Q3 2020 Orion Engineered Carbons SA Earnings Call
Greetings and welcome to the Orion engineered carbons third quarter 2020 earnings conference call.
This time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Wendy Wilson head of Investor Relations and corporate communications. Thank you Mr. Wilson you may begin thank you operator.
Good morning, everyone and welcome to arrive in engineered Carbons conference call to discuss our third quarter 2020 financial results.
I'm Wendy Wilson.
Investor Relations and corporate communications.
With us today are Corning painter, Chief Executive Officer, and Lorin Crenshaw, Chief Financial Officer.
We issued our earnings press release after the market close 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 our 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 those described during the call.
In addition, all forward looking statements are made as of today November six.
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 are 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 painter.
Thank you Wendy and good morning, everyone and welcome to our third quarter earnings Conference call.
I don't want to what this moment pass without thanking our people for their dedication and flexibility during the second quarter downturn and subsequent demand surge.
Most importantly, they have kept up COVID-19 safety protocols, and we have no workplace transmission of the disease. Thank.
Thank you for your focus flexibility and dedication.
I'd also like to specifically congratulate the employees involved the various upgrades of our facility in Borger, Texas. The upgrade of the cogeneration facilities at that site allows us to run the plant without drawing power from the grid, while still providing excess energy back to the regional grid for USANA local.
Area.
On today's call born and I will cover the third quarter results and also devote time to pricing negotiations for 2021, our operational response to cope with 19.
Select leading indicators of recovery that may affect the business and examples of initiatives that we've undertaken to emerge stronger.
As always we'll be happy to take your questions at the conclusion of our comments.
Turning to slide three three.
Third quarter demand for carbon black recovered, rather well versus the historic lows experienced during the second quarter.
In most months since April we have seen rubber carbon black demand improve across all geography, and specialty carbon black has recently improved as well.
While we cannot predict the future of course is a pandemic our year to date financial results demonstrate our ability to withstand its ups and downs.
From a financial perspective, we reported adjusted EBITDA of $55 million down, 19.2% year over year and more than triple second quarter levels sequentially, reflecting the substantial operating leverage we expected the business to deliver as the economy recovers.
Also note that on a year to date basis, our business that's required only a moderate level of funding for operations approximately $40 million. Despite the severe economic downturn, reflecting the underlying strength of our business and financial wherewithal.
Slide four lists some of the actions we have taken in the face of coping 90, we've used a variation of the slide before so I'm just kind of speak to the new developments starting with people as I said earlier, we continue to have no workplace transmission to the best of our knowledge. We continue to offer work from home policy is for us.
Office workers in areas, where COVID-19 levels remain high.
Our people had to deal with Hurricanes, Laura and Delta as well and we have assisted employees with items such as generators.
Moving to production.
Managing demand surge has been critical over the past few months product mix and order pattern shifted abruptly to the upside during the quarter acquiring our teams to adjust production to meet demand and ensure that as many customer orders as possible were filled.
We operated at strong utilization rates in every geography.
Number up sharply from the mid Fortys in April and similar to the high 70 rates we experienced in July.
We continue to use downtime to execute such products projects to improve facilities and uptime.
Moving to customers, we're staying very close to our customers to keep them supply in the face of what has been very large swings in demand deviations from forecast and transportation challenges.
We are well into our 2021 pricing negotiations and while specific information is commercially sensitive as one might imagine.
There are a wide range of demand scenarios between our customers because they have different views of what 2021, we'll break.
What is unchanged in my view is that the long term underlying drivers for higher carbon black pricing remain intact, particularly for North America.
[noise] community isn't yes, Gee I mentioned the upgrade at the border plant earlier, we also accelerated EPA related work Ivanhoe as the COVID-19 situation. There improved in addition, we provided financial support in South Africa to teach students environmental and sustainability best practices also.
Initiatives support our ongoing yes, she efforts aimed at operating sustainably and being a trusted community citizen.
With an eye to the long term horizon, we became a partner in the EU supported Black cycle project that was launched in September.
The project coordinated by Michelin is a consortium involving 13 organization and has a unique European public private partnership aims to demonstrate the technical and environmental and economic viability of circular processes to produce new tires from end of life tires.
