Q1 2020 Earnings Call
[music].
Greetings and welcome to Ryan engineered carpet first quarter 2020, <unk> earnings call.
All participants are not listen only mode. A question and answer session will follow the formal presentation.
If anyone to require operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I will now because at the conference over to what do Wilson head of Investor Relations at corporate Communications. Thank you you may begin.
Thank you operator, good morning, everyone and welcome to a Ryan engineered Carbons conference call to discuss our first quarter 2020 financial result.
I'm Wendy Wilson.
Of Investor Relations and corporate communication.
With us today, our Corning painter, <unk>, Chief Executive Officer, and Lorin Crenshaw, Chief Financial Officer.
We issued our earnings press release after market closed yesterday and have posted a slide presentation to the Investor relations portion of our website.
We will be referencing this presentation during the call.
Before we begin.
I'd like to remind you that some of the comments made on today's call are forward looking statements.
These statements are subject to the risks and uncertainties as described in the Companys filings with the FCC.
Actual results may differ materially from notice described during the call.
In addition, all forward looking statements are made as of today may eight 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'll now turn the call over to Corning painter.
Good morning, everyone and thank you for joining us for our first quarter 2020 earnings conference call.
Thank you Wendy and once again welcome to Orion Wendy brings a wealth of Investor Relations and communications experience from the vantage point of several different firms over the course over 25 year career. We're excited to have rejoin the Orion team as a follow up partner to Lauren and to me as we.
As well as a partner to each investor and analyst who is interested in understanding our fundamentals and the strategies to drive shareholder value.
First a big thank you to our people for their commitment and discipline during these challenging time.
With their leadership and dedication we've been able to operate all of our plants through the quarter in excellent for including those in China Korea, Italy America everywhere.
Our people know their work is important and that our customers and investors count on us to deliver every day.
Not only have our people been reporting to work with they have been discipline.
Across the workforce of more than 1400 people on five continents, we have had no employee to employee contagion.
In our plants at times when production slowed Union and non Union colleagues have worked in the spirit of teamwork trust and with great flexibility in terms of job descriptions together, we're striving not just to get through this but to build a better Orion.
We had an excellent Q1 until the second half of March when the impact of coded 19 hit our European and American customers on todays call Loren and I will cover the Q1 results as always but also devote time to three additional topics our operational response to coded 19.
How we expect our business to develop from here.
And our liquidity, which I believe you agree is more than ample.
As always we'll be happy to take your questions at the conclusion of our comments.
As I said, the first quarter started off with a positive sequential tone that we expected Q4 had been especially seasonally weak, including we believe a customer inventory drawdown in late December there was followed by an uptick in January.
However in mid March we saw a rash of order cancellations from tire manufacturers globally, particularly in North America in Europe, as our customers began shutting and slowing plants as the impact of co bid 19 group.
As a result, our March results dipped sharply mid month, and this year scope scale and speed of the downturn caused by coded 19 began to bite.
Overall, we estimate the first quarter impact of coded combining the volume impacts in inventory revaluation impacts to have been in the range of $7 million to $8 million, which gives you a sense of the way the quarter may have ended up excluding the coded related impacts.
Despite these headwinds we delivered adjusted EBITDA of $63.8 million of which rubber carbon black contributed $35.8 million and specialty carbon black contributed $28.1 million.
Our liquidity position stands at $283 million and lower and we'll have a lot more to say about that.
With that said I'd now like to shift gears and update you on the actions are Ryan has taken in the face of the coded 19 pandemic and what we're seeing operationally through April.
When Cobiz 19 was still largely seen as a Chinese phenomenon, we swiftly activated our business continuity plan for Pandemics, which was based partially on the World Health organization pandemic preparedness plan.
The values, we established yes last year were another bedrock for us as we took action.
I'm going to explain our actions across the six core pillars detailed on slide four.
People are most important pillar is protecting our people and our first actions were suit to secure their safety and health.
In practical terms, we secured and distributed personal protective equipment, such as masks segregated shifts and work team implemented temperature checks step up cleaning protocols shifted canteen arrangements secure an expert consulting physician and physicians and a big banks to them as well.
Shifting to remote working for office space people and massively stepped up employee communications with an emphasis on straight talk.
It is a testament to the discipline of our employees and the overall disaster readiness debt. Thus far. We currently are aware of only two employees out of total of 1400, who have tested positive for the virus neither of whom have required hospitalization.
Looking forward, we will follow governmental and whr guidelines as we slowly bring employees back into offices, establishing new protocols and maintaining physical distancing in order to continue to keep our employees safe.
Moving to production refers to you can operate a plant without people, we've worked hard to maintain safe plants and I'm proud to say our people continue to get their job Todd.
That is ultra important right now.
Next we have multiple reactors at all of our plants and in the normal course of business. We modularly these up and down according to demand in maintenance needs. While at the same time continuing shipping operations as you can imagine we've been doing a lot of modulating recently in response to customers I want to be clear indeed.
Visual reactors have only been down in response to declines in demand that is we have not proactively shutdown plans due to manpower at several plants in the us when production rates were low we worked collaboratively with union leaders and workers to achieve great flexibility in terms of roles and responsibilities.
Across the labor pool, allowing us to use this downtime to advanced projects.
That focus on enhancing safety and reliability of our plants.
Yes. This is meant higher cash consumption than laying people off but as you will see we have the financial flexibility to take this opportunity to build loyalty and to make plant improvements with a view towards emerging from this downturn even stronger.
Moving to customers.
