Q2 2022 Orion Engineered Carbons SA Earnings Call
Greetings and welcome to the Orion engineered carbon's second quarter, 2022 awnings conference calls.
At this time, all participants are in a listen-on mode. A question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations. Thank you and over to you, ma'am.
Thank you, operator. Good morning, everyone, and welcome to Orion engineered carbon conference call to discuss our second quarter 2022 financial results.
I'm Wendy Wilson, Head of Investor Relations.
With us today, our corning painter, Chief Executive Officer, and Jeff Glyke, Chief Financial Officer, Chief Financial Officer,
We issued our press release after the market closed yesterday and we also 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 hard forward-looking statements.
These statements are subject to the risks and uncertainties as described in the company's and gesturing Haderman application.
In addition, all forward-looking statements are made as of today, August 6.
The company is not obligated 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'll now turn the call over to Corning Painter.
Thank you, Wendy. Good morning, everyone, and welcome to our Earnings Conference call. I'm going to start with two of the slides from our investor day.
First, on slide 3, our strategic roadmap remains unchanged. It will continue to be our guide as we shift our capital spending from EPA compliance to financially value-added activities.
Our new conductives facility is a prime example of this strategy in action.
The conductive facility will expand our production capacity by approximately 12 kilotons per year So, for milesph 2016, Allein Beethoven will build a new Electronic sports vehicle. THE BEST COUNT BASE IS RETURN IT! you
With an investment in the range of 120 to 140 million dollars, we expect sustainable EBITDA levels of 40 to 45 million dollars.
Our conductive additive products are in high demand, not only for their purity, but also their performance.
We view this specialty material expansionist, timely, strategic, and a growth accelerator. This is a very important material expansionist, and this is a very important material expansionist,
With approximately 15 to $20 million of EBITDA generated from our conductives business in 2021, we aim to grow our earnings capacity to the $170 million range when this project is completed.
Today's high oil prices only strengthen consumer interest in EVs, further increasing demand for conductive carbons, whatever the business cycle is in 2024. Whatever the business cycle is in 2024.
The Conductives Project is an addition to our Greenfield Project in Y-Bade China.
Here, we have had zero recordable injuries in over a million construction hours in the field. We are also ahead of schedule of the spite the challenges with COVID, well done to the team. The spite the challenges with COVID, well done to the team.
This plant will produce 65 to 70 kilotons per year of specialty and high-performance carbon black starting in 2023.
By the end of this year, we expect to have completed the de-bottlenecking work listed on slide 15.
and our pen ultimate air emissions upgrade in the United States.
And we should be in commissioning at Y-Bay.
This greatly reduces the span of our large capital project work, allowing us to focus next year on the final US Air mission's controls implementation.
our settling facility in Texas, and consider various plant upgrades.
With our value creation mindset and steady progress with our projects, we have the building blocks in place to reach our mid-cycle adjusted EBITDA capacity goal of $500 million by 2025.
Despite the macroeconomic outlook, we are on track to increase discretionary cash flows significantly within the next 12 to 24 months.
As our cash flow improves, we will balance between investing in our strategic projects and returning cash to shareholders.
Frankly, ICS is well positioned today, despite a potential slowdown tomorrow. Megatrans like electrification are here, and coupled with a long-term disconnect between tire and carbon-black investment.
Trends are working in our favor. For example, in North America alone, thus far this year, we have turned down over 15 kilotons of spot volume requests. And I think the real need is somewhat larger than that.
Let's take a deeper look at the supply demand balance and the implications for a recession with another slide from investor day slide four in today's deck
The key point is, I don't see the global rubber carbon black supplied dynamics on this slide changing dramatically.
especially as most of the volume goes into tires and tires wear out.
We do see a weakness in China and for lower and specialty applications like MasterBetch, but that is inner guidance and part of the reason why our specialty gross profit per ton is so high.
We believe we are entering this period of uncertainty from a position of strength.
First, there are few regions where supply and demand are in balance today, and the projections for the next few years does not change that trajectory.
Since our investor day, one competitor has announced a 40 kiloton expansion in Europe , and there's a rumor that a plant that was going to close in the U.S. is seeking allowances to keep operating.
Neither of these events changes the big picture. As a result of years of subpar returns and underinvestment, the supply demand imbalance is quite favorable now.
Second, unfortunately...
There are few signs of peace in Ukraine, and it is unclear what the business relationships will be after the fighting starts.
The curve on this slide for Europe excludes Russian production and in fact we are aware today a good portion of that production is still being imported to Europe .
