Q3 2019 Earnings Call
Greetings and welcome to Orion engineered carbons third quarter 2019 earnings conference call.
At this time, all participants are in listen only mode.
Next question answer session will follow the formal presentation.
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I'll now turn the conference over to Diana Downey, Vice President Investor Relations Ms. down if you may now be get.
Thank you operator, good morning, everyone and welcome to the Ryan engineered carbon conference call to discuss our third quarter 2019 financial result.
I'm, Diana Downey, Vice President Investor Relations.
With us today, our Corning painter, Chief Executive Officer, and Charles Herlinger, Chief Financial Officer, We issued our earnings press release after the market closed yesterday and have posted a slide presentation to the Investor relations portion of our website.
We will be referencing this presentation during this call.
Before we be Dan I remind you that some of the comments made on todays call, including our financial guidance are forward looking statements. These statements are subject to the risk and uncertainties as described in the company's filings with the S. E C.
Actual results may differ materially from those described during the call.
In addition, all forward looking statements are made as of today November 1st and the company does not undertake to update any forward looking statements based on new circumstances or revised expectation.
Also 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 will now turn the call over deporting painter.
Q Diana good morning, everyone and thank you for joining us for third quarter 2019 earnings Conference call I will start todays call by providing general comments, our performance and our positioning in the current macro economic environment and industry backdrop.
Our retiring CFO Charles Herlinger will then provide detail on the financial results and related matters for 2019.
Then I'll come back and discuss the segments and share. Some closing comments, we will then be happy to take your questions.
Before getting started though I'd like to thank Charles for his leadership to this company from the very start.
And our recent announcement, we talked about Charles as many accomplishments, including going public converting to U.S. dollars in U.S. gap.
I'd like to add my personal thanks for Charles tremendous support and there were a poor we have built during my first year.
Thank you Charles.
I'm very pleased that Lorin Crenshaw, we'll be taking over as CFO to your Ryan group at the start of next week had Charles his retirement at the ended the year facilitating a smooth transition.
Worn brings a wealth of public company finance and broad chemical sector experienced here right.
He is a strong leader a team player and we're looking forward to his joining our management team and working with Charles during the transition period.
Turning to slide three.
Consistent with our forecast at the beginning of the year, we've seen weakness in Asian markets and with the automotive Oems.
Other key markets have weakened as the year played out along with a softer broader economy.
We navigated this challenging market environment to achieve strong cash generation and strong realize rubber segment pricing by focusing our attention on the areas within our control Orion's operating performance continued to generate more than enough cash to fully fund or dividends, we remain confident.
Determine to ensure that Ryan will emerge from this slowdown stronger and better position competitively to take advantage of our future growth opportunities.
In Q3, Ryan's adjusted EBITDA was $68.1 million with specialty at 30 million in rubber carbon black at 38.1 million without the unfavorable FX impact related to the stronger dollar which was nearly all translational Orion adjusted EBITDA would have been 71.
<unk> million dollars pretty much in line with the prior year.
We expect conditions to remain weak through the rest of 29 team.
Against this backdrop the stability of replacement rubber tired demand continues to provide a solid underpinning for our business as a whole.
As a result of these market dynamics, we're tightening our 29, King adjusted EBITDA guidance range to $265 million to $275 million.
Before we review the quarter I want to share with you how we've positioned to Ryan to operate effectively in this environment.
Slide four shows that we've positioned the business for the future by taking a number of key actions.
We implemented a leaner management structure, where leaders of our global business units also have regional responsibility and we executed a reduction enforced focused on senior roles and simplification.
Over the course of the year, we've eliminated approximately $5 million and cost primarily in the senior ranks equating to slightly more than 10% other positions. The participated in the 2018 long term incentive plan while at the same time, we've added a highly experienced key executives.
We refinanced our loan debt last year and renewed our revolving credit facility this year and even more attractive rates with no maturities until 2024 with total debt service cost comprising both interest and mandatory repayments of some $25 million per year, we're very comfortable with our ability to.
Our commitments, our covenants, which you can see in the backup slides also provides us with a lot of flexibility.
We increased rubber black prices in the 2018 and 29 teams cycles and we're determined to do the same for agreements starting in 2020.