Many of our customers, particularly tire customers idled their manufacturing facilities in April we estimate roughly 90% of north Americas, and 75% of Europe's higher factories, where idled or servier really curtailed with plans to slowly begin production at reduced rates in may and.
June with auto OEM manufacturing plants on a similar schedule.
Against this backdrop in April Orion's plants operated in the mid forties in the Americas in Europe and in the mid Fiftys in Asia.
I will discuss the outlook for our business. Later however in April we saw a rubber volume demand down approximately 60% in the Americas in EMEA with Asia down approximately 34%.
We have stayed and close communication with our customers to ensure good communication and coordinate transpacific transportations specific issues as well as monitoring customer plant operating levels.
Financial.
From a financial perspective in late March we enhanced our financial flexibility by suspending our dividend and bolstering our cash position by drawing on our revolver in recent weeks, we tap nearly the entire capacity under our uncommitted lines of credit bolstering our cash position by approximately.
Further $40 million to eliminate any funding risk under these lines.
Over the past several weeks, we've evaluated our liquidity, including financial covenants against a wide range of scenarios and stress tests.
We've also taken cost actions that will increase our cash generation over the coming 12 months, including salary freezes reduced discretionary spending across all businesses and functions lower incentive compensation accruals select head count reductions and temporary layoffs we.
We estimate the annual impact of these actions to be in the range of $10 million to $15 million, excluding actions like temporary layoffs.
Aside from cost reductions, we've also differs select capital expenditures and our lowering safety stock levels, where appropriate and stepping up the monitoring of customers and suppliers to protect our balance sheet, while holding the line on term.
Supply chain from a supply chain perspective, the key message is that we believe we have adequate access to raw materials supplies at all our plans for the foreseeable future.
We continue to track those markets very closely beyond that we are tightly monitoring our other supply chains, particularly for consumables and international shipping availability, we have qualified alternative suppliers as needed.
We will need to stay close to this and more generally speaking I believe international shipping will be a point of friction for the global economy in the coming months.
Communities in SG. During this time, we have not forgotten, what we could do to help our neighbors and the communities in which we operate.
We have supported hospitals and other medical providers with mass and cleaning equipment at several sites, where we operate.
And lastly, we have continued to focus on and keep momentum going in ESG. We recently received notice that our echo Vadis score improved this last year by 10 points to a score of 62.
While this continues to place us in the silver category 45 to six before the significant improvement last year is a sign that we are on the right track. This increase is a testament to the dedicated effort of our entire team and their focus on operating company in a socially and environmentally responsible fashion I'm very proud of the pro.
Progress that has been may.
Moving to slide five now I would like to shed light on what we're seeing through April and looking further out which indicators, we will be looking toward for signs regarding the likely pace and shape of a recovery.
Slide five provides perspective on what we're seeing around the world and is not a pretty picture with a large percentage of customer plants being idled, particularly in North America in Europe.
Rubber volume demand declined between approximately 68, and 34% and specialty volume declined approximately 38.
And 8% depending upon the geography under these conditions, we operate the reactors in campaign mode are running to build inventory and then idling. The reactors. While we continue to ship we have had to lay off employees at one location so far.
As you can see.
From a rubber perspective, the trends in North America and in May our resemble one another pretty closely.
Whereas declines in APAC were significant but more muted reflecting that most of our exposure is in Korea, which has navigated the pandemic quite well.
As a comparison a single worst quarter rubber experienced during the 29 2009 financial downturn from a volume perspective was 33% evidencing. The results of 2009 may not prove useful or accurate predictor of the current situation.
Also noteworthy on that slide is the relative strength of specialty.
Certainly specialty benefits from a greater market diversity and rubber and many of its markets are not quite as directly impacted by the physical distancing restrictions that cause miles driven and light vehicle sales to come to a screeching halt.
However, we believe specialty volumes will get worse before they get better because of continuing softening in demand.
To place the April trends in a bit of context, the single worst quarter specialty experienced during the 2009 financial downturn from a volume perspective was 34%.
I think we need to be prepared for it to be deeper this style.
Let me say again that the experience of our business. During the 2009 period may not prove useful or accurate predictor of future.
Of the future or of the magnitude of the impending 2020 decline and they do not represent guidance in any way.
We are sharing this data to provide perspective as a Ryan was not public in 2009. So this information would not otherwise be available to investors.
Turning to slide six we provide an overview of our two global business units by end market, our sense of the recoveries prospects for each and some sign posts to watch along the way.
Keep in mind.
The business environment is very uncertain that said here is one way it could play out.
Starting with rubber as a reminder, approximately 90% of this market segments volumes are driven by the automotive end market.
Roughly 60% of rubber carbon black goes into replacement tires demand for which is linked to miles driven.
The balance goes to the OEM end market as tires or MRG demand for which you can largely trace to global truck and light vehicle sales.
First of all certain aspects of the economy held up better than others, such as home delivery.
Truck tires have been fairly resilient and we believe this will only strengthen.
Secondly, passenger cars are not cruise ships before not afraid to get into their car driving by car I believe will be the preferred transportation mode and tires will wear out and need to be replaced.
To this end.
In a recent financial times article the first economic indicator to fully recover in China is traffic congestion.
Thirdly household purchases of new cars will certainly be depressed in the likely event over recession.
But new car sales are unlikely to be as weak as they have been recently.
Longer term, we don't believe the underlying growth in demand for rubber carbon black has changed as a result of the current downturn with motor vehicle production miles driven and automobile servicing likely to continue supporting growth in and demand within the tire and non tire market in line with a 3%.
