Q4 2019 Earnings Call

Greetings and welcome to the Orion engineered carbons fourth quarter 2019 earnings conference call.

This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and it's now my pleasure to introduce your host Diana Downey, Vice President Investor Relations. Thank you you may begin. Thank you operator, good morning, everyone and welcome to arrive in engineered carbon comfort.

Coal to discuss our fourth quarter 2019 financial result.

Diana Downey, Vice President Investor Relations.

With us today, our courting painter, Chief Executive Officer, and Lorin Crenshaw, 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 begin 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 FCC.

Actual results may differ materially from those described during the call.

In addition, all forward looking statements are made as of today February 21st and the company does not undertake to update any forward looking statements based on new circumstances or revised expectations.

Also non-GAAP financial measures discussed during this call earlier reconciled to the most directly comparable GAAP measures in the table attached to our press release.

I will now turn the call over to Corning Granger.

Thank you Dan Good morning, everyone and thank you for joining us for fourth quarter 2019 earnings Conference call.

I will start todays call by providing some general comments on our performance this quarter, our CFO Lorin Crenshaw will then provide detail on our consolidated financial results and related matters for the quarter and full year.

Then I'll come back to discuss the segments 2020 guidance and share. Some closing comments well then open up the lines and be happy to take your questions.

Turning to slide three during the fourth quarter, we delivered adjusted EBITDA inline with our guidance. Despite economic backdrop that remained quite challenging we finished the year strong and provide an excellent proof point of the resilience of our business.

Ryan was not public during the last major downturn. The 2008 2009 time period, and therefore investors don't have as many data points for us. It's the do for other industrial companies developing public longer.

As a result, it's important to accentuate periods like 29 team when we experienced a significant deep downturn in our key end markets, but proceeded to execute and delivered solid financial data point showcasing the resilience of our business 2019 represented a good test for our team and.

Our business.

A line executed well in the fourth quarter as well delivering adjusted EBITDA within our forecasted guidance range and strong cash flow from operations, while continuing to implement key initiatives to better position. This company in this challenging macro environment the continuation of weak OEM Auto day now.

Mix and the evidence of tire manufacturers conservatively approaching yearend contributed to the volume declines in the fourth quarter, However, favorable trends in price and mix helped offset some of the weakness.

We delivered fourth quarter, adjusted EBITDA of $63.2 million with specialty at 31.8 million rubber carbon black at 31.4 million and a full year adjusted EBITDA of $267.3 million engine inline with our stated twosixty.

Five to 275 million dollar range. Furthermore, our operating performance drove strong cash flow generation, allowing us to support our capital expenditure programs, while still delivering a significant reduction in net debt overall I'm proud of the way the global Ryan team rallied to the ended the year strong.

Oh and remain confident that Orion will emerge from the slowdown stronger and well positioned to take advantage of future growth opportunities.

Slide four shows how we position the business for the future by taking a number of key actions and 2090.

First from a people perspective, we streamlined our management structure, eliminating approximately $5 million and cost on an annual run rate basis at the same time, we added several highly skilled and experienced key executives specifically, we strengthened our Americas business with the addition of Pedro Reveres arc.

Global operations function with the addition of Carlos kilns, our HR function with the addition, total and we executed a smooth transition at the CFO level with the addition of Lauren to the team just a few months ago. We also adopted a leaner management structure with leaders of our global business units now also taking.

Regional responsibilities.

The second actually I'd like to highlight is the refinancing of our revolver and even more attractive rates as a result of these efforts. We currently have no maturities until 2024 and financial covenants that provides substantial flexibility.

2020 pricing negotiations now behind Us I can share that we were able to achieve meaningful rubber price increases that will show up in our 2020 result, and I will elaborate more upon this a bit later when I talk about the outlook for the new here.

However, reflecting on 29 team I'm pleased that we achieved a third consecutive year of progress in terms of taking steady steps in the right direction towards improving return on investment.

A fourth notable accomplishment is the installation of differential surcharge mechanisms across the vast bulk of our 2020 rubber volumes were also successful installing surcharge mechanisms with specialty volumes, though to a lesser extent as in rubber given the specialty value.

Continued nature of this business overall these cedar surcharges will significantly de risks our business from a feedstock differentials reducing earnings volatility in 2020 and beyond.

And we are keeping with our long established general principle that we passed on both positive and negative developments in the pricing of feedstocks to our rubber customers.

In 2019, we successfully completed a substantial portion of the spend related to upgrading our pollution control technology to further reduce emissions at our north American manufacturing facilities in line with both the 2017 EPA consent decree and with our core values of advancing sustainable operate.

Patients and growth.

