Orion S.A. Common Shares

Welcome to the Orion First Quarter 2025 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session. You may queue for a question at any time by pressing the star key followed by the number 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Please be advised that today's call is being recorded. Should you require operator assistance, you may press star 0. I'd now like to turn the floor over to Chris Cash, Vice President of Investor Relations. Please go ahead.

Thank you, Jamie. Good morning, everyone. This is Chris Cash, VP of Investor Relations at Orion. Welcome to our conference call to discuss our first quarter 2025 earnings results. Joining our call today are Corning Painter, Orion's Chief Executive Officer, and Jeff Gleick, our Chief Financial Officer. We issued our first quarter results after the market closed yesterday, and we have posted a slide presentation to the investor relation portion of our website. We'll be referencing this deck during the call. Before we begin, as you know, we are 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 the call. In addition, all forward-looking statements are made as of today, May 8, 2025, 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 tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP. With that, I will turn the call over to Corny Painter.

Good morning. Thank you, Chris, and thank you all for your interest in Orion and for joining our call today. Before getting into some details regarding the first quarter results, we wanted to discuss three central themes to help you get a sense for how we're positioned as global trade continues to rebalance around the world. First, we'll touch upon Q1 results in a broad sense. Yes, a challenging start to the year, but the numbers are not indicative of a stronger underlying performance and certainly Orion's greater potential. Second, we'll discuss how we expect the current tariffs to affect our value chains, but in a bigger picture sense, also about how the new paradigm on global trade policies will likely benefit the carbon black industry given its regional and localized nature and Orion in particular. Finally, we fully recognize the increased likelihood of an economic recession. With this possibility, although we do not see a pronounced weakening in our order books at this juncture, we are taking additional protective measures to manage costs and bolster free cash flow. These, coupled with other dynamics within our business, enable us to reaffirm our free cash flow guidance for the year. On slide three of the earnings deck, we convey several items affecting first quarter results, including multiple unplanned plant outages, which impacted productivity, absorption levels, and other transient costs, as well as adverse timing effects, mainly tied to contractual pass-throughs of raw materials. Collectively, these factors masked at least $10 million of greater earnings power in the first quarter alone, implying our business's Q1 underlying earnings power being more in the mid $70 million range of EBITDA. Even that higher level wouldn't showcase the earnings capacity of Orion because of the impact of elevated imports on Western tire manufacturers, at least for now. We expect some of the mix and timing issues that affected our P&L to lessen in Q2. Further, our overall plant operations have improved sequentially, and this should contribute favorably moving forward. Business conditions were mixed in Q1. Rubber demand was off to a slow start. Rubber volumes improved more than 2% year over year, but it would have done better if not for persistent headwinds from still elevated tire imports into our key markets. On this slide, you can see industry data showing U.S. production of tires being down low double-digit percentages in the first two quarter months of the quarter, and they remain dramatically below pre-COVID-19 levels. Our specialty segment addresses a much more diverse variety of end markets, and here we would characterize demand as choppy. We see some degree of cautiousness with certain downstream value chains, such as those feeding into the automotive space, including coatings in certain polymer markets. If looking through the transient items affecting our costs in the quarter, overall gross profit metrics were generally in line with our expectations. This includes the modest GP per ton drag from the rubber lanes we picked up contractually for 2025, which helped the volumes but contributed negatively from a geographic mix standpoint. More generally, and with continued conviction around the inherently greater earnings power and enterprise value, we continue to repurchase shares in the core. On slide four of the deck, we wanted to share our current view of how tariffs may affect our business, albeit with the same caveats most companies are offering around a high degree of uncertainty as to the final tariff environment as well as underlying economic conditions. On the left-hand side, we graphically depict how we believe our manufacturing footprint will gain in the new trade paradigm. Using a framework put forward by industry observers, on the x-axis, you consider if your region is an importer or exporter of the final product, such as tires. The Y-axis considers if your region is a net importer or exporter of your specific product. Obviously, as the trade paradigm shifts, being a manufacturer in a region that is a net importer of the final product is the place to be. The U.S. is a net importer of tires, and that puts us on the right side of this axis. The U.S. is more or less in balance on carbon black, but it always is the threat of import. That puts us and our customers in a strategically advantaged position. In Europe, where both carbon black and tires are imported, local manufacturing stands to gain even more. Whereas globalization has arguably hurt Orion in the recent past, given our under-indexing to Asian markets, the ongoing shift should become a structural tailwind for our business over time. and perhaps getting a little more granular on the tariffs, as contemplated today, including last week's fine-tuning to assist the automotive OEMs while maintaining 25% tariffs on other auto content, and that includes replacement tires. Tariffs, again, should be a net positive for Orion. Remember, it would not take a major rebalancing of tire trade flows to positively affect our demand function, and we are not making the case that the U.S.' 