Greetings. Welcome to Orion Engineered Carbons Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Wendy Wilson, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss our third quarter 2022 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer; and Jeff Glajch, Chief Financial Officer. We issued our press release after the market closed yesterday, and we also posted a slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call. Before we begin, I'd like 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 our filings with the SEC, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 4th. 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 table attached to our press release. I'll now turn the call over to Corning Painter.

Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. First, a big congratulations to the dedicated Orion team on our third consecutive quarter above $80 million of adjusted EBITDA. If not for exchange rate shifts in the quarter, this would have also been our third consecutive quarter of record adjusted EBITDA. Looking to the fourth quarter, we have lowered our full year guidance to $295 million to $310 million, still an increase of 13% over last year. It implies a roughly $55 million adjusted EBITDA for the fourth quarter. This guidance reflects a combination of seasonality and a weaker economy. There's a reasonable chance that customers will take longer holiday shutdowns this year. Next, let's pull back from the daily news in the fourth quarter and take stock of the broader situation. First, natural gas in Europe. We are ahead of plan in terms of reducing natural gas usage. Last quarter, we laid out sensitivities where there would be no financial impact below a 15% natural gas curtailment. With the progress the team has made, we don't expect a financial impact at gas levels detailed as much as 25% to 30%. Furthermore, if we had to cut by 40%, I'd say the impact would now only be about $2 million per month, which is half the level we shared last quarter. To be clear, however, we do not see that as a likely scenario, as we generate electricity at all our European natural gas consuming sites, and we provide district heating at several locations. Beyond all that, we have further trials scheduled as we continue to make progress. Although we are very cautious about gas usage, I will share that we do not see our gas production being impacted. Second, carbon black is an essential material. The majority of it goes into tires, and tires warehouse during a recession. We think OEM production will improve slightly in 2023, but we're doing well with today's depressed volumes. Specialty volumes will not be immune to a recession, but it's not like there's going to be some fundamental shift away from carbon black products in the world. Third, we made substantial progress in the 2023 and '24 rubber negotiation cycle in terms of price, volume, and payment terms. I say 2023 to '24 because taking Asia out of the equation, over 50% of our tire volume will be on multiyear contracts. Based on this, we expect rubber gross profit per ton to increase by $80 to $100 next year. I don't think there are many companies with this kind of upside for 2023, which brings me to my point. Our strategy is working. The pathway to a mid-cycle adjusted EBITDA capacity of $500 million is, as you can see, very much in place. The general economy may weaken in 2023, but we expect a significant increase in discretionary cash flow and a reduced debt ratio while we stay the course on our growth projects and execute our share repurchase plan. And when I say increased cash flow, I'm not hoping for lower oil prices; I don't consider hope a strategy. I'm saying better cash flow based on profitability closer to what we deserve. Meanwhile, we will use any slowdown in the specialty market to improve our offerings there. In the automotive space, the steady march of electric vehicle penetration will continue in 2023 and provide a tailwind to our conductive additives business. So on to the quarterly results on Slide four. Working together, the Orion team delivered another solid quarter following record first-half results despite the effects of foreign exchange rates. Adjusted EBITDA of $80.5 million was up 21.2% year-over-year, and gross profit per ton of $470.2 was up 12.8% year-over-year. Additionally, adjusted earnings per share was up $0.12 over last year, supported by an increase in pricing and improved mix. Year-over-year, all metrics improved with the exception of EBITDA margin, which reflects the dilution related to higher oil prices and our ability to pass those costs to customers. With that, I'll turn the call over to Jeff.

