Q3 2021 Orion Engineered Carbons SA Earnings Call
Greetings and welcome to the Orion engineered carbons SA third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now I'll turn the conference over to your host Wendy Wilson head of Investor Relations and corporate Communications you may begin.
Thank you operator, good morning, everyone and welcome to Orion engineered Carbons conference call to discuss our third quarter 2021 financial results.
I'm Wendy Wilson head of Investor Relations with US today are Corning painter, Chief Executive Officer, Lorin, Crenshaw, our outgoing Chief Financial Officer, and Bob Hrivnak interim Chief Financial Officer.
We issued a press release after the market closed yesterday, and we 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 company's filings with the SEC.
And our actual results may differ from those described during the call.
In addition.
All forward looking statements are made as.
Of today November 5th.
The company does not undertake to update any forward looking statements based on new circumstances or revised expectations.
All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the 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 before I get started I'd like to share a few words about Lauren as this will be his last earnings release with us.
You all know that he worked hard to help us weather the steep downturn last year so successfully.
Where people May forget is that he had only been with us for a few months before COVID-19 surfaced and then he was immediately thrown into that storm.
Being a quick study Lauren was enable partner and leader during that time under his leadership, we completed the refinancing of our term loan b facility, while adding a sustainability aspect to it.
Lesser known to our investors, perhaps was that Lorne revamped how we manage and think about risk and that he has been integral to our strategy development. During this time.
Lauren Thank you for your contributions and I wish you all the best.
Thank you for those kind words Corning it has been a privilege to serve as <unk> Chief financial officer over the past two years, providing financial leadership in partnering with you and the leadership team to refine Orion strategy and position the company for success Orion has an extremely bright future I truly believe that.
Capital allocation pivot presently underway and its impact on the intrinsic value of this company is not well appreciated except by a small but growing number of long term investors.
I intend to remain a long term shareholder myself and look forward to seeing this leadership team execute the strategies that have been developed and realize the great promise of this company given the quality of its people and its assets its competitive positioning and core competencies.
I want to thank you for the opportunity to serve this organization Corning, which from a financial leadership perspective will now be involved exceptionally capable hands as the searches conducted.
I'm not sure I have ever made a finer higher quite honestly you have made an enormous impact over the past 18 months and I have thoroughly enjoyed our partnership I wish you the best and look forward to working to make the upcoming transition as smooth as possible.
Thanks, So much Lauren it has been a pleasure working with you and I look forward to continuing to implement the strategy that you and the leadership team have developed for Orion I am also excited to lead the finance organization.
<unk> that you have developed which I believe is very talented and dedicated to Orion's continued success.
This company has a bright future and I am looking forward to the dual role of Chief Accounting Officer, and interim Chief Financial Officer to continue the path that has been established.
It's going to be an exciting time for Ryan now that we are close to finishing our EPA work and focusing on investing for growth sustainability and returning capital to shareholders.
I am glad to be part of that journey.
Corning, let me hand, the call back to you.
Thanks, Lauren and Bob I am pleased to report another solid quarter, continuing what has been an excellent recovery and our business specifically third quarter adjusted EBITDA was $66 4 million.
Up 28% from the third quarter of 2020, which marked the beginning of the recovery in our business last year.
Our results were powered primarily by the continued strong specialty performance, which represents 55% of our adjusted EBITDA year to date.
Overall against the backdrop of the downturn a year ago, both of our businesses have demonstrated substantial operating leverage and an impressive recovery.
Surging demand for our specialty products across nearly all end geographies and applications.
All that despite the reality that COVID-19 is still with us.
And global supply chain efficiency is not.
As you are aware, we recently reinstated our dividend by declaring an interim dividend to be paid in the first quarter of 2022 in the aggregate amount of $1 $25 million.
Which is equivalent to approximately <unk> <unk> per common share of the company.
Our primary capital allocation objective remains to make prudent investments and differentiated applications that drive profit and raise our long term's, earning capacity.
The expansions underway in Ravenna, Italy, and Huawei, China, and the future efforts to advance our connectivity franchise are prime examples of this with expected returns well more than our cost of capital.
