Greetings and welcome to Orion Engineered Carbons Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Miss Wendy Wilson, Head of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you, Operator. Good morning everyone and welcome to Orion Engineered Carbons conference call to discuss our fourth quarter 2020 financial results. I'm Wendy Wilson, Head of Investor Relations and Corporate Communications.

Thank you, Wendy. Good morning everyone. And welcome to our fourth quarter earnings conference call. 2020 tested just about every company’s ability to be nimble and responsive. I’m pleased to say the Orion team passed the test with flying colors. They ensured that our company’s needs were met also in the depths of the recession and through the demand surge. They implemented many improvements to our plans and work processes; most importantly, their exceptional discipline and adherence to our COVID-19 safety protocols resulted in our having zero workplace transmission of the disease in 2020, a truly extraordinary accomplishment. I congratulate them again on their dedication. 2020 was our first major recession as a standalone entity, and so by getting through it well, truly says something about resilience which is hard to convey with just words on our call. I’m quite pleased with the speed of our recovery and the strength of our financial position through the end. Ultimately, we borrowed a modest net $27 million to fund operations for the year and experienced a one-turn increase in our leverage at year-end. From a capital allocation perspective, in March, we suspended our dividends to provide financial flexibility to weather the impending economic storm. Going forward, we will emerge stronger as we establish a capital allocation policy that maximizes shareholder value by first ensuring our financial standing across severe economic downturns like 2020.

Thanks, Corning. Turning to slide eight, while revenue was down 2.1% year-over-year, it rose roughly 12% sequentially, reflecting a continuation of the strong recovery trends we have observed for the past two quarters now. Contribution margin increased 11.1% year-over-year, mainly due to higher specialty volume and realized pricing gains primarily in rubber. The sequential increase in contribution margin of 18.1% was driven by higher volumes in specialty and strong product mix.

Thanks, Lorin. Moving to slide 16, given the degree of uncertainty with the pandemic, we will not be providing adjusted EBITDA guidance for 2021 at this time. For your information, we've established a base case planning scenario, assuming the pandemic does not functionally end until 2022. As we get a clearer view of the situation, we'll consider reinstating that portion of our guidance. From a volume perspective, our full year planning scenario for 2021 assumes volumes resemble the second half of 2020 annualized run rate. However, I remind you that I put a higher value on agility than forecasting. January volumes were very encouraging continuing the momentum from Q4, with rubber volumes tracking around 98% of year-ago levels and specialty volumes tracking about 120% of year-ago levels. From an S&A perspective, as a reminder, in 2020, we targeted $15 million in cost reductions, of which roughly $3 million were permanent. We ended up significantly exceeding our target driven mainly by temporary cost reductions. These temporary cost reductions should reverse in 2021 with the rebound in volumes resulting in a roughly $20 million increase year-over-year, excluding the impact of fluctuations in distribution costs, which are also included in our S&A as reported. We expect taxable spending to be approximately $170 million, with safety and continuity spending in the range of $60 million and $65 million, EPA-related spending to be in the range of $55 million and $60 million, and growth investments in the range of $40 million and $45 million. Depreciation is projected to be in the range of $95 million to $100 million, debt service in the range of $27 million to $29 million, our effective tax rate around 30% and shares outstanding on the order of $16.6 million. Slide 17 restates some key takeaways from the quarter. They reflect that our team rose to the challenges we faced in 2020 and positioned us for further successes as economies recover. Their focus and dedication were tremendous. I'd also like to recognize our customers, suppliers, community, shareholders, and other key stakeholders who worked with us through this period of time. We look forward to your continued support as we profitably and responsibly grow Orion for many years to come. With that operator, please open up the line for questions.

Yes. Hey guys, thanks for taking my question, and congrats on a solid 2020. Just maybe to start on the volume side. I mean, that specialty volume you call out for January is quite impressive and I know disaggregating demand and inventory effects is kind of challenging. But I don't know if you can provide any color on what you've seen over the past few weeks, if there's any subsiding there, or if the strength from a demand perspective is continuing, and kind of maybe how you think about the sequential volume move in that segment for the whole quarter at this point in time?

Thanks, Josh. So first of all, thanks for your comments. We intentionally listed the order. We see at this point is primarily end customer demand. However, some portion of restocking and, in our case, some portion of new business is also in that. The thing about the restocking always brings up the question, when is that going to be behind us? And I think that some of our customers intended to do that for a while. In Asia, for example, to restock before the Chinese New Year disruptions to shipping and that kind of thing. But I think what people have seen is just demand has continued to grow. What was going to be perhaps unintended restock has really ended up serving underlying demand. So let's see how Asia in particular reacts coming out of Chinese New Year. But I think that January is going to be a continuation of a strong first quarter.

