Ladies and gentlemen, good morning, and welcome to the Orion S.A. First Quarter 2024 Earnings Conference Call. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations. Please go ahead.

Thank you, Ryan. Good morning, everyone, and welcome to Orion's conference call to discuss our first quarter 2024 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, our Chief Executive Officer; and Jeff Glajch, our 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 risks and uncertainties as described in the company's 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, May 3, 2024. 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 thank you for joining our call today. We started 2024 on a strong footing with adjusted EBITDA of $85 million, our second-best Q1 behind only last year's results. More importantly, we saw underlying improvement in the business. Our specialty volume grew by 19% compared with last year. At the same time, we increased our gross profit per ton from $492 in Q4 to $659, a level more in line with normal margin levels. Rubber gross profit margins of $435 per ton were well above last year's average of $409 per ton. Prior to 2022, our rubber gross profit margins typically ran in the $200 to $300 per ton range. These results clearly show that our key markets continue to restructure, and this is the new normal from which we can build. As a result of our progress in both markets, we continue to expect 2024 to be another year of growth leading to record EBITDA. In summary, we're on track to outperform expectations in specialty and to exceed per ton margins in Rubber, despite a more challenging geographic mix in both markets. Digging deeper into Rubber, we expect strong demand in Europe and a weaker-than-expected demand in the Americas. We are confident that we can adapt to these changes with agility and remain committed to our guidance range of adjusted EBITDA at $340 million to $360 million, and adjusted diluted EPS of $2.05 to $2.20 per share, up 5% and 11%, respectively. In sustainability, we were recently notified that our EcoVadis rating has been raised from gold to platinum, the highest possible distinction. That means we earned a place amongst the top 1% of companies assessed by EcoVadis, one of the world's largest providers of business sustainability ratings. This ranking is quite prestigious with a well-respected NGO validating our tremendous progress. A huge congratulations to the whole Orion team on this accomplishment, thank you and well done. Looking at our two business units and starting with Rubber, our customers are gaining confidence as they look towards 2025. This, combined with the EU ban on Russian Carbon Black which begins in less than two months, shipping challenges from Asia to Europe, the seeming end of the U.S. trucking recession, and the industry restructuring in our value chain, all make for a very promising 2025 pricing cycle. We see customers already gearing up for the negotiations, perhaps preferring to wrap things up before the market strengthens further. Some are essentially kicking off the negotiations now, while others are in the framing stage, defining parameters for the 2025 negotiation. In terms of framing for our part, we are open to starting early, but we want to avoid holding volume for a customer and then being left at the altar at the last month. So we will be stricter in enforcing time-bounded offers, utilizing volume rebates and considering shifting production towards our specialty business to support the strengthening polymer market. In our Specialty business, we advanced two significant products in Q1. First, last quarter, we shared that we achieved technical milestones related to the ongoing debottlenecking of our high-performance, unique surface-treated gas black grades for the coatings and ink markets. I am happy to report that technical marketing and customer uptake of the additional capacity is going well, exceeding expectations. Second, last month, we also announced the introduction of a new conductive carbon aimed at batteries with more of a cost-based value proposition. Here, I'm happy to say this product has been qualified by a leading player in the lithium-ion battery space and commercial sales have picked up. Turning to Slide 4. With the EPA spending behind us, we will now focus our capital allocation on more financially rewarding and shareholder-friendly ways. I see capital allocation as management's top responsibility after safety. One priority for us is strategic and profitable growth. Here, we recently celebrated the groundbreaking of our new plant in La Porte, Texas, that is scheduled to be online in mid-2025. When completed, this will be the only facility in North America producing high-purity settling-based conductive additives to support the global shift to electrification. This site will produce conductive additives with about one-tenth the carbon footprint compared with alternative conductive carbon technology. As we've communicated in the past, this not only supports formulations for lithium-ion batteries, but is also an essential material in the high-voltage cables needed to build out electric grids around the world. With that, I would ask Jeff to provide additional insights into our financial results.