You'll hear more from us on this project in the future.
Now turning to slide five I'd like to share a few thoughts on the current pace and shape of global demand.
This slide shows the demand pattern around the world in the third quarter.
As you can see on a year over year basis, our rubber carbon black business has recovered sharply since <unk>.
As a reminder back in April rubber volumes were down year over year in the high 60% range and the Americans and EMEA and 30% in April.
You may recall at the time of our second quarter call in July I Express the point of view the July could prove to be the strongest month of the quarter.
Happy to report that demand held up well throughout the quarter with volumes coming in at levels that were roughly 90% of 2019.
Quite a strong result.
Our specialty carbon black business as expected given the nature of its end markets. Initially lag rubber. However, ultimately this business not only recovered nicely, but delivered and even stronger quarter than rubber volume wise, the third quarter volumes coming in at 97% of 2019 levels.
Importantly, we did this without sacrificing pricing as Lorne will show you later.
As a reminder, where this business has come from in April specialty volumes were down year over year in the range of 38% to 8% depending on the geography. So overall, we are quite pleased to see this business come on so quickly in this still evolving recover.
Slide six is a sick slide we began providing when the crisis began.
It breaks down our business by end market and provides investors with our sense of where each market falls on the spectrum in terms of leaving coincident or lagging from an economic recovery standpoint.
Now with the recovery has commenced we can see the things are playing out by enlarge as expected with that said recent public policy actions in Europe. As a reminder of the risk that industry faces through the balance of the quarter and going into 2021.
From a replacement tire perspective, which makes up roughly 60% of our rubber business. We have seen a sharp bounce off the bottom driven by a combination of rising car passenger car.
What you can see in various metrics and relatively high demand for trucking as confirmed by improving measures of truckload freight trends.
Globally volumes remain below 2019 level and may not return to those levels for another 12 to 18 months or more according to forecast that we track.
However, demand has clearly picked up significantly from the April trawl.
Shifting gears from the replacement side of the rubber business to the original equipment side, which makes up 40% of rubber volumes and 15% of our specialty volumes. This market also picked up sharply in recent months.
Global light vehicle sales have shown a classic V shaped rebound through August according to LMC automotive.
This trend is quite encouraging but tempered by the fact that it is impossible to know the impact that temporary factors such as pent up demand and inventory replenishment following the second quarter lot down sales.
Overall, we were encouraged by both the degree and speed of improvement in our business results, which imply that inventory levels across the supply chain entering the third quarter were quietly.
We continue to assess how the pandemic may impact our business in the short and longer term.
There's another set of shelter at home Lockdowns, our business will suffer no question.
But we have shown that we can weather a locked out.
And when that passes people are going to drive and I believe we would see a strong rebound all over again.
For the time being people are most comfortable writing in their cars not claims or public transportation.
It's also clear that delivery trucks need to run even during a walk though.
It's also likely that theres going to be more working from home in the future cutting down on commuting.
However, I will tell but again, we think a greater share of computing will be done bike in cars and public transportation. So it's impossible to know exactly how things will play out, but what we're seeing on the ground in terms of current demand is promising.
Within the 85% of our specialty business that does not go into automotive at this stage. It appears the impact of the recent downturn is proving to be more cyclical than secular as evidenced by this quarter's performance and sharp recovery.
Overall specialty is well positioned to recover as the broader economy rebounds.
Given the breadth of our specialty end markets, a leading indicator for this business is manufacturing purchasing managers' indices, which JP Morgan and I Hs amongst others produce.
Such PMI indices have shown a sharp recovery from April levels corresponding with the trend that we've seen in our specialty business.
I was recently a September there remained in positive territory, which is historically correlated with an expansionary economic and Paul environment and as a positive indicator for our specialty business.
Now turning to our third quarter results in greater detail as you can see on slide seven adjusted EBITDA declined by approximately $13 million, primarily reflecting the impact of lower rubber specialty volumes lower feedstock prices and mix offsetting price.
And with that at this time I'll turn the call over to Laura.
Thanks, Good morning, now turning to slide eight volumes were down 7.6% year over year, but rose 51% sequentially on higher demand in both segments and across all regions against this backdrop adjusted EBITDA more than tripled to $55 million basic EPS came in at 15.