Specifically, we spent roughly $51 million in 2019 towards this effort and have spent over $63 million since the effort began.

I will share more on the next phases of our EPA spending when I discuss our outlook, but I'm pleased with the progress that we've made in 2000.

Since going public we've been working towards Rightsizing, our production footprint, while we continue to remain diligent in reviewing our portfolio to identify underperforming assets, we consider our current footprint to be largely well optimized and are primarily focused on finding ways to expand our capacity.

City in growth rather than reduced capacity further whether that takes the form of yield improvements.

Process.

Improvements in terms of technology de bottlenecks or projects like the Ravenna expansion. The contribution margins of every extra kt, we can squeeze out across our entire portfolio. Both rubber in specialty are quite attractive. So in the coming years, we'll be looking for ways to drive the earnings potential of both of these businesses.

[music].

On the sustainability front, we took a major strides in advancing our efforts in 2019.

We published our first sustainability report, which highlights key sustainability initiatives that are core to how Orion operates we continued to take steps forward in sustainability by achieving major milestones such as adding sustainability to the board of directors nominating and governance committee, forming a separate management.

In sustainability committee and setting our first sustainability related goals to name a few.

We're also investing in our commitment to the environment into the economy the communities in which we operate an example of this was the recent upgrades we made to our cogeneration facility in Qingdao, China, allowing us to produce more green energy alongside our carbon black lines in China by providing hot water.

The district heating system, the placing displacing the use of about 20 kilo tons of coal each year.

Whether it's through our own business practices contributing Susan sustainability through our products partnering with neighboring communities or leadership across the supply chain, we're committed to advancing sustainable operations and growth and we'll continue to drive these efforts forward.

Finally.

We delivered strong strong result from cash generation standpoint, with cash from operations of $231.5 million and net debt down year over year to $609 million over.

Overall as a result of executing on these seven actions in 2019 Orion enters 2020 quite well positioned and I salute the effort of our employees around the world, who all played a role in making it happen.

Throughout the year I've indicated that I believe their actions to be taken in every economic season on slide five we list. Some of the key actions, we took in 2019 to better position ourselves going forward, including eliminating coal costs, focusing on our customers driving new product development in launches.

Improving raw material recovery and improving our business model resilience through strong cash flow generation and net debt reduction despite weak economic conditions by taking these and other actions I am confident that we will emerge from the current slowdown stronger than before.

Turning to slide six let me start by saying that capital allocation is one of the most critical jobs that have any CEO and this is essential to ensuring that the future of this great business that I have the privilege of leading is even brighter than its past with that in mind in 2019, we allocated capital in line with the focus.

So well mannered, we said we would as we enter a new year. It's a good time to remind our stakeholders, what our capital allocation priorities are.

First we are committed to maintaining a strong balance sheet, which I define is maintaining net debt to trailing 12 months of adjusted EBITDA in the range of two to 2.5 as a steady state leverage target.

With that leverage target in mind first and foremost we will invest in must do safety maintenance and continuity projects totally unrelated the EPA driller driven spending.

These are projects that strengthen our foundation and ensure that our team members get home safely. Each day, we're privileged to be a part of the fabric of the communities, where we operate in and we strive to be a trusted partner and industry industry leader in terms of public stewardship.

Our second priority is safely executing the must do us EPA related investments that will allow us to meet each EPA compliance date between now and 2024 on time.

As a reminder, the compliance schedule for these complex projects include several deadlines in June 2020 April 21 December 22, and December 23 related to four distinct plant sites. We're currently in the field with the first two projects in 2020, we will advance.

A more detailed design for the final two projects and are committed to executing this project safely and on time in the coming years.

We recognize the dividend is an important source of value to our shareholders as such it is our third capital priority, reflecting our commitment to returning value to shareholders by paying a stable dividend at current levels.

We are extremely confident in the cash flows from this business being able to cover these capital allocation priorities in 2020 and beyond.

Once our top three capital priorities have been fulfilled you should expect us to fund high returning growth opportunities in the 18 months that I've had the pleasure of running this business, it's become quite clear that theres, a significant backlog of such growth opportunities for Orion.

They take several different forms including capacity additions like the 25 kiloton expansion of specialty capacity at Revana and de bottlenecking production capacity for gas plants at our Cologne plant.

Productivity in sustainability initiatives like.

Adding or increasing cogeneration that are facilities and smart investments that strengthen our position in certain geographies like the opening of our new technical service applications lab in New Jersey.

Of course, we would consider opportunistic acquisitions and other investments to strengthen our position in areas, where we are under representative or have gaps such as our acquisition of Essen two way the acetylene carbon black producer we closed on in late 2018.

