Greetings, and welcome to the Orion Engineered Carbons First Quarter 2021 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to 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 first quarter 2021 financial results. I'm Wendy Wilson, Head of Investor Relations and Corporate Communications. With us today are Corning Painter, Chief Executive Officer; and Lorin Crenshaw, Chief Financial Officer.

Thank you, Wendy. Good morning, everyone, and welcome to our first quarter earnings conference call. Following such an extraordinary year, I'm pleased that our business has started 2021 on such strong footing. Our Specialty products are in high demand, driving outstanding year-over-year and sequential volume growth. Our Rubber business is solid, realizing year-over-year and sequential volume gains. I want to thank the Orion commercial, production, customer service, and supply chain teams in particular for continuing to work safely in terms of COVID-19 and for their agility in managing a very active order book. COVID-19 infection rates are very high in some of the communities where we operate, and we continue to believe we have had no workplace contagion. From a community standpoint, true to our corporate values, we contributed funds this quarter to Hutchinson County United Way in Texas to support residents impacted by Winter Storm Uri. We operate a Carbon Black manufacturing facility in Hutchinson County's largest city, Borger, and have had the privilege of being part of the community for the past 93 years. I'm proud to say that we were able to operate our co-generation plant there through the storm, which took down so many power generators. From a financial perspective, we reported first quarter adjusted EBITDA of $70.9 million, up 11% year-over-year and up 7.4% sequentially, led by the strength of our Specialty business. Notably, our adjusted EBITDA margin was 19.7%, up 70 basis points year-over-year, with the Specialty EBITDA margin of 27.5%, up 410 basis points year-over-year.

Thanks, Corning. Revenue was up 7.2% year-over-year and increased roughly 14.1% from the fourth quarter, reflecting a continuation of the strong recovery trends we have observed for the past three quarters now. Contribution margin rose 11.6% year-over-year, mainly due to higher Specialty volumes. Adjusted EBITDA increased 11% year-over-year to $70.9 million, reflecting strong operating leverage partially offset by the factors mentioned by Corning earlier. Finally, we reported adjusted net income for the quarter of $31.2 million, up 17% year-over-year on higher adjusted EBITDA. The bridges on Slide 6 provide greater detail in support of the comments I just shared on our quarterly results. Slide 7 details our year-to-date sources and uses of cash. On a full year basis, we expect net debt to rise moderately year-over-year by an amount resembling the year-to-date increase in working capital, assuming that oil prices average near current levels for the balance of the year. Our first quarter results reflected this trend directionally with strong profitability being offset by the change in working capital and capital investments that advance our sustainability and growth initiatives. We expect next year to follow a similar pattern as this year from a discretionary cash flow perspective, before delivering substantial free cash flow in 2023 and beyond. Slide 8 summarizes our leverage and liquidity profile as of the end of the first quarter. Liquidity available at any leverage level was $310 million at quarter end. At the current stage of the economic cycle at 3.3x, we are less than a turn higher than our steady-state target net leverage of 2 to 2.5x. We expect that ratio to continue drifting downward throughout the year and to ultimately approach targeted levels by year-end, as economic conditions and our earnings continue to normalize. Overall, the strong state of our liquidity and the absence of any significant debt maturities until 2024 give us confidence in our ability to successfully navigate any demand scenario that transpires, fund our sustainability-related investments in the U.S., and advance select strategic growth initiatives that will position us to emerge stronger and with greater earnings capacity in the coming years. Moving to Slide 9, Specialty volumes increased 22.4% year-over-year and rose 9.2% sequentially. Volumes were up year-over-year across most end markets and geographies. From a profitability perspective, adjusted EBITDA increased 41.3% year-over-year, reflecting strong operating leverage. The next slide breaks out the major year-over-year drivers of adjusted EBITDA for the specialty business, the most significant of which was higher volume. End market-wise, polymers and coatings were particularly strong. Geography-wise, the Europe, Middle East, and Asia Pacific regions showed the greatest relative strength.