Rate. This business has reliably deliver on average over long periods of time once the current downturn has subsided.
Turning to specialty in the past, we've indicated that roughly 25% of this business is driven by global automobile OE production and new vehicle sales. However, upon refreshing our assessment of volume by end market at a more granular level. We now estimate this number to be in the order of.
15%.
The remaining 85% being driven by a diverse mix of end markets, ranging from engineering plastics and pipe to films wire and cable adhesives and synthetic fibers.
Clearly the automotive segment will see a sharp decline in the second quarter volumes and for the full year.
Also of note is that roughly 10% of specialty volume serve the pipe and market of which a substantial portion ultimately ends up in the oil and gas space.
Given the severe strain that sectors under right now a steep decline in oil and gas infrastructure spending as expected with a corresponding impact on this part of the business as far as pockets of strength I would point to certain film applications, such as food grade that have held up relatively well.
Longer term with the possible exception of pipe into the oil and gas space. We don't think the underlying growth in demand for specialty carbon black will change as a result of the current downturn, we still expect consumer spending on durables and non durables construction activity infrastructure investment and automotive build.
So should allow this business to continue growing in the 3% range in line with its growth rate over the past decade. Once the current downturn has subsided.
Now turning to our first quarter results in greater detail.
As you can see on slide seven adjusted EBITDA declined by $800000 year over year.
Price and mix were favorable for us while volume was the primary offsetting factor.
Within specialty the year over year decline Volumetrically was driven primarily by our two largest sales regions North America and Europe.
As far as underlying end markets year over year weakness was broadly in evenly widespread across all end markets coatings polymers printing.
Within rubber volumes were down year over year, but flat sequentially on both the MRG and the tire side of the business.
The year over year decline reflected one lower volumes due to a deliberate commercial strategy as part of the 2019 contract negotiations to emphasize raising pricing closer to reinvestment levers over volume.
Two week automotive OEE demand trends impacting MRG and three order cancellations from tire makers late in the quarter, reflecting a pullback entire production in all geographies as tire production facilities commence shutdowns due to Cowen <unk> Co. bid 19.
With that I'd like to turn the call over to lower.
Thank you very much Corning now turning to slide eight volumes were down by 10.5% year over year and slightly up sequentially inline with the trends mentioned earlier, while adjusted EBITDA came in at 63.8 million basic EPS at 30 said and adjusted EPS at four.
84 cents.
Contribution margin per tonne improved year over year due to positive customer mix and favorable feedstock cost development within specialty.
And based price increases within rubber.
Cash from operation was $4.9 million when working capital up 38 million, mainly due to higher sales and therefore.
Accounts receivables, which is a good thing on an underlying basis, but we'll now reversed given the current economic conditions.
For reference during the fourth quarter working capital was the benefit of 51 million driven by lower accounts receivable given the seasonally weak sales levels, we saw at that time.
We expect working capital to resulted a cast windfall of over 50 million during the current quarter due to lower oil prices and sales, providing an offset to the expected significant sequential decline in adjusted EBITDA.
Of course, the ultimate size of the working capital benefit will depend on volume and price development through the balance of the 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 base price improvement across both the rubber and specialty segments and favorable mix in specialty with eroded by a combination of lower volumes and FX.
From an adjusted EBITDA perspective, lower contribution margin and higher fixed costs were partially offset by the favorable impact of FX on fixed costs and lower SNA during the quarter, resulting in a decline of 1.1% to 63.8 million.
The key driver of the decrease in SNA was lower compensation costs compared with the prior years first quarter.
Earnings were reduced to reflect the fact that sales for them in Tory purchased at higher prices will occur in the future months at lower than expected prices.
This dynamic will also impact the second quarter.
Finally, net income decrease 1 million to 18 million or 5.2%. Your every year you.
Due to lower adjusted EBITDA and higher financing costs.
Related to an unfavorable F.X. impact, partially offset by lower taxes.
Now turning to slide 10, you see the development of our cash flow during the first quarter.
We generate at 4.9 million and cash from operating activities, which again includes a networking capital head when a 38 million.
We spent approximately 50 million of cat back in the quarter, a heavy amount, reflecting the timing of payment related to executing projects underway.
We expect the first quarter will be the highest Catholic spend all year.
Finally, we borrow 110 million during the quarter.
<unk> roughly 45 million reflected the previously announced proactive steps taken to bolster our cash position by drawing on our revolver.
Using slide 11, I'm going to explain the mechanics of our credit agreement with emphasis on how are financial Covenant works and the wide latitude. It provides to manage through the current economic store.
We ended the first quarter with net leverage of around two and a half times.
At that level, we are at the upper in of our steady state targeted range up to two and a half times.
Well that state it rains remains relevant during normal economic times. During this pandemic, we're going to exceed it starting with our second quarter reported results.
In doing so we will use the flexibility provided by our credit facility.
Just to get through this period, but to get through it in good shape.
Are one financial Covenant is summarized any appendix on slide 20.
That come in it is a net leverage test of five and a half times trailing 12 months.
It is only relevant if total debt drawn under our revolver exceeds 35% as defined in the credit agreement.
Importantly, not all dead count towards that 35% trigger.
Debt debt drawn under ancillary lights and under our uncommitted local lines are all excluded.
Because the ancillary lines are bilateral in nature that is they've been established one on one with individual banks in the revolver Bank group, but are not classic pro rata borrowings across the bank group.
Borrowings under ancillary lines reduce availability under our revolver, but do not count toward the 35% trigger.