Finally share buybacks are also a part of any companies capital consideration set.

However, given the attractive backlog of high return projects, we've got on the deck and our commitment to the other priorities I just summarize I don't foresee us utilizing cash to buy back stock anytime soon and certainly not prior to making further progress on getting this EPA spending well behind us so thats the synopsis of the way we.

Think about capital allocation at Orion.

Before we go into our fourth quarter results I did want to address the current situation in China and the Corona virus epidemic first and foremost our number one priority is the health and safety of our employees and our customers. We have one plant that is over 1000 kilometers from on and it has been operating throughout the Chinese.

New year holiday.

We believe we've taken the appropriate actions to protect our people on operations.

Business is beginning to restart in China, and we think the impact will be limited to Q1. However, no one knows for certain to the extent that the crisis remains confined to the first quarter and things begin to normalize in March our guidance range captures our best estimate of the impact.

Now.

Turning into more detail on our fourth quarter results you can see on slide seven adjusted EBITDA decreased by $1.2 million year over year in the table you can see that price mix were favorable for us while volume was the primary offsetting factor along with feedstock differentials lower energy.

Sales and FX.

Within specialty the year over year decline Volumetrically was driven by our two largest markets North America in Western Europe, with China actually up year over year and sequentially in terms of end markets. The year over year weakness was broadly and evenly ride spread across all end markets coatings.

Polymers printing in line with a broader economic trends within rubber volumes were down both year over year and sequentially on both MRG and replacement tire side of the business.

The sequential decline is largely reflecting seasonality while the year over year decline reflected two main drivers number one was of course weak OE trends.

Impacting MRG and on the replacement tire side, a week quarter for tire production in certain geographies in what seemed like a quite conservative position by the tire customers heading into the ended the year now ill turn the call over to Laurent.

Thank you very much Corning now turning to slide eight volumes were down 8.8% year over year end by 8.9% sequentially inline with the trends Corning cited earlier, while adjusted EBITDA came in at 63.2 million basic EPS at 32 said and adjusted EPS.

At 42 cents.

Contribution margin per tonne improved year over year due to positive mix and favorable feedstock cost development within specialty.

An important point I want to make on this slide is that every quarter. The contribution margin per tonne fluctuate primarily due to some combination of product mix feedstock developments and FX as the earnings mix between specialty and rubber rises and falls.

We will continue to talk about these changes and explain the dynamics quarter to quarter as usual. However, long term, we are less concerned about achieving a specific contribution margin per ton and more concerned about answering the question how do we as a leadership team fundamentally and reliably raised.

The absolute earnings power of this business, how do we make this roughly 300 million EBITDA business.

400 million EBITDA business, the exact strategies, we employ to accomplish that will result in a certain product mix between rubber in specialty. However, the point is our focus will be on raising the absolute earnings power of our business in the coming years with the primary governor being return on capital employed not managing talk.

Good day specific gross profit for contribution margin per tonne quarter to quarter.

Slide nine explains the drivers behind contribution margin adjusted EBITDA and net income in detail starting at the upper left hand side contribution margin declined 3% year over year as the favorable impact of price and mix, mainly driven by our rubber business was eroded by a combination of lower volume.

Negative feedstock differentials FX and lower energy sales from an adjusted EBITDA perspective, lower contribution margin and higher SNA and other costs were only partially offset by lower fixed costs during the quarter, resulting in a decline of 1.9% to 63.2 million.

The key drivers of the increase in SNA and other costs were fewer fourth quarter adjusted items compared with the prior years fourth quarter.

Finally, net income increased 3.3 million to $19 million or 21.1% year over year, despite lower adjusted EBITDA, reflecting the positive impact of fewer fourth quarter adjusted items compared with the prior years fourth quarter.

Now turning to slide 10, you see the development of our cash flow for 2019, and where we landed versus our most recent guidance for the year, which was to keep cash flat year over year. As you can see we actually ended the year with a higher cash balance year over year, even after reducing debt funding our capital program and other fee.

Financial obligations, beating our target.

Specifically, we generated 231 million in cash from operating activities 50 million of which was driven by lower working capital due to lower feedstock cost.

This cash was deployed in line with the capital allocation framework laid out by Corning earlier with 105 million in non EPA related spending 51 million in EPA related spending 48 million in dividends and the balance going to a combination of debt service and taxes.

Slide 11 summarizes select attributes of our balance sheet and financial position. We ended the year with net leverage of roughly 2.3 times well within our targeted range of.

Between two to two and a half times.

We also approach 2020 in the coming years within attractively priced debt package long maturity profile and substantial liquidity, a nice combination of attribute that provide us with substantial flexibility.