However, we can ask for how long will this last? And customers seem to see this as a high risk and an undesirable supply chain.
Third, a recession may not further depress production at OEM automotive manufacturers beyond the chip shortage.
LCM forecasts for 2022 North American SAAR to be more than 15 percent...
Excuse me, more than 15% below 2019 levels. And the Western European car sales forecast remains more than 30% below 2019 levels.
In addition, I would remind you that 60% of our tire business is replacement tire and this market likely remains strong for both truck and passenger cars. This is further strengthened by the used car market which is very strong.
More use cars on the road means more replacement tires are needed.
So, we believe we are in a good position going into this period of economic uncertainty.
Yes, we are affected by inflationary costs, supply chain issues, oil price fluctuations, and the threat of natural gas disruptions.
However, we are well positioned and are taking action not only to protect that position, but to grow our business and achieve our long term goals.
Having touched on the recession, let's address an elephant in the room, natural gas supply in Europe . First some context. We use natural gas in Europe and the Americas as the fuel for the combustion zone of many of our reactors.
In other locations, such as Asia and Africa, we use other fuels.
We use the heat from every one of those reactors in Europe to generate electricity and or supply heating to the local community. We use the heat from every one of those reactors to generate electricity and supply heating
Because of this, we have been put into the priority group for preferential treatment by our German gas supplier. However, keep in mind this situation is very dynamic and the final say is with the central German government.
I want to be clear.
Despite that potential prioritization, we are working to reduce our gas-year usage.
We expect to meet the European Commission's recent request for a voluntary 15% reduction across the EU.
Among other things, we are working to convert European reactors to alternative fuels.
Some of these reactors are easier to convert than others and some specialty customers may need to go through a qualification process. But I think we all see this as the right thing to do.
I don't want to convey that we have limited or no exposure to a natural gas or talent. Of course we do. However we are preparing for it and are making progress.
If we had to curtail natural gas by 20%, we believe the EBITDA impact would be $0 to $1 million per month.
If it's 40%, that impact could be three to five million dollars per month. However, we are working to minimize that.
Another element of strength going forward is that the 2023 rubber contracting season is well underway and most customers want to secure more volume and wrap up the negotiations well ahead of normal practice.
In fact, we've already verbally concluded several multi-year negotiations.
We expect that pricing negotiations will be more favorable than in the past.
For our part, we are not looking for a one-year pop or extracting rents. We are looking for partners who are prepared to make a mutual commitment at a fair price that supports investment in the resilience that this industry needs.
As I mentioned earlier, the fundamentals are robust and I believe they will be for years to come.
So, on to our quarter results on slide 5. Thanks to the operating team for delivering another tremendous quarter and a record first half results despite multiple challenges, while at the same time executing several key initiatives.
Second quarter adjusted EBITDA was $83.4 million dollars, up 5.8% year over year, our second consecutive record for the company as well as for our specialty business.
Another T-Driver of Prophetal Growth will be the completion of our surface-streated gas-black capacity expansion in 2023, which we announced during this second quarter. This is an important initiative for us, as we are the only producer of this material, and we have been essentially sold out, often on for years.
Customers will be happy to have more capacity available and can now design us into new formulations with confidence.
This expansion is corridor strategy to further strengthen our leadership in the premium specialty market.
That concludes my opening remarks. For the remainder of today's call, Jeff and I will cover the second quarter results in greater detail and our outlook for 2022.
After our prepared remarks, we will be happy to take your questions.
Jeff!
Thank you, Corning, and good morning, everyone. If you could move to slide 6.
You'll see that our revenue stepped up both the year over year and sequentially. This was driven by passing through Hieropy Cost Docs. This was driven by passing through Hieropy Cost Docs.
The realization of price increases both from the 2022 pricing cycle and those we have passed on to our customers to cover rising energy costs. In addition, as Corning noted, we have improved mixed, particularly in the specialty business.
Higher gross profit per tonne, which we believe is a key measure of our business, is up over 8% compared with last year and up slightly compared with Q1.
Adjusted EBITDA increased year over year and from the first quarter, resulting in record first half results. As I discussed at the investor day, while we do see an increase in EBITDA dollars with increasing oil prices, it is diluted to EBITDA margin.
We are showing an adjusted EPS today. Since you may recall in Q2 of 2021, we received a cash payment of $79.5 million from Ivonek related to our EPA investments. And that skews the year over year, and now the adjusted EPS comparisons.
Moving on to slide seven.