The very attractive feature of our credit agreement and one that gives us comfort that we have flexibility to manage the current situation from a balance sheet perspective.
As a result of this feature right now we can borrow roughly 87 per cent of our revolver capacity split 35% has a classic pro rata style borrowings and 52% hundred ancillary lies that we have established without violating the financial covenant.
And this is true at any adjusted EBITDA level one imagines.
Translating that 87% into numbers.
At first quarter exchange rates are 250 million euro revolver equals approximately 274 million of total capacity.
<unk>, 87% or 238 million could be drawn without violating our financial covered it.
The chart in the lower right hand quadrant of slide 11 answers the question what financial firepower Kinda Ryan access without violating it's covered it at any adjusted EBITDA level.
The answer as of the end of the first quarter was 247 million.
Price of 170 million in cash and 140 million incremental debt.
Keep in mind that on top of that 247 million.
With all prices dramatically lower and the economy slower.
We expect a meaningful working capital release in the second quarter.
The final point I want to make on this slide is that our debt maturity profile is such that we have no refinancing requirements over the next three years, which is a strong position to be n. as we approached the coming downturn.
Like 12 shows that 247 million of liquidity, a slightly different way detailing the mix of our current debt stat and what the entire liquidity stack would look like on a pro forma basis, where are we to access the full 247 million.
In closing out the topic of liquidity, let me simply say.
That there are a wide range of opinions out there regarding how challenging things may get over the next several quarter.
One group not consulting.
Recently published scenarios for the overall industry.
From a worst case, 37% full year decline in global demand with a 60% peak decline in the second quarter.
The best case, 11% full year decline in global demand with a 35% Pete decline in the second quarter.
However, scenario planning across a wide range of downside cases indicates that the 247 million liquidity that we can access without triggering any covenant will prove sufficient to cover our liquidity need for quite some time.
This flexibility combined with the absence of any significant debt maturities until 2024 allows us to be confident in our ability to whether this downturn.
Moving to slide 13.
Quarterly specialty volumes were down your over here.
The reasons I discussed earlier.
Geographically North America, Europe, and Asia X., China.
Where the primary sources of weakness.
<unk> each of our core in markets impacted such as polymer film wire and cable and ink.
From a profitability perspective gross profit per time rose 5.2%.
Thing a combination of favorable mix and price.
The price element of the increases notable and a good signal however, given that grade mix energy sales F.X. and the timing of feedstock pass throughs, or so dynamic and difficult to predict quarter to quarter.
Trailing 12 month trend is a better measure.
On that basis.
Profit for time is essentially flat sequentially.
The next slide breaks out the major year over year drivers of adjusted EBITDA with positive price and mix.
Offset by volume.
Turning disliked 15.
Rubber volumes were down 11.1% year over year and flat sequentially.
Reflecting the factors mentioned earlier with the strong tone to the quarter being arrested in mid March by Kobe, 19 related dynamics, causing order cancellations globally late in the quarter.
Gross profit parametric tongue was flat you over here, it's higher base prices were primarily offset by unfavorable aspects and lower energy sales.
Slide 16 shows the development of adjusted EBITDA.
With the significant positive price offset by lower sales volume.
That I will turn the call back over to corny.
Thanks for.
Moving just slide 17 as you know in March we withdrew are 2020 guidance in light of all the uncertainties caused by Cobin 19.
However, we want to provide some information that we believe will be helpful.
Investors in developing financial scenarios for the balance as a year, we're happy to answer any questions regarding any of the assumptions detail on that slide.
However, I'd like to use this time to discuss Catholics and the impact of oil.
I was working capital and he picked up.
We have lowered our cap expending expectations from a range of 132 and $150 million to 122 $130 million. This reduction reflects the reality the physical distancing mandates in connection with Cove in 19 impact our ability to advance com.
Flex capital projects, requiring heavy staffing whether they be growth orientated efforts, such as expanding capacity at revana or sustainability enhancing efforts such as the EPA mandated work and Ivanhoe.
Regarding EPA orientated work, we're committed to advancing these projects where possible while continuing to adhere to the physical distancing unsafe work requirements of each state I'm thrilled to confirm that remain on track to complete the work at our Orange site in May in advance of the June 30th deadline.
Line under the consent decree despite the challenges.
I would like to congratulate the Orange project team a plant team and are contractors for working cooperatively in overcoming many obstacles to get Togethers here in health as the Orange project was far enough along that we could finish the work without needing large numbers of contractors onsite.
However, <unk> and Ivanhoe, we are in the construction phase and safety and physical distancing challenges have been more impactful of course, if we can do more ivanhoe, we will upon receiving force majeure declarations for numerous suppliers in recent weeks, we officially declared forcing the shore to the E.P.A. and are currently.
And discussions regarding and path forward in the face of the extraordinary challenges. We currently must contend with.
Overall, despite our efforts we do not expect to spend as much E.P.A. related capital as previously anticipated in 2020 and this is one driver behind the 15 million dollar reduction to our forecasted capitols fans.
Before leaving the topic of capital spending I also want to refresh our current estimate of the impact of the overall E.P.A. span.
We have certain technology choices to make with regard to the remaining to plan and are currently awaiting a stage two front end loading quality design estimate that should be completed during the current corner when that studies done it will represent the most robust estimate we have had gym date of the overall.
<unk> of the E.P.A. spending.
We'll update investors again, and our second quarter earnings call. In August. However, we know enough to say now that the range for this estimate is likely to be in the neighborhood of $230 million to $270 million with the midpoint being approximately $250 million, which is up substantially compared or.