Having this very competitively priced backstop assures us that our Ryan can weather pretty much any storm the global economy might throw at us manage fluctuations in working capital quarter to quarter and comfortably execute against our capital allocation framework I will now pass the call back to Corning.

Thank you Lauren moving to slide 12, our quarterly specialty volumes were down year over year for read the reasons I discussed earlier.

Graphically North America was the primary source of volume weakness year over year, whereas we actually saw growth in China, while Europe was flat. So overall, a mix dynamic reflecting the overall, Malaysia, the underlying global automotive and polymer end markets.

In contrast to the volume decline gross profit per ton rose, 18.2%, reflecting combination of favorable mix positive price lower fixed costs and lower feedstock costs I'm pleased with this improvement in this metric, but I would caution that both mix and year to year feedstock implications are quite.

In that dynamic with mix varying quarter to quarter based on the demand across different grades and feedstock costs fluctuating.

The next slide brings out the major drivers in adjusted EBITDA year over year, which principally reflect the same factors that drove gross profit. In addition to favorable SGN a cost development.

Now please turn to slide 14 rubber volumes were down 9.6% year on year, and 9.9% sequentially, reflecting the factors I cited ease earlier with weak end market dynamics and the conservative customer position evident in certain areas in the world the reduction in gross.

Profit per metric ton was not mix, driven but instead driven by a combination of negative differentials feedstock dynamics and lower energy sales, reflecting lower production levels.

Slide 15 shows the development of adjusted EBITDA with significant positive price impact offset by lower sales volumes unfavorable FX effects and negative differentials.

On slide 16, you'll find a summary of several key assumptions behind our 2020 guidance.

What I'd like to do is provide a prospective and color on what we expect from price volume cost and cash flow perspective.

Pricing will be a bright spot in 2020 for both businesses, but especially rubber.

Reflecting a constructive resolution to our negotiations, which took another step towards improving returns, particularly in North America, where a good portion of the 2020 increases coming from specialty pricing will also rise year over year, but by a much lower order of magnitude compared with rubber.

Pricing will be partially offset by lower rubber and specialty volumes, we expect each to decline around 3% to 4% year over year.

One factor driving the decline is simply a continuation of the general malaise, we've seen for sometime now in certain key markets. For example, as a reminder, 33% of our rubber business and 25% of our specialty business is driven by trends in the global automobile OE production levels and new.

Vehicle sales.

While we expect the long term growth outlook for this market to be in the 3% range tracking global GDP growth in 2020, we anticipate this market will continue to experience below trend levels of growth and some instances of outright declines there are various third party forecasts out there if we.

Look at Hs for instance, its most recent outlook calls for the global light vehicle production to decline for the third consecutive year falling roughly 3% with us rebounding from a decline of 4% in 2019 to a 1% increase Europe down for the third straight year lower by 2%.

And in China, a large engine of historical growth in the global light vehicle fleet in recent years projected to post the third straight year of decline falling about 4% against this backdrop, our business is exposed to auto OE demand and we'll experienced lower volumes year over year, even while move a lot.

Roger replacement market remains solid.

The second factors the negotiating strategy I shared at our last earnings call I made a comparison to airline pricing where in a tight market you don't discount your remaining seats. Instead, you except that you may have a few empty seats that is what we did and we expect rubber EBITDA to be up by.

Digits, despite having have few empty seats.

Shifting gears to specialties. The volume decline there is in part due to the same empty seats analogy I used with rubber with us showing a willingness to lose volume in exchange for driving higher prices, while others pursued share.

In addition, however volumes in 2020 are also lower due to the below trend growth dynamics in nearly all of the underlying end markets that drive specialty business over time with 25% of the volumes being impacted by automotive OE trends and approximately 15% of the sales in China, both of which are.

Expected to experienced sluggishness, if not year on year declines in 2020.

Overall, I think we got the balance right between price and volume in 2020 negotiations and I'm very pleased with the outcome.

Turning to costs in 2020, we will benefit from the impact of the $5 million production on an annualized run rate basis in ESG and eight related to the head count reductions executed in 2019.

However, higher incentive compensation.

We'll offset this in 2020 due to the fact that in 2019, given that we fell well short of adjusted EBITDA expectations Tier Ryan team will experience a reduced bonus payout.

In contrast, we're projecting 2020 to be more normal year, resulting in a normalization of incentive compensation, which will show up as both the fixed cost line and the SGN any line and when combined with salary increases and insurance premiums represents a headwind of around $15 million to $20 million for us.

