Orion S.A. Common Shares

Ladies and gentlemen, greetings and welcome to the Orion SA Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please signal the operator by pressing star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Kapsch, Vice President of Investor Relations. Please go ahead.

Thank you, Ryan. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our conference call to discuss second quarter 2025 results. Joining our call today, once again, are Corning Painter, Orion's Chief Executive Officer, and Jeff Gleick, our Chief Financial Officer. We issued second quarter results after the market closed 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, we are again obligated to remind you that some of the comments made in 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, August 7, 2025. Orion 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 debt. All non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP. And with that, I will turn the call over to Tony Painter.

Good morning. Thank you, Chris. And thank you all for taking time to join our conference call. Before discussing some industry trends and digging into Q2 results, I wanted to briefly express my gratitude to Chief Financial Officer Jeff Gleick, who after nearly four years with Orion will be retiring in the fourth quarter. Jeff's leadership and guidance will be genuinely missed throughout the organization. We've commenced a formal search process, and we appreciate Jeff's intent to help ensure a smooth transition through the end of the year. Turning to slide three, the $69 million of adjusted EBITDA we generated during Q2 was in line with our expectations, and that was despite demand headwinds that became more acute during the quarter. Overall, volumes were up 3% year-over-year in the quarter, but declined a little more than 4.5% sequentially. A markedly improved manufacturing performance at our plants was a key driver of the higher sequential earnings. As we had indicated last quarter, the level of unplanned downtime during Q1 was anomalous, and our efforts to drive better plant performance through operational excellence initiatives are now starting to bear fruit. I mentioned demand headwinds. Here, we experienced this in both segments in Q2. Affecting our rubber business, there was a surge of tire imports into the U.S., presumably to beat the early May automotive sectoral tariff deadline. We believe this continued to weigh on local tire manufacturing rates and therefore our demand. In specialty, And you've seen this across the broader chemical segment. Uncertainty resulting from the lack of tariff clarity, possibly some destocking and polymer end markets, and economic malaise more generally have translated into a softer demand environment. And Orion was not immune. Despite this difficult backdrop, some of our more profitable specialty product lines have exhibited resilience, and we continue to make tangible progress with new customer qualifications for our higher-growth conductive grades, lithium-ion batteries, energy storage systems, high-voltage wire and cable applications, and conventional battery markets, amongst others. This commercial trajectory for our conductives product line in the healthy double-digit range in terms of CAGR helps position the specialty segment for longer-term earnings recovery. Nearer term, the overall specialty demand trends have remained choppy. However, the recent propensity for customers to place orders in a just-in-time fashion could suggest inventories are quite low through the specialty supply chain. The subject of tariffs, of course, remains topical. We continue to expect that the automotive tariff rates, which include replacement tires, will help normalize the level of tire imports into the U.S., diminishing pressure on top-tier local tire manufacturers, our customers. We believe this will translate into improved rubber segment demand starting late this year or early next year. Most recently, the attention has shifted to India. I don't think the 25 plus 25 percent tariff is definitive, but even a 15 to 25 percent tariff would be impactful. while less important to the overall Orion mosaic. This will make carbon black imports into the U.S. less economically viable. Indian imports currently satisfy about 4% of North American market demand. Not coincidentally, the 2026 negotiations are underway a bit earlier than normal in our view. My read is that customers started early for two reasons. Due to the elevated tire imports, their consumption of carbon black has been disappointing so far into 2025. They like that backdrop for negotiations. Second, the 2026 is looking more encouraging, and tire makers want to close negotiations before this becomes more apparent. The U.S. Section 232 automotive parts tariffs and the announced reciprocal tariffs on India improves the setup. Meanwhile, in Europe, the Chinese tire dumping investigation is underway, and you have to ask yourself if the Europeans are really going to keep the door wide open for their crucial automotive segment. The impact of these moves has not yet been felt in business trends. By the way, on top of everything else I just mentioned, another risk factor for tire makers is carbon black and other auto-related imports from Canada or Mexico potentially being in play given that the USMCA comes up for resetting mid-2026. We may hear more about what the US administration's intention here as early as this October. The last point on this slide, investors should