Reinstating our dividend reflects our high level of confidence in our business. It also reflects our commitment to regularly returning cash to shareholders and maximizing the universe of potential investors in Orion shares.
We believe our strategy of balancing capital reinvestment and a prudent capital structure with returning a portion of our capital to shareholders positions Orion to maximize long term growth and value creation.
Aside from delivering solid financial results during the quarter. We also began construction of our second plant in China. The plant located in a chemical park near FOP, a in Anhui Province will produce both specialty and high performance carbon Black and is a key project to help us lay the.
<unk> for a substantial increase in our long range earnings power.
We also achieved mechanical completion and our expansion in Italy, and commissioning is now underway.
This expansion is focused primarily on specialty applications and will expand our production by about 25 kilo tons with Ravenna ramping up next year.
Well I Bay is projected to ramp up in the 2023 to 24 time frame and it is expected to provide in the order of 65 to 70 kilo tons of incremental capacity.
As previously shared we expect these two investments to contribute roughly $30 million to $40 million and adjusted EBITDA at steady state levels, representing a substantial increase in the inherent earnings capacity of our business and an excellent example of the sort of value enhancing investments, we intend to make from a capped.
[laughter] allocation perspective.
We also advanced the air emission controls project at Ivanhoe and brought the systems online last month.
Getting this system, our largest and most complicated air emission control project online in the throes of the ongoing pandemic is a major accomplishment, although we were behind schedule I congratulate the team for executing this project safely. The focus now is on working through startup issues and reestablishing.
Normal supplies and inventories.
With year to date rubber volumes at 90% of 2019 levels. We continue to expect 2022 market conditions to be very favorable for our rubber carbon black business. Despite the semiconductor and other supply chain disruptions, we expect driving an automobile to remain the preferred.
Third mode of transportation for individuals and families and commercial traffic to remain robust. These.
These factors are likely to result in higher miles driven which in turn drives demand for replacement tires, which makes up approximately 60% of rubber carbon black volume.
Our positive 2022 outlook is also influenced by the projected tightening of the global supply demand dynamics as measured by global utilization rates, which are projected to be roughly 300 basis points higher in 2022 versus <unk> 19.
Against this backdrop as of today, we've agreed approximately two thirds of our EMEA and Americas volume.
That's roughly in line with normal levels with new signing pricing being up meaningfully as it needs to be with the increasing cost and take another step towards improving returns on the capital that we have invested in the rubber carbon black business.
Finally during the quarter, we successfully refinanced our existing term debt with a seven year dual currency sustainability linked to term loan, which Lauren will discuss in greater detail later in the call.
We believe that this is one of only three of its kind ever issued by an NYSE listed public company. The response that we've received from investors for this sustainability linked financing was impressive validating our long term commitment to responsible growth and reflecting confidence in our financials.
Train future business performance and long term corporate strategy.
Turning to our third quarter results in greater detail as you can see on slide four adjusted EBITDA rose to $66 $4 million year over year, primarily driven by our specialty business with favorable mix and higher volume across nearly all applications and geographies.
Our results were partially offset by higher fixed costs, reflecting higher incentive compensation and maintenance costs due to the heavy attorney turnarounds as we expected heading into the quarter and is expected to persist for the balance of the year.
That concludes my opening remarks for the remainder of today's call Lauren and I will cover the third quarter results in greater detail and our outlook for the year. After our prepared remarks, we'll be happy to take your questions.
Laurence.
Thanks, Corning revenue increased 39, 4% year over year, primarily reflecting the impact of passing through higher feedstock cost with higher specialty volume and favorable mix contributing to a lesser extent contribution margin increased 18, 9% year over year, mainly due to strong product mix.
<unk> higher co generation profitability and the favorable effect of oil price movements adjusted.
Adjusted EBITDA rose, 28% year over year to $66 $4 million, reflecting higher contribution margin, partially offset by higher fixed costs related to incentive comp and maintenance costs, reflecting a relatively heavy quarter for turnarounds as anticipated. Finally, we reported adjusted net income for the quarter.