We have our EPA related capex spend well underway and expect the majority of the spend to be behind us in just five more quarters.
After that are available cash flow increases significantly and all this is before the anticipated reimbursement from a product for a significant portion of these costs at the conclusion of the arbitration process.
Finally over the course of several years, we've right sized our manufacturing footprint with consolidation of plants in Korea and closures in France, and Portugal, we are well positioned with a resilient business model for 2020.
Sustaining a healthy cash flow profile during challenging economic times is paramount on slide five we share some perspectives on this to be clear, we're able to sustain positive cash flow to fund our dividend, even if the economy deteriorated significantly.
Demonstrated the ability to proactively manage cash in the face of the softening demand by running our business lean and curtailing, our non EPA related capex investments beyond that lower feedstock prices and volumes in a downturn will improve our cash flow profile through the release of working capital and.
The reduction in cash taxes as a result, we're confident that are 80 cents per share dividend is both safe and sustainable.
Indeed insider Ryan we're eager to prove that we can execute the first EPA projects fully fund the dividend and whether whatever 2020 brings while simultaneously positioning ourselves for the future. After 2020, the EPA capex spending will fall dramatically averaging around $20 million per year.
For the next three years in contrast that to the 60 to 65 million of investment taking place in 2019 and 2020.
Given the current market weakness as we look at our capital allocation priorities in the near term, we don't feel like we're missing opportunities by postponing growth Capex projects when significant growth returns to our core business, we can easily restart our core business growth projects in the interim our dividend warmer.
And safe and our shareholders will be compensated to wait out the current macro headwinds.
With regards to our capital allocation options. So investors have asked about corporate share repurchases.
While we understand their perspective, managing cash and turbulent times, providing confidence around or dividend getting the bulk of the EPA work behind us and preserving the ability to execute high impact projects our priorities.
That being said the confidence of our management and directors in the future of the business is reinforced by their acquisition of more than a quarter million shares recently management is fully aligned with our shareholders.
I believe their actions to be taken it every economic season on slide six we list some of the two dues for an economic downturn of course. The first thing is to get your cost right, but not just cut cost short term, but rather take out cost that will not come back in the future. For example, one way we reduce.
Cost is by going to a leaner global business and regional management structure.
We also need to reverse that when things get better those costs are eliminated next we use the downturn to stay close to our customers advanced new products and address structural issues and as I mentioned before we are using this downturn to demonstrate our resilience to market weakness by executing the bulk of the EPA work.
While maintaining our dividends.
Taking these and other actions I am confident that we will emerge from any downturn stronger than before.
Now, let's move to our Q3 results on slide seven.
Adjusted EBITDA decreased by $4.5 million year over year in the table you can see that price and mix were very strong for us while volume feedstock differentials in FX, mainly translational where negatives you can also see the impact from executing an inventory drown draw down as we did last call.
Quarter, although this quarter was considerably smaller looking forward to the rest of the year, we see an ongoing uncertainty in the marketplace in general with customers continuing to be cautious about stocking our specialty carbon blacks as they manage their own supply chains.
Specialty and MRG volumes were soft in all regions and for specialty across nearly all applications tire related volumes were down slightly from prior year end up slightly sequentially with the Americas in EMEA holding steady for us.
From a regional perspective, our specialty volumes in Asia were down from the strong performance last quarter, but essentially.
The level of a year ago in EMEA, and Americas specialty volume slipped relative to prior year on broad based lower demand.
All in all we're satisfied with our results given the current economy and translational FX headwinds.
I will now turn the call over to Charles Herlinger.
Thank you very much koning now turning to slide eight year on year volumes were down by 3.9% and time by 5.2% on a sequential basis, our adjusted EBITDA, the $68.1 million for the quarter with basic EPS and adjusted EPS at 40 cents.
And 52 cents respectively.
The development of adjusted EPS versus the prior year quarter as well as the second quarter. This year is essentially in line with the change the adjusted EBITDA versus these quarters.
There is also important to point out that a significant portion of the decline overall contribution margin per metric ton was attributed to the two unfavorable foreign exchange translation effects, mostly related to the strengthening of the U.S. dollar against the euro.
We would have been fully $71 million of adjusted EBITDA, rather than the reported 68.1 million had we not seen the strengthening of the U.S. dollar.