Since per share and adjusted EPS was 32 cents per share count.
Contribution margin declined 12.7% year over year, primarily driven by lower volume, but increased 59% sequentially.
Overall, each division showed strong operating leverage with incremental margins adjusted for the impact of FX in all on revenue and profitability in line with or better than expected.
With specialty exceeding the mid Fortys plus range due to mix and rubber in the low to mid Thirtys range.
Slide nine explains the drivers behind contribution margin adjusted EBITDA and net income in greater detail.
Starting at the upper left hand side contribution margin declined 12.7% year over year as lower volume the impact of lower oil prices on margin and unfavorable mix in specialty partially offset based price improvement in both segments.
Adjusted EBITDA fell 19.2% year over year to $55 million.
Reflecting the decline in contribution margin.
Lower cost cushioned the impact somewhat.
Driven by favorable VAT settlement and lower discretionary spending.
Finally, we recorded net income for the quarter of $9 million.
Our year over year, largely due to lower adjusted EBITDA.
Slide 10 details the year to date sources and uses of cash.
As expected working capital rose during the quarter, primarily driven by higher accounts receivables, resulting from a sharp sequential sales increase.
Notably this surge driven working capital increase was the primary factor preventing us from showing positive free cash flow for the quarter.
Overall as Corning noted earlier from a cash flow perspective, we are pleased that on a year to date basis. Despite the severe second quarter downturn and continuing to advance our EPA investments our business is only required a moderate amount of funding approximately $40 million year to date.
The rest of our borrowings to date $34 million simply reflecting elective actions taken to strategically bolster our cash position.
All in all we have come through the first part of this economic storm in a strong financial position.
Finally, our EPA investments continue to advance our sustainability strategy, while also creating a barrier to entry in North America.
We expect these investments will continue at levels around the current run rate through 2022.
Temporarily diminishing our free cash flow before.
Before declining in 2023.
I don't think in higher free cash flow conversion at that time, all else being equal.
Slide 11 summarizes our leverage and liquidity profile at quarter end.
Liquidity available at any leverage level was $316 million at quarter end.
As a result of our success at converting a significant portion of our revolver to ancillary capacity.
We can now borrow 100% of the 250 million euro commitment amounts under our revolver at any adjusted EBITDA level without our leverage covenant being in play.
Overall, the strong state of our liquidity and the absence of any debt maturities until 2024 give us great confidence in our ability to continue successfully navigating through this downturn.
Moving to slide 12, specialty volumes fell 2.6% year over year and rose 18.8% sequentially.
Volumes were down across most end markets with Asia Pacific and Europe, performing somewhat better than the Americas.
From a profitability perspective gross profit per ton declined 7.8% almost entirely due to lower volumes, but rose 29% sequentially.
Similarly, adjusted EBITDA declined 9.2% year over year, but rose, 61% sequentially, reflecting strong operating leverage and incremental margin.
The next slide breaks out the major year over year drivers of adjusted EBITDA, which were lower volume with mix offsetting price.
Turning to slide 14 rubber.
Rubber volumes were down 9.1% year on year and were up 65.9% sequentially.
Geographically volumes were down in our car business across all regions, particularly in North America in Asia.
In our MRG business volumes rose in China and were down in all other regions.
From a profitability perspective gross profit per ton declined 19.3%, but more than doubled sequentially.
The year over year decrease reflected lower volumes, while the strong sequential profit recovery was driven by incremental margins adjusted for the impact of all in FX on revenue and profitability in line with expectations demonstrating good operating leverage.
Slide 15 shows the development of adjusted EBITDA.
Sharply lower volumes and feedstock prices the primary drivers of the decline.
With that I will turn the call back over to Corning.
Thanks, Lauren moving to slide 16, we reinstated our EBITDA guidance for the fourth quarter barring a further downturn in economic activity and that could happen with rising COVID-19 infections. We expect adjusted EBITDA to be in the range of $44 million to $54 million, which is roughly.
The 10% lower sequentially.
With that being said our fourth quarter order book is constructed.