$27 $2 million up 32% year over year on higher adjusted EBITDA, partially offset by higher fixed costs.
It is also noteworthy that our effective tax rate year to date of 27% is tracking 400 basis points below our guidance heading into the year.
This dynamic has also benefited our adjusted net income and reflects excellent planning and execution by our tax and business teams.
We project that our full year effective tax rate will be in the range of <unk> 26 and 28%.
We will provide 2022 effective tax rate guidance in February however, I can say that we believe that the drivers of our lower effective tax rate are the result of structural changes that should prove sustainable over time drive a higher cash flow and therefore intrinsic value of our company overtime I salute the effort.
<unk> of both our tax and commercial teams and I'm pleased with their efforts.
On slide six you will find several useful bridges that provide greater financial details supporting the comments I just shared on our quarterly results.
Slide seven details our year to date cash generation, which is essentially flat with the favorable impact of strong financial performance and receipt of the <unk> settlement proceeds largely offset by a surge in working capital and EPA related investments as a reminder, when oil prices rise or working capital increases.
Roughly $30 million for every $10 change per barrel of oil in our feedstock costs.
Of the year to date increase in working capital over 60% has been driven by higher oil prices about a quarter by higher sales and the balance by higher inventory levels in line with the current robust demand dynamics, we have experienced to date.
Turning to slide eight the first point I would like to make is that the combination of the strength of our year to date operating performance and receipt of the <unk> settlement proceeds earlier. This year have resulted in our net leverage being restored back to pre COVID-19 levels at around two three times well within our targeted steady state net leverage range.
Two to two and a half times.
The positive impact of our recent refinancing of our term debt is also evident on this slide.
I'll highlight three attributes of the deal first it was completed at attractive rates, our blended spread on the euro and dollar tranches of around 238 basis points.
Good Opportunistically pushed our term debt maturity profile out by four years to 2028 from 2024 and.
And third it represented one of the first sustainability linked term loans by public corporate issuer in the United States.
The loan is sustainability linked and that it includes an ESG adjustment to the spread that works as follows.
We've established certain kpis related to the combined Sox and Nox emissions of our North American plants with detailed targets for each year of the seven year term loan.
During the first four years of alone if we hit both targets are credit spread declined 10 basis points and if we miss both targets are spread rises by 10 basis points during.
During the final three years of the term loan we no longer enjoy a 10 basis point benefit from achieving our targets. However, if we miss one or more of the Kpis are spread rises five to 10 basis points.
We were excited to broaden our commitment to responsible growth by securing this first of its kind sustainability linked term loan clearly aligning the commitments we've made to our stakeholders with the financing costs of the company.
Finally, I would like to highlight that in connection with the refinancing both S&P and Moody's reiterated their credit ratings with S&P, maintaining a double b rating and Moody's maintaining its <unk> rating and revising its outlook to stable.
As we look forward, our strong financial standing and capital structure positions us well to fund and execute the remaining EPA investments as rapidly and safely as possible.
While also advancing growth initiatives that bolster our earnings capacity we also.
Anticipating higher discretionary cash flow in the coming years as EPA investments ramped down while our Ravenna expansion ramps up in 2022, and our Huawei expansion ramps up in 2023 and 'twenty four.
Moving to slide nine specialty volumes rose eight 7% year over year, showing strength across most end markets and geographies with strong volume driven operating leverage and favorable mix. The main drivers of the 47, 4% year over year increase in adjusted EBITDA.
As shown in the trailing 12 month gross profit per ton chart. We are pleased to see that specialty profitability is approaching levels above 2019, and approaching levels not seen since 2018, driven by extremely favorable mix high loading rates.
And the associated operating leverage.
The next slide breaks out the major year over year drivers of adjusted EBITDA for the specialty business in greater detail. The most significant of which were higher volume and improved mix, partially offset by higher incentive and maintenance related costs. We've increased prices significantly year to date, but these increases have simply allowed us to hold even.
With rising costs as opposed to expanding our margins and market wise coatings polymers synthetic fibers and wiring cable were particularly strong.
Geography wise, the Western Europe, and North America regions showed the greatest relative strength.
Turning to slide 11.