The other item of note from a cost perspective as feedstock costs, we have the ability to pass through feedstock costs through indices in our contracts in most markets.

This year, we negotiated ability to pass through surcharges for differentials to those indices in most of our rubber markets, we still some contracts without the surcharges, but our exposures differentials has been greatly reduced specialty we have agreements with about 40% of our customers and for the 60% of specialty.

Not covered by a pass through mechanism. The impact is mixed with some portion of the increases and decreases in oil prices being passed through to customers eventually depending upon a variety of dynamics as expected given the specialty rather than commodity nature of this business.

Now turning to slide 17, all in all we projected EBITDA will be in the range of $250 million to $280 million. This year with strong rubber price increases offset by lower volume and higher incentive compensation and the corona versus only impacting the first quarter.

It's important to note that our guidance assumes that the full year average for oil prices and the euro and Twentytwenty is in line with levels comparable with the fourth quarter of 2019 changes in either of these can be material impact on the business and the table on slide 16 provides rules of thumb on how these factors would impact adjusted.

EBITDA positive or negative.

The upper and lower ends of our guidance reflect uncertainty around FX oil prices differentials and volumes that could cause us to underperformer outperform the midpoint of the range that said our guidance reflects our best estimate of the range of possible outcomes for 2020.

Moving on to cash flow at this point, we expect to spend between 130 million and $150 million on Capex of which roughly 45% is safety and continuity related that is non EPA related spending 45% to 50% reflects EPA drew.

And spending and the balance related to productivity and growth oriented capital just like last year, we will be disciplined and agile in our spending to stay within our targeted net leverage range of two to two and a half times. This year, we expect to bounce around that two to 2.5 range from quarter to key.

Order with the first quarter of this year being example of where we expect leveraged pick up somewhat as a strong sequential sales increase drives higher working capital.

From a dividend perspective, we expect a cash outflow in line with 2019, and approximately $48 million, reflecting our intent to maintain the current dividend rate.

With that operator, you may now open up the call for Q1 day.

Thank you we will now be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad, a confirmation Tony will indicate your line is in the question Q.

Press start to if you'd like to all of your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset the four pressing the star Keith one moment. Please all we pull for your question.

Our first question comes from the line of Josh Spector with Caveats. Please proceed with your question.

Yes, Hey, guys. So just in terms of your 2020 guidance I'm curious if you could quantify how much you're baking into long queue for the potential krona virus impact.

So first of all good morning, Josh Thanks for being with US today, we've got mid single digits in for Corona virus.

At the mid single digits EBITDA.

Mid single digits millions of EBITDA. So effectively clearly this month is heavily affected China, though is getting back to business now and we're seeing that restrictions on transportation and so forth using customers restarting that we'd see some of that fall over into the next month March but that it would be limited today.

Yes.

Okay, that's helpful and.

And just also in terms of your guidance comment you talked about feedstock prices and impacts being at levels similar to fourth quarter. I was wondering if you can kind of square that with your commentary about surcharges and potential lesser impact a differentials into 2020.

So I think we have a slide where we show you. What we think are sort of the rules of thumb of what we expect from a differentials perspective, we feel that we're now much more.

Isolated from that impact, it's not completely zero as I said in the prepared comments, but it's certainly.

Dampened impact significantly dampened impact compared to the past.

Okay, and I guess, maybe just one more around that is I mean, low sulfur feedstock prices has generally declined pretty significantly from the end of last year beginning of this year to where we are now that decline is not baked into any of your guidance or commentary you've given on the call. So far.

So our current guidance is looking at as we see the markets those have come down right now some of that I think is reflecting that lets say speculation in that market is somewhat behind us as IMO 2020 is now actually live and running some other probably reflects all the blank sailings.

And so we can kind of speculate too low sulfur is surely I think the speculations over we might see a slight.

Happening in the demand for that right in the moment, we'll have to see.

And Josh I would just as of that on our rubber business. These month to month dynamics over the course of a three or four month period of time, given the way our pass throughs restructured it should wash itself out and so month to month, you'll see these variations, but we've got pretty good coverage there in over a period of couple of months should wash itself out.

[music].

Okay. Thanks.

Thank you. Our next question comes from the line of Mike late head with Barclays. Please proceed with your question.

Thanks, Good morning, guys.

Morning, Larry Bird Warren I guess first question on the outlook I. Appreciate you don't give quarterly guidance, but just given some of the unique macro circumstances were seeing right now and given we're already about call. It two thirds of the way through the quarter I was hoping you could provide a bit more color about how you're seeing the first quarter develop relative to your full year guidance just.

Because I think theres some questions about the range in your guidance and if we had a better sense of just kind of how you're thinking about the first quarter my better contextualize the overall year.