Last estimate of $190 million.
This is due amongst other things to additional abatement equipment being required at Renault the remaining sites and higher cost surrounding the implementation of equipment and Ivanhoe.
Oh that 250 million dollar midpoint, we expect that around $115 million for 45% will have been spent between 2018 and 2020 year and with the remaining 135 million dollar balanced expected to spread between 21 and 2023 or early.
<unk> 2024.
Once again the numbers are not yet at stage two front end loading precision. However, we have more confidence in this estimate going forward and again, we'll update investors with a range during our second quarter earnings call in August.
Turning to oil prices given the extreme volatility we have seen year today I would like to provide more detail and clarity on the impact of changes in oil prices on our business from both of working capital and even perspective.
As we have sat in the past we estimate the impact on working capital of a 10 dollar change in the feedstock to be in the order of $27 million to $30 million.
Over three or four month period during the normal business conditions. This estimate will vary a different points of the economic cycle.
When accounts receivable and inventories are lower the impact on working capital of oil prices will be somewhat lower and vice versa. However, this estimate is directly accurate in a reasonable proxy.
Regarding the impact on <unk> when oil prices fall are even softballs and vice versa.
There are several factors and play the drive this dynamic.
<unk> is the way the terms of our supply and sales contracts interact for contracted volumes, which tends to benefit us when prices rise and vice versa. When they fall.
This impact persist notionally until the next contract period, when there is an opportunity to reset overall profitability.
The second factor, particularly during periods of extreme price volatility is inventory reevaluations, which are unfavorable when prices fall unfavorable when they rise.
That's exceptional gains and losses are not included in this rupprecht.
A third factor in play is that a meaningful portion of her volumes are not under contract and do not require us to pass along our feedstock costs at all.
As a result, when prices decline, we enjoy the benefit for a period of time and vice versa when prices rise.
These complexities in mind, we have refined our estimate.
Estimated impact of a given changing the oil prices on even.
Previously we basis on a percentage change in our features docks.
We have shifted this rubric away from percentages because one per cent of $100 is very different from 1% of $50 for example.
Instead, we are now stating the impact in terms of a dollar exchange in this 12 month average feedstock costs.
On that basis, we expect every one dollar change in the 12 month average feedstock costs you impact adjusted EBITDA by 700002 $1 million.
This revised approach suggest a less severe impact from oil than our previous version.
For instance, a change in our 12 month average feedstock costs from $65 to $35 would amount to an estimated he bit a impact between 25 and $35 million under the new approach versus $54 million under the prior approach.
In mind as a copy out at this estimate will vary at different points in the business cycle with a larger impact wouldn't volumes are higher. It also does not consider extraordinary impacts such as impairments such as we've experienced and the first quarter and we'll again in the second quarter.
Overall.
Proxies are useful tool to understand the impact of oil on our business overtime and under normal business conditions.
Before closing I'd like to invite investors an analyst review, our inaugural <unk> proxy, which we filed last week.
It's an important milestone in our evolution from a foreign domestic filing company to a domestic filing company, providing a level of disclosure and transparency than the lines us with the universe of comparable U.S. companies against wish we compete for investors support and capital we're thrilled to provide a step change increase in.
Perspective tour stakeholders in terms of our overall governance.
Upon reviewing the proxy you will notice that at our annual General meeting we are proposing a slate board members that includes three new independent members Ms. Mary Lindsay Doctor <unk> Park and Mr. Michael verse.
While t. existing board members, Mr. Jack Clam and Mr. Marks you don't care Farber will not stand for reelection.
The experience skills and backgrounds of each nominee or detailed in a proxies. So I would invite you to review the proxy rather than trying to quickly summarize their backgrounds at this time.
<unk>.
I would like to thank Jack for his vision leadership and on a personal level for is ongoing support to me I would also like to think Mark for support to the company both as a board member and by acting as our class B. Daily manager.
Going forward the collective skills experiences and independence of our board will be as strong as they've ever been since going public no stones she'd be left unturned is we strive to soldier through this downturn and emerge stronger on the other side.
Publishing our inaugural pox, C. and refreshing our board are too important steps on that journey.
In closing I liked leave you with four thoughts.
Burst are key markets are going to emerge from the stronger sure people may delay buying cars in a recession, but cars, where you can drive your family safely from point to point are not going out of style.
Second the majority of our rubber carbon black goes to replacement tires not new cars.
We have a little liquidity, we need to get through this in good form and forth are people are committed they've proven this end with commitment rate things are possible.
I'd like to thank Diana down for her roughly eight years of service to a Ryan in various financial roles and most recently as V.P. Investor Relations and insurance Diana you've been a vital link between a Ryan and our investors you saw us through the I.P.O. financial reporting and leadership changes. Thank you for everything we wish.
You the very best.
Operator, please open up the line what questions.
Yes.
Mm.
Ask a question. Please press start one on your telephone keypad.
Confirmation tell and you can't you align answering the question kill.
You May pass started <unk> they came over here question <unk>.
And start practice 10, she thinks speaker equipment and may be necessary to pick up your handset before pressing this started keys.
Please ask one question and one follow up question and then <unk> additional questions.
Our first question <unk> spectacularly you'd be S. Please proceed.
Yeah, Hey, everyone I'm glad to hear that every what sounds well. So just to go into the oil sensitivity first I appreciate the update disclosure and <unk>, how your kids that that's helpful.
<unk> in your example, we talk about a 30 dollar decline of seats stocks 25 to 35 million decline and <unk> and you just talk about in a generic scenario, okay, how that impacts at different segments differently.