The range of our guidance reflects the fact that historically December is hard to predict especially in a year like this and the fourth quarter is typically our weakness. It's also difficult to gauge the extent to which the recent decline in mobility data is reflecting normal seasonal declines as the summer ends.
Or whether other factors are in play.
Our 2020 capital forecast remains in the $140 million to $145 million range with the upper end of the range increasingly likely as we execute a variety of safety reliability and productivity projects that will position us to emerge stronger heading into 2021 as noted in our previous earnings.
Call.
Our best estimate of the cost of the U.S. air quality investments remains $250 million plus or minus 8%.
As we've shared previously we expect approximately 50% 60% of this cost to have been spent between 2018 and the end of this year with the remaining 50% spread between 2021 and 2023.
We completed our first EPA project in June Orange facility and remain focused on executing the work at our Ivanhoe facility as rapidly as supply issues in the physical distancing required to safely advance. The work will allow we continue to communicate our intentions and project schedule to the EPA on a monthly basis.
As we have done since we did first declared force majeure.
Turning to slide 17 in closing I'd like to highlight a few takeaways from the quarter.
I'm pleased that we've been able to demonstrate the resilience of our business model. During these extraordinary times from the demand loans in the second quarter to the demand surge over the last several months, we've proven that we can operate focus and agility to efficiently respond to dramatic economic changes.
This period has been a time of great change for the global Orion team just before we completed our first employee engagement survey with an amazing 91% persist.
We've used this time to address a number of opportunities, including employee communications training and development and work simplification.
These initiatives are part of the substance behind our goal of emerging stronger for example, we have stepped up video communications introducing E learning platform simplified processes consolidated EPS could use and reduce costs, while maintaining momentum towards our sustainability objectives.
One example is the dramatic simplification of our pricing approval process, where we're cutting the number of steps by more than half, while improving and simplifying controls at the same time.
Through the early weeks of the fourth quarter demand in both our rubber and specialty segments continues to recover from.
For sure there's still much uncertainty with COVID-19 of the global economic recovery.
But our third quarter financial performance and its remarkable rebound from Q2 demonstrates our people and our businesses resilience that we're on the right track and that we will continue to show strong operating leverage if the global economy continues to recover.
Operator, please open the line for questions.
Thank you, we'll now be conducting a question and answer session in the interest of time, we ask that you. Please start off with one question and one follow up and we welcome you to rejoin the queue for any additional questions you may have.
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One moment please poll for your questions.
Our first question comes from the line of Jeff The caucus with JP Morgan. Please proceed with your question.
Thanks very much.
Can you talk about some of the negative mix factors in the quarter. Your volumes were really not down very much year over year, but your EBIT da fell at a much greater rate.
Can you more concisely describe why that's the case.
I'll take a couple of general comments and Loren CHMP and so one element of mix is in the rubber area. The issue between MRG and tire MRG being only going into new cars, and a little bit more attractive than rubber carbon black going in.
To the tire market, so the relative strength of.
Placement tires, right now relative to OEM production, even though I am recover that's one thing that plays into mix for us.
And I would just add that's right on a year over year basis sequentially in terms of our incremental margins. Once you back out the impact of all on revenue and profit.
Specialty actually had better mix sequentially and was right in line with our mid Fortys plus incremental margin and rubber again sequentially was right in line with our low thirtys incremental margins and so I think thats right.
And I guess secondly.
So miles driven.
Has been touched by the recession by cobot conditions.
You know to what extent do you think that that effects.
The growth rate of tire market over a multiyear period.
Well, there's no question, if there is going to be less driving going forward over the long haul then there is going to be less tire wear.
And that would have an impact on the market if thats what you mean.
Right I was wondering if you. If you guys have made an attempt to quantify that given current conditions or or one can see a tendency, but one can't really do much more than that yes, I think right now in drawing conclusions from the current COVID-19, not being behind US as we said in the script I mean, I think theres.
Going to be more working for home I think theres going to be a stronger preference for cars over other modes of transportation.
I think we just got to get a little bit of time to see where that balance is going to come out.
Great. Thank you very much.
Thank you. Our next question comes from the line of Mike We had with Barclays. Please proceed with your question.
Great. Thank you guys and good morning.
I guess survivors.