Okay. Thanks. That's helpful. I guess, maybe just on the specialty pricing dynamics, a couple of things to ask around there. I guess the EBITDA per ton was probably the highest level that we've seen in some time. I assume some of that was pretty strong volume leverage. And wondering how you see that progressing kind of through the year? And then, as demand remains strong, are pricing dynamics and specialty different kind of in this cycle? Are you able to get pricing faster, which maybe mitigates the effect of rising raw materials quicker than what you would expect in a weaker demand cycle?

Excellent question. Well, you can imagine that is a key priority for us. So we're in a situation with increasing input costs, and at the same time, very high levels of demand. And that's a situation that lends itself to pricing appropriately for the situation, which in this case means moving those prices up with an underlying cost inflation. And that's something we're going to be working very hard on.

And, Josh, I would just also add that. In terms of GP per ton, we ended the year in the 640 level, as you can see on slide 12. We should see some favorability in the new year, probably in the 680 to 690 sort of range. On rubber, we also expect that GP per ton to be higher, probably in the 250 plus range.

All right. Thanks. I'll turn it over.

Thank you, everyone. Good morning. It's been a strong end to the year, and it looks like volumes are continuing into the start of the first quarter. There are quite a few moving parts, particularly with demand and rising oil prices. You've mentioned some temporary costs returning to the business. Can you provide an update on how earnings are progressing in the first quarter?

So, I'll take a first set of comments on that. And then I'll let Lorin allow you to make some further comments. So I think first of all, the situation is set for one where we would see a positive trend for earnings, right? So the oil price, we've given the metric before on how changing oil prices can affect our P&L, and there's no reason why that isn't going to play back in exactly the same way as oil prices come up. It is sometimes a challenge in the specialty environment that we are very fortunate. Right now, the specialty volumes are very strong, at the same time. So all of that lends itself to a favorable situation from a profitability perspective.

And I would add that, from a volume perspective, our planning scenario assumes if you do the math, about 90% of 2019 levels, and that the current crisis doesn't end until 2022. I know that this isn't the guidance in terms of EBITDA guidance that we've given in the past. But if you wanted to imagine, 95% or 100% of 2019 levels, we've also given perspective in terms of incremental margins. That will be helpful in terms of getting there. The 30% to 35% for rubber, we think is still a reasonable proxy and the 45 plus for specialties as well. A rising oil price environment on balance, over the course of a year should be a net benefit to us. If you think about Brent, last year, averaging about $43. For example, if it averaged $10 more per barrel, we would expect a positive impact on our EBITDA between $7 million and $10 million on average over the course of the year. And so, we won't give quarter-to-quarter estimates on oil price dynamics, but on balance, a rising price environment is positive for us.

Got it. I apologize, just because there's so many moving pieces, I'll make sure I understand. You talked about oil being a positive. And it sounds like orders are continuing positive. Should earnings trend higher sequentially or lower? I guess without the guidance, there's a lot of moving pieces. And I just want to make sure I have the right expectations there?

We haven't provided guidance. But given the volumes, which are definitely a move forward, I think one can use some of those ratios as Lorin just said. And I think doing that math, you come out with a favorable picture. Lorin, did you want to add something?

No. That's right.

Okay, thanks.

Good morning, everyone. It's great to wrap up the year. I have a question regarding the new capacity. You're adding 25,000 tons next year and an additional 65,000 to 70,000 tons the following year. How much will this contribute to your specialty capacity? I understand you sold 230,000 tons this year. What is the cumulative effect of this new capacity on specialty? Additionally, how much will it affect mechanical rubber goods? It seems you are not focusing on tire grade rubber, but rather on specialty and technical rubber. Are you aware of any other upcoming capacity additions in specialty and technical rubber over the next few years? I'm trying to understand the overall capacity changes we can expect in the near future.

Right. So the 25 tons in Ravenna, that reactor makes specialty, but it can also make some higher-end rubber grades. A typical scenario is that you would start up doing qualification volumes on specialty, but maybe in the first year sell a fair amount into rubber and then that would transition over time. In a time like this, where demand is really quite strong in specialty, you could more aggressively get a very large portion of that over to specialty quickly. In the case of China, we release technical rubber grades, so heavily into MRT there as you know. Some of those technical rubber grades that we'd be making here could go into tires as well. We do have a number of global tire accounts who have facilities in China. So that's also an option for us there.

And I would add, Kevin, with both of these expansions, if you look at our EBITDA per ton just as a total company, it's about 230 or so. Both of these expansions are well in excess of that. And so they are accretive margin-wise and mix-wise to the total company.

Okay. Got you. And then, you guys have a couple of facilities in Texas. I believe some of your competitors do too and obviously there are some winter storm impacts going on there. So curious if you've had any issues with your facilities there? Or if you're aware of any issues in the industry, or suppliers or anything like that, that could affect your facilities or industry facilities, or your suppliers down there?