Thanks, Corning. On Slide five, we show a walk for Q3 adjusted EBITDA. The year-over-year volume increase in the rubber business was partially offset by softer demand in the specialty business. We had increases in the base price of both businesses, and we saw an improvement in mix for specialty. However, the strong U.S. dollar was an $11 million headwind in the quarter compared with last year. On to Slide six. Looking at our specialty business, volumes decreased year-over-year as well as sequentially. However, revenue increased to $169.6 million, up 12.9% year-over-year driven by price and improved mix. Revenue decreased 6.8% sequentially compared with our record second quarter. Gross profit per ton continues to be strong, both in the quarter and the trailing 12 months. While there was a sequential reduction from the second quarter, you may recall that we noted in August that the second quarter gross profit per ton was elevated due to strong mix and cogeneration profits. We expect that this would return to a more normalized level in Q3. The continued improvement in gross profit per ton has been driven by price realization and the positive impact of newer products. However, in the fourth quarter, we expect gross profit per ton to decline significantly due to weaker volumes and lower cogeneration income. Slide seven shows the year-over-year walk of adjusted EBITDA for the specialty business. As noted earlier, the volume reduction was significant. However, it is nearly offset by improved pricing and mix. Higher fixed costs were offset by improved cogeneration profit in the quarter. And finally, as noted earlier, the strong U.S. dollar was a significant headwind of over $6 million. Slide eight shows the key metrics for the rubber business. Year-over-year volume increased over 10%, with strong pricing and higher oil prices driving revenue to $373.5 million, up 53.8%. Sequentially, volume was flat, and revenue increased 4%. Gross profit per ton was $364 in the quarter, a 33.8% increase year-over-year and an 18% increase sequentially. We continue to see a nice upward trend in our trailing 12 months GP per ton to over $300. This reflects the results of the successful 2022 pricing cycle, partly offset by cost inflation and air emissions control related operating costs. Cogeneration sales and profits were also strong in the quarter. Slide nine shows the year-over-year walk of adjusted EBITDA for the rubber business. Higher volume, base price, and mix were all favorable, as well as cogeneration profits. These were partly offset by a nearly $5 million headwind due to the strong U.S. dollar. On to Slide 10. Our consolidated year-to-date results have been strong, with revenue up 35.9% to $1.6 billion on essentially flat volume and adjusted EBITDA up to $247 million from $216 million last year. As we have noted a few times, we believe that we are entering this period of uncertainty from a position of strength. Despite near-term challenges, we are well positioned to grow our business in 2023 and beyond and to achieve our long-term earnings and discretionary cash flow goals, which we laid out at our Investor Day earlier this year. We have seen a nice step-up in EBITDA this year and expect positive cash flow to begin in the fourth quarter and to continue into 2023. With that, I will turn the call back to Corning to discuss our guidance, capital expenditure, and outlook for 2023.

Thanks, Jeff. Turning to Slide 11. As I said earlier, our full-year adjusted EBITDA guidance is now $295 million to $310 million range, with a corresponding adjusted EPS guidance range of $1.75 per share to $1.90 per share. I'm pleased to say I don't have anything exciting to share about capital expenditures. The big debottlenecking project is complete. Several other projects are nearing completion. Looking forward to 2023, we only expect to have about $25 million of U.S. air emission control spending left for our final project. Next quarter will probably be the last time we call out U.S. air emission control spending as it is no longer particularly significant. As that activity tapers off, we expect to have the bandwidth and cash flow to take on some of our backlog of smaller high-value projects and execute on our share repurchase program. Turning to Slide 12. I've made these points already, but it's powerful to see it visually. With our value creation mindset, earned pricing, and steady progress with our projects, we have the building blocks in place to reach our mid-cycle adjusted EBITDA capacity goal of $500 million by 2025. Despite the macroeconomic outlook, we are on track to significantly increase discretionary cash flow in 2023. As our cash flow improves, we will balance between investing in our strategic projects and returning cash to shareholders. The Board's approval of the $50 million share repurchase reflects confidence in our strategy and the near-term prospects. We believe, as I think many of you do, that the intrinsic value of the company and our projected cash flows greatly exceed our share price. In closing, I'll leave you with a few thoughts. First, we are ahead of plan on reducing natural gas use and continue to work on this. Second, we expect just $25 million of EPA project spending in 2023 as we wrap this up. Third, we made a step-up in adjusted EBITDA in 2022, and we will step up again in 2023. Fourth, this year's cycle for rubber contract negotiations is essentially complete, and we expect 2023 rubber adjusted EBITDA to be on par with last year's total company adjusted EBITDA of $268 million. Fifth, taking all of this into consideration, we expect to significantly increase discretionary cash flow in 2023. I see us as well positioned today for the global slowdown. Electrification will continue to drive demand for our conductive materials. The long-term disconnect between tire and carbon black investments supports sustained pricing at higher levels. As I've mentioned before, the fundamentals are robust, and I believe they will be for years to come. Now, that ends our prepared comments. Before we open up the lines for questions, we again received some questions overnight. I think two of them in particular we will cover first due to their broad interest. So let's start with those. Wendy?