Looking at the second quarter results, this was a great quarter for us with revenue and gross profit both increasing. Adjusted EBITDA at 83.4% was up 5.8% compared with last year. Additionally, on a TTM basis, gross profit per ton continues its steady increase over the past year driven by mix in the specialty business.
As we discussed during the investor day, and for the reasons Corning mentioned earlier, we have entered a period where demand likely outstretched global supply. So we believe we're in a position of strength even as the global economy stalls.
We have been working to find solutions this year to support our customers, given the tight global capacity to demand. And we are balancing this with achieving a fair price for our products to ensure we receive a strong return on the investments we have made in our facilities.
Moving to slide eight.
As you can see in these two waterfall charts are 2022 based price improvements and better mix especially in the specialty business with strong contributors to higher contribution margin as were higher cogeneration profits and inventory revaluations.
These were partly upset by FX headwinds and lower specialty volumes.
Looking at EBITDA, our improved contribution margin was offset by higher fixed costs, D&A and employment costs.
Moving to slide nine.
While specially-volume decreased year-over-year and from the first quarter revenue increased to $181.9 million, up 16.4% year-over-year and 2.4% sequentially reflecting the past through of higher oil prices as well as improved mix.
For a gross profit per tons perspective, you can see that especially was extremely strong in Q2, driven by a very favorable mix, including the positive impact of new products and improved prices.
That level of growth profit per ton however, should not be assumed going forward. We would expect to move back toward our Q1 margin levels. We would expect to move back toward our Q1 margin levels.
Slide 10 breaks out the major year-over-year drivers of adjusted EBITDA for the specialty business in greater detail, the most significant of which were improved pricing, mixed co-generation profit and inventory evaluation, partly offset by lower volumes and the effective effects translation.
Moving to slide 11 and the rubber business, rubber revenue increased to $359.3 million, 46.8% year-over-year and 17.1% sequentially. 46.8% year-over-year and 17.1% sequentially.
proven by feedstock related price increases and higher base pricing from the 2022 cycle.
Volume is also strong.
specifically in Europe and the Americas.
Gross profit per ton was $308.8 million.
While strong, this was down slightly year over year and 3.9% sequentially.
We continue to see a nice upward trend in our TTM gross profit per tonne. This reflects the success of the 2022 pricing cycle balanced by higher operating costs.
including higher variable comp.
employment costs, and air emission control costs, related costs.
Co-generation sales were also strong in the quarter.
Slide 12, breaks out the major year-over-year drivers of adjusted evita for the rubber business in greater detail.
Similar to what I noted on the last slide, higher volume, base price, and mix were favorable.
These were offset by a strong US dollar as well as higher employment costs, maintenance costs, and relative to last year lower inventory bills.
You may recall that we built inventory in Q2 last year as we planned for shutdowns in the second half of the year.
Slide 13, a quick look at our unitate consolidated results. Revenue is up 34.8%.
to $1.026 billion on flat volume, and adjusted even though it's up to $167 million from $150 million last year.
Our guidance, which Corning will discuss shortly, projects a stronger second half compared with last year's $118 million that he had done.
As we have noted a few times, we believe that we are entering this period of uncertainty from a position of strength.
Despite some near-term challenges, we are well positioned and have plans in place to
to not only protect our position, but grow our business and achieve our long-term goals which we laid out at our investor day.
With that, I will turn the call back over to Corinne to discuss our 2022 guidance and capital expenditures for the rest of the year.
Thanks Jeff.
Our pricing has kept up with significant inflation. Our major projects are progressing well, and we have upgraded the quality of our specialty business.
Beyond the conflict in Europe , we are experienced increased demand in our rubber business and realize the benefits from our contracted pricing cycle for 2022.
The 2023 pricing cycle is well underway and we have verbally closed with a few customers on multi-year agreements.
While some specialty markets have softened, results continue to be strong.
With that taken into consideration, we are maintaining our full year adjusted EBITDA guidance range of $310 to $340 million reflecting the momentum we achieved in the first half of the year, as well as the impact of current market conditions. We are also maintaining adjusted EBITDA guidance for 2022 within a range of $2 to $235 per share.
Our guidance anticipates sustained demand, particularly for rubber-barban, carbon-black, despite an uncertain global economy, and inflation pressures.
We balance these challenges with our operating performance and confidence in the demand drivers we mentioned earlier in the call.
Turning this slide 15. We shared this slide with you in the first quarter, but believe it is worth repeating.
It lays out the shift in our capital expenditures to growth projects and what the near term benefit is expected to be.
Note that we have approximately $50 million of U.S. air mission control spending remain.
In closing, I'd like to leave you with a few thoughts.