Right. Well, so first of all, thank you for that question. Because it gives me a chance to just recognize our employees and our investors as well. I mean, in Texas, Louisiana, and other areas that have just been quite impacted by this situation. We salute the employees who have come to work, working on our facilities, getting us online, keeping us online, maybe at home during some pretty significant hardships. And in particular in Borger, Texas, where the team has kept the cogeneration unit going, which of course is an important issue in Texas right now. But we have been impacted, we've been impacted by utilities, natural gas and power. We’re in different situations in different plants in terms of reactor lines, in terms of if we have to go ahead or where we are and restarting our full operation at this point.

Okay. Thank you very much.

Hi, good morning, gentlemen. Thank you for taking my questions and nice quarter. Corning, can you clarify? Did you say you achieve similar pricing to 2020 on an absolute level or were there some of the pricing increases? I'm not sure if I heard the right thing there?

What we've said is that our profitability levels and our share levels were essentially stable year-over-year in terms of pricing margin.

Got it. So as you head into Q1 that the pricing hasn't changed too much?

Correct.

Okay. Got it. And then can you just talk a little bit about the quarterly cadence as you go into this year? I get that Q1 is going to be strong and the continuation of momentum that you're seeing in Q4 and then inventory is staying low. Do you see a little bit of a hangover as we reach Q2 or Q3? And maybe does that bounce back up as we exit the year if vaccination rollout goes as planned? What are you thinking just in terms of historical seasonality, and how you see this year playing out?

I'm afraid I'm going to disappoint you on this. There are many scenarios regarding how the disease and vaccines will develop, along with consumer confidence. We have to consider this for each of the markets we're in, which makes the situation very dynamic. That's why we've decided not to provide guidance, as doing so suggests more certainty than the current environment permits. Regardless of how things unfold, we will remain adaptable, responding as necessary to support our customers and manage the business effectively. Speculating on how the year will progress would not be productive in my view.

Let me just add that. I want to be clear that the fact that we're not giving guidance reflects us being candid to say, we don't feel confident that we can forecast vaccinations and the impact of variants, et cetera. But at the end of the day, I hope that you and others have what you need; if you want to assume 90%, 95%, or 100% of 2019, I think we've given the kind of perspective that allows you to do what we're doing, which is look at various scenarios, and what those outcomes could be.

Understood. And thank you for that color. I appreciate it. Just one last one for me. With the $55 million to $60 million in CapEx on EPA spend this year, do you have an update on when you're going to complete the investment? How much more is left in terms of costs and your latest talk with your contractors?

Well, so we would expect them in 2022 to do about $50 million, having the balance in order, let's say, 15 to do in 2030. Does that answer your question?

Yes, it does. Thank you very much.

All right.

Thank you for your question. I would like to follow up on what Lorin mentioned regarding the expected volumes in 2021 compared to 2019. Looking at your slide seven, the available capacity appears to suggest that the first bar represents the full year, which indicates around 82% utilization throughout the year. If your comments about 2021 volumes resemble the second half of 2020, it seems you might achieve, as Lorin mentioned, a utilization rate of around 90% to 95%. Is that an accurate way to think about it? Additionally, will the improvements over 2020 be evenly distributed across rubber black and specialty, or will there be a greater emphasis on specialty?

Yes. I would say when we initially came up with the planning scenario, we did exactly what you're saying. We looked at the second half volumes and analyzed those. Clearly, you are seeing, based on our January, February order books, that specialty is outperforming year-to-date. As you look at that incremental capacity with an economic recovery, we do publish our contribution margins for the public company, which are about 530. Yes, specialties are outperforming year-to-date. But I think I just use the aggregate contribution margin rather than guess about mix at this point. And that gives you a sense for what the upside could be.

Okay. And then, just to follow up on that, the incremental margins that you referenced, 30% to 35% for rubber and 45% plus. Is that just a function of the better overhead absorption? Or do those also factor in right now a more favorable energy scenario over 2020 and a more favorable FX scenario? Or would those be incremental to the incremental margins? Thanks.

Those both would be incremental. And so those incremental margins our oil price neutral. To the extent that oil prices, I'm just using an example, go up $10 on average for 12 months, we would expect a favorable impact on top of that on the order of $7 million to $10 million. To the extent that FX is up year-to-year, we provide guidance there that says for a 1% change on average, for the full year, there's a $2 million EBITDA impact. So those would both be additive to the core incremental margins.

Thank you. It seems that the pricing remained stable in 2020, which is a decent outcome considering how strong that year was. Could you provide an estimate of how much base pricing increased in 2020 compared to 2019? If we're going to set aside 2020, it would be helpful to compare 2021 to 2019 alongside any additional improvements from better pricing. Could you please remind us of the specific improvements?