Thanks, Lorin. Turning to capital allocation, our EPA investments in North America continue to advance. After COVID-19 related delays caused us to declare force majeure related to our efforts to install emission control systems at our Ivanhoe, Louisiana, and Orange, Texas facilities, we ultimately got the Orange, Texas facility on-stream per the original schedule. With regard to Ivanhoe, our current project schedule, which we share regularly with the EPA, calls for completion in the third quarter. Overall, our growth strategy remains centered on expanding capacity in the differentiated segments of our business. The results of this approach are reflected in our business mix with approximately 75% of our adjusted EBITDA driven by specialty and technical rubber grades. An example of this strategy in action is that we have kicked off an expansion of our Gas Black production capacity in Germany, which is expected to be completed in phases over the next several years, with the initial impact in 2021 and building into the future. These actions will set the stage for incremental high-margin premium-grade growth in the coming years and have the potential to gradually add an incremental $7 million to $10 million of adjusted EBITDA to our run rate, building to that level over the next five years. Two major strategic initiatives that will expand our capacity to meet increasing demand and shift our earnings mix even further towards differentiated market segments are the 25 kt expansion of our Ravenna, Italy facility and the construction of a 65 to 70 kt greenfield facility in Huaibei, China. Ravenna is on track to begin ramping up in early 2022 and Huaibei in 2023.

Our first question is from Josh Spector with UBS.

I was wondering if you could expand on what's going on in Korea and how that's impacting you. I guess I would have thought there would have been more of a volume impact, but you're alluding to what's going on more as a margin or cost impact. So any detail you could provide there would be helpful.

Yes, so what we have there is a couple of customer-specific situations. And as they're customer-specific, there's a limit to what we can say. But I'll just say we're taking action and working through it and this is all in our guidance at this point.

Okay, is there any - does it resolve in the next quarter, or is this something your guidance assumes persists through the year?

I expect to make progress, but I do think that because it's customer-specific, Josh, it's just kind of hard to lay out a specific solution or what we see the timing, because this is all subject to discussions.

Josh, I would say we don't expect some quick resolution and that's all in our guidance.

Okay, fair enough. I was just curious on Specialty broadly then. Where do you think you're at from I guess more of a normalized margin perspective? I guess I assume margins continue to see some pressure as higher costs flow through, given where oil is today versus where it was. But obviously demand remains strong. Mix is a bit better. I mean how are you thinking about how things trend sequentially into Q2 and maybe into the second half?

So I really think of these as the separate individual markets more than their overall mix. From an overall mix perspective, however, one element is where are we constrained, right? And right now, we have constraints on a number of our higher margin Specialty products. That's one of the reasons why we mentioned the bottlenecking activity. So to the extent that we are constrained on the growth in some of those areas, that obviously puts some pressure on us for the mix. And that's one of the things we look at as we go into the second quarter between potential changes in market demand, but also just capacity issues if that's a challenge.

And Josh, rather than quarter-by-quarter; last quarter, I mentioned 680 to 690 GP per ton for the full year, on average. That's still a good number. And it incorporates actions that our team has taken to offset price - to offset raw material increases due to oil price. So that number is still good.

Our next question is from Mike Leithead with Barclays.

So I guess first, the color on the full year guide was super helpful. It's clear around the moderating impacts you're expecting in the second half. But just curious how you're seeing things trend into Q2. Obviously, you don't get Yuri repeating. You talked about channel inventories being low, but we're also seeing some OEM production slowdown. So can you just kind of help us think about how we should see all of that shake out sequentially here for Q2?

So we think Q2 is going to be a strong quarter for us. With respect to - first, let's talk to the chip issue, why that's out there. Car companies do shift production around to other models. There's probably a net improvement for replacement tire as this plays out. So while that's a factor out there, we don't see that as a huge impact for us. And to some degree, demand that's maybe pushed down a little bit now, right, you'd expect to see later in the year from that perspective. But specifically, I think the market dynamics here remain quite good for the second quarter. It's really when we get into the second half of the year where we hear customers having some caution. Meaning, they think it's going to be good, but is it going to be at the current levels?