First, for the reasons we outlined earlier on the call, we are entering a period where the supply and demand balance works in our favor despite what might happen in the global economy. In the global economy.
Second.
The 2023 rubber contract negotiations are ahead of the normal pace and we expect a very positive result this year.
Third, we have the majority of the projected EPA air mission control spending behind us.
and are entering a period of spending for growth and higher returns to share over.
With our demonstrated earnings power, we expect to have significant discretionary cash flow in 2023.
Fourth, while European natural gas supply is a real concern, we are advancing contingency plans with an aim to at least reach the 15% gas reduction mark.
With all of that taken into consideration, we remain on track to achieving our mid-cycle adjusted EBITDA capacity goal of $500 million by 2025. The adjusted EBITDA capacity goal of $500 million by 2025.
Thank you. Operator, please open up the lines for questions.
Thank you very much, Sir.
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We have a first question from Lineup Josh Pactor with...
UBS please go ahead.
Yeah, hi, thanks for taking my question and just kind of a couple when they're out margin so We didn't specialty I mean really impressive margin performance you mentioned you expect that to go down to quenchally I guess I'd be curious how much of that is was a temporary benefit in mix versus some of the weaker markets Maybe you not selling into there and I mean you're expanding a lot of capacity into specialty markets If you could capture that mix with your current asset
I guess why wouldn't you expand less and capture that more? Are you sure that you can't do that?
So first of all, if we look at where we're expanding, which would be our premium areas and things like connectivity, like to be clear, we can sell all the conductive additives we can make right now. That's going very well, let's say, in the lithium ion space in the premium area and that area. So I think there's no question that remains a real positive for us. Where we see the weakness is in the lower ends of specialty areas like masterbatch. Our customers tell us there's a lot of price competition in masterbatch.
thought then, so if that's more challenge and if MasterBatch has a lower margin profile, I guess would you proactively deselect from some of those markets and maybe slow some of your longer term expansions to improve the mix or that not feasible?
Well, so like if you think about what we're doing in La Porte for the acetylene, the reactors that make this lower grade specialty, we might be able to switch those to rubber, but we could never make like that grade of a conductive material in it. There's real differences in the different reactors.
So we can think about when we absolutely do. How do we want to allocate our reactor time, reactor by reactor, and there's things we can do. But just to be clear, the ones that are where we see the slowdown are pretty different from the high premium markets in terms of the nature of the material.
Okay, thank you. I'll turn it over there. Thanks.
Thank you.
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We have a next question from the line of John Tenwanting with CJS Securities. Please go ahead.
Hi, good morning. Thanks for taking my questions. And I'm very excited to hear that you're signing these multi-year contracts. I think that's a combination of a lot of work you guys have been doing. So good work there. My first question is, you confirm the range in guidance, but I was wondering if you're expecting to be higher or lower on the range compared to three or six months ago, especially given all the moving parts with currency inflation, your voluntary gas usage reduction. Just help us understand which side of that equation you're going towards now.
I say we're tracking really towards the dead center of that as we look at it. There's things that could push us up. Those would include like a really strong December and that could well happen in the rubber area in particular, maintaining the mix and you know a high margin and specialty and just continued good execution on stream of the plants. At the lower end would be maybe an earlier adaptation of for example a 20% cut.
Maybe a weak Q4, the economy continues to slow down, that sort of thing. But yeah, I think we see that guidance range is solid.
Okay, great. And then just to drill a little bit deeper into the curtailment, what are the other fuels that you're converting to? Is there a cost associated with that? And is it something that we need to think about as a ramp up and delay process of the qualifications that you talked about might be occurring?
Yeah, I think that that will be manageable. I think things are tight. People will work with us on the qualifications and there probably isn't going to be a huge change in the nature of the product that we're making. We'll have to see. Most of the fuels will cost a little bit less than natural gas. You shouldn't be thinking that's going to capture a huge margin to us. We basically pass through everything to our customers. So if we have economies there, fair is fair, right? We would pass that through as well.
So, I think it's more just a view of we've got stability, we've got plans, we can deal with this, we don't use natural gas in many parts of the world, we're on our way. Not that there's zero risk, but I think between the prioritization and the work we've got going, it's at a good place. And for that reason, we want to just give you those boundings of, hey, what could be the impact at 20 or 40 percent just so that, you know, like the risk factor, you guys have a sense of...
what the boundary conditions are there.
Does that help, John ? It did. I get the run right in fact. I'm just trying to get a sense of more of the one-times conversion cost and I guess the way to wrapping up the speech.