Lower volumes translated into rubber carbon black adjusted EBITDA of $27 $4 million, 4% below year ago levels.
Specifically volumes were down 3% year over year in.
And market wise replacement demand was relatively stronger than original equipment demand, reflecting the impact of the ongoing chip shortage on automotive production levels.
<unk> volumes in the EMEA and Korea regions were relatively weaker with Korean exports being particularly impacted partially offset by stronger Americas performance.
Slide 12 breaks out the major year over year drivers of adjusted EBITDA for the rubber business in greater detail with the unfavorable impact of lower volume and less overhead absorption offsetting mix with that I will turn the call back over to Corning.
Turning to our outlook as we approach the end of an exceptional year. We are narrowing our full year 2021, adjusted EBITDA guidance to a range of $265 million to $280 million shaving the top of the higher end of our range reflects the impact of the delayed startup at.
Ivanhoe and dynamic market conditions, including supply chain and inflationary pressures.
Capital spending continues to be on track towards approximately $190 million to $200 million and our estimate of the full ultimate cost of installing our U S. Air emission controls remains unchanged at between 270 and $290 million.
In closing there are four key messages I would like to reiterate first we're excited to be laying the foundation to deliver substantially higher earnings power in coming years.
By the end of 2022.
Since the time of our IPO in 2014, we will have allocated over $600 million towards debt reduction dividends and EPA related emissions technology.
As we approach the next five years, we expect to have the wind at our back from a discretionary cash flow perspective, with net leverage in line with targeted levels. The EPA investments coming to an end and our dividend rate at a fraction of prior levels, enabling our continued investment in growth opportunities.
And differentiated applications and sustainable offerings.
Second while we've highlighted the Ravenna expansion and the Huawei in recent quarters as one of a very small handful of leading producers of acetylene Black we also see significant growth opportunities in conductive carbons.
Settling black is an important conductive additive in modern lithium ion batteries and other attractive markets. We have seen considerable traction in year to date in getting specced in with battery customers and just completed a significant capability upgrade at our plant.
This plant, which we purchased in 2018 provided a foothold in this space going forward, we look forward to sharing more about our plans to take the next steps towards making this attractive near adjacency a more substantial contributor and growth driver.
Third rubber carbon black market to conditions are quite favorable and poised to take another step up in 2022 in terms of our goal to achieve higher returns on capital.
Finally, I am pleased that we have our most challenging air emissions control project Commission, while I expect some challenges in the early months of operation. It's great that we will have about 70% of the projected EPA spending behind us by year end.
We look forward to the ongoing support of our investors as we continue to grow Orion profitably and responsibly in the years to come with.
With that operator, please open the line for questions.
Thank you.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before Christmas turkeys.
One moment, please while we poll for questions.
Our first question is from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, Hi, guys. Thanks for taking my question and first thanks, Lauren for the help over the past couple of years and welcome Bob.
Thank you Tom.
Just on the rubber side, specifically on the contracts and the first congrats on getting higher pricing year over year. That's certainly positive as we look to 'twenty two.
Is there any way to quantify what you'd expect from an EBITDA perspective, or what youre getting price net of the higher costs that you expect to see.
No I mean, its very commercially sensitive and we're still in the middle of this so we're not going to be able to talk about that at this time.
Okay, then maybe I'll just go to the cost side near term is it.
Rubber EBITDA per ton stepped down a bit more meaningfully than we were expecting Q on Q I understand some of that's probably downtime, but the higher oil might be a bit more of a positive offset there can you maybe walk through some of the sequential puts and takes and what's temporary versus permanent how you see things, perhaps shaking out over the next couple of quarters.
Well so first of all we had indicated that we thought it would come down from the GP per tonne that we had last quarter and I would just say one aspect of what played out for US just to draw in terms of an inventory draw which has implication on fixed costs and we will see similar.
<unk> in this quarter, just because of the slow restart at Ivanhoe.
And Josh I would add that you had volumes down sequentially and so are our incremental margins work the same on the up side as they do on the downside and you also had high turnarounds. So that combination in addition to the draw.
I would say we're both unique.