Thanks, Corning. One of the questions we received overnight was for Q4. Could you walk through the dynamics you think are going to affect the quarter and why will that not persist into 2023?

Got it. So the major factor for us in Q4 is volume with also some weakness in power rates in Europe, where we sell electricity from our cogeneration units. If we look at volume, examining the Q2 results and the Q3 results, you can see there's been a weakening in specialty, somewhat offset by strength in rubber. That weakness for us was initially largely in Asia, in particular, China, and then became Europe as well. More recently, we have seen that the North America market has followed that same trend. So October volumes were down for us in specialty. We had one large customer who did not take any orders for November, but I think that December could be very much in question and that comment about shutdowns reflects this. Looking at the broader picture, I would say that in China, we started to see some green shoots in certain areas in certain markets in terms of volume, but with the zero COVID policy apparently remaining and the growing number of shutdowns, I think that's at risk. Europe was more or less stable and depressed rates as we see it playing out. In North America, we are seeing a downturn as well. Rubber has been an area that has offset that. But we think in Q4, we're going to see a slowdown in European rubber carbon black purchases, likely reflecting inventory adjustments. If we move forward to next year, we do think next year will be a robust year in terms of rubber carbon black demand. I'd say the weakness in Europe may continue into Q1, but customer forecasts are very uncertain. As for specialty, this will follow the business cycle and go into many different end markets. Things like OEM will probably strengthen a little bit compared to last year. However, I think we'll see the broader economy enter a cycle, reflecting general economic trends.

Thanks, Corning. One other question that came in last night is related to the percentage of multiyear contracts for rubber volume for next year.

On that, we stated in the script that it was a little over 50%. For modeling, I would suggest using 50% for next year. There was one additional question that came in that I think requires clarification. What does this mean for rubber carbon black last year? We gave some more indications in the script, but Jeff, maybe you can lay that out more clearly for everybody.

Sure. If you think of rubber profitability to date, our GP per ton has been about $340. I would likely use a similar number to estimate full-year GP per ton. If you recall, our GP per ton in the fourth quarter last year was just over $300 GP per ton. By the end of this year, it should be closer to the $340 range that we're currently at. For 2023, Corning mentioned an increase of $80 to $100 per ton. Nominally, if you consider 750,000 tons per year, that $80 to $100 per ton would yield approximately $60 million to $75 million of additional profitability in 2023. Additionally, we anticipate our volume to increase by at least around 3,000 tons next year. So, if we multiply that by the higher GP per ton, it would yield about another $15 million of profitability. Therefore, we are looking at around $75 million to $90 million of additional profit on top of this year, which would be in line with the full-year number of $268 million that was mentioned earlier in the script.

For context, those who consider 2019 as a good benchmark for pre-COVID, we expect to exceed our total company 2019 number. Now, let's get those two points out as a level-setting. Let's open the lines for questions from our investors.

Thank you. Please check the instructions for questions. Our first question is from Josh Spector with UBS. Please proceed.