On slide nine on the top left hand side. The main drivers of the changing contribution margin from Q3 of last year.
Summarized with the net impact of positive price mix associated mainly with us friends and run the business.
Eroded by negative feedstock differentials, a negative FX translation impacts.
As well as by lower sales volumes and lower energy sales.
Recovery of these negative feedstock differentials is key to ensuring that we have a stable run the business platform.
Indeed, consistent with a long established general principle, we pass onto our rubber customers, but positive, but also negative movements in the pricing of feedstocks, we used to manufacture products.
This is of course, a focus during the negotiations for agreements with customers beginning in 2020.
Moving further down the piano the change in contribution margin was also the main driver the change in adjusted EBITDA together with additional fixed costs associated with higher than usual plant maintenance costs.
Set by lower SGN, eight costs and favorable FX impacts on a fixed costs.
The waterfall charts, along the bottom of this slide shows that the change in net income is mostly driven by the decrease in adjusted EBITDA offset by lower taxes.
Now turning to slide 10, showing the positive development of our cash flow year to date as well as a full cost of cash flow within the provided adjusted EBITDA guidance range for the remainder of 2019.
The first nine months of the yet a cash flow from operating activities totaled $142.7 billion.
In which working capital overall remained at a level consistent with the status of the yet.
This performance underscores our ability to generate positive cash flow to operate up business and fund our dividend even in a weaker economy and without a significant working capital benefits so far.
While still addressing EPA related capex investment needs.
Slide 11 summarizes our overall financing structure and shows the long maturity profile of our entire debt package.
Key balance sheet metrics as of September Thirtyth 2019.
The company's Noncurrent indebtedness as of the second quarter end was $621.1 billion with net debt at $616.4 million, taking our term loan b debt and local debt into account, which represents a leverage ratio of two point.
Three times LTM, adjusted EBITDA, which is well within our target range further underscoring the sustainability of the run business.
While our intention is not to drawdown on revolving credit facility on a regular basis, having this very competitively priced back stop in place assures us that Iran can weather pretty much any economic storm that the global economy told them they might throw to us while continuing to comfortably funded dividend.
Furthermore, I would draw your attention to the details we've included in the appendix to this presentation regarding the operating flexibility provided by the feud debt covenants, we do have.
I'll now pass the call back to Corning.
Thank you Charles moving to slide 12, showing our key quarterly specialty metrics, which are below the prior year quarter. However, GP per ton improves sequentially and adjusting for FX gross profit per ton was above $720, while I'm pleased with the.
Improvement in this metric recognize that mix is an important driver for GP per ton.
Impacted by both varying demand across different applications as well as the rise and fall of regional end markets. For example over the course of many years some of our lower margin specialty markets have grown more rapidly than the higher margin markets.
Although not in premium markets. This growth is attractive and thus good for the overall development of adjusted EBITDA of RBS business, even though it dilutes GP per ton.
The next slide breaks out the major drivers of adjusted EBITDA walk from prior years quarter.
Hey, somewhat improved mix and a modest based price improvement were more than offset primarily by significantly weaker volumes FX impacts and negative feedstock differentials.
Volume is clearly the biggest challenge right now most importantly, we're not going to chase volume in a week economy for the sake of volume alone on the contrary, we're working hard to recover feedstock costs, including differential in July we announced a seven cents per pound price increase for our specialty grades in North America as wells.
And enhanced price list for certain services.
I have recently met with several specialty customers for many regions and end markets. The common view is that the fundamentals of their business remains sound and the long term drivers of demand remains solid. They believe they are suffering from the well reported uncertainties in the economy. Most share my view that we need to be prepare.
There for tough sledding for some time to calm.
We are clearly already seeing this in our volumes and so our specialty customers. The appendix tour slide presentation includes the summary of the key metrics, we have used in setting expectations for the remainder of this year.
Now please turn to slide 14.
Rubber volumes were down 2.9% year on year and 2.3% sequentially.
Overall rubber carbon black demand for tires, driven in large part by the replacement tire demand remains healthy, but slower OEM automobile activity has impacted MRG demand.
Gross profit per tonne, excluding FX impacts was nearly flat at $302 per metric ton and adjusted EBITDA at $39.4 million.