Our second half run rate is not going to be our 2022 run rate and so I would suggest that both the volume dynamic and the turnaround dynamic are both unique.
And.
Unlikely to persist as we go into next year and so you look at next year I think if you look at that GP per ton. That's a good measure to use and we're in the sort of 275 type range and Thats a good place for us to be next year.
Okay. Thank you.
And our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.
Hey, good morning, everybody.
I'm wondering if you could comment on the mix in the specialty side of things it seems like that's been.
Nicely favorable here to the results, what's driving that especially with the chip shortage iowans and.
How that's impacting Ottawa, we always felt that.
Thought that the coatings and auto OE side was probably the highest mixed up so could you kind of comment on what's driving the mix in the specialty business.
Yes, so mix first of all we're just going to say big picture comparing it from a year ago.
It's pretty much everywhere, alright, and if you were going to think sequentially then you're correct. There's pressure sequentially in automotive as you would expect so.
Coatings adhesives that sort of thing, but we also see strength for example in the engineered.
Plastics in that timeframe, including having made some gains with some new products and that sort of thing.
Okay, and then in terms of the.
The dividend it is good to see that.
Reinstated what's the plans going forward with the dividend I'm, assuming that there will be quarterly going forward and then do you.
Just something you plan on raising going forward, especially as you get say 2023, when our cash flow will will improve meaningfully could we see a step up in the dividend at that point I'm just kind of curious your plans with the dividend from here right. So ultimately these things are.
Voted each time by aboard right, but I would anticipate yes that we move back to our quarterly dividend from where we are I would encourage us to think about this in the broader picture, but just capital allocation. So we've got the balance sheet in a good place we've got the net leverage in a good place, we're always going to prioritize safe.
Ft in sustainability investments and then we've got a trade off between things like growth and we've talked a little bit about projects. We are going I think we've made it clear that we see opportunities for us in productivity moving forward, especially in the acetylene Black and there's also the element of returning cash whether that's in a dividend or a <unk>.
Buyback to our shareholders.
Going forward I think we will be looking at just what's the balance between those.
I think our current dividend is one that you could grow off of but I wouldn't necessarily signal necessarily a step change I think a decision about a step change.
Would be in context of what do you see as your growth prospects and other demands for the capital.
Okay, Alright, thank you very much thanks, Kevin.
Okay.
Our next question comes from the line of Mike.
Mike <unk> with Barclays. Please proceed with your question.
Yes.
Great. Thanks, Good morning, guys.
To Echo Lauren best wishes moving forward and Bob look forward to working with you.
Thank you.
I guess.
First I wanted to circle back to Josh <unk> question on rubber pricing into next year and I fully appreciate you won't put numbers really around it but just conceptually you are talking about higher pricing, but what your costs are also up meaningfully over the course of this year. So is it fair to assume that prices at some level that means higher unit margins for next year or is it just.
Going to roughly offset.
That cost inflation.
Yes, it has to do more than offset the cost inflation I wouldn't be saying. This if that's all I was expecting to achieve I mean think about all of the capital we and other people are putting into it industry in North America in particular.
So yes.
I feel strongly that margins and profitability and return on capital does need to improve we see ourselves taking a meaningful step forward in that regard and of course, that's more than just covering your cost but costs are going up and.
And I would also add we have additional operating leverage when you think about our total.
Potential volumes.
For a full year, it's in excess of $1 million and we're going to end this year somewhat shy of that so just the operating leverage on the rubber carbon black business.
Could also drive higher profitability next year in addition to the price.
That's great. Okay. That's all I just wanted to clarify.
And then second I don't want to talk about 'twenty, two permanent and I think lorin you touched on a bit in an earlier answer but just if I look at the EBITDA cadence. This year I think you averaged about $75 million or so a quarter in the first half $66 million of <unk> and the mid point of your guidance about 56% to <unk> now.
And you touched some one off stuff this quarter, but just.
Is the first half of this year that call it $300 million or so annualized level. The right run rate for earnings next year or I guess I'm, just really just trying to get my hands around the right earnings power level as we kind of move our models into next year.
Right.
