Earnings Call Transcript - OEC Q2 2024

Operator, Operator

Greetings, and welcome to the Orion SA Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Kapsch, Vice President of Investor Relations. Thank you. You may begin.

Christopher Kapsch, Vice President of Investor Relations

Thank you, Sachi. Good morning, everyone, and welcome to Orion's conference call to discuss both second quarter 2024 results and to provide a mid-year update on some strategic context, which we believe will be helpful for the investment community to consider. This is Chris Kapsch, new to leading Orion Investor Relations efforts. I know many of you from prior roles and look forward to working with you in this new capacity. Joining our call today are Corning Painter, Orion's Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. We issued our 2Q earnings after the close yesterday. We have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, I am obligated 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 the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during this call. In addition, all forward-looking statements are made as of today, August 2. The company is not obligated to update any forward-looking statements based on any new circumstances or revised expectations. All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release. And with that, I will turn the call over to Corning Painter.

Corning Painter, CEO

Thank you, Chris. Before going through the detailed presentation, let’s jump to Slide 4 and address the key issue. Why was our Q2 EBITDA below our expectations, and what is our plan moving forward? Our revised guidance for 2024 indicates a midpoint that is now $25 million to $30 million lower than what we anticipated at the start of the year. The main reasons for this shortfall are lower-than-expected volumes in our Rubber segment and challenges related to cogeneration. On a positive note, our Specialty business is performing well with increased volume in Q2, and the decline in GP per ton compared to last year does not concern me. This was largely due to timing effects and some one-off items from the previous year, as well as lower cogeneration and higher maintenance costs. Many of these factors will be reflected as higher costs in our EBITDA analysis for this segment later on. The Specialty business is improving, driven by stronger polymer and coatings markets, which led to a slightly negative mix during the quarter, but that is acceptable as we are responding to customer demand. The GP per ton remains within our expected range. Now, let’s shift our focus to the rubber business. Importantly, pricing has increased year-on-year, and we anticipate gains in 2025 as well. While volume has remained flat, the underlying situation is not as encouraging. Demand for Rubber Carbon Black in our key markets is weak due to three main factors. First, consumers are adjusting to higher inflation by opting for lower-value brands, which negatively impacts us. Second, there has been a significant rise in imports in North America and Europe, which I will elaborate on shortly. Third, trucking activity depends on manufacturing, and while there might be signs of bottoming out, the recovery is slow, affecting truck replacement tire and OEM demand. Regionally, rubber volumes are down in North America and Asia, but increased in Europe, primarily due to volume gains from last year’s negotiations. To clarify, volumes in Europe and our other key markets are below expectations for the reasons I mentioned. Our cost performance in the rubber segment is influenced by cogeneration issues, prior year one-offs, timing, and heightened costs due to inflation. More details on costs will be provided later, but some of these costs relate to maintenance expenses. In total, the lower rubber volumes contribute over $20 million to the decrease in our initial 2024 guidance. As we look ahead to the second half of the year, we expect the Specialty segment to continue its positive trajectory. We foresee only a slight improvement in Rubber volumes and expect to build inventory in preparation for 2025, which will assist with cost absorption. Our cogeneration has also been a challenge, as our utility partner at the Louisiana plant experienced intermittent downtime in Q2 and is expected to remain down for much of Q3. Furthermore, European power prices have fallen short of our expectations. Turning to 2025, there are several reasons to anticipate an improvement in rubber volumes, including our continued expectation for a favorable pricing cycle in light of the industry's restructuring. I believe that broadly imposed higher tariffs in our key markets are likely, which will support demand and enhance local supply security. Achieving better pricing remains a primary focus, and I’ll provide more information on this. Looking forward, we are set to open two new facilities, one of which is [indiscernible] and the other in La Porte during the second half of next year. These projects are top priorities for us, and as shown on Slide 5, we anticipate significantly reduced CapEx until we complete them. We will also work on debottlenecking and expanding capacity for our most differentiated specialty grades, which usually requires minimal capital investment. In the rubber sector, we are enthusiastic about introducing sustainable grades, and I’ll share more details in future calls, though we anticipate modest capital needs for this initiative. Given our lower projected capital spending, the expected recovery in our specialty business, the ongoing restructuring in rubber, and input from our shareholders, we have opted to resume share repurchase activity at a moderate pace. Our excess free cash flow might be slightly negative this year due to working capital fluctuations, but we believe this is the right decision. As noted on