Thank you, Corning. On Slide 5 are the consolidated results for the first quarter. Compared with Q1 last year, volume was up in both businesses with Specialty volumes increasing in all regions and Rubber increasing in Europe and China. Gross profit and gross profit per ton were down. If you recall, as we discussed last year, in Q1 2023, we had some timing and one-time benefits totaling $9 million. Those did not repeat. We also saw an adverse impact this year from the regional rubber volume mix with less North American and more China volume. On a sequential basis, all metrics were up, especially of note, a significant increase in gross profit and gross profit per ton, which was up 28% to $492. On Slide 6, we look at the EBITDA drivers. Stronger pricing and volume in Rubber was primarily offset by a poor regional mix. On the cost side, the $9 million impact in timing and one-time items from last year, as previously noted, higher labor costs and operating costs, as well as fewer benefits from cogeneration. On Slide 9, Rubber volumes increased in Europe where we are already seeing the benefit of the upcoming Russian carbon black ban as well as in China, but this was mostly offset by lower demand in the Americas. Compared with Q1 last year, we experienced lower gross profit per ton despite strong contractual price increases. This was due to the timing issues previously mentioned: poor regional mix, namely the weaker North American volume, higher fixed costs, and lower cogeneration pricing. However, Q1 gross profit per ton of $435 was well above last year's average of $409. Reiterating what Corning said, we expect this higher level of gross profit per ton to continue across 2024. Slide 8 shows the impacts in a waterfall chart of the rubber business. Pricing was up $5 million versus 2023, due to the continued structural market improvement. While volume was up 2.5%, the impact of the regional mix adversely impacted EBITDA by $6 million. Cost impacts also offset the improved pricing. Just to be clear on this chart, the $5.8 million cost impact is split roughly between cost increases and lower cogeneration pricing. On Slide 9 is the financial table for Specialty. Volume increased across all regions and nearly all markets. Gross profit per ton decreased on a year-over-year basis, primarily due to the prior year timing impacts previously mentioned and higher fixed costs. As expected, our gross profit per ton was significantly higher than Q4 2023, up 34% to $659. While our trailing 12-month gross profit per ton has declined over the past four quarters, our Q1 level is above our trailing 12-month level, and we expect the curve will be turning back up as we move into the second half of this year. As we look forward, we also expect specialty volumes to continue stronger as market conditions improve and volume and mix moves towards higher-margin products. The surface-treated gas black products, which Corning noted earlier, are an example of this. Slide 10 shows the waterfall chart, Specialty EBITDA as discussed on the previous slide. Increased Specialty volumes were offset by the impact of favorable timing items from last year as well as higher operating and labor costs. Slide 11 shows cash flow for the quarter. We had an increase in working capital, but also a lower level of CapEx in Q1 compared with what we expect for the rest of 2024. Debt was down slightly, but since our trailing 12-month EBITDA was lower than our year-end 2023 EBITDA, our debt ratio increased to 2.4x, still within our targeted 2.0 to 2.5 range. We are comfortable with our debt level, as we made a concerted effort to lower it significantly in 2023. Slide 12 shows our expected range for cash generation and usage in 2024. For this year, the majority of our discretionary cash usage will go towards the La Porte plant. On this table, we have not shown any change in working capital for 2024. This is one area of risk as we saw in Q1, where working capital was up $26 million. We will monitor this closely as the year continues. With that, I will turn the call back over to Corning to discuss our 2024 guidance.

Thanks, Jeff. We're off to a good start, and I expect this to be another record year. Turning to Slide 13. We're reaffirming our guidance. Based on current conditions, we project 5% EBITDA growth in 2024, and an 11% increase in EPS. This would be our fourth year of growth. Let me close with a few points for you. First, the industry restructuring, which has been underway for years, will continue. Tire factories, new tire factories continue to be announced in North America and Europe. The EU ban on Russian Carbon Black starts in 58 days. The risks of a far-flung supply chain are obvious. The supply-demand balance continues to move in our direction, and a strengthening polymers market also tightens the rubber carbon black supply and demand curve. Second, Specialty demand is recovering. Third, our La Porte facility is on track for mid-next year, providing additional opportunities for expanding Specialty margins. And fourth, we take capital deployment seriously. We are committed to increasing free cash flow, maintaining a strong balance sheet, and deploying your capital wisely, providing increased returns through investments like La Porte, buying back shares, or reducing our leverage. And Ryan, with that, please open up the lines for questions.

Our first question is from the line of Josh Spector with UBS.

Corning, I was wondering if you could talk a bit about the volume trends that you're seeing in the market today and some of your forward expectations. Your comments seem pretty optimistic or maybe more upbeat on where demand is at. But it's pretty clear that your guidance assumption assumes no improvement. So how have things changed? And how does that compare versus what's baked into your guidance?

Sure. So we have never said that we saw a hockey stick necessary to achieve our guidance this year, nor do we really think there is the confidence in the marketplace to do that. That said, in Q1, there are positive developments. I'd say in the Specialty area, it's really quite broad across the market. For example, some of the higher-margin areas like coatings, distributors who are often serving coatings margins are customers, those margins are very high. But so are things like thin film, pipe, and so forth. You can see that balance in how our GP per ton has developed in Specialty. Broadly speaking, we think that it's going to continue down this path. I don't see customers being able to really stock up and restock in a big way. But I do think the fear of inventory is down a bit. In the tire space, you see, for example, in the North American market, increased purchases of tires, which are in the mid-teens, but you see tire production only up maybe like 4%. So they're still suffering from imports. We're still seeing the trucking volumes, while perhaps now bottoming, they haven't really come back stronger. Over the course of the year, it's possible that trend has stabilized, and we'll have to see the rate at which it improves from here. We do need a little bit of improvement, right, from an $85 million run rate to hit our guidance. So there's some growth expected in our numbers.