's ever going to be anything close to self-sufficient with tire, with captive tire making capacity. Currently, more than 60% of replacement tires in the U.S. are imported, primarily from Southeast Asian countries and Mexico. A similar percentage flows into Europe, primarily coming from China. Even modest rebalancing of trade flows would help our demand function to benefit meaningfully. Now, when will we see the benefits? Data shows tire imports into western regions remained elevated in the first months of 2025. It's a widely held view that tire imports will slow and the channel inventories will be drawn down, resulting in a demand inflection starting in 2025 second half. We are well positioned to serve that upside should it materialize. Slide five accentuates a couple of these key points more finally. The initial tariffs that were announced were more extensive than almost anyone had contemplated, precipitating market volatility and macro uncertainty. But since the recent fine tuning to lessen the impact on auto OEMs, but while also keeping the 25% tariff on certain auto content, including replacement tires, we see the current framework as a bit of a Goldilocks scenario for Orion and for our customers. Potentially not too disruptive for the broader economy, offering significant protection for auto industry workers including those at tire plants in a recent conversation a customer expressed similar views but also expressed near-term concern about freight volumes orion's potential direct exposure to the u.s tariff cost is quite manageable as we procure essentially all raw materials locally We do also export certain specialty grades from plants in other regions into the US. This is a very small percentage of our specialty portfolio, and we believe the differentiated nature of these grades translate into sufficient pricing power to offset potential tariff exposures. An additional point, the rebalancing benefit we're discussing here is structural in nature, so we expect this shift and benefit to our business to build over the next couple of years as the US and ultimately European tire manufacturing benefits. In the near term, with odds of a recession having increased, it's worth highlighting the resilience our business has demonstrated in prior recessions. As I referenced in our annual report commentary, which was recently posted to our website, we believe our business's overall volume performance through the COVID pandemic in 2020 and 21 as well as the Great Recession in 2008 and 2009, showcased that resilience in our portfolio. Our aggregate volumes declined 15% during 2020 when the COVID-19 pandemic was shut down, shut down the global economy, but rebounded more than 11% in 2021 despite still subdued economic conditions. Looking further back during the global financial crisis after a very strong 2008, When volumes gained more than 25%, Orion's overall volumes declined about 14% in 2009. In 2010, volumes recovered nearly 15% to levels almost on par with Park Peak 2008 levels. And they were just about 23% higher than 2007 levels. Moving to slide six. the factors in our control slide that we shared in the fourth quarter presentation back in February, and it's being used here as somewhat of a scorecard. We had stated if we execute on the factors we control ourselves, then we would be able to optimize performance regardless of the backdrop. So how does it look thus far into 2025? Here we can put a check mark next to the commercial strategy line. Volumes from additional lanes we rewarded have But to be fair, this has more or less been offset by continued pressure on key Western customers where tire production remains down. Still, the subtle customer portfolio rebalancing should be beneficial as the global trade paradigm shifts is discussed. We completed headcount reduction measures in Q1. We were leaning to start with but expect an annualized $5 to $6 million run rate of savings. We did not add back the separation costs to our adjusted EBITDA like many companies do. Looking forward, we're taking additional actions with the goal of doubling that savings through a variety of means. We've made good progress in resolving operational challenges at our new facility in China, and we still expect a positive EBITDA contribution swing there. Our deep bottlenecking projects and differentiated grades are largely behind us, and we have refined the algorithm that helps us decide which grades should be run on which reactors to optimize mix and asset utilization. An area where we have considerable progress to make, however, is with improving plant reliability, and this journey is underway. We're also making progress in driving operational and yield improvements within our network of manufacturing plants. This will be evident when our plants are more stable. As Jeff will touch upon in the Q1 financial review, Unplanned plant downtime was a major factor impacting results in the first quarter, driven by equipment failures. One strength we have is the commitment of our people, and I'd like to recognize our team in Borger, Texas in particular. They worked through a number of challenges with aged equipment in the quarter. Several of us were at the site in March and conducted, amongst other things, a surprise crisis management tabletop drill. Later, that very day, A wildfire tore through the area, threatening our plant and taking out the power lines on the edge of our production site. I would like to thank the border team for their housekeeping, which made us less vulnerable, and for their quick actions to safely secure the plant in this real crisis. I would also like to thank the team at Panhandle Northern Railroad for their quick action to replace a trestle bridge that was completely destroyed in the fire. Well done by all of you. It's worth framing the opportunity we see in reliability. Many of our plants are aged, and with age comes some fragility and unpredictability. On top of that, the addition of the EPA equipment in the US in recent years, essentially overlaying a new unit operation on top of our existing footprint, serves to stress some of our plants even more. This is not unique to Orion. We've disclosed in the past that the industry's overall effective capacity was likely primped by at least 200 basis points by the EPA in position. That compliance burden, which we have shouldered disproportionately relative to our competitors, has contributed to the failure of equipment that was designed long before retrofitting these plants for air emission controls equipment was ever contemplated. Cost, absorption, restart scrap, and other impacts from these equipment issues and other plant downtime collectively had a major impact on Q1 results. we recognize the need to flip the script on this dynamic. Looking forward, we have a pathway for improvement, including a distinct portfolio of maintenance projects that are prioritized to protect our business and customers. As we shift from being reactive, as was the case in Q1, like literally fighting fires, to focusing our small project spend on replacement and preventative maintenance efforts, we will see the improvement. Moreover, as we enhance many of these unit operations, we'll also see parallel opportunities to try better process yields and quality levels. Quantifying the anticipated benefit from these manufacturing and operational excellence issues, we foresee the potential to improve utilization rates by as much as 50 to 100 basis points annually. Moreover, in-flight enhancements are expected to enhance or to achieve as much as 250 basis points of underlying margin upside over the next several years, all else being equal. Encouragingly, we've had an early success in implementing this more systematic and holistic approach to operational effectiveness. Our plant in Brazil served as a pilot, and these results have been tremendous, with all operating metrics improving sharply, including uptime, performance, diminished quality issues, and greater throughput. which has helped us being awarded with additional lanes in that region. We intend to deliberately extrapolate our success in South American operations to other plants in our network. Let me now pass the call over to Jeff to discuss our continued focus on free cash flow, as well as the Q1 results. Jeff?