Got it. That's helpful. And then maybe as a follow-up, just two quick ones on cash flow. And if I could reference your Slide 7. First, on working capital, if we just assume energy prices stay flat from here, would you assume working capital to stay flat or move higher or lower by year-end? And then second, that other line item, I think, was a use of $10 million of cash this quarter. Where would you expect that to roughly shake out on a full year basis?

For working capital, I think if oil prices stay where they are, somewhere in that $40 million to $50 million use of cash is where we would expect it to be, depending upon our sales volumes for the balance of the year. And in terms of other, you could use - I would actually combine other and the change in provision line and tell you to use something like $20 million to $25 million for the full year.

Our next question is from Kevin Hocevar with Northcoast Research.

Wondering if you could comment on how capacity utilization is now in the business. If I look at Slide 21, you show your capacity. And it looks like in 2020, you had 867,000 tons of volumes. And then you mentioned current available capacity at 180,000-190,000 tons. So that's 1,052. You sold 254,000 tons in the quarter. So - and I don't think there's a ton of seasonality in the business. So if you annualize that, it seems to suggest you're operating at pretty high utilization rates. So I guess I'm curious your take in terms of how is the operating rates on the assets, and how do you expect that to go going forward? Well, I guess you've given some color there. But what type of rates are you operating at currently?

Yes. So we're at high rates right now, let's say, above 90% in the EMEA and the APAC region. In the Americas, I'd say we're more in the 70s. But that's very much around specific lines that drive that and the relative demand for those specific lines.

Okay. And in terms of price, in Specialty it seems like there's been some inflation. And here, you have to go to the market and push through the inflationary pressures with pricing. And typically - I think in a typical year, there's a little bit of a lag there, so there can be some price-cost pinch on as you do that. But given the strong environment, how would you say that that's going? Have you been able to push through pricing pretty quickly and timely on the specialty side? Or do you see any pinch in the price cost there?

The market dynamics are very favorable to pricing right now. I mean, demand is very high. Capacity is limited. Supply and demand laws are what they are. So we have been working that. I'm frankly disappointed we don't have more to show for that at this point, but that's something we're going to continue to work through this year.

Our next question is from Jeff Zekauskas with J.P. Morgan.

In your Rubber Black business, there really wasn't very much growth at all. And I think your competitor in Massachusetts in both the United States and Europe, I think their volumes grew about 10%. And I think their profit increase was enormous. So what happened?

So I'm going to just speak to our business versus comparing it to your hypothetical player there and say that, first of all, we made our moves in terms of pricing and where we think the appropriate value is, and that plays out sometimes in the marketplace, as we indicated. And overall, as we look at it, the Korea market dynamics had a play for us that we - although we show right now, if you look at the trailing 12 months, we're down from where we were, let's say, at the end of 2019. We would expect that to get back to roughly on par with where we were at the end of 2019. And finally, if we look to China, we play in different spaces. So we're heavily MRG there, so a different sort of play. And the Rubber business we have, it is going into actual tires. For us, it's much more of the multinationals with whom we might have global agreements, and so a different sort of situation for us, a different market, we're really playing in, as we're a very small part of that overall Rubber market in China.

No. I excluded that. That is, I think your competitor grew 30% in China. But I think in the United States and Europe, they grew 10%.

Yes. No, we saw that. And so I think there's - this then plays out to, I think, what comes out of the annual pricing and volume negotiation. And what you see in that in part is where we are and where they are in that space. I'm not - we don't break down our volume performance for each area. As I indicated a moment ago, our European loading is really quite high.

Okay. So if you look at your first quarter revenues and you think through the year, do you think your revenues would be lower in any quarter versus the first quarter? And if they were, in which segment might they be lower and why?

Well, I'll just speak - I can tell Lorin wants to jump in. But I mean, I think there's one element of this is just seasonality. And while the fourth quarter is a way off, I'm not sure that the business cycle has totally escaped seasonality.