Yes. And I guess maybe on that last point, trying to take a little bit more near term here on the second quarter. You had some pretty easy volume comps in Specialty and Rubber. And I mean, there was some noise in the first quarter from cogen credits last year. But I guess a simple way to ask this is, do you expect EBITDA to be up year-on-year in Q2 with the higher volumes and maybe improving profitability in Rubber? Or are there other offsets we should be considering?

I think on a clean run rate basis, we're in a good position for next year with improved margins and an improving Specialty market. Does that help, Josh?

A little bit, I guess, trying the other way just on the second quarter. I mean, I think volumes could be up something like 10%. I assume that would lift earnings year-on-year. What would be wrong with that thinking?

Just in terms of last year, I think you need to consider what the power rates were last year and any timing impacts that might affect our profit and loss statement. For instance, if a specific input cost fluctuated sharply and quickly, that can create a delay in our pricing models. In general, I'm not trying to be pessimistic. I expect we'll see a stronger quarter in Q2, which is reflected in our guidance without disclosing specific numbers.

And Josh, this is Jeff. Just one additional thought. If you think about the midpoint of our guidance relative to the last three quarters of last year, we clearly need significantly higher EBITDA in the last three quarters to hit the midpoint of our guidance. We would need to be at about $265 million in the last year. In the last three quarters, we were at roughly $230 million, $231 million. So there's a significant ramp over the three quarters, whether you see some of it in the second quarter or it's more back-end loaded, we'll have to see. We did have a bit of a stronger second quarter last year and then the third and fourth quarters weren't nearly as strong. So you might see more growth in the third and fourth quarters year-over-year.

Our next question is from the line of John Roberts with Mizuho Securities.

It's been a while since we've had kind of normal seasonality, I guess. Would you characterize the Q-over-Q, the March quarter versus the December quarter, 10% volume growth overall, 8% Rubber, 15% Specialty, normal seasonal pickup, or better or worse than normal seasonality?

I would describe the Specialty as a little bit better than normal. I looked back over the time. There were a few times we had a bigger, let's say, EBITDA step change, but that's when we saw power prices really move sharply in Europe or a special circumstance like that. So I put the Specialty at a little bit better than your normal seasonality.

And then industrial rubber has a fair amount of automotive OEM exposure. And it seems like at least in the developed markets, North America, Europe, auto OEM has slowed here. Are you seeing that in your industrial Rubber products?

Well, as I said, we see North America a bit slower and some of that is probably in the OEM space. Some of that I think is the impact of import tires on the replacement market. It's difficult for us to tease out exactly where that is. But I'd say North America is a little bit less. In Europe, I'm not saying the market is dramatically better than North America. It's just I think the Russian ban has really tightened things up.

Okay. And then lastly, I know China is not that big, but you've got new capacity there and you sounded pretty upbeat about China. It's confusing to a lot of companies what's actually going on. What's your read on the sustainability of the strength in China right now?

So I think sectors of the Chinese economy that are really set on exports are important. You can look at whether there's a recovery in European consumer demand, North American consumer demand, and so forth. In general, maybe it's like the story of the purchasers' matters index, slightly above 50%, but not much. So I think it's a slightly improved situation and sentiment from where I was last in November, but I wouldn't read into it as extremely bullish for that there isn't still some negative sentiment in that market.

Our next question is from the line of John Tanwanteng with CJS Securities.

I was wondering if you could talk a little bit more about pricing and the remaining capacity you have in '24 ahead of this Russian import ban. Exactly how much upside are you seeing there or movement, I guess, are you seeing there first in '24 and two, is it impacting '25 pricing negotiations if those have started yet?

Sure. In Europe, specifically, many of the premier tire brands had already locked in their supply without Russian Carbon Black. So I see we do see opportunities to pick up some additional volume there. Competition is really with Indian supply in that space. It's a positive environment. It's not unchecked positivity, I would say. I think definitely all this sets up for a very strong negotiation for next year.

Okay. And have those discussions started yet for next year? Or is that later this year?

Oh, yes. I tried to make that clear. Some people are in the framing, and some people are talking numbers. So that's already happening.

And also, congratulations on the platinum rating. I was wondering if that impacts your pricing ability? Or is it just more nominal at this point?