Hi, thanks for taking my question. Just a follow-up on the volumes for the fourth quarter, specifically regarding specialty. Given how Q3 came in, I'm not sure how much of that is demand weakening or something else. What's the range you're looking at for the fourth quarter for specialty? And how do we think about that in the context of the early part of next year?

I expect a significant drop in our EBITDA run rate. Some of that is seasonality, but the main component is the weakness in the market. I would anticipate the market weakness to persist into next year. The majority of our decline in the fourth quarter is due to specialty volume, compounded by power rates, but it's primarily volume. There’s also some weakness in rubber volume. Jeff, do you want to add anything?

If we look at our volume in the third quarter, we also saw a decline year-over-year and sequentially. We would expect a little softness beyond that level.

Yes, it's reflective of a slowdown in the North American market.

Thanks. The commentary on rubber for 2023 helps to contextualize a lot of that clearly. If I look at some simpler math, annualizing the fourth quarter and layering some of that would seem to suggest that flat EBITDA year-over-year is a relatively negative scenario versus your expectations. I guess if I look at kind of what you have out there, you might be closer to mid-teens up in EBITDA in 2023. Is that a reasonable base case?

We've provided guidance on rubber, estimating that our benchmark is 268. Additionally, looking at the specialty side, we should factor in a weakening in the Americas portion, along with power rates. If you annualize that, it gives you a sense of where we could be. However, we anticipate a stronger year overall with improved cash flows from our current position.

Good morning, guys. Thanks for taking my questions, and congrats on the rubber negotiations and the multiyear contracts. My first question is regarding the buyback. How quickly do you expect to utilize that? Is it an opportunistic thing, or is it more aggressive in reducing share count?

On the buyback, our intent would be to complete it fully. We have put out that number not as a loose target but as one we intend to execute. The timing and speed will depend on several factors, including continued positive cash flow, which we're confident in, and opportunism. We don't see ourselves sitting here 18 months from now without substantial completion; we expect it to be done much sooner.

Got it. Thank you for that. Additionally, you have a couple of facilities opening or expanding. What is the expectation for their utilization and earnings contribution given the market situation? While rubber is performing well, specialty demand may not be there.

Regarding Ravenna, it is already up and sold out quickly, with more of that allocated to rubber than specialty. Looking ahead at our new facility, we previously estimated it would contribute about $12 million of EBITDA for next year, but given zero COVID, we now see this potentially in the high single digits to $12 million range. We'll have to monitor how that plays out, potentially affected by the situation with rubber carbon black in relation to Russia.

Great. Lastly, where do you expect gross profit per ton in specialties to be in Q4, maybe entering Q1, based on what you see today?

We have avoided giving specific guidance. However, I suggest looking at the drop we anticipate in the fourth quarter, with most of that expected in specialty.

Could you share your expectations for currency headwinds when guidance was given at the end of Q2, particularly regarding the recent $25 million headwind?

Back in Q2, exchange rates were around $12 million to $15 million. Now, we are at parity, reflecting a significant drop year-over-year.

Looking back at a year ago when we gave guidance for the year, that represented almost a $20 million shift for us in forex.

In 2022, exchange rates were about $1.18 euro to dollar. Now we're year-to-date at around 1.06, and if you project, you might see around 1.04. This is a significant drop, around 12% to 13% year-over-year, which will continue to affect us in Q4.

Our next question is from Laurence Alexander with Jefferies. Please proceed.

Hey, good morning. Just wanted a little more detail on supply and demand dynamics in the different businesses, particularly in Europe. Can you share what you observe?

In Europe, specialty demand is down across almost all segments. This trend has also been reflected in China, but we've seen some recent improvements. In North America, polymers started to slow, and we are observing broader weakness. Rubber demand has been interesting; our competitors had concerns initially about Russian carbon black reliance, and while we saw some shifts towards sourcing from China, Russian supply became established. However, concerns regarding security and exchange rates led to a cautious approach for 2023. For the fourth quarter, tire manufacturers are reporting a slowdown in the European passenger car market, especially for replacement tires. Overall, there may be weakness from using up Russian carbon black stocks, and customers are not always fully transparent about their positions. Therefore, the impact on our industry could be more than expected in general.