Okay. So first of all me to say that I misspoke, there for a 30 dollar drop and at times 0.7, you'd actually get to 21 or 21 does $30 million for the actual impact on that so that's going to be an impact, though that's going to hit us basically volume.
Strictly as we use oil.
And Notionally speaking, that's going to then be just spread out evenly across the segments.
Mm.
So then you wouldn't expect a larger impact and and the rubber segment versus specialty Oh, you'd expect it to be more even.
Yeah that that number is a net of the favorable effects on specialty.
Offset by the negative effects on the rubber and so on balance.
It's $20 million to $30 million, but because the specialties, but as it is is less contract it it would benefit.
From lower prices for a period of time and so that is a net US back then so the specialties impact would be on balance favorable offset by the rubber and so that's the.
<unk>.
Okay, Thanks, and and just in terms of the April numbers that you provided a with his specialty I mean, North America was showing down a lot more than Europe. You just comment on why that large difference if there's anything we should take about behind that.
Oh.
Well I think part of what.
Been a an element of specialty in North America has been oil patch activity much more so than Europe. So that wouldn't be an example of where things are different from the U.S. and from Europe.
Also say that there's a number of different economies in Europe, and and I don't think all of them have been impacted to the same extent the U.S. is at this point.
Okay. Thanks.
Oh, the next question as five.
Like we that with Barclays teach proceed.
Thanks, guys and good morning, when do you welcome to <unk>.
I guess first then once you start with the E.P.A. cap X. changed three things on that one how does that change or 2021 expected spend for the project to between this and the pandemic How's that change your conversations with the E.P.A. and read the this change it all your calculus in your ongoing discussions with of on it.
Okay. So let me take those not necessarily directly in order. So we are at this point, giving out guidance for next year and what we're going to do on Capitol, but obviously with a higher expenditure. It's it's more of a burden into next year and do they spent that we end up shifting.
Capital from this year, let's say with Ivanhoe going slower into next year those are impacts or.
<unk> roll over into 21 at the same time in terms of Ivanek, It's really know changed whatsoever. So we all are clear there is ultimately a cap in the agreement that we have with them. We have never disclosed to what that is so we just continue business as is in terms of the E.T. a way of ongoing discussions with them around.
What the conditions are at <unk>, this side and an orange as well and I think that the.
Situation with Cove in 19 is so dynamic that I don't expect to get to like a definitive sort of in revise timetable or something like that with the E.P.A. right now I'd say, it's more a matter of.
Mmm informed with what we're doing and what we see on the ground.
Ah Okay, and then I just want a second I. We appreciate the granularity you gave us on the April demand data on the inventory impairment can you use help us with what you expect the impact can be into Q. and is there are expected to be any drag beyond the second quarter from that.
The impact into Q. could be on the order of.
It could be in the hide it could be in the five to 10 million dollar range, probably more like 10 million or so and couldn't last beyond that really depend on him into where he turns.
When you when you buy raw materials.
From a cost based on a customer's order you assume certain m. into return.
Our customers in many instances have abruptly.
Reduce their orders.
And therefore will be sitting with that inventory for a little while longer than we anticipated could it last the on the second quarter that's possible.
But you can see an effect in the second quarter.
And the 10 million dollar range.
Okay. Thank you <unk>.
<unk>.
Oh next question is from Kevin Hi, There with you know it's coast research. Please proceed.
Hey, Hey, good morning, everybody.
Alright, Kevin.
If you could comment on how should we think of Sacramento margin here and the second quarter, because obviously it seems like volumes are going to be down something fairly sharp <unk> and it seems like specialty you'll probably get some price near term price cost benefits. There's this inventory impairment to think about curious.
There's so many moving pieces I mean, how how should we think of the deck with mental margins here in the near term with all those pieces.
Hi, Kevin had a total company level I think you would start in the high thirties for contribution margin and that considers rubber being in the low to mid thirties and specialty in the mid forties plus.
Would not attempt to then in Jack extraordinary items into that so I would start with that as a baseline and then later on the 10 million dollar impact from impairments and I think that will be a reasonable approach to take versus.
Changing the classic contribution margin to anticipate extraordinary effect.
Okay. That's really helpful and then in terms or the volume and <unk>. If you know I I kind of wait by geography divides you outlined in your slide for rubber and specialty it seems like April is maybe down in the magnitude of 60% for rubber 25 per cent per specialty and.
You know could you give some color on.
What the order books look like what you expect a you know as tire manufactures start bringing to pass the online when the capacity comes back will it be.
You expect a sharper improvement.
In terms of you know I guess <unk>.
A year over year declines, which still meaningful or is it going to be very slow ramp and and and especially sounded sounded like you expecting to get worse before they get better. So curious if you get elaborate on why you expect that to be the case on specialty.
Okay.
Personally say on rubber, it's a very dynamic situation and it is extraordinarily difficult to get a lot of visibility from our customers.
So I think we just have to we have to go into any questions that were thinking around on that score personally I believe that's their restarts will be slow and gradual.
Starting with probably more activity on truck tires that kind of things slowly building into consumer tires, I think it's gonna take some time to get their supply chains.
Moving as well, but that's my.
Personal view on it based on our discussions I would say customers are really not able to give a lot of visibility into it on specialty my view that it's going to get worse before it's going to get better. It's just that I think we have to be realistic at times like this and not living on hope and.
Taking the actions appropriate for the real situation on the ground.
I think we're going to declare ourselves after the next quarter to you know technical recession.