I think that for many of our customers, they are really concerned about sustainability, and that is their preferred metric for sure. I think it really is just another validation that we're a leader in this industry, that we're a supplier you can count on for the long haul. That sense of reliability and long-term commitment surely is worth something. I think people have learned the risk of not locking up serious suppliers. So I think it's a net positive for us.

Okay. Got it. What areas do you still see weakness in? And what are the prospects for improvement in those areas as you go through the year?

Yes. Well, I would say North American tires is still a weaker area. Tire purchases are up much more than manufactured. So let me clarify that when we say North American tires, I mean North American tire manufacturing, and that relies on the brands with really a better cost of ownership value proposition to customers, start earning back people's business as people adjust to the pricing changes that have happened in the market and incomes are up, people sort of accept the new normal. I think that's a big opportunity for the marketplace. I mean, in general, in the specialty area, almost every market is up some more than others. For example, in North America, offshore wind and related growth, connecting far-flung wind farms as that progresses will increase demand in that particular market. Does that help, John?

It does. And then finally, just an update on capital allocation, you mentioned was important. I'm just wondering where is it most likely that you deploy excess cash in the next 6 to 12 months?

All right. So when we think about capital allocation, we consider our cash flow, what are the other uses for cash, and also our share price relative to different ways of assessing its value. Of course, we consider the balance sheet and not just the balance sheet today, but what are the exposures to that working capital, as Jeff mentioned, with oil prices, that sort of thing, and significant milestones. We were not in the market in the first quarter. If things play out relatively stably for this year and continue the trend, we're likely not to be in the market. We see the share price as significantly undervalued, presenting a good opportunity. With the EPA spending, we don't have that draw on us, and we have positive cash flow, but it's not of the magnitude that we really like. We did see our balance sheet ratio move up to 2.44. That's really an artifact of trailing twelve-month effects. Nonetheless, that was a little bit higher. On the balance of that, I think we're unlikely to be in the market this year, but things may change as the year plays out.

Our next question is from Josh Spector with UBS.

I got to try again. So I'm definitely reading here that you don't want to be specific on Q2, but I do want to walk through some of the moving parts, I guess. Because obviously, first quarter had cogen impacts that you specifically called out. Europe gas was higher last year, but it was flat through the quarter. Oil was lower last year. It's higher now. I'm trying to think about the energy side of things. Oil is probably a little bit of a positive, while gas as it relates to Specialty is probably a little bit of a negative. Is there anything we should look at outside of volume growth that should be drivers there? And I guess I'll ask again specifically if Q2 EBITDA could be higher year-over-year? And I'm focusing on that, because the second half of last year, the comps are easy. I would hope you're going to be higher year-over-year. Q2 is more informative of the run rate for us, which is why my focus is there. So any additional color would be helpful.

Josh, this is Jeff. Let me give you a little more clarity on Q2 last year. Our EBITDA last year in Q2 was $87 million. Included in that was about $4 million of one-time items. We also had some cogen benefit because of some forward sales and power that we had set up in late '22 that benefited all of '23, which was probably about $10 million. So you can kind of think about that as $2.5 million a quarter. Between that $2.5 million and $4 million the operating result last year would have been around $80 million. I want to get us all on the same starting place.

So do we expect to exceed that number? Yes, we do. Do we necessarily think we're going to blow past $87 million? Well, we certainly aspire to. But there's that element. There's the forward power sale that we've talked about before, but just to remind us, that's in last year's numbers.

Yes. So if I look at the earnings per ton and assume that some of that's baked in, we think specialty normalizes year-on-year, maybe slightly better than the first quarter Rubber, you have some benefit. I guess the other piece comes down to volumes. I think previously asked about it, but year-on-year, there's an easy comp that should be up 10-ish percent. Is that a fair way to think about it?

I would expect specialty GP per ton to continue to improve from where we are today. I would expect the Rubber GP per ton to hold where we are just because the majority of the contracts are locked in at this point. Yes, volume growth from there as the year progresses on a modest level is what takes us into higher levels. Jeff, anything you want to add?

No, I think you hit that well. We will continue to see weakness in volume in the Americas, we believe. But again, that's built into the GP per ton number that we gave you.

All right. So I think we have covered everything. Thank you all for your questions.

Ladies and gentlemen, there are no further questions. I now hand the conference over to Corning Painter for his closing comments.

Well, thank you all again for your time today. As an industrialist and myself, I'd just like to thank you all for the trust that you've put into us. Thank you again for listening and for the thoughtful questions that we received as well. Please reach out if you have any further questions; we'd really be happy to hear from many of our investors. Thank you all, and have a good rest of your day.

The conference of Orion SA has now concluded. Thank you for your participation. You may now disconnect your lines.