Slide 15 shows the adjusted the development of adjusted EBITDA, which is in line with the changes in gross profit you can see the significant positive impact from pricing against unfavorable FX impacts and the very significant negative differentials being partially offset by an improvement in fixed cost levels and energy.
Related items.
To address the differentials going forward in July we announced a price increase of eight cents per pound for rubber grades structured as a four cents based price increase and four cents to account for CEO differentials surcharges. We believe these increases are fair and should begin as soon as agreements permit we're so.
Simply looking for our customers to live up to the intent of our mutual business model that we create value by converting feedstocks into engineered a carbon black and pass through feedstock costs with a rising or falling failure to do this inevitably leads to further under investment and lack of carbon black supply capability.
We expect that the positive effects of these price increases will largely begin to take effect in the first quarter of next year.
On slide 16, we summarize the three issues that are Ryan and the carbon in black industry as a whole are addressing regarding feedstock costs.
There are a couple of key points.
First the IMO 2020, or more pool impact on the spreads between high sulfur and low sulfur feedstocks is being largely addressed by indexes in customer contracts were in place.
For non index customers for example in the case, if our premium specialty products. The cost pass through objective is achieved through negotiation. We remain committed to recovering. These marpol 2020 related costs, although we may inevitably experienced some fluctuations between our quarterly results relating to the timing effects.
Second IMO 2020 has some broader impacts it makes north American rubber carbon black more competitive on the world stage relative to carbon black made good loose ofer feedstock in other locations. This creates yet another barrier to imports simulate IMO 2020 will increase.
Some winners and some losers in local markets, depending upon market specifics.
We're working to make most of the opportunities and minimize the challenges which between the two of these I believe will be largely a wash for us.
As previously discussed a feedstock differential occurs because the actual cost of purchasing a given feedstock is rarely identical with the index used in customer contracts to reflect the cost of feedback.
These differentials have been worsening in recent years as our feedstocks are getting lighter due to a number of reasons, including the oil shale boom. We believe that Marpil 2020 related impacts have also exacerbated negative feedstock differentials.
Turning to slide 17 here you can see the key assumptions behind our guidance. While 2019 is shaping up to be a relatively tough year for our industry. We are as a management team busy taking appropriate actions for a downturn, while also working hard to make the most of the opportunities. This creates.
While economic conditions are challenging our business remains robust and we have taken appropriate cost and pricing actions to deal with this environment. As a result, we expect to end the year within our guidance range at between 265 and to $75 million of adjusted EBITDA.
Other areas of guidance for 2019 remain unchanged, except that we now expect our non EPA capital expenditures to be about $80 million and our us EPA settlement related capex to be in the range of $50 million to $55 million before any reimbursement to us by Ivanek for this expenditure with our group.
Overall tax rate for the year at 29% rather than 30%.
We're pleased with our performance in this environment and we will continue to manage our cash and capital spending closely in order to optimize cash generation.
In line with our current milestone planning with just five more quarters of elevated EPA capex before it falls to around the 20 million dollar per year range, we're confident in our ability to manage through the duration of the spend while maintaining capital efficiency. This requires tradeoffs in the near term when the curve.
Current economic conditions. These are prudent decisions, while allowing us to comfortably address our dividend in the near term and position us well for growth as the macroeconomic environment improves I look forward to the opportunities in the fourth quarter and the year ahead, we will stay laser focused on driving strong operational.
And financial performance in the business environments that develops while also positioning our company for future success.
Thank you and we'll now open it up Tortue and I'd.
Thank you well, having conducting a question and answer session.
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One moment, please hold the poll for questions.
Thank you first question is from the line of Mike Late Hill with Barclays. Please proceed with your question.
Thanks, Good morning, guys and Charles Congrats again on your upcoming retirement.
Thank you very much Mike I.
I guess first on specialty Black can you, maybe just talk a bit more through the moving pieces that drove the improvement in GP per ton. This quarter, I think you'd mentioned better mix, but maybe just a bit more color on the areas, where you're seeing better growth versus others as we sit today.
Well, so I think first thing to keep in mind is a year ago and all of business. We had a relatively weak mix. So in that sense for this quarter, we had a favorable comparison to it and so I wouldn't say necessarily from trend lines that we've seen thus far this year, we saw a.