If I look at slide six which I think is really helpful by the way it looks like rubber black.
One of the leading the recovery where specialty is a bit more concurrent in terms of economic factors and then if I look at your volumes this quarter rubbers down about 9% specialty is down about 3%. So can you maybe parse through why specialty was a bit better than rubber volumetrically this quarter and with.
Maybe.
How the different end markets demand trends you've seen on specialty.
Yeah. So I I think what we're trying to reflect is that we thought the first thing the balance is where that green checkmark is and the replacement tire and that is the first thing we saw balanced and we did see rubber carbon black come back sooner than we saw specialty carbon black it turned the corner sooner or let's say.
But no question specialty carbon black has come back overall at this point to a higher level compared to last year and that reflects that just across a wide range of of end markets.
And in general many of those have improved even areas like pipe, which I've talked about before although I suspect that portion of that that sounds like oil field services is probably still impact infrastructure and other activities in the region of the world back continues to do well.
Probably star areas in the specialty area would be anything related to food food packaging that kind of thing in the current environment with all the Carryout is quite strong.
Things like Inc. for printed materials, that's that's an area of weakness in the market today.
Great. That's super helpful. And then Corning any early indications about how you're feeling about base pricing heading into next year and related Lee you've talked in the past about trying to improve or restructure.
The contracts in the industry. My guess is coal that got a little bit in the highway this year from doing that but do you still think that's achievable maybe in the next two three years.
Okay, Yes, so for two of those things if I start just with a sense of pricing I think one really critical thing.
While pricing is that.
This whole industry was tested this year during this downturn I'm really happy to say being relatively new to this space that rubber carbon black pricing the contracts held in really weren't even challenged I think thats, a really positive thing for us and if you look at our behavior over the year or through this year I think the same thing is.
Largely set about specialty although the contract structure there is different.
In terms of talking about 2021 have to keep in mind that our customers are listening to this as well so.
So let me just.
Sure a couple of observations number one.
The customers, we're working with for the tire market, primarily we're talking about now they have pretty different scenarios of what they think 2021 is going to look like I think it reflects the overall uncertainty in the market, but it's an interesting negotiating dynamic going on right now and the second thing I'd say.
Is that given that and given the limitation of the ability to store material I'd say in a dynamic market like this with the potential for surgeons and we don't know how covance kind of play out next year capacity, having capacity is a valuable thing in my opinion.
Beyond that I, just say look the long term drivers for pricing in the carbon black industry is still with us there's still increasing.
Capacity of rubber of tire manufacturing in the United States. There is not increases in carbon black I mean is that.
Trend there is still with us.
In terms of long term agreements, we are actually still in discussions with certain players I think the stable, we see that as a forward way of thinking at a good win win for everybody involved.
Hi.
Okay. Thank team does complicate things this year, but.
But we continue to discuss with people, it's all talk until we havent done but.
I continue to think it makes sense and there is some parties in the industry who remain interested.
Great. Thank you.
Thank you. Our next question comes from the line of Josh Spector with US. Please.
Please proceed with your question.
Yes, Hey, guys. Thanks for taking my question, just coming back to specialty volumes pretty.
Pretty impressive performance in the third quarter yeah.
No wonder if you could quantify how much of that may have benefited from restocking and how much of that was maybe more normalized demand and maybe a related question around that is what does the volume scenario that you're baking into your fourq guidance around specialty.
[music].
So it is difficult to tease out and we made some comments of that in our script.
What's restocking what was pent up demand from when things were locked down and.
And that's that's hard to gauge if we think about automotive you know there was a hard stop in a little manufacturing for a period of time, everybody wanted to burn through inventory.
Inventory if you bought a car recently as I have you can see that as very few cars on the lot right now so there's still a little bit in catch up mode. So I would say I don't think we're necessarily seeing steady state at this point.
Our guidance is based largely on the current forecasts that we have from our customers So high.
Taking that as the primary versus guessing where they are their inventory and then with this kind of open question Mark about whats December really going to look like and I think.
Our customers.
Claim to have a great deal of insight exactly what's going to happen to that model.
And Josh I would just add that if you look at the midpoint of our fourth quarter guidance I.
I don't want to get into specialty versus rubber, but if you look at the midpoint and you just think about our typical EBITDA.