Slide 6, we’re on track for another solid EBITDA year. While we find the results disappointing, we are likely to achieve underlying EBITDA growth when excluding timing effects and one-time benefits, despite a demand environment far from mid-cycle conditions like those experienced in 2018. Compared to those levels, we estimate the rubber volume alone could yield around $60 million to $75 million of additional EBITDA. Our Rubber segment profit margins have remained strong even with the weak volumes. The sell-through of replacement tires to consumers has been acceptable but worsened during this last quarter, and inventory builds have not kept pace with end market unit sales. Tire build numbers in Western markets remain significantly below pre-pandemic levels, attributable in part to a surge of low-value imports and consumers trading down due to inflation. We do not see this as a structural issue, and we believe the onshoring of capacity in North America and Western Europe will persist. We have faced similar volume shifts before; another tire company has linked the recent surge in imports to concerns about potential tariff increases, but I do not believe the U.S. or the EU will let go of their automotive markets. For Orion, these challenges in end markets have been intensified by the lower-than-anticipated Cogen contribution, coupled with costs largely due to planned and unplanned maintenance turnarounds and inflation. Some of the turnaround activities are tied to ongoing upgrades of our manufacturing assets, which will help reduce maintenance costs and improve reliability and throughput moving forward. For instance, in Q2, we replaced an outdated filtering system in one of our lines in Belpre, Ohio, which caused a month of downtime. Given the challenging environment this year, we will intensify our efficiency initiatives to reduce costs and meet our revised guidance. On Slide 7, this report serves as a timely opportunity to outline our expectations for 2025, as the annual negotiations for tire maker supply contracts typically begin in late summer. We noted in our Q2 earnings call that some discussions had already started, but we felt no urgency to rush into agreements. We are cautious about binding ourselves to volume commitments during extended negotiations, and the initial discussions have concluded without resolution, reflecting our commitment to enforce time-bound offers strictly. Formal negotiations are ongoing with several major customers, but I would advise investors not to expect swift conclusions. Some negotiations may take longer as we seek a return on capital for our ongoing investments. We are optimistic about this year's negotiation cycle for several reasons. First, the ongoing restructuring within the industry sees tire capacity increasing in our key markets while carbon black capacity additions remain limited. Second, our focus is on negotiations for 2025, not 2024. Third, there are multiple encouraging indicators: mileage data remains robust, the freight market is stabilizing, the ban on Russian imports is now fully in effect, and Belarus has recently been included. With the recovery in specialty, some carbon black capacity will transition back from rubber to specialty grades. Fourth, recent EPA regulations effectively reduced the domestic industry's capacity by several percentage points, and the emission control systems are prone to outages, often affecting entire plants. Fifth, shipping has become more expensive and less reliable. Finally, potential increases in tariffs on imported tires in North America and Europe could boost demand locally, and I believe this is likely. All these factors give us confidence regarding the Rubber segment as we head into 2025. Thus, we plan to build inventories in the second half of the year, which should enhance our profit metrics due to improved operating leverage and lower unit costs. While our Rubber segment has made significant contributions to our EBITDA growth in recent years, we expect the Specialty segment to continue recovering. The overall market recovery should improve the segment mix, and with innovation-driven growth, the Specialty segment will be crucial for Orion's medium-term growth strategy. This expansion does not require significant additional growth capital beyond the ongoing investment in La Porte. Switching topics, I want to address sustainability, where we feel our efforts have been misunderstood by the investment community. Despite the common perceptions about our industry, we have made significant strides in sustainability. We see substantial opportunities here as our downstream customers increasingly aim for, or publicly commit to, circular practices. We've achieved Platinum grading, positioning us in the top 1% of all companies evaluated for sustainability. We encourage you to review our latest sustainability report published last week. A few highlights include completing upgrades at all of our U.S. plants ahead of others, being the first major industry player to produce carbon black from entirely biocircular feedstocks, making a small investment in a European tire recycling firm to scale production of tire pyrolysis oil for Orion's use, and proactively investing in technology in South Africa to process treated wastewater for industrial purposes. This initiative will help the water-stressed community, reducing potable water usage, improving our reliability, and cutting costs. Lastly, our low emissions conductive carbons facility in La Porte, Texas, is set to begin operations targeting the battery and growth markets in 2025. All these efforts position Orion as a leader in delivering commercially viable sustainable products. In summary, we are confident in our foundation and our journey toward unlocking much greater earnings potential at Orion. Now, I will hand the call over to Jeff.