Dramatic shifts in terms of specific end markets for us at this point.
Indeed, what we would say is.
Broadly speaking specialty was just suffering from the economic environment broad based across most of the end markets that we serve.
Sales in our if you want to add anything to that no I think thats right I mean the.
We.
As you said the concrete key point is the comparison with last year.
It doesn't indicate anything more than that.
Got it that's helpful. And then second question just on rubber black pricing and I fully understand you won't talk about actual for numbers are 2020 negotiations here, but if I just look at the business, there's really no new supply coming online in the western industry. The cost pressures on your business seemed to be growing.
IMO and feedstock differentials EPA spending all that stuff. So is it logical to just assume that pricing should accelerate over the next few years to sort of compensate for those factors.
Well, that's definitely our position and that's what we are setting to our sales teams into our customers that this is industry that needs to get to cost of capital pricing needs to have the ability to pass through energy prices positive and negative and by the way although differential pass through May increase.
The high sulfur feedstock material used in North America is going down right now so for the end customer those two things are largely wash. So it's not that big and ask that we're going for but our view is yes very much. So that these prices should continue to move.
Our next question comes from the line of Josh Spector with MBS. Please proceed with your question.
Hey, guys just want to Echo my congratulations thanks, Charles for all the help over the years and welcome to learn as well.
Thank you.
So just I was wondering if you could provide more color regionally.
Terms of some of the volume trends I mean, you talked about weakness Yeah Europe Asia.
How strong more volumes in North America, or perhaps how much better where they relative to the other regions.
So let me.
Let me maybe answer if we just we're going to look at for example loading to get US started on this.
Loading in our facilities around the world largely in the let's say the eightys range floating up and down a little bit specifically, where perhaps are doing a build for an outage or a drawdown around an outage.
In terms of the environment, if we're going to speak about momentum in the markets.
I think it's fair to say, there's there's a slowing across.
Most regions at this point.
Certainly for specialty generally speaking I'd say rubbers held up better in the us than in other markets.
And we in a little bit because of our customer mix, we were a little bit less impacted by the GM strike than others.
Which looked at anything.
Nothing.
Okay. That's helpful.
And just kind of back to specialty margins briefly and specifically around that.
If demand was say flat next year is there a scenario where mix improves enough where margins are processed for today actually lift up or would you need to see actually demand to to increase in order to get that seeing meaningful improvement.
Well so the mix really turns on the various end markets. We serve that I think a key point on the whole specialty businesses. It is built around where you've got a particular different our case carbon black structure that does something unique and specific for this particular application.
And so in coatings, it's not just that at Disburses or has got I jetting thats, maybe they want to a specific undertone.
And that's a that's a variable valuable value, adding material for them.
It's perhaps meaningless in some other applications and so certain applications, we add more value. So we get more profitability so with those ones move see more demand.
Then we do better with them. So I just move beyond automotive, which a lot of the talk is around if we were going to say other coatings protective <unk> marine coatings decorative.
Engineered plastics, the majority of which are not in an automobile fibers printing areas like toners or packaging food grade those are like a variety of different end markets all of which would give us an uplift in terms of our GP per Todd and I list I'm, just because you know they're fairly different.
Segments of the economy, but theres ones, where we're able to add more value.
And maybe the final point is those are things that would move that but we do continue to support the growth of our carbon black into specialty markets that are below our average GP.
Theres still good business for us they're accretive in EBITDA, there are more attractive than Robert they're good things for us and yeah. They cross some dilution, but we shouldnt lose sight that.
It's positive EBITDA growth for us.
Okay. Appreciate the color. Thanks.
The next question is from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Yes, hi, good morning, it's Pete Lucas for John can you just talk about your eye expand on your cash flow expectations for next year, how much flexibility is there in capex.
And what are other sources of cash improvements that are out there.
So our current plans for next year are going into it with a pretty lean capital budget to so that we're prepared for really whatever 2020 comes up to us and so that means deferring some things and items like that in terms of growth Capex, that's really not a big.
Deal for US right now and the current economic environment I don't see it I'd just stress we've got five more borders of heavy EPA spending we can absolutely do that we can shift around our capital spending as we needed it's not that long.
Oh, great and last one from me can you talk about your implementation of adjusters to better reflect your input and selling price differentials and have customer has been receptive to that.