And I would say that our second quarter is likely to be amongst our strongest. And for reasons Corning just cited, the fourth quarter for seasonality reasons would be weaker in the way we look at things. I would also just follow on the prior question to say, one quarter doesn't make a year, and this Rubber Carbon Black business is tracking towards more than 90% of 2019 volumes for the full year. And so we're going to have a strong year for this business, and we're going to see strong growth year-over-year for this business.

Okay. And have you made any progress with your Evonik negotiation?

So we indicated last year that we didn't think last year was a likely year for any solutions in terms of a settlement separate from the arbitration. We thought it was possible this year, just the way things played out. But beyond a broad-brush comment like that, there's really not very much we can say until we either have a settlement or we go all the way to the ending of arbitration. And I would expect arbitration to go into 2022, if it goes all the way.

And then lastly, can you talk about what your competitive advantages are if you have some in the EV market? That is, how does your product portfolio compare to your competitors? What are you trying to do that they're not doing, or are you trying to do the same things that they're doing, but you're just a little bit later to the market?

So there's different additives, different carbon additives that go into a lithium-ion battery that compete for space in that. And I think that we're likely to see a solution in the end where there's a mix of materials that are inside the electrodes in those materials. Right now, our play in that space is around Acetylene Black. So there's, I'd say, one other player who's also in that space. And there's plenty of battery manufacturers for us all to kind of focus on. So we're really very focused on the people we are in development programs with for their needs. I think other people focus on other players.

What are your revenues in that area?

I don't think we're going to go to that. I would say right now, our EV portfolio is a relatively small part of our overall conductives business for Orion right now. But I think the positive thing for us is that we're gaining these qualifications, and we're - you've seen it in the price increases and so forth we've announced around Acetylene Black to enable us to kind of work our way out of previous supply arrangements to be able to reallocate more and more of this product into the EV space. We've said before that we saw the, let's say, EBITDA potential of that acquisition being in, let's say, the upper single digits in terms of EBITDA for Orion. And so obviously, in the fullness of time, as this business continues to - there's very rapid growth, that would be an opportunity for further investment for us.

Our next question is from Jon Tanwanteng with CJS Securities.

Very nice quarter and good work on raising the guidance. My first one, and a lot of them have been answered already is, Corning, can you just talk about the Rubber dynamics entering 2022? I know you made a comment on them looking pretty robust so far. Can we expect, I guess, that pricing to come up as you had maybe expected before the pandemic? Are the supply and demand dynamics similar? Or are people adding capacity? Just help me think about how you're thinking about pricing and volumes in the out year?

Yes. So I think that we're looking at a very good 2022. You can just see the confidence, the stimulus, all of this. I think it's an improving situation. This whole thing with the chips is only going to get resolved for us going forward. You see as the vaccines have come out, what's happened in the U.S. in terms of mobility. I mean, if you've driven anywhere, you've experienced that personally. We see a number of expansions of different tire companies moving forward, a number of the Asian tire manufacturers, so that kind of long-term pressure. If you look at the Notch data and you compare what, I think, demand and domestic supply is going to be, there's quite a gap that builds over the next several years. And we've seen customers wanting to negotiate early this year. And so I would read that as a sign that people recognize 2022 is going to be tight.

Got it. Is there kind of a ballpark pricing increase or maybe margin expansion range that you're looking at, given these early discussions and positive outlook?

No. I think we've never given, let's say, a target. And I think, for competitive reasons, we wouldn't want to do that in this sort of a setting.

Okay. Fair enough. Just on inflation, in general, I know you've gone through COGS and oil prices and everything else. Is there any concern on your CapEx and the cost to complete your EPA investments that those costs may rise in the near term? Or do you have this pretty locked down?

So I would say near-term costs typically are, right, because that equipment is all procured. It's more like the later projects where you'd have to look and see. But for this point, we see ourselves being able to hold to budget.

Okay. Great. And then - sorry, last one for me. How much have you factored any potential benefit from an infrastructure bill into future performance? I mean, the obvious things would be - I think batteries are mentioned. Pipe is something that would be probably used, heavy construction, tire usage; all of these things flowing through to you guys. Have you thought about the beneficial impact of that at all as the potential for that bill to be passed gets closer?