Yeah, I don't think that they're necessarily going to cost more. I mean natural gas is pretty dear right now. I mean natural gas is pretty dear right now.
So I think I'll turn the liquid fuel prices per amount of contained energy are typically in Europe less than natural gas. So I think I'll turn the liquid fuel prices per amount of contained energy
So conceivably right there's cost savings in this
by doing it. So it makes sense in any case, I do not believe running your company on hope that, oh, we're not going to get your tails or whatever, right? We run ourselves thinking, hey, our recession is coming, natural gas hotel is running, we'll have to be ready, let's be ready. In this particular case, those same things could well help us to be more economical in this coming winter in Europe . So I don't see the conversion, see, at one time cost, but for right now, the alternative future? Fungr project build do produce lot of a people YouTube 2019 experience and
Now, not once they're forced upon us, so perhaps. But again, the investments that you saw are fairly minimal.
Got it. Thank you guys.
Thank you.
A reminder to participants, if you wish to ask a question, please press star 1 on your telephone keypad now. We have next question from the line up Josh Spector with UBS. Just
OK, thanks for letting me back in. So just a follow up on rubber black, kind of similar line of thought on the margin progression. I guess you had higher volumes sequentially. You guys are getting pricing, but the EBITDA and EBITDA per ton were lower sequentially. I think we thought that could be maybe in the mid 200s, came in close to 200. Was there anything one time you call out in the quarter? You could talk about some maintenance.
And I guess along with that, how are you thinking about the earnings cadence for rubber blacks through the rest of the year?
Yeah, I think there were, I think one of the headwinds we have, of course, that was on the FX side. I think that's a big one. I think as we look forward at Robert Black for the rest of the year, I think the GP for Tom perhaps is in range, maybe a look, probably in a range of three times of 330 looking forward. We're at 315 in the first half of the year, so in the same ballpark.
you
Okay, thank you.
Thank you. We have next question from the line of John with CJS Securities. Please go ahead.
All right, thanks for taking the follow up. I was wondering if there's an update to your capex expectations for the out years just given that steel prices are falling. And if there's been any change in the expected cost there and what did that do to your FICAS expectation going forward as well.
Well, I'm looking forward to the fact that the steel prices and other things may come down that could be a benefit for us in the port, but we have not updated that at this point. The steel prices and other things may come down that could be a benefit for us in the port, but we have not updated that at this point.
Okay, great. Just remind me if you expect to be free cash or positive mixture with the investments that you're doing. So positive mixture with the investments that you're doing.
Oh, yes. We do. Definitely. OK. And if in that case, are you exploring the idea of other capital allocation like buybacks or M&A and analysis, things that I'm no piano or any curve?
John , thank you for that because it would have been like an unusual call if we didn't talk about buybacks. So look, we as a board see the stock as extremely attractively priced, undervalued, and in that sense a buyback would make a lot of sense. I think as a board we also just feel a strong fiduciary duty thinking about a recession, thinking about the EPA capital spending is trending down, not quite over, and just really in a sense of caution.
have obviously not done anything in that sense this far. But if that's something that we will continue to evaluate and I think is a possibility for us next year, I mean ultimately that will be a full board decision on which way we go. But when we say that we use that free cash flow for strategic projects and for increasing shareholder value and returning cash to shareholders, clearly a buyback would be one of the opportunities for us to do that.
Great, thanks for.
Thank you. I now turn it over to Wendy Wilson for the questions received via email.
Thank you, operator. We've got a question here that came in that we haven't addressed yet on the call. And that question is around a year over year, and the second quarter evites on a constant currency basis. The second quarter evites on a constant currency basis.
Sure, thanks, Wendy. If we had not had the impact of a stronger US dollar, the impact of Q2 this year compared to Q2 last year was about nine, nine and a half million dollars negative to us. So that obviously hurt the second quarter on a comparable basis. Another data point that I'd probably put out there is had the FX rates stayed constant in the second quarter compared to what our expectation was in the first quarter, it was probably a three to four million.
Josh and John , thank you for that. Just a reminder to everyone that we're going to be presenting in a few upcoming conferences and traveling around the US this fall. And after basically two years, pretty much doing this virtually by Zoom, I'm really looking forward to getting out in the road and seeing some people in the flesh going forward. So we hope we have the opportunity to see everybody on the call in the near future. Thanks very much for your interest and your investment.
and have a good rest of your day. Thank you. Thank you very much sir. Let's enjunt man this concludes today's conference.
You may disconnect your lines at this time. Thank you for your participation.
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