So Pete by this I think you mean for example, moving in with the surcharge for.
The differentials and so forth. So firstly, we have that structure in Europe . Today. So really we're just trying to modify that structure to work for what we have in the U.S. and I'd say, our you know it's all commercially sensitive because we're in these negotiations right now for 2020 pricing.
But I'd say, we expect to get that.
Perfect. Thank you very much.
The next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good morning, two related questions and then just a clarification.
With respect to sort of the pricing initiatives, what kind of feedback or your customers, giving you on each side of the business around the sensitivity of demand that they're seeing I mean that is is there a price point, where they're worried about.
Demand destruction.
And how is that feeding into your discussions with larger customers trying to shift to a more return on capital based model.
And I guess another clarification is just the working capital have you seen a impact on your working capital because of the differentials.
So is your working capital being a little bit less responsive to the.
Brent benchmarks that we might be eyeballing.
Okay. So let me start on the first part so we are in the middle East contract negotiation. So it is commercially sensitive to say a lot, but let me give you the sense that I give our teams and kind of how we see that playing out what I tell my our teams as we need to think of ourselves as an airline and airline.
And the has just a few seeds left.
And I kind of situation, you're going to sell those at full fare and I. Just mean, if they are also fair Epay IR all we're going for his return on capital and pass through of feedstocks.
And I am okay.
If this means we have a few empty seats on our planes. So to speak that is all right and I think thats an important message for our team now in a specific market as specific route if we stay with airline analogy. If we find that we've got to many open sales would have to adjust our strategy, but that's what we're going to.
Sure that's how we're thinking about it when we talk to customers I would say the discussion is more around.
A fairness and.
Competitive situation more than that this is really pricing them out of their specific end market I don't think that what we're trying to do is having that effect in that message with that in terms of long term contracts. So that's something we remain very interested in I think is the right thing for this industry it gets us to better place.
Right now most of our negotiating effort is just on these 2020 pricing. We do continue discussions with customers as recently as a couple of weeks ago I had a very senior level meeting with one customer talking through the issue, but most of the focus right. Now is just on okay traditional 2020 pricing.
Charles do you want to respond to the working capital yes.
Your question Lawrence was.
The differential is getting tied up.
Working capital through the prices feedstocks. The answer is yes, but it's not that material or not it's a good point to remind that.
That in 2000.
17, and 18, we tied up nearly $90 million of.
In working capital and year to date, where about breakeven on working capital and so if the economy were to soften.
We would we would certainly still expect to to recover that on most of that from from working capital and indeed, we should start to see that pretty soon we should start to see some of that coming out in Q4.
So the point I think most most important to understand is that the the these strong cash flow performance. We've had in this quarter than do year to date isn't through working capital it's through managing the business is Corning outlined.
Working capital benefit is still to come.
Thank you.
The next questions from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.
Hey, Good morning, guys now I'd like to also extend my congrats Charles on a nice career and.
And good luck in the retirement.
Thanks, Thanks, Thanks very much can.
On the the differentials I think in this slide or in your.
Press release, you mentioned this expectation to the differentials here would stabilize at current levels in the fourth quarter. So does that imply like another five and a half or so million headwind and what type of visibility do do I guess, what would be driving that stabilization because it does seem like it's gotten worse throughout the year and what type of visibility do you have there.
Give you confidence that it all kind of stabilize here going forward.
Well, so just in terms of our ordering patterns and how we do it I mean at this point I'm just looking out really.
Two more months, we've got a very good idea of what thats going to be in some of that materials already really been committed for and I think what we've just seen is that.
Supply and demand around the as CEO market that perhaps it's it hit a point where it just stabilized.
Based on those factors.
Gotcha, Okay, and so then.
It looks like that will be.
10, or so million dollar headwind for the year, assuming the fourth quarter similar to the third. So is is the goal then with the price the surcharges and things that you're implementing is the goal then.
To recover that it was a big headwind. This year is the goal to then recover what 20 Nineteens headwind in 2020, the gets you back to.
2018 type levels.
Is that the ultimate goal here with the initiatives that you have out there.