Jeff Glajch, CFO

Thank you, Corning, and good morning, everyone. Slide 8 covers the company's financial results for the second quarter. Overall volumes improved 3% compared to last year. This was driven by a 17% recovery in specialty volumes, which more than offset a small decline in rubber volumes. The overall EBITDA performance compared to the prior year was negatively impacted by softer-than-expected rubber volumes, a lower cogeneration contribution, one-off benefits last year, timing issues, and negative absorption, namely that we did not build inventory as we had planned during the quarter. To provide a little more transparency on the second quarter, we had a strong April, but both May and June fell well short of expectations. On to Slide 9 is the company's year-over-year EBITDA bridge. As I noted during our Q1 call, a more normalized earnings level for last year's second quarter was $80 million after adjusting for one-time items and the forward sale of power at elevated prices. You can see that both volume and price/mix contributed positively overall. Timing issues, primarily related to pass-through formulas and differentials, higher maintenance costs, a portion of which are intended to improve our operating leverage over time, and cogeneration were the other primary factors. Slide 10 shows our Rubber segment's 2% year-over-year decline in volumes and an 8% sequential decline. As Corning referenced, the inflation-driven consumer trade down in the passenger car tire market was a key contributor to the softer volumes, as well as weaker tire demand in a softer Chinese economy. The consumer trade down to lower-tiered brands and the related importation of lower-quality tires from Southeast Asia represents a negative impact for Orion's customer mix in both North America and Europe. Gross profit moderated just slightly, owing to the lower Cogen, but was supported by the sturdiness of our supply agreements, which included higher year-over-year pricing. We continue to expect full-year gross profit per ton to exceed the 2023 level of $409. Slide 11 shows the EBITDA bridge for the Rubber business, which begins from a year-ago level that excludes one-time items and the benefit of the forward power sale. For this segment, you will see that volume, despite being lower, contributed slightly positively to EBITDA as a result of favorable geographic mix. Pricing was a more positive contributor year-over-year, reflecting the improved annual contracts. The negative Cogen contribution in this year's second quarter was a big factor in the Rubber segment EBITDA bridge. Other costs include timing, higher maintenance, and inflation. Switching to Slide 12. The volume strength in our Specialty business, up 17% compared to last year's second quarter, reflected a broad-based demand recovery across essentially all geographic markets. Lower profitability metrics were a function of non-repeating benefits in last year's second quarter, as well as a lower Cogen contribution and higher fixed costs. Reduced Cogen, along with adverse absorption, contributed to the slight sequential decline in gross profit. Slide 13 shows the Specialty segment's year-over-year EBITDA bridge, again, from a more normalized year-ago level before one-time benefits. The big contributor here was a broad-based volume recovery, slightly skewed towards the lower-value markets. Higher costs this quarter were primarily adverse timing effects in contrast to last year's favorable timing effects. On to Slide 14, we look at the year-to-date cash flow, which was negative in the first half. This was partly due to the normal seasonal volume-driven working capital increase, as well as higher cash taxes. Because of the negative year-to-date free cash flow, our net leverage ratio is just above our targeted range. However, we are very comfortable with the absolute net debt level. With that, I will turn the call back over to Corning.

