contracts. The negative co-gen contribution in this year's second quarter was a big factor in the rubber segment EBITDA bridge. Other costs include timing, higher maintenance, and inflation. Switching to slide 12, The volume strength in our specialty business, up 17% compared to last year's second quarter, reflected a broad-based demand recovery across essentially all geographic markets. Lower profitability metrics were a function of non-repeating benefits in last year's second quarter, as well as a lower co-gen contribution and higher fixed costs. Reduced co-gen along with adverse absorption contributed to the slight sequential decline in gross profit. Slide 13 shows the specialty segments year-over-year EBITDA bridge, again, from a more normalized year-ago level before one-time benefits. The big contributor here was a broad-based volume recovery slightly skewed toward the lower value markets. Higher costs this quarter were primarily adverse timing effects in contrast to last year's favorable timing effects. On the slide 14, we look at the year-to-date free cash flow, which was negative in the first half. This was partly due to normal seasonal volume-driven working capital increase, as well as higher cash taxes. Because of the negative year-to-date free cash flow, our net leverage ratio is just above our targeted range However, we are very comfortable with the absolute net debt level. With that, I will turn the call back over to Corning. Thanks, Jeff.