Hi, there. This is this is Lauren I would say you should expect through the first quarter of strong sequential increase we're seeing a really good tone. After these destocking has sort of subsided and so you probably ought to think high single digit percentage sequential increase from where we ended the fourth quarter for the full year of fuel.

Hey, roughly the midpoint of our ranging you think about the quarters for the year you ought to look at a slight first half bias for the total company a flight first half bias and that reflects on the rubber side of the business weakness in the fourth quarter as we always see.

Seasonal slowdown then and a slight first half biased to the specialties business driven by mix volume and for the overall company driven by better absorption just reflecting the way we're running our plants in the first half.

Sorry, just to clarify you think theres a mid single digit sequential improvement in EBITDA was that correct.

So from the fourth quarter. If you look first you ought to expect the high single digit percentage increase in our EBITDA from the fourth quarter to the first.

Then for the full year as you distribute.

The midpoint of our range for the full year, a slight first half bias.

So the second half for the total company.

Got it I guess.

What gets worse than in the back half because I mean, I think most people would think the first half and I appreciate theres, probably some orion specific numbers, but one Q will likely be the worst macro environment, particularly with what we're seeing with the Corona virus. So.

When you think about your guidance range I mean, the low end of the range is actually.

Below annualizing the fourth quarter of this year. So can you just walk me through kind of what gets worse in your guidance for the back half of the year them.

There is two things on the rubber side of the business, we're anticipating a fourth quarter that will be weaker than the other quarters as usual and on the specialty side. It's just the idiosyncratic dynamic the first half where specialties is going to be a little bit stronger than the second and that reflects the volume that reflects.

Mix or we've got some high margin.

Grades that are shipping in the first half and overall, our absorptions going to be better in the first half of the year. So perhaps those are somewhat Orion specific.

Thank you so much in March congrats and joining.

Thank you.

Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipments may be necessary to pick up your handset before pressing the star Keith. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Good morning, Thank you for taking my questions and nice job on the quarter, especially the specialty margins great to see that and then.

I know what the context that these things can jump around but given that you're expecting stronger mix in the first half what products are driving that specifically in kind of what why does that fall off in the second half is as you just mentioned.

So first of all thanks for those comments, John and you just shared with US. So if you look at things alike.

Some of our more premium products that we see strength in the marketplace on that right now and there is certain cycles, sometimes that are going with that and where we see certain and markets moving and so I think thats a big part of where we are I'd say.

Just the movement of the premium grades and particularly in certain end markets geographic end markets for us that's what we see.

Okay, Great and then quarter you've been talking about.

Sign and customers up on the RCB side for multiyear contracts for a little bit of time now.

Anything to report on that front did youve managed to compensate hand to 20 120 and no.

We don't have any one under lets say, what I would call a true long term agreement.

We did successfully conclude one that went multiple years in the past and continues on that basis going forward, but in terms of one that's really out in let's say the tennis year range. We are in active discussions with people today, but we don't have that concluded and it's one of these things where it's kind of hard to give an update until it's like done.

For one way or the other so we continue to think this makes a great deal of industrial logic, I'd say, our negotiating partners feel the same way and it just a matter of trying to get to an agreement that makes sense for everyone.

Got it and just a little more clarity on that given that we didn't get one done before year end 2019 does that push the time I back out to the end of 2020 now.

Not necessarily know you could do something is starting to get really at anytime.

Okay, Great and then finally.

Loren maybe can you discuss your free cash flow expectations for the year.

Maybe your cash tax expectations are working cap changes.

At that.

Either extreme of your EBITDA guidance range, and where there might be flexibility if necessary on the.

On the growth and other opportunities and Capex.

Sure.

First of all I would say as you think about the first quarter, we're seeing a strong tone to the the business starting the year and Thats going to drive our working capital higher and so we'll start the first quarter and you'll see our net debt rise probably on the order of.

On an IL 30 to 40 $40 million.

What happens after that you just depends on oil price dynamics in terms of do we get a windfall like we did last year from working capital or not.

But we've got flexibility and we express in the form of that range. The 130 to 150 Capex range.

And the percentages or EPA non EPA.

Reflect the degree the flexibility that we have.

Within that that Capex. What you saw this year was in a weakening economic environment. The kind of stabilizers that we expect from working capital actually did kick in but we'll see what happens, but I would tell you for the first quarter you should expect to tick up.

In our in our leverage to reflect higher receivables, but we'll give you updates throughout the year and just why were on that topic and talking about capital. There was a minor typo in our press release and just to clarify the ivanek indemnification that applies to the EPA capital, which is about 45% to 50% of our capex.