Corning Painter, CEO

Thanks, Jeff. As mentioned before and shown on Slide 15, we are lowering our full-year guidance to align with Q2 results and our overall cautious outlook for our Rubber segment, which is partially counterbalanced by better specialty results than we anticipated. Our updated adjusted EBITDA guidance range is $315 million to $330 million, and we have adjusted our EPS guidance range accordingly. Our estimated effective tax rate has slightly increased due to the mix of our earnings across different jurisdictions this year. We still project capital expenditures to be around $200 million, including the rise in maintenance capital we've discussed and ongoing progress in our conductive carbon investment in La Porte, Texas. Overall, our revised guidance suggests a slight improvement in rubber demand from Q2 levels, based on some positive market indicators and feedback from certain customers. The profitability of the Rubber segment is expected to remain strong, with better fixed cost absorption. While we don't provide quarterly guidance, we note that our Rubber segment is not likely to experience as much seasonality in Q4, as seen in the last three years when EPA project tie-ins significantly impacted those results. The Specialty segment is forecasted to continue seeing profit growth year-over-year, driven by recovery in end market demand, absence of destocking in some markets, and easier comparisons to last year. We expect some sequential profit per ton improvement due to a favorable mix, as demand for higher-value products is anticipated to recover more significantly, aided by the commercial introduction of newly qualified specialty products. Looking ahead, our medium-term goal of $500 million in adjusted EBITDA capacity is progressing well. Under mid-cycle conditions, we anticipate about 150 kt increase in rubber volumes and 20 to 30 kt increase in specialty volumes, contributing an additional $60 million to $75 million and $20 million to $30 million, respectively. We also foresee an additional $20 million to $30 million from further mix and productivity improvements. We believe there’s $20 million of upside from ongoing issues we are addressing. The addition of $40 million to $45 million in EBITDA potential from La Porte brings us closer to our goals. On Slide 16, before considering the resumption of buyback activity, we expect positive free cash flow in 2024, although the expected level will be lower than previously forecasted due to decreased EBITDA, slightly higher working capital needs, and cash taxes. As noted earlier, Slide 5 provided directional expectations for capital expenditures over the coming years. We do not plan to allocate capital towards new greenfield rubber or brownfield expansion projects. We will likely want to fully ramp up La Porte before considering any significant new investments in specialty. Other growth opportunities we see in the next couple of years are expected to be capital light, allowing for significant free cash flow during that time. Our maintenance capital expenditures will focus on problematic equipment or operations that have outlived their useful life. This spending should reduce maintenance costs in the future, enhance plant reliability, and improve throughput. Our effective capacity has declined over the years due to a lack of maintenance capital in the business’s past. This is one of the reasons why we believe improved pricing is justifiable and essential for growth. Given reasonable expectations for EBITDA growth over several years, stable maintenance capital spending, and a decrease in growth and discretionary capital expenditures in the next two years, we are anticipating a substantial improvement in our free cash flow, particularly in 2025 and beyond. Considering our stock price, we believe our shares are undervalued. Given our confidence in the carbon black industry's fundamentals, our competitive position, and the outlook for 2025, along with our overall strategic direction, we see share repurchases at current valuations as a wise use of capital. With that, we'll turn it back to Sachi for Q&A. Thank you.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. The first question is from Josh Spector from UBS. Please go ahead.

Chris Perrella, Analyst

It's Chris Perrella on for Josh. A question, I guess on the volume cadence in the second half of the year. With things being softer, do you see volumes down in the fourth quarter for both Specialty and Rubber? And how should we think about that?

Corning Painter, CEO

So looking forward, first thing I'd say is July was on track for us and a bit of a recovery, especially I'd say, rubber; it's only one month, but it was an improvement. We would expect some seasonality still in Q4, but just not as much as we've seen in the past, given the absence of a significant EPA style high in that time period. Does that answer your question, Chris?

Chris Perrella, Analyst

Yes. And then I just had a follow-up on the cash flow and the buybacks. Given the inventory build and sort of the absence of working capital, how do you opportunistically balance the buybacks? And would you guys increase leverage a little bit to do some of those opportunistically in the second half?

Jeff Glajch, CFO

Hey Chris, this is Jeff. Yes, we would be willing to have a slight increase in leverage if we needed to do that. But it's not a meaningful impact both on an absolute and on a leverage ratio basis.

Chris Perrella, Analyst

What were the maintenance costs in the second quarter, and will those costs decrease in the third and fourth quarters? What were the one-off maintenance upgrades that you mentioned?

Corning Painter, CEO

Yes. We had simply planned more maintenance in the first and second quarter. Of course, that was in our guidance. But we also had some unplanned maintenance in the second quarter. We have less planned maintenance going forward. We expect less unplanned maintenance going forward. So things like Ohio, the change out of that filtering system, we did a lot of other maintenance at the same time, which is why we had the downtime. That's the kind of thing that can make one quarter higher than another.

Chris Perrella, Analyst

Is there a way to quantify kind of the unplanned maintenance impact?

Corning Painter, CEO

I'd say we're in the range of $2 million to $3 million in the quarter.

Chris Perrella, Analyst

Okay. Thank you very much. I appreciate that.

Corning Painter, CEO

You're welcome.

Operator, Operator

The next question is from Laurence Alexander from Jefferies. Please go ahead.

Daniel Rizzo, Analyst

This is Dan Rizzo standing in for Laurence. Regarding the relative strength in specialty, are there any end markets that are performing better than others? Is there anything that's outperforming or underperforming by end product?