Well I would say the ultimate goal, we're going for is to get this business to a return of capital pricing and Thats what needs to happen to meet the supply and demand challenges as you look forward, that's what's needed to get reliability in the systems and do certain degree right. You just trying to get to a number and if you look at our price increases that.
We announced eight cents for Robert seven cents for specialty that's that all of that moves us in that direction I mean, the the industry I think has traditionally had an annual.
Increase and then over the course of the year, a certain amount of differential creep and then the next year. They would do a reset and a reset I think the best way to understand this is we just need to get this industry to its cost of capital that's not a big gas that's how most of the world works.
Makes sense.
And then in terms of the EPA related costs that you're incurring this year in next year are those.
Oh for the most of our capitalized costs that you know has gone through that Capex number that you've talked about or is there any.
Meaningful pickup you expect in operating costs.
As maybe some of those plants become compliant.
Yes, that's a good question. So when we talk about those headline numbers, we're talking there about capital.
We do have higher operating costs associated with it and that's really the basis of the EPA surcharge that we put in place.
EPA surcharge, just really about operating capital capital is the numbers were disclosing and Thats a separate issue.
Okay got you okay. Thank you very much.
Thank you as a reminder to ask a question we press star one the next questions from the line of Jessica with Jpmorgan. Please proceed with your question.
Thanks very much.
So the specialty carbon black market has contracted this year.
When do you expect that to stop contracting or can you don't tell contracting in the fourth quarter versus we comparisons year over year.
So Jeff that's a that's an excellent question and let me just say when we think about 2020 and of course, we're not giving guidance for 2020 in that sort of thing I'm not planning on our recovery in specialty volumes.
I think this is going to turn over all those end markets, but those are all a little bit right now rising and falling with the overall economy I think thats, a tough thing too to predict.
But I think we still see the impact of a weakening economy.
So are we continuing to contract in the fourth quarter and is that your expectation for the beginning of 2020.
So I think wary when our let me say this our expectations for the fourth quarter, our in our guidance.
You always going to market sequentially weaker fourth quarter, right and we would but I would say in general we do expect a.
More or less on par, but not us wasn't really a great fourth quarter last year either.
Hello can you compare.
Tyson demand conditions in China to prior to price demand conditions ex China I realize China has.
It's not the largest market for you, but it's not the smaller thoughts.
Yep, Thank you for that.
So, let's let's recognize that our participation in China.
In rubber is largely in MRG. So we just have less exposure to the whole tire situation. There I would say rubber and MRG both challenged in that market in China in the specialty it depends to certain degree on what the end market is and then how whats affected by things area like fiber, which isn't it.
Pardon market for China, and one which is let's say the specialty market of which China is the largest I'd say, there's both volume and competitiveness issues. There we export some product from the United States for that market into China. So we of course see the whole tariffs situation that makes that a choice.
Clinching one but at the same time, it's a highly differentiated product and that's gives us a little bit of stability and what we can see in that space.
I would say if we think about some other highly differentiated markets and that is tends to be the ones were and then China pricing there has held up.
Comparatively well.
And then lastly on your as China expense Crs shouldn't expense was really sharply down year over year, maybe I don't know 9 million.
And it's under 50 million, who were fair various one time items and the SGN a line or are we now below 200 million annually for question a expense.
So I mean, one element of that is just FX. Okay. Another wireless it with volume goes distribution center, that's in our SGN, a and so thats a a piece of that as well Charles anything you'd like to and.
Some bonus accruals that vary year together.
I say so so there is some lower incentive comp expense that's built into that.
Yes, absolutely in the year like this.
Okay, great. Thank you so much.
You're welcome Jeff.
Our next question from the line of Chris Kapsch with Blue Capital markets. Please proceed with your questions.
Okay.
Good morning. Thanks.
I appreciate the additional analysis on and then.
Chris.
Chris.
We didn't hear you, Chris Hi, Chris if Theres this line disconnected.
All right.
We have any other questions in the queue and no other questions at this time, alright, so let's hold a moment CFO , Chris is able to dial back in.
Okay.
Okay.
Okay.
Okay. I would guess this is not going to work out for Chris So or sorry for that we'll look forward to after hearing from him separately. So I'd just like to thank everyone for taking the time to be with US today. We appreciate your interest and for all of our investors listening. We appreciate your investments and.
Look forward to Q4, thank you all very much.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.