Thanks for this year.

Okay, great any any thoughts on the cash tax expectation. Thanks.

That's right around 29% is where we're expecting for the year.

Okay, great. Thank you guys.

Yep.

Thank you. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Hey, good morning, everybody.

Kevin.

Could you give a little.

Talked several times about strong pricing in the rubber business.

If I look at the.

Those EBITDA bridge provide on your slide deck that looks like if I add up all the quarter.

You got about 34, or so million in the price based price and mix benefits in rubber in 2019, So curious what that looks like in.

2020.

Well, so we had a a very good pricing cycle, we're happy with the outcome from it it's a little commercially sensitive to go into exactly where those numbers came out for us.

But I would say it was all in all a good year, albeit just as I said before in the previous earnings call. We went with this is the airlines seeding pricing model that when you're in a tight market. It's okay to have a couple empty seats and we did see samil issues on volumes for us, but all in all the net positive a strong net.

Positive.

Okay, and then the surcharges you talked about it could you just give a little color there.

How quickly does that pass along feedstock changes it sounds like you had.

You got these implemented in most you said the lion's share your volume so is that on a global basis.

And does it does it reversed out I mean, you think you had 13 ish or so million dollars a differential headwinds. This year does it reverse out any of those and turn those into a tailwind you quantity that back as a result of this.

Or is it really just kind of setting.

Yes, that's kind of the baseline year 2019, and now going forward you just reduce that volatility by offsetting it just wanted to just give some color on those surcharges.

Yes, Kevin a couple of questions raised there. So let me take them sequentially. So first of all 29 team is 29 team is done we closed the book side and what we do now is really just looking going forward, a new set of contracts with our customers.

Theres always some timing issues between when we buy in how it gets sold and works through our inventory and so forth but effectively.

In the same sort of pacing, we have with our other elements of oil cost pass through the same things there with differentials we had a essentially a very similar mechanism in place in Europe for a number of years, we don't have that largely in place here in the United States. So thats a.

A substantial dampening effect for us going forward, we don't have it across the board. We had for example, some people who are on multi year agreements that didn't come up this year, but by and large we were very successful that.

Okay got it and sorry to beat a dead horse here, but I guess I want to make sure I understand the first quarter expectations are you said high single digit sequential improvement in EBITDA, which gets you closer to 70, just a little under 70, and then but baked into that as a mid single digit headwind from.

The Corona virus impact so that gets you to.

Low to mid 70 million of EBITDA, excluding that which seems like very strong year over year improvement.

In the underlying core business I mean, it is that really the way I'm thinking about that appropriately and I know you've given all the reasons why so far I just want to make sure I'm understanding how your.

Frame framing that up yes, I mean, I think with not for Corona virus, we'd be looking at a very strong situation. We ended December in Asia with high degree of momentum as I said earlier, we think in December our tire customers grew down inventory and I'll, just mean tired of carbon black I think barrel and finished goods we saw.

An upsurge in their orders in January and February and so all that is quite positive. If you think about a year on year comparison, we were going through changing that some of our channel management issues in China, a year ago, we executed that quickly we got it done with the Garnet batch better place. There now so all those are really strong positive.

As for US and I think we put in that comment about krona virus and we put it into our guidance because I think theres a hunger for it out there and that's how we see this.

I don't underestimate this I lived in Taiwan with my family during Sars My Kid got quarantined I've been through it but I think our feeling is and the feeling of our team on the ground is that.

China is getting back to business. This too will pass we will move forward and that's why we wanted to put in that but if not for Corona virus I think we'd have had a stronger Q1.

Okay. All right I was just add that is an estimate our team's doing we don't have any better information in the rest of the world, but we're doing our best as a week by week, if we see a march normalization to our business what would the impact we all know Paul that.

It's just an estimated doing our best to give you perspective.

Yeah for sure and perfect. That's very helpful. Thank you very much.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

This is Adam view this on for Laurence Thanks for taking my question today.

It sounds like no upturn is anticipated 2020, but thinking about 2021.

Once growth.

Demand growth resumes, how should we think about incremental margins.

Well first of all out and welcome to the call. So clearly incremental volumes are positive and any business with fixed costs and so that would be a strong positive for us in that timeframe and we've got some capacity to be able to take in I'd say, certainly a year or two of recovery in.

So I think that wouldn't be quite good for us.

I think at this point, we're not prepared to quantify I think we have to see what and where and which markets and all of that.

But I would say that if you look at the bridges in our press release, we've got a contribution margin bridge in there that you ought to be able to back into some indication of what our contribution margins are and they are pretty attractive.