Corning Painter, CEO

Yes. So the coatings area has been relatively strong. That's more than just automotive, but I'd say, in general coatings as well. We speak of polymers, but polymers is a really broad market. So let me say, some of the lower-value areas in that area, Masterbatch going into those applications was strong for us. On a relative basis, actually, ink was a little bit stronger than usual. So those were a couple of areas that looked good in that quarter. I just caution people, there's some movement quarter-to-quarter where we see that buying activity.

Daniel Rizzo, Analyst

Okay. Do you publish or release your capacity utilization in Rubber Black, and what is your assessment of the industry capacity?

Corning Painter, CEO

We don't speak for the industry. There is some third-party data you could go for, but we were in, let's say, the mid-70s. So that's relatively low compared to where we would see mid-cycle for sure. But with the current conditions, that's where we were.

Daniel Rizzo, Analyst

Would you consider mid-cycle like mid-80s or higher? I mean I think we've seen up to like mid-90s in the past, if memory serves. I mean going back a couple of years?

Corning Painter, CEO

Yes. No, I think mid-90s, if you talk compared to nameplate would be really hard for this industry, maybe as maintenance continues to catch up for others. No, I would expect to get it in the high upper 80s kind of area. So say 85 to 90 in that range. And to be clear, we were like a little bit below exactly midpoint in the 70s. So there's substantial leverage for us there.

Daniel Rizzo, Analyst

Okay. Thank you.

Corning Painter, CEO

You're welcome.

Operator, Operator

The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Jon Tanwanteng, Analyst

Hi, good morning. Thank you for taking my questions. I was wondering if you could give us a little more color or maybe a snapshot of the economics of tire imports versus domestic production. How that changes as higher shipping costs maybe flow through supply chains and inventories? And if you think that's going to change consumer minds at all? Or if that's not going to matter just given maybe importers may try to push through more volume ahead of what might be tariffs on that kind of stuff?

Corning Painter, CEO

Sure. Maybe just an anecdotal story. There's a young person in our life, not a direct child of ours, but someone in their early '20s getting started in life. They had a lot of issues with their vehicle, and they went to get it inspected, which meant they then had to go get some new tires. And they recounted how the tire salesperson said, 'I'll sell you the same tire if you really, really want it. But if you would spend like $10 or $15 more, you could get a much better tire.' I think that conversation is playing out, and that ultimately gets people to a value proposition that's a little bit more long-term as people get used to the inflation and wage growth improves and so forth relative to that as we see inflation coming down. In general, I think what you see is really low-value import tires coming through. As we see tariffs coming in, it means to hit the same competitiveness point. We have to go to even cheaper, lower value, and less reliable tires, or I think what we're going to see is just consumer sentiment moving back towards the higher-value, really lower cost of ownership products.

Jon Tanwanteng, Analyst

Got it. And to be clear, are you expecting on the trucking and manufacturing side improvement through '24 and '25, just given some uncertainty in the macro here that's appearing to crop up?

Corning Painter, CEO

Yes. If you look at the freight wage data, it certainly suggests that we bottomed and we're coming up. We're beyond even the second derivative. The first derivative has improved, but there's a long way to go. So we see that coming; I think the data speaks for itself that right now, that's a gradual improvement, but it does look to be improving.

Jon Tanwanteng, Analyst

Okay. And then finally, just in terms of capacity and how you're positioning it, are you more likely to be switching rubber reactors to specialty as that trajectory continues to improve? Or is there a change in the expectation there?

Corning Painter, CEO

Well, we'll see as this plays out during the course of the year, and we'll put effectively Rubber and Specialty business in competition for our reactor hours. We'll see how that goes. But my point would be, if there is softness ongoing in rubber, I don't think there will be for all the reasons I said that would certainly give you a place to move it. But also beyond that, just simply rubber even improving, and specialty improving at the same time as we're seeing means just naturally some of that capital or that capacity is going to be reallocated and tighten up the rubber market as well.

Jon Tanwanteng, Analyst

Got it. Thanks, Corning. I'll jump back in queue.

Corning Painter, CEO

Thanks Jon.

Operator, Operator

The next question is from John Roberts from Mizuho. Please go ahead.

John Roberts, Analyst

John Roberts from Mizuho. I’m looking at the chart on Slide 12. It seems that gross profit per ton for specialties has reached its lowest point. I believe you mentioned it will improve sequentially, but it appears that the improvement is more due to the mix rather than price-out spread. We are still far from where we were a little over a year ago. How can we significantly increase the margin? Are there many price increases planned, or is the expectation that we will gradually improve through mix?