know we are not standing still, simply hoping for the challenging backdrop to improve. Here, we mentioned self-help initiatives that are underway. Expect more elaboration on these efforts over the balance of 2025. Beyond improving productivity and lowering costs, we've also shifted our capital allocation priorities towards debt reduction over share repurchases, at least in the near term. On slide four, we share recent tire industry data and our current view of how tariffs may affect these trends. Despite all the noise and volatility, the originally contemplated automotive tariffs have remained steady at 25% And the early May deadline for that targeted segment has come and gone. We believe this tariff imposition is what spurred the surge of imports into the U.S., as shown on the top slide. As shown on this slide, excuse me, on top of already elevated levels. Recall, a historically more normal level of tire imports as a percentage of industry sell-through has been in the low 50% range. In the past year and a half or so, this level has increased to more than 60%, 65% by some counts. The tire industry channel shifted to lower value tires, including imported tier three and tier four brands in response to the consumer's reaction to inflation. But we think the stronger cost of ownership offering of the world's leading tire manufacturers, including their tier two offerings, combined with trade policy shifts will reverse this dynamic. And as you can see in the top left chart, monthly tire imports surged when the auto import tariffs became apparent and remained elevated through May. This has, in turn, weighed on U.S. tire production as depicted in the U.S. TMA data shown here in the lower left chart. We expect June data to show reduced tire imports. I think tire companies want to frame the annual negotiations before this kind of market data becomes more apparent. Given this recent import surge, tire channel inventories, certainly for the lower tier offerings, are likely elevated. From customer engagement, we've gleaned their expectation for channel inventories to be drawn down in the second half of 2025, possibly towards the end of the year, and tire production rates may then recover. When portraying U.S. tire imports as elevated but likely to normalize with some assistance from tariffs, we're often asked by investors, Well, how do you know the increased import levels are not structural in nature? We've added slide five to help answer this question. Here, we show there's $7 to $8 billion of capital so far that major tire customers have committed to projects in North America alone to expand or modernize their tire production capacities. These are all investments scheduled to ramp in the next four years, contributing to a 3% to 3.5% North American CAGR through the end of the decade. This CAGR is net of some closures that have been announced. We believe these investments are just one example of the reshoring and deglobalization trends that are taking place. Essentially, all of these project announcements have predated the new tariff paradigm. In terms of carbon tax, It's not unreasonable to expect little or no greenfield capacity expansion in North America, at least over the next three years, based on the absence of project activity. Back to the tire onshoring trend, there's a similar dynamic at play in Europe, although to be fair, there have been more closure announcements of older, less competitive factories in that region. On slide six, we wanted to touch upon our recently announced production rationalization, and some other self-help initiatives intended to bolster our performance under a scenario where the business cycle trough is extended. The decision to shutter three to five production lines, representing less than 5% of our global capacity, is part of a broader portfolio optimization effort targeting lower margin business. This initiative was based on data-driven analysis, allowing us to examine cash flow performance beyond regions and plants and all the way down to production line, product grades, and even by customer. Going forward, we'll have fewer reactors competing for maintenance capital, so we can also sharpen our pencil on our maintenance spend. We simply cannot have assets on hold for when a customer's decision to source from an undependable supply chain fails them. Shifting gears a bit, part of the reason this rationalization decision is prudent reflects the progress we're making with our own operational excellence programs. These initiatives are gaining traction across our portfolio and building momentum. To be clear, we're not sitting around waiting for demand's inevitable recovery. In our current scenario planning, we contemplate subdued demand over the balance of 2025. To this end, we're executing on the additional cost reductions that we mentioned last quarter. We've stressed the driving of sharp improvement in free cash flow is our greatest priority, and that remains the case. Here, we've made good progress, including the extraction of $27 million from working capital in the second quarter alone, primarily from inventories. We also expect the Q1 increase in receivables to reverse in Q4. The confluence of these and other working capital actions, along with lower CapEx, underpin our ability to reaffirm our previously conveyed free cash flow target Jeff will elaborate more on this in a few moments. And with that, I'll hand the call over to Jeff, who will walk you through the second quarter results in more detail.