What I would tell you is that it.
It is not difficult to get to something with a three in front of it for next year. When you think about again, if our total volume is about $1 50, which we've said in the past and we end this year around say 975 ish.
That incremental leverage and we are giving you, 30% operating margins incremental margins for rubber and mid Forty's for specialty just that incremental leverage getting back to say 2019 would be an increment and then the pricing would be an increment. So its not difficult to get to something with a three in front of it our first.
Half of this year was very strong in part because we waited our turnarounds towards the second half so we can't get into quarter by quarter, but it's not tough to get yourself to that kind of a level, which I think is where consensus is.
Got it thank you guys.
Our next question comes from the line of Chris cash with Loop capital. Please proceed with your question.
Yes, good morning, Happy Friday Lorin, congrats on the new role look forward to chatting with you about that.
Thank you.
Yes, the follow up was on really on the profitability of the the rubber business.
Talking Directionally. If you think about next year. If you look at the gross profit per ton TTM chart that you guys provided I think Lauren you said being kind of in that ballpark next year would be.
Something to think about but if you. If you look back to 2008 2019, when when the levels were north of QAD.
Got pricing in calendar 2020, although then the pandemic considered and then no pricing in 'twenty, one because of the pandemic, but then another level of base pricing in 2022, which was just referenced in the contract negotiations and operating leverage so why wouldn't we be thinking something.
Materially higher than kind of what your TTM is around around now.
Youre right between price.
And operating leverage we should do better than that TTM average youre absolutely right.
Okay and the way you would think about that again, if you assume incremental margins in the low thirties for rubber you can make your own assumptions about how much incremental volume growth would be next year, but he use sort of low 30% incremental margins and you can also make your own assumptions about what price.
We're going to get in excess of our cost to corning's point, we're not just going to cover our costs.
And then Youre right, we could do better than that on an oil price neutral basis, if oil prices go.
Down then you know that that is to the detriment of the rubber business, but on an oil price neutral basis, we can do better than that.
Okay.
Just sticking with the rubber business and totally appreciate the commercial sensitivity around these negotiations but is there any way you can characterize maybe just the nature and tone of the conversations because clearly you're you're sending the message to your customers that you need and you have been you know.
Yeah.
Been stalwart.
Mentioned convenience to customers since you arrived at the company Corning is that you need the industry needs better returns on capital. So just wondering given.
Given that setup.
And then generally healthy trajectory in demand.
Just any characters characterization of it is just the nature and the tone of those conversations.
Good to hear.
Sure.
Yes, so Chris I think one element of it is just supply and demand dynamics and what people see for next year maybe.
Maybe there is the chip shortage in the beginning of the year, okay, but it just drives more.
Replacement tire demand in that same timeframe and youre basically reserving capacity in.
Maintaining as how much carbon black are you signing up for so if he thinks the second half's going to be stronger you need to make that commitment now. So I think all of that plays out very well I would say is the dynamics in South America are extraordinarily strong it's positive in North America.
Europe as well so I think.
Thank.
And it's to a certain degree, it's simply supply and demand as well as every supplier.
For ourselves, there's cost pressures and there is big investment.
Got it and.
I had in the script.
Comment about loading and that came from a third party data source, but that was saying, let's say overall.
A 300 basis point tightening in terms of utilization of capacity and as clean as to look at places like North America, because Europe, you've got this balance with what comes in from Russia.
I'd just say, it's another data point that says that it gets tighter and you can see that.
You can see the onshoring for example of tire capacity and no no increasing capacity and carbon black.
Okay and can I just follow up on one.
Certainly one prior question Brock.
The mix in the specialties business because there is a little counterintuitive you improve sequentially.
A higher oil price, where there's you have to fight.
More to get that through because it's not automatically contractually passed through.
And your.
In the past you've described the automotive end market as being the more favorable mix.
Given the weakness in the automotive late in the third quarter. You would have thought that may have been a headwind for for that segment. So just trying to reconcile.
A little bit and a little bit more color what why.
That mix on a sequential basis was.
So much better than the second quarter. Thank you.
Alright, yes. Good question, Chris So one element of that is we did have a <unk>.