I think we're going to we going to see the impact of the unemployment rises that we've had and I think that's going to have to have a a further impact on the broader economy. That's yeah again, a subjective opinion.
Okay. Thank you very much.
Oh. The next question his friend Cats caucus with J.P. My again. Please proceed.
Thanks very much.
In the course of the June quarter given.
<unk> order sacraments or the volume sacraments, you're experiencing are you going to have to think.
Think about closing various plants that that may have natural effects on you or can you continue to operate as Houston operating with this on off structure.
Well so in the on off structure, we do have the ability to.
Shut down reactors, while continuing to shift.
And this is a product to customers tend to qualify certain gray in certain materials from certain plants doesn't support our customers, we really need to be able to continue to ship from all of our various sites. So I don't see the likelihood of a a full stop south Africa's sort of different situation.
Because the government is taking a very hard policy towards it's sort of shutting everything down but beyond like a specific situation like that I think we're likely to need to be able to continue to ship to support our customers.
That's not a huge number of people. So I mean, that's that's a cost effective thing to do.
Okay. Okay.
<unk>.
Given given the magnitude of volume decreases.
You expect to to report positive keep it in a June quarter.
We're just not going for any guidance at this point looking forward, Okay, and then let lastly.
With the the inventory write downs in the end are those cash effects because he or.
Selling selling product where are you built the inventory at a particular raw material price of the raw material price. So fell and then you have to sell it so it it eventually translates into.
Cash negativity is that correct.
Or or I could if marching on the thing you're selling.
Yeah that calculation is based off of.
The the new anticipation lower gross profit on that inventory, yeah, and so in as much as we will have lower gross profit on the inventory and effective <unk>. It's it's profitability effect yeah, yes, Okay. That's that said, though let me say that the spirit of our contracts.
Is that we passed through oil costs.
And yeah.
When demand goes down at the same time to such a big shifting oil prices that stresses the mechanisms that we have but we continue to work with our customers on.
Mechanism to achieve what the intent is behind these agreements.
That's a very important priority to us.
Okay. Thank you so much.
Thank you Joe.
As a reminder to start why then your telephone keypad, if you like to ask a question.
Question <unk> cafes planes per seat.
Good morning, two questions. One can you elaborate on the logistics friction that you alluded to out in the beginning.
And secondly on the oil sensitivities.
How should we think about to pass for fixing matches that if they're going to be something that is addressed in the next coming a contract negotiations or is it going to be sort of emotion your pets.
Okay, Let me a start with the logistics today, there are quite a number of blank shipping center, where is the ship in the end doesn't sale. They didn't have enough loading they didn't put it on the water.
So the challenges of.
Ships or you know a porch not really functioning in certain parts of the world India in particular right now.
Containers building up under certain locations not getting clean not getting set up her returns to all this just creates friction and difficulty in terms of restarting the economy and and that's what I mean, I think yeah and that goes into my comment earlier that I think.
Terms of the broader economy restarting, there's there's gonna be these things to have to be worked out before we.
We get to the efficiency and let's say the fully lubricated global global economy that we had before this whole thing started and that's a broad comment I think is a ryan we can manage that but just a little color too.
International Logistics at this point in terms of the contracts all we always look for improvements in our contracts. We made a a good move this last year on differentials and we look to and working with our customers a a an approach that is.
A fair and equitable way to handle oil.
Okay. Our next question, it's from John tend to hang with <unk>.
C.J.F. Kennedy's planes per seat.
Hi, Good morning, guys I was wondering if you'd be able to disclose d. on average intertwined or average price you pay for oil for about dial and Q1, what's that kind of trying to to an April so far.
If you have any color there.
Yeah, we we can't share the average price that we pay into one on on oil, but clearly.
Over the past several weeks is continue to decline more recently, it's it's it's bounce back but no we can't hear that precisely no.
Okay <unk> is it fair to say, there's differentials you've been experiencing I've I've been meaningfully decreased from last year since you've improved the the contract terms.
Are differential pass through that working and they have diminished year over year as anticipated.
That's right, but that that's to say the differential the show up at R.P.N.L. now different markets different places the actual differential in the marketplace. You know, it's it's a different story necessarily but we've we've been able to pass that through.
Okay got it and just from the cost reduction standpoint, I think you much intend to 15 billion and you're <unk> is that just over the three remaining quarters, where is that an annualized number for the year in kind of what's a split between Cogs in M.S.G.N.A.
That's an annualized number split about 70%.
Compensation oriented and 30% discretionary.
I would say.
90% of it is s. inane and only 10%.
It's a good so.
By and large because we're running in this how'd you download in terms of our plant.
We are <unk> and the visibility from our customers is not very great.
We are not including in that 10 to 15 million.
Substantial fixed cost reduction.
We're managing it month to month week to week in the AD download that Corning indicated, but it's gonna largely be in <unk>, where you see that benefit over 12 months.
Got it okay and put your share without that kind of month to month expense, you're saving is on the outside it I tend to 59.
Well see that really depends upon what the loading is on various plants and what the approach we take on that plant is and I'd like to leave that flexible so that when we go and we meet with a plant team a Union works Council, we can be in genuine discussions with them and haven't really sort of promise star.
Away into a corner that there's a certain out cup and we need to achieve in that but clearly authorities said I mean, we've had places where we have impacted people and taken costs down as a part of that.
Got it okay <unk> costs, you're talking about for the city P.A.
Upgrades is that going to be spread out evenly over that time from kind of to help us with the the facing up that and yeah <unk>.