Per metric ton it implies that we're expecting about a.
10% ish, a sequential decline in volume and.
That's true across both businesses generally speaking.
Okay Fair enough. Thank you I guess.
If I look at rubber profitability for the quarter EBITDA was around $160 per ton. If I assume oil is still kind of constant in a low to mid fortys and maybe some of the other pricing factors that remove that as well.
Is there anything I should add or a move to that when I start to look at maybe first half next year, assuming volumes are still down 10%. So just trying to think if there is anything temporary within the quarter that we should remove or anything that we should add back into a more sustainable recovery.
I would say that.
Once you make an assumption on all on average for next year, which we've provided some guidance on how to think about that the main thing you ought to consider is that we've accomplished about $15 million of cost reductions this year.
But only 3 million of those are going to be permanent and so you should anticipate an increase in SNA for that delta.
And that would flow between both businesses and so that's the main to think about 2021. That's the main thing I want to make sure that you consider.
Thanks say, one more clarification around that so the 15 million can you clarify how much maybe benefited this quarter versus last quarter.
Mmm.
Yes, I'm not prepared to break that 15 down in terms of the impact this particular quarter, but as you look at 2021, Yeah I'd just ask you to consider that.
Okay. Thanks.
Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Yes. Good morning, it's Pete Lucas for Jon you guys have covered most of my questions. I guess, just one on gross profit for ton in either segment do you think that Weve reached a trough there and if not when would you expect to see recovery there.
Well I mean, a lot of the impact has been volume and so I think what you're really kind of getting at is are we seeing a trough or could we see in the prior quarter across volume I, certainly hope so and that's certainly how things look right now.
Okay, Great Thats. It from me most of the others have been answered thanks.
Thank you. Our next question comes from the line of Chris Kapsch with <unk> capital markets. Please proceed with your question.
Yes, Hey, good morning, guys. So.
So we're encouraged to see that yeah. Good morning.
See the tire industry wasn't the only one impacted by by Covidien, but the refining industry. In particular was has been impacted by lower miles driven demand destruction for gasoline kerosene and so im.
Just curious if.
With that industries.
Pressure that's seen as has that affected at all your availability of feedstocks and notwithstanding the IMO 2020, regs that everybody's sort of no longer focuses on I'm just wondering if it's resulted in any.
Changes or opportunities with respect to your differentials.
In source.
Okay.
Yes, so I'd say the ability to source feedstock.
Is really unchanged so that we have no problem with that I I.
I think it's slightly commercially sensitive what exactly we experience in differentials I'd like to hold on that.
Okay.
So.
The other.
Question I had was I appreciate the details on.
The profitability metrics and and differentials on a sequential basis, but I'm curious the.
I forget what your cost accounting is im curious if its FIFO because if it if it is as I understand that there would therefore be some maybe some sequential drag on the profitability metrics. The extent you know youre selling inventories that were produced when when your utilization rates were lower so I'm wondering if if that.
Dampening.
The.
Even though they obviously improved nicely the margins in the in the second I'm sorry in the third quarter of either be the second quarter.
Sure.
You know dampening margins.
Because of that because of your cost accounting period.
Yes.
We have not had that sort of dynamic we did experience to something of that sort.
During the chief of the crisis earlier in the year, but that was not an impact on the quarter. The main drag from an absorption perspective was simply the fact that our utilization rates year over year were lower although we do.
Did fine in terms of sales volumes in the nineties year over year, our operating rigs were not.
In the Ninetys of 2019 levels and so that was the main driver.
Okay, and then one last one I guess, it's a little more nuance on as you completed some of that the EPA investments or whereas you work through that is that will that.
Effectively with your the scrubbing that will be in place does that change the.
The flexibility that you'll have in terms of sourcing different feedstocks will you be able to.
Opportunistically.
Use effectively higher sulfur feedstock since you can abate the the sox associated with combustion those those feedstocks is that.
Effectively a sort of a hidden benefit of these of these investments. Thank you.
Hi, Chris.
Just want to acknowledge on that question, there's a lot of things in play including.
Hey questions between ourselves and then Paul I can all of that so let me just say that.