Fixed cost advantage, we had outages coming so we had a bit of an inventory build so that's a plus for us I would say without that let's say compared to prior quarter. It would have been roughly on par in a broader sense across all the products that we make.
We've been working hard to refresh our products to enhance our investments in innovation, we've talked to over a year ago. We started up a lab in the United States for example, and as you do these you've just upgraded your overall portfolio. So don't get me wrong mix is still <unk>.
Factors right and if certain segments go down in other segments grow it can go down from where it is today no question about it or even where it is a natural run rate is without let's say that inventory build.
But we have worked hard to improve that overall picture.
I appreciate the color. Thanks.
And our next question comes from the line of John <unk> with CGS Securities. Please proceed with your question. Good morning, guys. Thank you for taking my questions and again congrats Laura.
On finding something new and then Bob or al for stepping up.
My first one that Corning I was wondering if you could talk more about that factory downtime EPA upgrade and just kind of maybe how it's taking longer than expected.
Maybe you talked about earlier, but I missed it what's the actual cause there and are you on track with the expected Capex and spend.
And that facility.
Yes, I don't think there is going to have a huge impact on capex there might be more startup costs that we have to end up capitalizing that kind of thing.
I would describe it having been a startup engineer many many years ago.
We're in the throes of the startup and you kind of work your way through.
Kind of a typical issues that come up with that it's more complicated control system, but one that has got certain advantages and we're just working our way through that and I think this period of time, which I.
Refer to as sort of like a shakeout time as we go through that process to run well through this quarter and potentially into next slightly.
Okay got it and then just approaching the rubber pricing question from another perspective.
You mentioned, you're getting paid for the capital Investor makes the replacement cost I'm not sure, which one has the model itself changed how you price to customers and are there better escalators and maybe de escalators for how volatile the inputs are now.
So we have so I think one more comment to the startup. Let me also just be clear so that doesn't sound overly pessimistic.
We're up and running the issue is you have trips you have things you shutdown for things you want to shutdown in check because we wanted to make sure we don't damage the equipment.
Fundamental way like that so again I, just mean that it's going to be a little less reliable in this timeframe. If I move I am sorry could you repeat your second question briefly.
Yes.
Revisiting the rubber pricing question, Oh, right I think.
You said you had.
Do you want to get paid more for the capital invested there may be for I guess, the replacement cost and I was wondering if the algorithm has changed how you price to customers.
Is it more of a traditional one way you just raise prices and hope for the best.
Escalators, he escalators index, just given how how the input and supply chain.
It's been so volatile.
I think by and large our Formula has worked well for US a couple of years ago. We made an enhancement on how we handle differentials in the pass through on that and that the deal. We have with our customers is essentially that were going to pass through these variable costs as they go up or down and that's what we strive to achieve within the contracts and I think.
Thats understood, perhaps the only like structural thing I point to is that in Europe. Many of our contracts had a CEO tune clause in them.
And as the trading scheme Ratchets up in Europe, we're seeking in this round to have.
Two aspects of those pricing formula. So that's I guess I would say that's the enhancement that we've made in that marketplace.
Okay understood and then last just wondering as you look forward.
I think one of the things that you have.
Looking for a long term, which is increasing the mix of specialties.
A portion of the business.
I am wondering if there are any updates to that outlook and then kind of how that trends and if that does take any more of a I'll discuss the online and.
Offline as you do that.
So I think first of all you can already see it's moved up for US. This is a percentage of our EBITDA, it's going to step up with the Ravenna project, it's going to step up with a Y Bay project and we've obviously talked a bit and we're looking at conduct is a little bit of that might go into the rubber market, but the vast majority of that would be in the specialty area as well.
So I think we'll continue to see a larger and larger proportion of our EBITDA coming out of specialty.
Yeah.
And just with regards to the overcapacity does that cannibalize it at all.
It does in some cases, yes, that's true.
Okay got it thank you.
Yes.
Sure.
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Our next question comes from the line of Arent Roulac with <unk>. Please proceed with your question.
Hi, guys. Thanks for.
All of the hard work.