Our next question is from Chris Kapsch with Loop Capital. Please proceed.

Good morning. In specialty, I understand automotive-related grades are experiencing higher profitability. With global auto builds expected to rise next year, could that serve as a buffer to EBITDA run rates?

For Q4, I anticipate our GP per ton will decline partly due to mix and also lower volumes. However, for next year, the automotive sector could indeed present strength for us, alongside other supply and demand dynamics. We plan to enhance capacity by debottlenecking one of our key production lines. This will instill more confidence in our ability to fulfill customer needs, suggesting potential for increased sales.

Thank you. Just to clarify, when you mention higher volumes and pricing in rubber, are you referring to increased capacity in China, or are there also higher contracted volumes achieved through operational efficiency?

Both factors play a role for us. We anticipated softness in specialty, particularly in polymers, and decided to allocate that volume to rubber, resulting in increased rubber capacity. We also implement operational excellence improvements. While we are sold out, it's not uniform across all marketplaces in Europe; we have some flexibility in North America. Therefore, we expect to witness a slight incremental increase in volume across North America, China, and Europe.

We have a follow-up question from Jon Tanwanteng with CJS Securities. Please proceed.

Regarding the rubber carbon black number for next year, is that considered a minimum or midpoint? Additionally, I'm curious about the risks associated with the figure and what you've accounted for.

We have considered various risk factors when providing that number. You can view it as one we have reasonable confidence in, considering we are wrapping up Q3. It remains a very dynamic environment. The pressures from cogeneration will be especially felt in our specialty area due to the volume dynamics, so that’s a risk factor. However, our outlook reflects our expectations regarding volume and pricing.

As we look ahead to '23, are you still improving pricing in specialties, and how does the mix compare to this year?

Mix will depend on the overall economic landscape and the specific demand in individual market segments. We produce several high-value products that command higher prices. If we add more value to customers, we can expect better pricing. However, pricing in the polymer specialty area has experienced increased competition, influencing margins across the industry.

Can you clarify your involvement in the masterbatch market? Have you reduced your participation due to poor economics?

We continue to collaborate with customers in that market, mainly those competing against a specific competitor. Nonetheless, we transitioned some capacity from low-end specialty to rubber, as rubber demand remains more favorable.

We have one more question from Ken Ajana with BX Credit. Please proceed.

In Europe, have you made or are you planning to make any curtailments in your specialty operations? It seems you are weathering the natural gas situation well. What are your insights on that? Also, regarding sourcing and trade flows, any significant changes?

We are not planning to make any curtailments related to natural gas. We’ve successfully cut back our natural gas usage and substituted it with alternative methods to drive our operations. We received high-level prioritization for our German facility. As we co-generate electricity and provide district heating, it does not make sense for us to curtail operations. While some costs are associated with these changes, we find the overall cost benefits to be minimal. Regarding trading arrangements, we are cautiously optimistic for 2023. However, companies still face significant challenges adjusting their supply chains in light of the situation in Russia.

We have expanded our Revolving Credit Facility (RCF) recently. Additionally, our RCF auction was oversubscribed, which speaks to our robust position. We navigated 2020 without facing major issues regarding our loans or covenants, and I believe our loan situation remains comfortable.

We remain confident in the improvements in payment terms and practices. I anticipate that our efforts related to reducing accounts receivable will provide substantial funding moving forward.

We have now reached the conclusion of our question-and-answer session. I would like to turn the conference back over to Corning for closing comments.

I'd like to thank you all for joining us today and for your time. I believe that we will be one of the few specialty chemical companies projecting higher earnings and improved cash flow next year. I see that as a real positive. Thank you very much, and I look forward to speaking with you.

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