Jeff Glajch, CFO

Hey, John, Jeff. A couple of things. If you're looking at the trailing 12 months number. First off, you've got a pretty rough Q4 2023 in there, which is kind of dragging it down. That's the first thing. Second thing is the last two quarters, this past quarter has been above that. Actually, the last two quarters have been above that 609 number. So we would expect that will turn up in Q3. And certainly by Q4, we should see a meaningful uptick. I think we talked last call about our expectation for the GP per ton for specialty to be somewhere in the $650 million to $700 million range, which we would be and if it wasn't for that one really rough quarter in Q4, which was under $500 million. So you should absolutely be seeing that turning up as we go through the rest of the year.

John Roberts, Analyst

And we need a much stronger volume recovery to get back towards a 900-ish number?

Jeff Glajch, CFO

I don't think we consider the 900 million as a typical figure. That number had a significant positive impact due to Cogen. If we look back at 2022 and early 2023, I don't think we can expect to reach that again. A year ago, when our volumes decreased in '22 and early '23, it was primarily the lower-end specialty products that suffered. As Corning mentioned earlier, we've seen improvement in some lower-end polymer products and in the lower-end coatings. Therefore, we believe the 900 million is not a sustainable figure. While we would aim for it, realistically, we're looking at 650 million to 700 million this year, with some potential for upside, but likely not reaching the 900 million mark.

John Roberts, Analyst

All right. Thank you.

Jeff Glajch, CFO

Thanks, John.

Corning Painter, CEO

Maybe I'll just build on that. So we don't see an upper limit on what can be as we drive innovation and upgrade reactors and so forth, we can still move that on. It wasn't really obvious at the time where European electricity prices were going to land. They've come down significantly. And so that part of the cogeneration story has been difficult there. And just keep in mind, because of the relatively small volume of specialty where compared to rubber, a movement in power prices has a much bigger impact on the GP per ton for specialty than in rubber. Next question, please.

John Roberts, Analyst

Great. Thank you.

Operator, Operator

The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Jon Tanwanteng, Analyst

Yes, I was just wondering if you could discuss conditions on the ground in China right now? And what your expectations are in the guidance that you've provided?

Corning Painter, CEO

If we discuss the macroeconomic situation in China, I would say that there is still a significant lack of economic confidence, with people delaying investments and concerned about trade barriers and export opportunities. The government is now attempting to stimulate domestic demand, which I believe would ultimately benefit China. That’s the broader context. For us, the focus is on our plant, where we've faced startup challenges as I have mentioned before, as we work towards producing higher-grade materials. We’ve made some progress and have one more scheduled outage to advance this further. Thus, our opportunity lies in getting back on track with our plans. Overall, the macroeconomic situation in China is not very strong. However, OEM production appears to be relatively robust as they continue to export vehicles. There has been recent news regarding their effects on the market in Thailand, but generally speaking, the market remains challenging.

Jon Tanwanteng, Analyst

Okay. Great. And maybe just a little bit more on what the mix is there in OE versus tire. And how do you expect that to trend?

Corning Painter, CEO

So generally speaking, the amount people drive a car in China is relatively lower than, let's say, in the United States and Europe. So the impact of OE is higher. We talk about here, you buy a car, you probably change the tires 3x or 4x. I would say it's more like 2x or 3x in Asia typically or in China, in particular. So the replacement market has always been a little bit weaker. And we see overall tire for local tire companies, which is where we are in the qualification process, that that's tough going right now.

Jon Tanwanteng, Analyst

Got it. Thank you.

Operator, Operator

There are no further questions at this time. I would like to turn the call back over to Corning Painter for any closing remarks.

Corning Painter, CEO

Well, first of all, I appreciate everyone's time and joining our call today and your very good questions. It was a challenging quarter. But when you have a quarter like that, it's important that we get the questions out. We'd address them. We think the underlying business is very strong. And the more we can talk to that transparently, the better this is going to be. We value our shareholder views and we look forward to speaking to you over the next couple of days and have some upcoming corporate access events, including Mizuho's Conference in New York on August 14th, the UBS Global Materials and Jefferies Industrial Conferences in New York on September 4th and 5th, as well as some regional MDRs that we have in the pipeline in coming months. Thank you again.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.