At Orion in the last few years.
A couple.
Observations and then may be just some questions first on the capital allocation side.
Oasis has been public.
Public for about.
Six or seven years at this point.
Paid some dividends didn't pay dividends now it's paying a very small dividend, which is which is great.
I think leverage is two three times your cost of capital for that cost of debt is around 3%.
Enterprise EBITDA is around five 5% to six times, depending on what you use for EBITDA next year.
Sydney Richardson was acquired for over 10 times, when you adjust for environmental spend.
And next year, even with let's say capex being $200 million, probably your last year of elevated capex youre still going to probably producing free cash flow and less working capital expands a light oil goes from let's say 80 to 100.
I am curious why just from a board level, there hasn't been more of a thought about buying back and taking advantage of D.
The market's view that you should only be valued at five five times, where you have a specialty business that could probably sell in the private market easily double digit multiple.
Let me add to that I haven't even.
It's what you said earlier today that these growth projects, which are sort of potentially adding 30 to 40 million of EBITDA, which I don't think or any really are in the models for next year, that's probably 'twenty three event of 24.
Why not.
Buy back some stock now.
Sure.
Prior to sort of all of these things.
Capex ending in terms of the environmental stuff deploy the growth project EBITDA kicks in and out.
Spend some of your money that way versus versus not.
Alright, well, thank you art and ask the question that I think is out there. It was sub people. So lets just take it back to the overall look at allocation of the capital.
That we would agree we've got our balance sheet in a good position today, we'd always put I think we'd all agree safety and sustainability, we feel right now number one after a robust discussion with management with the board and so forth that we have some very important growth opportunities.
<unk> for it and some of those like kind of activity are essentially strategic right.
Alright, there is very few players in our particular area within.
The acetylene black market and either we move forward or we don't at this time and we see that as important I think when you look at what can be done with Huawei in Ravenna, and the gas black deep.
Debottlenecking and expansion that we've talked about before.
You get yourself with that I think well into the mid three hundreds and with going with acetylene Black I think you can get yourself into the four hundreds at some point.
So I think there is a positive path forward and I think as a board and as a management team as we look at it it's just saying that thats important its strategic and for some of that it's now now's the time.
And it's it's a choice of.
Strategic growth I would guess I would say versus taking advantage of what I would agree is an attractive purchase price today I don't argue about.
What I would also add is that since the IPO, we spent over $600 million.
If you Grant me through next year for the EPA, we would've spent over $600 million.
On initiatives that don't drive economic profit.
Okay.
Debt reduction dividends.
Pivot that's underway over the next five years is to allocate capital towards projects that drive a higher earnings for this business and so we think we will be rewarded eventually.
We're doing that.
I guess the question would be why can't we do both.
Even if youre doing small share repurchases.
If you're spending $200 million of Capex 300, EBITDA cash taxes of 40 to 50 cash interest of around 25 5 million for your dividend today, Youre still producing $70 million to $80 million of free cash flow why not allocate some of that too I guess share repurchases at this point in time and I appreciate a growth cap.
Opex is always better if you can show growth you get a higher multiple.
You need to be competitive that's how businesses thrive no question, but the question is why can't there be a balance between allocating $25 million of share repurchases just something to start with.
<unk> seen the slow thats been out there for <unk>.
More than half a decade.
Well I think this gets into that realm, where reasonable people can disagree in.
You can get to the point of well, what's the point of a purchase that as small as that satisfying and so forth.
And I would just say that.
A wide range of options have been really very thoroughly discussed and debated.
And with our board and for the time being your points are noted but for the time being this is what we thought made the most sense, especially when you look at next year, where.
Where we still do have significant EPA spending.
Thank you.
And we have reached the end of the question and answer session. I will now turn the call back over to CEO pointing painter for closing remarks.
Okay, well. Thank you all for your time and your attention today, we appreciate it very much Lauren.
Thank you very much for the last couple of years in partnership as we've gone through this so I'll Miss not being able to do earnings releases with you going in the future.
Bob looking forward to working with you even more closely now thank you all and have a good rest of your day.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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Yes.
Okay.
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Okay.