Well, let me say, on the rubber, what we're saying is that the pricing will resemble last year sort of year-over-year. So if you look at revenue by KTs, you'll get an average selling price for rubber. And we're pleased that the outcome resembles last year.

Okay. Fair enough. I think I can solve these equations with the two unknowns from here. Thank you so much.

Thank you.

Yes. Hey, again, thanks for taking the follow up. Just a quick one on the bridge, Lorin. The other line, overall, was a more significant negative than I would have expected. And you guys talk about the oil prices and higher fixed costs. I guess, year-on-year, and the bigger negative than 3Q. I'm not really sure how to interpret that, what that means for first quarter, second quarter, if that gets better or worse, or if there's anything unique within the quarter?

For the first quarter, you can expect that aside from oil price dynamics, things could remain stable or improve since oil prices have increased. We mentioned that decreasing prices had been a disadvantage, but rising prices represent an advantage. As we move past 2020, which experienced a negative year-over-year impact, we are entering a new year. The oil price dynamics will play a crucial role, and currently, they are leaning towards positive. So, let's put 2020 behind us. Looking into 2021, it will really depend on the trends of oil prices, which are currently trending upward.

Okay. I guess maybe for me to clarify then, was that a bigger impact in 4Q versus 3Q because of the volumes being higher and it had a bigger impact? Because I guess I look at 3Q and say, oil price was lower year-over-year for the prior six months to that versus 2019 and the impact was less. Is that the main driver?

No. The main driver was that in the fourth quarter of last year, we had lower bonus accruals and more capitalization at some of our plants of fixed costs. These are idiosyncratic dynamics that wash out. And so that's why you saw a bigger other in the fourth quarter than the third. And over a trailing 12-month basis, it's a wash. That's why.

Okay. Thanks. Just a quick on sustainability. I guess you saw an announcement from a large tire producer, that they're investing in some recycling capacity with what appears to be a recycling company. And part of the outputs there is carbon black from there. And I was a little bit surprised to see no major carbon black producer involved in that project. Is there anything we should be reading from that? Or is there involvement from you guys and others in that arena?

So I'm not sure exactly which project you're mentioning. We are an active participant in the black cycle project. In that scenario, we'd be taking the oil from the pyrolysis process and then converting that into carbon black. Maybe just a background on this. The program is you take end-of-life tires, shred them, and you put them in a pyrolysis unit, which means you heat these things up to high temperature. Coming out of that, you end up with some solids; they are mainly carbon black, but they also have ash and other materials that are in a tire. You also get this pyrolysis oil or tire-derived oil and so forth. So one approach is using that oil, and we're in some programs working on that as well as other renewable sources or carbon black oil. The challenge with recycled carbon black is just in terms of applications, the relative impurities that are in it, and the overall condition of the carbon black. That's something that we're certainly very interested in, and we continue to follow.

Okay, I guess you are specifically referring to the Michelin project being done within Viro. Is that something that you guys are involved in?

No, we're not in that. We're in a different project called black cycle.

Okay. All right. Thank you.

Good morning. Could you touch on a couple of things? One is, is the arrangement with the EPA kind of set and done? Or are there areas where the new EPA could come back and revisit? And if so, could you discuss your expectations around that if any? And then, I guess secondly, can you give some sense of how you're thinking about the ground rules for growth CapEx once the EPA projects are done? And then lastly, your thoughts around what conditions or constraints might lead to delaying or deciding to reinstate dividends?

Okay. So let's start then in sequence with the EPA. The consent decrees that we and essentially all the other carbon black manufacturers in the U.S. operate under were negotiated under the Obama administration. So we don't think there's going to be any further air emissions issues associated with us. I think they tend to go from industry to industry. And I think we're all in the implementation phase, so I don't expect any changes to that. In terms of growth, I mean, I would see this in the broader category of just capital allocation. We will put up an emphasis on amongst other things, making sure we have the financial wherewithal with our debt levels and so forth. We want to balance that with sustainable returns of capital to shareholders. And maybe your final question then is, what would be the timing? What would factors contribute to that? Again, I’d say it involves our debt levels, understanding the economy, both where it is and how stable it is, and let’s say macroeconomic situations, as well as the specifics to Orion itself, finally arriving at a level of dividend that is sustainable for this company through a business cycle and at a level at which investors have confidence.

Thank you.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Corning Painter for closing remarks.

Well, thank you all for your time and attention today. And one more time, just a moment to recognize the severe hardships in much of Texas, Louisiana, and other parts of the south, and once again appreciation to our employees who are keeping the lights on so to speak and our facilities at a time when there's a lot of personal hardships as well. So thank you all for that, and everyone have a nice day. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.