Certainly, we have. I think for us, if we look at it and where we are in loading right now, as I indicated earlier, it's somewhat high. There's a little bit of an opportunity in North America, but it also just says, okay, so when we think about where are the areas we need to put emphasis on, which are the directions we might want to reallocate current capacity toward. And we do think about that.

And Kevin, I would add is, if you want to start thinking about 2022, I would refer you to Slide 21. And what you'll see is that if we were able to sell, say, 90% plus of 2019 volume, we would still have another 80 kts to really maximize our operating leverage. So even if this year we were at 90% plus, if you look at that chart, because there's another 80 kts of upside just from operating leverage in 2022 without considering any price. And so we'll see how the economy transpires, but we think there's continued leverage into next year.

And I think those dynamics then are certainly going to be a plus for us in terms of loading Ravenna for next year as well.

Okay. Got it. And just to go back on the infrastructure, if that bill passes, what would you expect your tax rate to go to?

Well, today, the way that our profitability mix by geography happens to be, we wouldn't expect a significant impact because of Americas' profitability levels not being perhaps as high as you might expect, due to specific factors that are confidential.

Well, just to build out, we've talked about we still see the U.S. as an opportunity for us in the Specialty business.

Our next question is from Laurence Alexander with Jefferies.

I guess, just a couple of things. What are you seeing specifically in the wire and cable and building materials markets? Are you seeing any signs of a turn in those?

When you say - I mean, so those are, I'd say, fairly robust areas right now. When you say a turn, do you mean coming off? Or do you - which way are you sort of speculating about of turn, Laurence?

I just want to flesh out kind of how you're seeing sequential momentum in those.

I think we see most markets for us, in a sequential way, remaining robust. The question for us overall is just when you go into the second quarter and you talk to customers, there's a certain degree of less certainty and with some of them, a little bit of caution. But I think if we think immediately sequentially, I expect a good second quarter.

Okay. And how are the discussions evolving in the industry around decarbonization and implications for feedstock availability?

So far, I'd say there's a lot of confidence around feedstock availability for a variety of reasons. But I would just point out that we are a party to BlackCycle, which is a tire - end-of-life tire recycling program, which as part of that overall process does create Carbon Black oil, which can then be used to make new Carbon Black. We also are involved in, what I'd say is green Carbon Black. So from renewable sources, we've had Printex Nature for a number of years, but we're also in a program using forest products or developing the capability to use forest products in the same way. So there's options for us, for sure, in terms of a more sustainable approach to Carbon Black.

And where do those two fit on the cost curve relative to kind of conventional Carbon Blacks?

Well, I think it's very early to say where they are compared to that. It would - especially when we think about the renewable and agricultural and so forth like that. They're certainly a challenge to make the yield. They're a challenge to make the full range of Carbon Blacks, that kind of thing. I think when you think about end-of-life tire recycling, you're looking at, well, what's an overall solution that's needed for the industry in an environment where maybe you don't want to burn used tires in cement kilns.

And how is the pipeline for bolt-on acquisitions?

So I'd say we consider acquisitions, there's - it depends upon how broadly one describes a bolt-on and different people can disagree on that. But there certainly are, let's say, adjacent opportunities, for sure. In terms of specific in Carbon Black, well, there's a limited number of major players. And then there's markets, places like China, which is still quite fragmented, and some people have participated in that.

But I mean should we expect you to be active in that? Or what's the kind of degree of appetite?

So I mean, I think we would always be - we would always investigate and give good consideration to an attractive M&A activity, particularly those that were close in. But we also wouldn't have a lot to say until we had something to say.

There are no further questions. I would like to turn the conference back over to Corning Painter for closing comments.

Okay. Well, a big thank-you for everyone who took part in today's call. We know your time is valuable, and there's other places you can be. So we greatly appreciate you spending this time with us and your interest in Orion Engineered Carbons. Have a good rest of your day. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.