Once you put in the abatement equipment.
Year now.
Tracked on whats your actual emissions coming out of it are.
And let.
Let me just leave the answer there, which I think gets to it.
Okay fair enough. Thanks.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star Keys. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.
Hey, good morning, everybody.
Good morning, Kevin.
I wanted to make sure I was understanding something correctly Lauren I think you just mentioned in the fourth quarter guidance. It seems to imply a mid point kind of 10% quarter over quarter decline in volumes and I think you mentioned that is kind of similar for both businesses and then on one of the slides it mentioned.
No that October utilization rates.
Are up year over year versus the prior October I think that's what that's saying on slide four which seems to imply.
Well volumes might be up in October so I guess I just want to make sure I'm understanding that right because I guess volumes down 10% sequentially would imply volumes down something you.
Year over year, and again that October comments seem to imply that volumes are up unless you're building inventory or something but curious if you could help me reconcile kind of what you're seeing October versus what's implied in that guidance sure. So the key uncertainty around the next 60 days is really.
With regard to our customers and how they choose to position themselves and so one month does not make a trend and so yes October has been a very solid but in that might take us towards the higher end of our guidance, but we just don't know how the next 60 days.
Going to transpire and so that's how you end up at the midpoint.
Okay got you and then.
You guys mentioned.
The expectation is a I think when you mentioned the prepared remarks that you know we wouldn't returned back to 2019 levels of demand until for another 12 to 18 months secure.
So curious what that implies for.
2021 does that obviously volumes I would imagine would be up quite a bit year over year, but sounds like down something versus 2019. So does that imply were within fiveish percent or something from 2019 to just kind of curious what if you could just give a little more color on that comment in terms of what that implies for.
You know volumes Oh.
The next call my though.
Yes so.
I think one to answer on that and if you were going to look for just independent data you can look at what the notch data is suggesting which is saying that.
More or less on par with 2019, and then they give a various scenarios from there. If we were going to look at forecast from customers as I said earlier that's a.
A bit up and down themselves amongst different customers as well. So as you would expect there is a certain amount of uncertainty for exactly what it's going to happen, but it's certainly the volatility dampening down considerably compared to where we were this year.
And I would also add that who knows what notches considering but.
It's really important to have an assumption around well we have a safe effective widely distributed vaccine in 2021 and and that's a key question that is difficult to know.
But I'd just throw that out there.
Okay. All right. Thank you I think that also I think that also just plays into the whole commercial dynamics because people are essentially right now negotiating to reserve capacity and you can be in a situation, where I don't know halfway through the year. According to the way the food here I mean at some point next year I think we're going to get that vaccine.
And people are going to walk the capacity because I think we'll see quite a bit of uptake in the economy when that happens so.
So it all adds for just a very exciting and interesting time right now, but at a time that we are very well prepared to take care or take advantage of to use the volatility and to perform well in this environment.
All right. Thank you.
Thank you once again as a final reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Hi, there could you give us to discuss capex from a slightly different angle how much could you grow the topline or grow volumes before you would need to undertake your next significant increase in capex spending.
Hi, Laura.
It's an excellent question and so our opportunities there is number one what we've got about 1.1.
Billion Kt of capacity. So you can look at where sales come out and say, okay. There is an opportunity there and use the.
The guidelines, we put in for how to look like that would turn off as an incremental margin for us.
Beyond that we clearly have the project underway in China, So that gets us some added capacity slated towards specialty with some differentiated rather than that and there is also the opportunity to let's say re purpose a lot of capacity that we have in a bear beyond that though you are looking at additional capacity.
And let me just add Lars if you if you accept at 1.1 is our maximum and you annualize what we're doing today volume wise you get to about a 40 and that would imply about 30% growth.
Two our Max utilization.
Perfect. Okay. Thank you.
Thank you we have reached the end of our question and answer session I'd like to turn the conference back over to Mr. painter for any closing remarks.
Well. Thank you again, everyone for joining us today and we appreciate your attention and your interest in Alliant engineered carbons. Once again, thank you to the Orion team for their great performance in this quarter working diligently to keep up with just surging demand from our customers. Thank you all and to our shareholders. We appreciate your support.
We are doing our best for you. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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