Okay. Okay, Great and then my last question is just.

After the seasonal de stocking you saw in the rubber business.

Are you seeing signs of a restock through Q on so far.

Oh definitely let me say I think it was stronger than the typical destocking and we think it was really quite aggressive on the tyre side and then we came into a very strong January set of orders. So I'd say that was pretty much confirmed.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Chris caps.

Loop capital markets. Please proceed with your question.

Hey, guys. Good morning, just a quick follow up on that restocking comment you just made.

The is that exclusive to the rubber segment are you seeing any restocking in the channel on the specialty side.

Now that's our first quarter.

Good morning, Chris that was for sure most pronounced in the rubber area.

Right whatsoever.

I know the there was the destocking.

Seasonal if you want in the fourth quarter, but there has been kind of a prolonged de stocking up for the polymer supply chain, which you guys Steve into on the stuff I've as well. So I was wondering if theres any sort of recovery. There that's visible in terms of either end market demand strength or or restocking, but some but not not what your characterize.

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And Chris I'm glad you asked a question because specialties is not seeing a sequential.

Pick up from the fourth to the first quarter. So.

That pick up for the total company is on the strength of rubber Manav specialty.

Got it.

And then.

Corn coming back to the MPC. It analogy, so I understand the willing to willingness to walk from some volumes, we didn't feel like they're getting appropriate value for your products.

But you also said you felt pretty good about repricing that you got in North America. So I'm wondering if the if the volume that you faded for lack of better term was was that.

They tend to be geographic in nature with some regions no.

More competitive or was it more customer specific in terms of.

Where are you now sort of walk from that those volumes.

Right so speaking of rubber.

I would say the biggest impact for us in terms of let's say volume, where we took it was north America.

And the somewhat in Europe.

And that's a reflection of I'd say pricing negotiation dynamics really around individual customers I mean, that's that's the nature of this.

Got it.

And then.

Given that you're you said, 3% to 4% lower volume expectations for the full year Im just wondering what sort of.

Impact you have baked in that your outlook from absorption variances.

Talking about the sequential.

Improvement in EBITDA, you'd said better absorption variances, but I would assume that.

All your basis with a lower volume might be a penalty. So if you could reconcile that.

Yes on a full year basis net of the first have better absorption you're right on the full year basis, our overall of fixed cost and SNA are a headwind and.

Although we have a first half dynamic where you have a little better absorption for full year perspective, you're right. It's a it's negative you got it just nailed there Chris it's because Q1 in particular is a lot stronger than a year ago.

As we also.

Thats helpful. Thanks, and then finally.

The on the.

Causes you get sort of feedstock differentials path to the customers think thats, mostly on the rubber side I'm wondering.

And your EBITDA guidance range.

Is there.

Well of feedstocks sort of become less of a headwind on the specialty side is that source for potential.

Well.

Movement upward within your range within your guidance range or.

Because thats definitely I guess what on that.

Sorry, Chris I cut you off keep going yeah, I know that no I guess, what I'm asking if theres no pass through mechanism for feedstock adverse feedstock differentials on the specialty sites Phil.

So first of all the answer your guide Mike Yes.

To answer your earlier question so of that market improves its a net upside for us we do have some ability to pass through differentials and so forth in the specialty area specialty items, just say has been a more.

Challenging and more aggressive pricing and let's say competitive negotiation environment than.

It's just been challenging so it's been a harder to achieve the same ends there and that sort of makes sense because in a lot of these areas for selling highly differentiated product and it's really on a different basis.

Right fair enough, but the reason to offer the way on the quantum correct me, if I'm wrong, but from your assets that are dedicated to specialty you you need the lower so for feedstock, which is where.

Some of the.

Because of our client going for your portfolio, most pronounced so where you might need.

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More of our production in the form of a pass through costs, but.

Background.

Yes, so that tends to be in.

In specialty it tends to be the larger customers who are in perhaps a slightly.

Less differentiated end of the specialty spectrum, where we have contracts and the people who we have been let's say the more highly differentiated areas tends to be maybe a slightly larger numbers skews for specific end properties that are trying to deliver and those contracts are just I think by their nature.

Less less link to.

Underlying indices like this.

Fair enough.

I think it works out our risk reward return for all of us.

Okay. Thanks.

Okay. Thank you Chris.

Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipment, maybe necessary to pick up your handset before pressing the star Keith one moment. Please the we pull from my question.

Josh.

There are no further questions at this time I'd like to turn the call back over to Mr. painter for any closing remarks.

Thank you all for being with US today, we appreciate your time and attention and interest in Orion engineered carbons have a good rest of your debt.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.

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Wow.

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