Some of that yeah, starting some of that let's think about maybe a a third of that is gonna be and the cost to to the Ivanhoe project and so that one is cost and we'll see this year or some of that coming into next year at this point.
The other one would have most of the income was actually our last project.
So it'll it'll be in the latter part of the overall time frame.
Okay got it and I need your discussions with the E.T.I. right now I mean, what what are the things that are being discussed as Americans just passing on information is a two way street and the technology is an issue just kind of give us a flavor as to as to how they're responding to the situation.
Well I [noise], because it's a a bilateral discussion I I'd like to not go into great detail. The U.P.A. put out in general letter.
Which is published in which they basically said to everyone who had.
Oh for for some as your or some sort of relief that basically they were instructing you to carry on as is for right now.
And I think.
That's a a way to understand maybe the generic E.P.A. approach you know, it's our job to get as much of this down as quickly as weekend, it's their job to ensure that and yet you know there's just certain facts on the ground about.
The challenge, putting a large number of people in a relatively small space to try to do a lot construction work and I I'd like to just leave it there and that I I don't want to purchase this purchase this one way or the other week, we work that and you can imagine.
If I'm in their shoes, I'm Gonna Wanna understand that you're continuing to do your best on it while at the same time understanding you know the situation on the ground and let me just add from a modeling perspective, you take the mid 0.2 50 by the end of 2020, we expect to have spent roughly half.
Oh, the total too busy. So then you've got 125 30 to spread over three years.
Got it okay. Thank you and then finally, just one from from a regarding China and I know last quarter, you disclose that you'd have a new customer that was kind of really pulling up your gross margins, there and and maybe it was lines a little bit I'm wondering if if the relative strengths. There that you saw in the lounge was due to that one day contractor over the bar of a general you know.
I guess improvement coming out of their locked down after February that that shows the vines that you saw.
Yeah, I I'd say in general it's it's it's a broader story in China right now.
Got it thank you.
They're all them.
As a reminder to start one on your telephone keypad, if he would like to ask that question. Our next question answer I'm Chris capital.
Capital markets. Please proceed.
Yeah come morning, so.
Thank you for the the new sensitivities and I'm focused on the one on oil.
I get that you know guesstimation over a 12 month period, but if you look at.
See that's unprecedented scenario, where we're all seeing right now you <unk>. The the there is an abrupt nature and the price adjustment for oil.
From called 16 to 24 or whatever in the first quarter alone on <unk> during the first quarter, if I understood correctly. Your your gross profits were actually.
Yeah sure maybe even up sequentially so is it.
So I understand that just a fight bowl sort of accounting benefit there and then I guess would you feel that bryant of that full year sensitivity in the second quarter, given how just abrupt that the change in the seats that cost for.
If you can provide any color on that.
Yeah, So we buy on a rolling.
Average basis, and so of course, we're all watching or prices and we've done analysis suggests that Brent by the way is the better one to look at probably a 90% correlation with what we actually by but because we're buying on a.
Average monthly basis looking backwards, there tends to be a bit of a lag effect and we don't have the volatility that you would expect just looking at a screen at the day to day prices.
No.
When you think about that rubric.
It is calculated based off of volumes Overate well my period of time. So if you then want to look at a particular order you would look at it on a pro rata basis.
Tank, but but no you you wouldn't accelerated because the recent activity because if the rubric is based off of volumes over 12 months and so.
That's the best way I can explain it.
Okay. So.
In that in the first quarter, though there was.
Despite the <unk> sharply lower oil prices you didn't see any degradation in gross profit really.
So.
If that's at the near term <unk> cost accounting dynamic.
Yeah. So.
In the first quarter, if we just look back to what we budgeted.
Again is allowed to snack.
In January February based off of the seed stock that we buy.
It was actually Flatish.
If you look at January February and it was March where you saw a large dagger a large a larger decline. So the first quarter did not see a dramatic reduction when you look at the weighted average cost of what we actually buy it was more muted until.
Later in the quarter, So I think you'll see more of that in the second border.
Right, Okay and then.
And the higher U.P.A. cap expending.
It can you just <unk> if you have intelligence on it is your sense that the entire industries incurring need sort of and then I don't really want to characterize them as cost overruns, but but higher than expected.
Yeah capital expenditures on these projects and the reason I'm asking because clearly you know part of the.
Mercil conversation you had with your customers was in terms of you know the industry and and eating at deserving inadequate return on the necessary capital expenditures. It. So just wondering if it if it you know if you have a sense or is it something unique about your facilities that when you're.
And currently tire expenditures or is it just the the more nature of the the remediation efforts in a general sense. Thank you.
Yeah, I think in Chris.
Maybe in the easiest and most objective way to answer that is we have one other public competitor U.S. company who's in the same.
Situation that we are and from their filings that we've been able to see we've seen that their costs have gone up considerably from where they originally estimated them as well so I think in that sense.
Not that we all would <unk> I would presume that we're all looking at trying to get her return on a larger number at this point.
That said, we all make our own pricing decisions and you know there's no discussions around that.
So we have any further questions.
That's it for nothing so catch up with you guys later.
Okay. Thanks, a lot for us.
Mm.
We have reached the end of our question and answer session I have it now like to 10 o'clock back over to according for closing remarks.
Well. Thank you all for making your time to be with US today. We appreciate it and we appreciate your interest in support for Orion in these very challenging times I wish you all to remain keeping physically distant and keeping yourself safe and we look forward to following up with you. Thank you very much.
Thank you. This Descanso today's conference you may disconnected lines at this time and have a window for a day.